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Optimum Technologies, Inc. provides product development and contract manufacturing services to client companies seeking to maximize competitive advantage through strategic outsourcing . Through this process, companies large and small can organize themselves to minimize costs and maximize flexibility. The diagram below illustrates how one company might be structured. It is a hypothetical medical device company that has developed novel technology. The intellectual property associated with this technology is core to the company’s existence, and is managed by the company. However, aspects of almost every other part of the company’s operations might be outsourced, as shown by the location of the functions in the overlapping rings. Some operations are outsourced in their entirety. Product Development activities span the range from Core Processes to Non-Core Non-Critical. For example, defining the key specifications and market requirements for the product might be considered Core, while the specification of a polymer resin for one of the parts might be considered Non-Core Non-Critical, and thus outsourced to an expert polymer scientist. Likewise, within the Manufacturing function, fabrication of machined parts might be considered Non-Core Non-Critical, and thus outsourced to any number of machine shops. On the other hand, the production of an optics module, while important, might still not be considered a core competance, and thus be categorized Non-Core Critical. This assembly might therefore be outsourced to a provider with specialized optics skills rather than trying to build an in-house expertise.
The following is exerpted from The Sourcing Interests Group white paper titled The Fast-Developing World Of Business Process Outsourcing Business Process Outsourcing (BPO) means delegating the ownership, administration, and operation of a process to a third party. BPO is about solving a business problem. BPO aims to raise a client company’s shareholder value because it is about delivering outcomes—that is, higher-performing business processes. Companies essentially have three kinds of processes: core processes (which give strategic advantage), critical, non-core processes (which are important but are not competitive differentiators), and non-core, non-critical processes (which are needed to make the environment work). Few advisors suggest outsourcing core processes; they recommend investing in them. Many do recommend outsourcing critical, non-core processes to providers who specialize in those processes because they will invest in them and aim to make them world-class. And most advisors recommend outsourcing all non-core, non-critical processes. However, outsourcing does not mean handing over an entire process. It generally means turning over to a BPO provider the “how” aspects of a process—the systems, infrastructure, administration, execution, and some of the design of non-core processes. The company retains the “what” aspects of the process—the governance, policy-setting, decision making, and strategy of these processes. The intent is to outsource the execution of a process while retaining the direction-setting part. Companies generally outsource four types of processes:
There are several types of BPO providers. One way to categorize them is as
Transaction providers handle a single process (such as payroll), at their sites and with their people. They are accountable for the transactions only, and they are paid per transaction. This form of outsourcing is easiest to manage, but it can also fragment operations because different pieces are handled by different providers. Niche providers handle several processes (such as employment, which includes hiring and staffing). They may work at their site (or the company’s) and they may take on some of company’s staff. They are accountable for the outcomes of those processes (such as reduced time to hire or lower attrition), so they may be paid based on outcomes. Comprehensive providers handle the transactional and administrative processes of a function (such as HR). They work globally, they aim to increase process effectiveness, and they are generally paid based on outcomes. This is the newest form of BPO and it involves the most change because the providers introduce new and better practices and processes. Offshore outsourcing is building at a very rapid pace. Outsourcing to India has been successful. Other offshore countries currently include Ireland, Philippines, and Eastern Europe. Near-shore countries include Canada and Mexico. Future countries include Vietnam, Russia and China. Some providers are making heavy investments in education and IT infrastructure in these countries. All are possibilities for back-office work. But companies do need to guard their intellectual property when they outsource, especially offshore. When issuing a BPO request for proposal (RFP), explore the “realm of the possible” by focusing on “what” you want done. Keep the “how” in your RFP to a minimum. Every provider has unique capabilities, so it’s best to let them propose different processes (the “how”) rather than try to force fit them into one way of working. Focus on the outcomes you want. The problem most prospective BPO clients encounter up front is understanding the cost of the process they plan to outsource. Their estimates are often one-half the true cost, for several reasons. Department budgets are below true costs because of internal overhead allocations. Companies do not count all the people or the technology support costs in a process. And the costs of the process in outlying offices are often not known. That’s why many BPO clients often do not know whether a provider’s proposed service levels are any better than their own, because they have no benchmark of their internal operation to use as a comparison. That’s also why companies may back off from BPO. For the first time, they see all the hidden costs they have never measured and start to wonder whether BPO will really reduce costs. They also fear losing control of their process, so they see their process more favorably than the providers’ processes. Advisors can help companies work through these emotional issues and bring the benefits and hurdles of BPO into a more realistic light. As with ITO, service level agreements (SLA) are at the heart of the deal. Without good benchmark data, client companies start out negotiating from a disadvantage. To help reduce that disadvantage, this report provides a seven-step process for creating good SLAs. Metrics are a major part of SLAs, but there are few good BPO metrics today because the field is so new. Metrics cost money to collect, report, and respond to. That’s why the overriding pieces of advice on metrics are: only have a few metrics, keep them simple, only measure the outcome of a process (not input or intermediate steps), and use metrics to incent behavior you want. Consider metrics in three areas: business outcome metrics (the results of a process), service metrics (the health of a process across client and provider), and transformation metrics (the progress of planned changes). Metrics battles most often occur at hand-over points, so it’s best to measure a process end-to-end, with each party’s work clearly defined and measured. Agree on metrics before signing the contract, which means doing internal due diligence and measuring before you talk to providers. Often, clients and providers agree to a grace period at the beginning of a deal, to figure out appropriate service levels. But grace periods are not in the best interest of client companies. For one thing, the initial months are a time of turmoil; those metrics will not reflect normal operations. Two, a grace period might incent the provider the wrong way—so that service levels are less that desired. Three, somehow the parties never seem to define metrics once the deal has been signed. Use reciprocal metrics—for the provider, the client’s relationship management team, and the client business unit. That way, all parties have a stake in the success of the relationship. Then discuss these metrics regularly, together, not just to fix problem areas but to consider changing some of the metrics. BPO changes processes, making them more efficient and effective. As these changes occur, new metrics may become more appropriate. Therefore, it’s important to have a process for changing metrics over the life of the deal. Outsourcing clients need to understand that their work will change—from managing “how” to managing “what.” Managers no longer oversee operations; they become consultants to the business units, setting policy and strategy. Training BPO managers on this new role can be the single most important determinant of BPO success. They need to be good at negotiating, analyzing, managing change, organizational development, and strategizing. Success in BPO is based on how well the client manages the relationship. Yet most companies severely underestimate the cost of managing a BPO relationship. They think it will cost one to two percent of the deal. More likely it will cost two to six percent. Some even estimate up to 12 percent. The relationship should be managed by the people who benefit from the result. For instance, if a call center has a revenue-generating capacity, through cross-selling or up-selling, it should be managed by sales and marketing. And its metrics should be related to generating sales rather than simply being a low-cost operation. Successful management means having the appropriate governance model, processes, and skills in place, so that the relationship evolves with the business environment. At the moment, outsourcing end-to-end BPO processes is not for the faint of heart because it does involve transforming processes. But it can also lead to more world-class processes than clients would implement on their own. The goal of BPO is to increase shareholder value. One way to achieve that is to have your A players facing your customers, and your provider’s A players in your back office. Outsourcing is not a one-time event; it is continuous. Companies that outsource one process later outsource another, then another—as their strategies change and new outsourcing options open up. The outsourcing field is thus not slowing down. At the moment, BPO is the driving force, and it is developing fast. The full white paper on BPO may be downloaded from the Sourcing Interest Group website (requires login). |
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