Date: Thursday , January 30, 2003
AS I WROTE IN MY LAST MONTH COLUMN, Business Process Outsourcing has become the Holy Grail for many services providers—in India and the U.S. They are discovering that selling BPO services is not as simple as creating a PowerPoint presentation with a cost savings value proposition. They are also discovering that the lead-time to close a BPO deal is far longer than anticipated. Why is this?
My experience—as a buyer of these services at Carrier and Xerox, and as a BPO service provider at Pricewaterhouse Coopers and now as a consultant—has shown there are many reasons. However, the most important one is a factor that is generally ignored in creating a value proposition. It is managing the risks of outsourcing! This is as important, if not more important, that the savings in transaction costs. Many, if not most service providers miss this point. They spend a lot of time and energy in creating a cost savings value proposition only to be surprised when the executive shows little interest in it, but instead wants to know about the risks of transaction.
Leaders succeed by managing risks, understanding the boundaries of risk parameters, providing coverage for risks that must be taken and sidestepping risks that can be avoided. Outsourcing, in any form, introduces risk to the business. BPO generally creates a greater risk than outsourcing an IT function. After all, a delayed implementation of an Information System may only result in delaying the anticipated benefits from the application. Whereas a failure in responding to a customer query, at the outsourced call center, may mean a loss of revenue for the business—temporarily or permanently. One must remember that for most business processes, a day’s worth of revenue, or a revenue potential from a lost client, is far greater than the cost of the transaction processing, let alone savings in it. A business that procures $1b worth of goods and spends $10m managing the transaction is not going to risk even a 0.5% error rate on the procurement (meaning a $5m loss) for a 10% savings in the transaction spend ($1m).
Four risks business leaders consider in evaluating a BPO value proposition:
• Risk of disruption—short and long term: Business leaders generally do not like disruption of any type. It removes predictability and alters their knowledge basis for decision-making. The risk of disruption on the short term is from a botched transition of the process to the outsourcer. Off shore based BPO creates greater disruption than an on-shore one.
• Risk of losing control over the transaction process: When a business process is outsourced, the integration of that process with the remaining business is altered. If this is not well managed, the outsourced process may be disruptive to the whole business. For example, if a business cannot successfully integrate its in house procurement process with an outsourced Accounts Payable process, the results can be damaging to the business. Businesses also fear that if they lose control over the transaction process, they may have trouble meeting regulatory and security requirements. This risk has increased with post 9/11 security rules and a tough new regulatory environment in the wake of U.S. corporate scandals. An offshore BPO service provider may have difficulty convincing a potential client about its knowledge of the total business and not just the outsourced process.
• Risk of losing access to business process knowledge: Leaders are always considering the “exit” strategy. The risk of losing the business knowledge, as a result of outsourcing, can limit the options for exiting. An off shore outsourcing service provider must allay this fear while sitting 10,000 miles away and not being easily accessible during a business day.
• Risk of creating “new legacy”—Risk of not being able to reformulate the business on an on going basis. If the BPO service provider does not provide needed flexibility, business leaders may view the outsourcing as creating yet another “legacy” restricting the businesses ability to change.
Service providers must define, assess and present their value proposition with an understanding of the client's appetite for risk. Clearly, a presentation that assuages the risks will address a key concern, and in the end, the cost savings will be viewed as an added plus and not as the driving force behind the decision to outsource. Let’s learn from the airline industry; they began by saying how safe it was to fly before offering cheap travel alternatives. Start the discussion by talking about managing risk, and become a “partner” with the business leader rather than just a vendor offering cheaper services to the business problem. It will sell, and the business executive will have more confidence in the service provider; especially one that is 10,000 miles away.