Success Pyramids of BPO

Date:   Thursday , June 26, 2008

Even though Business Process Outsourcing (BPO) is becoming common place, and many service providers are competing in the marketplace, there is still a lack of understanding as to what creates success in the marketplace. However, it is evident that businesses are getting more savvy about outsourcing and are gathering more intelligence on prospective service providers before entering into outsourcing agreements. Managing short and long term risks is as important as seeking short term cost advantages from outsourcing. As a result, businesses are looking at providers who can offer more than just low cost labor options. A successful BPO engagement involves consideration of various disciplines and expertise for long term success. In fact, it is these disciplines that form the basis for due diligence when selecting a BPO provider and provide for control over the life of the agreement. The location from which the services are provided – on or off shore – has no bearing on the success or failure of a BPO engagement. If anything, offshore providers have to be more demonstrative of their capabilities and competencies to win and sustain the business. There are two models that are necessary to create a successful BPO environment. One is needed to ‘win’ the business and the second is needed to ‘manage’ it effectively.

1. Winning the BPO Business

The accompanying Figure 1 shows what I call the ‘Pyramid of Success’ for winning a BPO engagement. Successful BPO providers build and maintain their competencies in these areas. As is evident, the pyramid of success depends on many dimensions in addition to access to skilled labor. One face of the pyramid identifies the skills and competencies required to ‘win’ the business; the other face shows what it takes to keep customers satisfied and create a profitable environment. As can be seen, they are totally aligned in their value to a BPO engagement.

Skilled Workforce and Change

Even though labor cost is a part of the basis for an outsourcing engagement, unfortunately, some view it as the key differentiator for winning the business. Offshore outsourcing with a labor rate differential may look attractive at first blush, but it does not form the necessary foundation for a successful long term BPO engagement. A skilled workforce requires a company to also have an effective change management capability. It addresses the issue of effectively managing the recruiting, training, or transferring of employees from the business to the service provider and deals with the human issues related to that change. Change management is not a one time intervention but an ongoing discipline in managing the workforce changes as they occur through the life of the agreement. For some offshore providers, this is a critical element especially when there is a high turnover of employees or dramatic shifts in business processes.

Process and Technology Expertise and Quality Management

No BPO engagement can be successful without the service provider bringing expertise in either the process or a technology that forms the foundation for the process. I have seen many failures in BPO engagements where the provider depends on ‘learning’ the process in the existing environment of the business and then transferring it. The success of the knowledge transfer technique in the information technology outsourcing has created a false impression that it can be just as effective for a BPO engagement. History has also shown that the provider cannot expect to be profitable in a BPO engagement over the long run, without this expertise. After all, the labor rate differential has only a one time impact while process and or technology expertise allows the provider to continually improve the process and operations and thereby gain through productivity increase.

It is also this continuous improvement in the process that requires the provider to have a strong quality management program. Businesses are expecting that the provider will offer year-over-year productivity improvement, reflected in their price and performance. Successful providers have a well-established quality management program; involving Kaizen techniques as well as Six Sigma methodology.

Domain Expertise and Innovation

The most significant differentiator for a very successful BPO provider is their expertise in a specific domain and their ability to utilize this expertise in going beyond improving existing processes. Domains in this context are generally industry or process specific; such as Insurance Industry or fraud protection process. The domain expertise would allow the service provider to be a consultant in that field and customers would engage them just for consulting purposes. When the provider can combine this deep knowledge basis with an operational environment for business processes, they have the strongest offering for a business. It will allow the service provider to not only assume managing the existing process but significantly improve the performance by bringing in industry best practice knowledge. In my opinion, the domain expertise, coupled with strong process and technology background is the ‘killer differentiator’ for a provider. This not only helps acquire business but also allows offering of service at a higher rate of return for both the customer and the provider.

Lack of innovation, through the life of the agreement, is a major concern for some businesses opposed to outsourcing. Companies are hard pressed to innovate and at an ever increasing rate, due to increasing global competition and economic pressures. In this environment, businesses will be seeking providers who can be a ‘partners’ in innovation rather than an impediment to it. Domain expertise clearly plays a significant role in this.

2. Managing the BPO Business

Figure 2 shows how a provider succeeds in managing the BPO business and creates a satisfied customer. These processes are critical for short and long term success of a BPO engagement. One face of the pyramid addresses how a service provider creates an operational environment and solution that delivers value to its customer; the other face shows what it takes to assure ongoing success. It is quite evident that the competencies required to ‘win’ the business support are necessary to establish the framework for managing the business. These requirements not only create a satisfied customer but also enable the provider to have a profitable business.

Solutions Development and Transition Management

Success of a BPO depends on the provider developing a solution during the proposal and negotiation process. This solution forms the basis for the pricing and delivery metrics and assures that both the business and provider are in agreement on the objectives and expectations of the outsourcing. My experience has been that, too often, providers wait to develop a solution after an agreement is signed and then discover that they cannot meet the requirements under the agreement terms.

Linked with the solutions development is transition management of work. Again, my experience has been that a large majority of outsourcing failures occur when the transition activities are unplanned or mismanaged from the onset of the agreement. Transition management assures that the provider transfers the responsibility for work, people, and assets according to the solutions developed and approved by the customer. It requires a disciplined approach and incorporates project management as well as change management.

Operational Stability and Governance

Ongoing success of outsourcing is realized when the provider develops an operational environment that is stable and well regimented. The process, technology, and domain expertise help in creating an operational environment that meets the customer’s requirements, but it is the disciplined operational approach that assures compliance. It is only this stable operational process environment that prevents surprises and delivers results on a consistent planned basis.

Governance is the act of managing the outsourcing engagement, and it is this discipline, instituted by governance processes, that guarantees that results meet outsourcing objectives. It also makes sure that the delivered service continues to meet the contractual commitment as well as customer expectations. Risk management, relationship management, and delivery management are the components of the governance that assure success for both the parties.

In summary, entering and sustaining a strong BPO service requires that the service provider has a strong foundation of process or technology expertise, coupled with domain knowledge. Skilled staffing is a requirement for successful provision of service but is not, by itself, a criterion for success in winning the BPO business. On the other hand, operational knowledge and experience are required to keep the customer satisfied and achieve results expected by both the customer and the service provider. A pre-planned solution and strong transition management assures that the service provider can take over the responsibility for the operation, and then, utilizing the quality and operational management expertise will continue to meet the commitment. The most successful service providers have all of these disciplines as their core competencies and using the domain expertise they continue to innovate and evolve their service. It is the stable delivery of operation, coupled with continued innovation that creates a long term successful relationship with the customer.