The real benefit of BPO

Business process outsourcing has much in common with its smaller sibling IT outsourcing, but there are still some lessons to be learned.
What is business process outsourcing (BPO) and how is it different to the outsourcing we're already all too familiar with?
While there is a distinction between BPO and outsourcing generally, the line is not clear-cut, as some organisations merely use BPO as a buzz-word and apply it to relatively simple services. Formal definitions vary widely, but we believe the key feature is that an entire process is outsourced, not merely one or two steps in a process. For example, contracting a freight company to deliver goods to your customers is outsourcing, but engaging a logistics company to handle warehousing, distribution, and delivery is BPO.
"People have been doing [BPO] for a long time," says Brian Prentice, senior analyst with META Group, pointing to the way companies engage an advertising agency and have the relationship managed by their own marketing staff. What has changed is that the processes involved increasingly relate to or use IT, he says.
But Sujay Chohan, research vice-president at Gartner points out that very few organisations have an extensive end-to-end capability for any business process, so today it is more likely that only parts of a process will be outsourced rather the entirety, but even that can give a tremendous business advantage.
In any case, simple outsourcing can lead to a BPO relationship. Fuji Xerox's BPO involvement with customers often starts with a document-related service, such as graphic design or imaging and evolves over time into BPO as the customer becomes more confident and sees the value, says Michael Byrne, services development manager.
The relationship may evolve as both parties gain further understanding of the situation. For example, Fuji Xerox might start by handling the documents associated with a client's accounts payable, receiving the invoices, imaging them for electronic storage, and handling the storage. Over time, its role may expand into making the payments.
Clients may be sceptical if you offer too much at the outset, he says. They want to get to there in small steps. "Generally you start with a vision," he says, "but it's a big commitment to outsource to one organisation."
Market size
BPO is a AU$1 trillion global market, according to John Bligh, VP business transformation at IBM Global Services. If the entire back office operation could be outsourced, the market would potentially be AU$5 trillion. IBM alone expects to sign over AU$5 billion worth of BPO contracts this year, including deals with companies as prominent as Goodyear, Philips, and Toyota.
Although Asia-Pacific represents a small part of the current market at AU$5 billion, it is the fastest growing according to Chohan, and is expected to reach AU$12 billion by 2007. This growth is largely driven by Australia, Singapore, Hong Kong, and New Zealand. Why BPO?
Different commentators provide a variety of reasons for adopting BPO, but there is consensus that it should be driven by strategic considerations, not tactical issues such as (potentially short-term) cost advantages. Chohan warns that in some organisations the debate over BPO has been hijacked by cost arguments to the exclusion of strategic thinking.
Bligh says BPO has enabled new business models. No attention was paid to processes during the dot-com boom, and Y2K issues were generally addressed by patching up rather than changing underlying processes. Since then, "dramatic changes in technology" have occurred, leading organisation to look at their processes.
For example, Procter & Gamble has decided to focus on brand marketing and manufacturing, outsourcing everything else, he says, spending the money that saves on the brands themselves. BP took a similar direction in the late 1990s and has done well ever since, he adds.
Speed is another factor. Organisations may find they don't have enough time to make the change they want, such as transforming from channel sales to a direct-via-the-Web model, says Bligh. A BPO provider may be able to make the change within the desired timeframe.
Bill Richards, managing director of services at LogicaCMG, says the drivers for BPO are same as for IT outsourcing (ITO): to obtain economies of scale, to solve business problems that can't be solved internally (ie, to act as change mechanism), and to transfer risk to third party (eg, the organisation needs certain range of high level skills, but lacks the size to employ people with all those skills). Not everyone sees BPO as a panacea. Prentice points out that enterprise software vendors are beginning to provide standardised processes within their products, and this is currently a major focus for them. If you've already paid for best practice processes as part of your software bill, why look elsewhere? He suggests another possibility for larger organisations is to set up shared services centres that will take over particular processes from the various divisions. (That is how IBM started in BPO, and then extended it to external customers).
This resembles an older organisational model with roots in the military, where the line takes care of the fundamental business (eg locating, extracting, and selling minerals), while the staff takes care of support functions such as accounting, procurement, and HR. In a diversified group, those functions would be run from head office, leaving the subsidiaries to concentrate on their core businesses. Over time, this was seen as too inflexible and the subsidiaries objected to the head office overheads, so the operations were decentralised. The pendulum swings; all that's really changed is the introduction of market competition, which does not necessarily benefit the group as a whole. Outsource which processes?
The usual advice is "stick to your knitting and leave the rest to the experts" -- in other words, continue with the core processes and outsource the others. But the definition of "core" varies, so check that you and whoever you're talking to mean the same thing.
We might be told that a bank shouldn't run its own call centres, because running a call centre isn't banking. Similarly, manufacturing companies might outsource their logistics requirements. But according to Andy Zaple, principal at financial analysts The Pitt Crew, even processes that are "core" under this definition can be outsourced. For example, home loan specialist RAMS outsources processes such as sending statements and calculating interest. While they are clearly core to the company's business, they aren't things that distinguish RAMS from others in the mortgage market. The company's core competence -- its "secret sauce", if you like -- is securitising loans, selling bonds in international markets, and building the brand. So RAMS franchises its sales operation and outsources administration processes. The result is that the cost of servicing customers falls while service levels rise, and this leads to improved brand yield.
Debbie Thomson, national outsourcing manager at Drake, takes a similar view, suggesting organisations should consider outsourcing activities that make little or no contribution to profits and are a distraction to management, allowing effort to be focused on activities which provide growth, uniqueness, and profitability.
Prentice puts forward a three-dimensional model for determining which processes can be outsourced. The first dimension is the context of the process, ranging from core (processes such as accounts payable that are similar across all industries), through industrial (processes that are similar within industries, such as cheque clearance), to unique.
The second dimension represents the function, such as finance or product development.
The third dimension is jurisdiction: is the process controlled locally, centrally (by a parent company), by regulation (eg, Sarbanes-Oxley requirements), or by the public (customers, suppliers, partners, etc)?
Prentice says the places to look for BPO are in core and some industrial processes, in any function, and local or regulatory jurisdictions.
Just because a process is a candidate for BPO, that doesn't mean it should be outsourced. Thomson says you should consider the current efficiency of those activities, the competitive landscape surrounding suppliers of those services, and whether you are thinking in terms of a strategic partnership or a vendor or subcontractor model. If you want change, you can't use the same people and processes, she says. While retrenchments are bad news, staff transferred to the outsourcer might enjoy better career progression, as their work is core to the outsourcer's business whereas it was only peripheral to their previous employer. Who's buying BPO?
Much of the activity in BPO is taking place in the financial sector. "In Australia, the banks are leading the charge," says Chohan, due to their cost structures and because they have the IT infrastructure in place. This is also true elsewhere in the region, he says.
Chohan notes that while insurance companies are using BPO for claim processing and other paperwork, they are only outsourcing parts of the processes.
Thomson notes that the financial sector is an educated buyer of outsourced services, and works closely with outsourcing providers to ensure they understand the processes and requirements in order to avoid surprises during implementation.
The financial services industry is vibrant and lends itself to BPO, says Ian Mathieson, managing director, DSTi. "Anything that is reasonably procedural lends itself to being outsourced," such as back- and mid-office functions as well as customer contact, leaving the organisation to concentrate on what it does best, such as putting together investment vehicles.
Australia is not a large economy, he says, and as our "large" enterprises aren't that big in global terms they have more to gain from the economies of scale provided by outsourcing.
Not all parts of the sector are as active as others, suggests Zaple. The UK life and pensions industry has seen plenty of BPO during last two or three years, he says, but there hasn't been much activity here in terms of unit registries and so on, and very little in life insurance.
Chohan also identifies telecommunications (resulting from a combination of customer focus in a effort to reduce churn, and attention to cost structures in recent years -- even Indian telcos are outsourcing to multinationals, he says), retailers (either to cope with seasonal peaks in phone or Web ordering, or to run loyalty programs), and airlines (adversely affected by the economic situation, they are looking to reduce costs).
Bligh suggests that established airlines are looking for the "on demand" (to use his company's catchphrase) characteristics of BPO to help them compete with new entrants that own no assets. He also suggests -- contrary to other interviewees' opinions -- that financial services is "a bit of a slow starter" when it comes to BPO, at least as far as established companies are concerned. "The hottest sector is industrial," which is driven my global pressures, he says.
Very few organisations want to be leaders, says Bligh, but points out that Unilever and others in the same industry are now following Procter & Gamble's lead. It is sometimes said that Australian organisations are particularly reluctant to move ahead of the pack, but Bligh describes that as a generalisation. Catastrophic events tend to drive change, he says, which is why the industrial sector moving on BPO. The banks didn't make dramatic change in response to the emergence of mortgage brokers, and "often, when you realise the need to change, it's too late".
This sentiment is echoed by Karl Bowen, vice president of outsourcing at Capgemini Australia, who says that while local interest is "pretty broad", most organisations are still at "phase one" -- reviewing the situation, working out the costs, and identifying skills. The market is getting close to more action, he predicts.
Government is another significant area for BPO according to our commentators. It is "an ideal candidate for outsourcing" due to duplication of efforts, says Chohan, and a shared services model offers potential benefits even if it is not outsourced. Australian government processes are probably streamlined enough to outsource, he says, but security and privacy issues need consideration, along with the organisational readiness for outsourcing.
Government, especially in terms of healthcare "may end up being one of the largest for transformation," says Bligh. Reducing the cost of back office functions means more doctors and nurses can be employed for same total expenditure. But he warns that it is hard for even a large organisation to transform itself. BPO vs ITO
While IT outsourcing (ITO) and BPO are separate issues, there is clearly some linkage due to the pervasiveness of IT in most organisations.
Philosophically, if an organisation has decided to outsource processes then IT will also be a candidate for outsourcing, says Bligh.

"We don't run into a lot of CIOs in the decision making process."

The majority opinion is that BPO is no harder with or without ITO. Bligh says it makes no difference even if two separate providers are involved as long as the contracts are sufficiently flexible. For example, Procter & Gamble successfully uses HP for ITO and IBM for BTO. From a technological perspective, the increasing use of HTML, Java, and other Web technologies means "we don't find the interfaces a problem at all," he says.
Zaple is also optimistic, saying that integration should be straightforward: "If you're doing BPO properly, your inputs or outputs should be easy enough to define." You're outsourcing a process, not a task, so the boundaries should be clear-cut. Providing the goal is clearly defined, there should be no integration problems. Chohan takes a similar line, but Richards suggests BPO plus ITO can add complexity. Prentice is the most cautious, saying that while the integration involved is easy for simple processes such as linking a payroll service with the general ledger system, it gets more difficult when more complex systems are involved. He recommends that the CIO should play a part early in a BPO project to ensure proper integration, but that depends on the relationship between the CIO and the rest of the business. The more important IT is seen within the organisation and the higher the perception of its IT capability, the more likely it is that the CIO is kept in the loop and seen as a partner in making BPO work.
hohan warns that CIOs could become "chief invisible officers" unless they get involved in evaluating BPO. The problem is that they are generally perceived as techies rather than business people, and outsourcing decisions are being made in functional areas such as HR or procurement. Consequently, the pendulum has swung away from CIOs and they need to show more understanding of business issues.
"We don't run into a lot of CIOs in the decision making process," says Bowen.
According to Andrew Rowsell-Jones, research vice-president at Gartner, other executives see IT as an impediment to outsourcing because it raises privacy and technical issues, and cast the CIO as "the abominable 'no' man". If the CIO is brought in late in the day, the only alternative is to say "yes" and then cop the flak if some aspect doesn't work.
Without suggesting an adversarial relationship is appropriate, we can't help wondering if CIOs should remember the way an earlier generation of computer salespeople would try to bypass the technical evaluation process by selling directly to finance directors and MDs. As Bowen points out, suppliers will try to standardise processes and will want to minimise any modifications to their systems, and this will put pressure on CIOs to conform to the standards adopted by the outsourcer. In addition, vendors may also offer applications management services along with BTO, and may offer to take over customer-owned systems as an alternative to working closely with the in-house IT department. There are signs that CIOs haven't been paying enough attention to BPO. Rowsell-Jones says their most recent CIO survey found little interest in BPO except in Singapore and Hong Kong. Australian CIOs were less interested than their UK or US counterparts, "which was somewhat surprising," he observes. Australians either looked at it from the perspective of cost reduction, or were simply not interested.
"BPO is as inevitable as buying motherboards from Taiwan," says Rowsell-Jones, so CIOs need a wake up call: "It's going to affect the enterprise you work in."
Apart from cultivating good relationships with executive colleagues, he advises CIOs to put BPO into their strategic plan. Organisations are typically looking for agility at low cost, but need to go beyond this and consider resources, reliability, security and governance. Potential BPO operations should be treated as IS operations -- you may not know who you'll outsource to, but the strategic plan should identify likely processes and determine their effects on investment or resources. Don't be surprised by BPO, he warns. Who's offering BPO?
Providers in the region are "all the multinationals," according to Chohan, including IBM Global Services, HP ("a little slow off the blocks," he says), Accenture, and Unisys (a strong regional player, especially in Australia). Chohan also identifies EDS, ACS (a pure BPO operation), and KAZ/Telstra as being active in the area. Various small local shops have been moving from offline to online services, he says. IBM expects to announce local contracts by the time this article appears, and all will involve transformation. "The market's really arrived," says Bligh: organisations are not just looking for cheap labour, instead they are changing what is done. Almost of these contracts will be charged on the basis of units processed rather than fixed costs, he says, and the people previously involved will move from the client to IBM.
LogicaCMG operates the trading systems for the NSW gas market, says Richards, and it is about to start operating the combined SA/WA gas market. "We run the entire market system on behalf of the participants in the market." The NSW market has a single employee (the CEO), he says, and LogicaCMG operates the market itself while another company carries out all other functions.
The company is active in HR and payroll outsourcing in Europe, but not yet in Australia. It tends to work with newly created operations, as cultural and industrial issues can cause problems in established organisations.

"We think Australia is perfectly placed to play a major role in providing BPO."

While a BPO provider takes responsibility for the entire process, they might not do all the work. For instance, Fuji Xerox sometimes partners with large outsourcing providers, says Byrne. Fuji Xerox might provide all the document processing and engage with a partner to do the rest. Such arrangements occur with Fuji Xerox as the prime contractor or as a subcontractor.
Thomson notes that lots of niche companies are challenging the big players, and specialist subcontractor providers are playing a part in the BPO ecosystem.
She advises organisations to look at potential providers' track records and references. In emerging markets where nobody has substantial experience, examine the providers' capabilities and how that applies to what you'll need. In either situation, don't overlook privacy and compliance issues. Australia as source of BPO
"We think Australia is perfectly placed to play a major role" in providing BPO, says Bligh. For example, if one of IBM's Japanese customers rings about the ThinkPad notebook, the call is answered in Brisbane. Australia is also the infrastructure leader within IBM, and very good on software skills and finance and accounting. "We see an integrated world," he says.

"Some things can go offshore, others are better done in Australia."

As Chohan observes, KAZ Business Services with its 1000-plus employees is a major player in the Australian BPO sector, and offering end-to-end service capabilities. KAZ has been doing BPO for over a decade, says Anderson. Australian Administration Services -- part of the KAZ group -- administers superannuation for 165,000 employers and 3.5 million fund members in Australia. KAZ also handles customer acquisition and credit card application processing for major banks.
The question of offshore versus local sourcing depends on the model, the service and the client, says Anderson. "Our clients want an Australian provider," he says, as they have complex requirements that require local knowledge along with agility and speed to market.
That said, KAZ is taking some work offshore to its partners, but that is driven more by skills and capability that cost, he says. The process also works in the opposite direction, with overseas partners coming to KAZ for specialised services.
Mathieson takes a similar perspective: "Some things can go offshore, others are better done in Australia" such as those requiring local knowledge, he says. Simple processes such collecting name and address changes through a call centre can go offshore, he suggests

"Labour cost control is not the reason to go down this path."

Zaple warns against confusing offshoring with outsourcing a process to someone that can do it better. "I think that's a misleading issue," he says, as offshoring may simply reflect a labour arbitrage benefit that will erode with time as opposed to running the process more efficiently.
UK insurance firms typically have one administrator to every 5000 life policies. In Australia, the ratio is one to 2500. To catch up, Australian organisations need something better than cheap labour or the simplistic application of imaging or other technologies. A BPO provider should be able to get the process right, he says, and doing it the right way in Australia is more beneficial than relying on cheap labour.
"Labour cost control is not the reason to go down this path," agrees Thomson.
That said, Zaple believes Australian BPO companies are "lacking". He says a colleague looked for a customer contact/fulfilment centre, and ended up building one from scratch and offering it to other companies. When both productivity and labour costs are included, Australia can be cheaper other countries. He points out that Indian companies base their comparisons on the US, but we have lower costs -- especially in regional areas -- than the US.
"We can be the BPO providers to the rest of the world... but there aren't enough competent players," he says.
For example, some BPO providers doing claims processing for the insurance industry scan forms on receipt, send the images to India where they are keyed overnight, ready for processing the next day. Why not get rid of the paper completely?, he asks, as organisations are looking for tenfold, not 10 percent improvements. There is an opportunity for Australian companies to look at processes and work out how to improve them, especially as offshore providers are criticised for failing to offer a more efficient alternative to customers' existing processes. Process optimisation
One of the most contentious issues around BPO is whether you need to optimise a process right before outsourcing?

"I don't believe you need to fix a process before you outsource it."

"I don't believe you need to fix a process before you outsource it."
"I don't believe you need to fix it before you outsource it," says Bowen, recommending instead that an organisation considering BPO should establish a firm budget, arrange to share the benefits with the outsourcer, establish a joint governance structure, and change the core business where necessary. An open relationship between client and vendor will then allow any problems to be dealt with, he says.
Mathieson says business process re-engineering (BPR) should be the first step, and only then should decisions be made about what can and cannot be outsourced. The difference between his position and Bowen's is that the latter suggests BPR should be a joint effort between the customer and prospective provider.
Anderson takes Bowen's side, as KAZ's consulting business often does the review and reengineering process before his part of the group does the outsourcing. For example, a cheque-processing customer previously ran a distributed operation using multiple outsource partners. This resulted in inconsistent standards and high administration costs, which were affecting customers. Moving to a regional model and consolidating on one provider reduced the two-day turnaround to overnight processing and reduced administrative overheads.
Another issue is that processes need constant review. For example, the new rules that allow employees to have their superannuation contributions directed to multiple funds makes a big difference to the associated processes, says Anderson.

"There's a rule of thumb: don't outsource a problem."

"There's a rule of thumb: don't outsource a problem," says Zaple, explaining that while there is some truth in that, if you clearly define why you're outsourcing and how to measure success, it doesn't matter if you fix the process before or after outsourcing.
In order to give a provider the flexibility to deliver the service you need, it is important to approach the arrangement as a partnership, not a vendor-buyer relationship, says Chohan.
Thomson suggests this partnership approach is not helped by involving a professional services firm in the selection and re-engineering efforts. She argues that providers themselves are better placed to advise on processes as that is their core business, and more value can be extracted from a strategic partnership than by keeping the provider at arm's length.
One problem with doing BPR first is that it makes comparisons with BPO more difficult, says Thomson. Providers might offer something quite different again to your reengineered process, so what do you compare it with? That said, she recommends that any process that is a candidate for outsourcing should be running as efficiently as possible within the restraints of the current business or operating environment.
Australian organisations are "doing a reasonable job" of BPO overall, says Mathieson, but the standard varies from excellent to bad. "It's not an easy decision to make," he says, as it can mean retrenching 200 people (which usually means bad publicity) and selling a facility. Consequently, it is easy to find reasons to delay or avoid a decision. "It's mainly to do with the fear factor," he says, and once the decision is made, the implementation isn't as hard as those involved expect. Once a process is outsourced, changing providers at the end of the contract is an even more difficult decision, because you rely on the goodwill of the incumbent to make the transition a smooth one.
Thomson notes that the federal government mandated an examination of outsourcing in areas such as recruitment, cleaning, and security. Most departments took the opportunity to re-engineer internal processes to be competitive, but one outsourced without re-engineering first. There are pros and cons to both approaches, she said, but the odd one out faced "massive cultural change" and "what was sold wasn't necessarily what the outsourcer cam into find." The parties had different expectations, and so it was hard to move forward from there, she says.
A provider can only as effective as the client allows it to be, she says, and there is a risk that the client will try to micro-manage the provider, which needs to sufficient flexibility to deliver what the client needs and to allow for environmental changes such as new regulations or changes to the client organisation and its goals. An outsourcer might comply with the contract and exceed the performance standards, but the client might not be happy if that wasn't really what it wanted.
Consequently, relationship management is a key factor. Trust and a clear understanding of each other's expectations are required, so educated buyers rarely go out to open tender, except in emerging markets. Instead, they do their homework first to identify suitable partners. If a contract is going to last three to five years, you need to be confident of the relationship.
Prentice says there are two critical factors for BPO success: the maturity of the customer, and that of the provider. Customers need to be able to untie a process from the rest of their operations and to set clear metrics for the process. They should consider the provider's maturity, including its knowledge of the industry and the specific process. Case Study: BTO: transformation is the key
It may be more appropriate to look for business transformation outsourcing (BTO) rather than BPO, because "the most important thing is to transform the process," says IBM Global Services VP John Bligh. It's no good moving a call centre to India if it responds to customer requests by faxing forms to them. IBM bought PwC Consulting and other businesses to obtain a deep understanding of business processes, he explains.
It is hard for an organisation to transform itself, even with the right strategy. It is necessary to identify the components of the business and look for duplication and lack of integration, and identify the capabilities within each component. For example, logistics may not be a core competence, or the HR department might be expending the most effort on trivial activities (such as payroll and expense management) rather than strategic issues.
So IBM Global Services designs the whole process for clients, and only then are the candidates for outsourcing decided. The next step is to take the client through the implications of those decisions as the whole team must be onboard. "I think that's the piece most often neglected," he says.
META Group senior analyst Brian Prentice's view is that BPO and BTO are elements of a hierarchy.

At the bottom comes simple outsourcing, such as IT or security.

Next is functional outsourcing, such as payroll and claims processing. This represents the start of BPO.

Shared services or managed outsourcing (eg, procurement) is the next rung.

Then we have full process outsourcing, such as the entire HR function.

The next step moves out of BPO into transformational outsourcing, and then at the top of the ladder comes divestiture and vertical dis-integration.

If you want a simple explanation of the difference between BPO and BTO, Prentice suggests BPO is "your mess for less", whereas BTO is "we do your process better". Executive summary
BPO is growing fastest in the Asia-Pacific, and Australia is one of the leaders within the region. What must you to do take advantage?

• Use BPO for strategic purposes, not to take advantage of a (possibly transient) cost saving.
• Consider using the best practice processes designed into enterprise software, or setting up a shared services centre as an alternative to outsourcing (but even large organisations may not get the best economies of scale).
• Outsource processes that are common to other organisations; keep control of those that make your organisation unique.
• You won't get the full benefit if you insist the outsourcer mimics your current processes. Concentrate on the inputs and outputs, and leave the process to the experts -- that's why you're using an outsourcer.
• Depending who you ask, BPO hot spots are said to include financial services, telecommunications, airlines, manufacturing, and government.
• Whether or not your IT is outsourced probably has no effect on the success of a BPO project.
• CIOs should position themselves to become involved at the early stages of BPO projects.
• Providers may subcontract parts of your process, so check the capabilities of potential partners before you invite them to tender. At the same time, make sure your organisation is ready for BPO.
• BPO is not synonymous with offshoring -- local providers can deliver the goods.

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