Business is becoming more and more dynamic. Gone are the days when you needed to build expensive development, manufacturing and logistics infrastructure to compete. That’s because almost any activity today can be outsourced. That brings with it flexibility and opportunities for small companies to scale much quicker than before, without having to incur huge fixed costs.
It also gives large companies the opportunity to focus more narrowly on their core competencies and let Business Process Outsourcing (BPO) partners run the other part of their businesses – often at lower costs and more efficiently. But managing BPO partners is tricky. Get it wrong and it can cost you dearly – financially and reputationally.
There are many examples out there of outsourcing disasters. In fact, almost two-thirds of all outsourcing deals fail. But if outsourcing is done the right way, based on a sound strategy, it can make your business more competitive, agile and profitable. So, what is the “right way”? What are the things you have to think about when developing your outsourcing strategy?
Why you should consider outsourcing?
You first need to consider your true reason for outsourcing. Many outsourcing deals have failed because companies tried to get their outsourcing deal to deliver too many different benefits at the same time. Lower costs. Higher quality. More flexibility. Simplified operations. The list goes on. It’s not realistic to expect outsourcing to solve all business issues from day one.
You are far better off focusing, initially, on the one benefit that is going to have the most positive impact in terms of executing corporate strategy. You can then pursue other benefits later. Also, the entire senior management team needs to be bought in for outsourcing to deliver strategic benefits. If there is no buy-in, history tells us that the outsourcing initiative has a very high probability of failure. So, make sure your business case for outsourcing is solid.
What to outsource?
Now that you know why you are outsourcing, the next thing to consider is what you want to outsource. Conventional wisdom says that you keep your core competencies in-house and consider outsourcing everything else. But it’s not always so easy to decide what’s “core” and what’s “non-core”. It’s true that business processes others can perform better than you should be candidates for outsourcing. But it’s also true that capabilities that the company considers strategic and core may have, over time, become commoditised, as a result of globalisation and technological advances.
Recognising this, American Express spun off its transaction processing operation in 1992. Amex then negotiated a long-term service agreement with the newly spun off and independent, First Data. Though Amex management considered transaction processing a strategic capability they realised that commoditisation was in the process of eliminating any proprietary advantage.
First Data was also able to aggregate Amex’s volume with that of its competitors, whereby Amex gained additional scale advantages and long-term cost-effectiveness. Finally, the arrangement also allowed Amex to focus on its core capabilities in marketing and risk management.
When determining which processes to outsource, you should also consider whether the process is purely mechanical, or whether the process requires a high degree of human judgement. The former is easier to outsource, whereas the latter should probably be kept in-house.
Whichever process you decide to outsource, make sure the process works optimally before it’s outsourced. Too many companies have tried to outsource “problem areas” hoping that the BPO partner will sort it out. But often that’s not how it works. Instead, you are likely to end up with more problems, finger-pointing and higher costs when the problematic process continues to be problematic.
Where in the world to outsource?
The global BPO market is expected to reach USD 314.81 Billion by 2025. In such a huge market, where should you look for your next BPO partner? While the market is big, it’s also fragmented. So, you need to get to understand the BPO niche well that’s relevant to your business. I would recommend using analytical tools such as Porter’s Five Forces and PEST to get an overview of industry dynamics and the impact of the macro environment.
You then need to consider whether the process you want to outsource can realistically be performed at a distance without any loss of quality. If the process requires no physical proximity, it is a good candidate for off-shoring. If distance matters, a BPO partner closer to home is preferable. The most popular outsourcing destinations are India, China, Central & Eastern Europe and Latin America. All have pros and cons, which should be evaluated carefully.
Who to outsource to?
To select the optimal outsourcing partner, you first need to go back and examine your own capabilities with respect to performing the processes you intend to outsource. Determining how well the processes are performed with respect to quality and cost, will paint a picture of key capability gaps that need to be filled by the chosen BPO partner. This, in turn, will affect which BPO partners you shortlist for the Request for Proposal (RFP) process.
If, for example, your capability to perform a process is assessed as “not good enough” and “above industry median” in terms of cost, the focus should be on finding a BPO partner who can increase capability at a lower cost. This, then, becomes a key goal for the BPO relationship.
If, on the other hand, your capability to perform the process is deemed “better than it needs to be” at a cost “below industry median”, you should consider taking the same approach as American Express. As mentioned earlier in this article, Amex spun off a process into a separate business, and subsequently entering into a long-term service agreement with the independent unit.
Assuming you will not be going down the same route Amex did, you should start by launching a Request for Information process (RFI) to gain more insights into the capabilities for potential BPO partners. This should then be followed by a series of workshops with BPO candidates, an RFP and site visits. Due to the importance of getting the selection right, this is an involved process and you should not underestimate the resources required to find your ideal BPO partner.
How to manage the relationship with a Business Process Outsourcing provider
It takes a lot of effort to manage BPO relationships. Chrysler, for example, had to refocus its entire Procurement function to make it capable of managing its highly collaborate sourcing relationships. The more complex, interdependent and strategically important the outsourced processes are, the higher the requirement for a governance model which includes client-vendor partnership arrangements. These types of arrangements are often characterised by:
- Continuous improvement dialogues
- Exchanges of ideas and plans
- Frequent communication and interaction
Regardless of whether you pursue this type of governance level partnership with the vendor, it’s worthwhile considering establishing an internal Alliance Management Function. A key purpose is to ensure management on both sides are talking and involved. A study, which compared 203 companies with and without Alliance Management Functions, concluded that those with alliance functions had a 25% higher long term success rate.
Do you really want it?
As you have probably gathered by now, outsourcing is not something you just decide to do on a whim. The stakes are simply too high. So, you really need to test your company’s commitment and strategic rational before starting your outsourcing journey. It’s a lot of work, but the good news is that if you get Business Process Outsourcing right, you can expect to reap substantial rewards.
If you’d like to discuss your Business Process Outsourcing, and how we could support you in making the right decision, get in touch.
