BPO: Improve your operations and costs will fall

In outsourcing business processes, the key is to prioritise efficiency and customer relationships rather than cost, says...

In outsourcing business processes, the key is to prioritise efficiency and customer relationships rather than cost, says outsourcing expert John Willmott in the third article in this series.

In earlier articles we have categorised business support services into three main areas:

    • Back office support services, such as accounting services and HR services

    • Industry specific business services such as mortgage processing or claims processing in the financial services sector

  • Front-office services, such as customer contact management.

At first glance, the benefits to be derived from outsourcing each of these processes would appear to be very different. After all, most organisations just want to carry out accounting and HR processes at the minimum expense and with the minimum senior management involvement, don't they? So the client should just look for the most cost-effective service, and the cheapest vendor will be awarded the contract, won't they?

At the other extreme, client management is extremely important to the organisation and no expense should be spared in retaining its clients. After all, we all know that retaining clients is far cheaper than acquiring new ones.

However, in practice, the benefits to be obtained by outsourcing these areas have more in common than might be expected at first glance. In all instances, process improvement has to come before reduced process cost.

This has parallels in IT outsourcing, particularly in application management. Every organisation would like to reduce the cost of supporting its existing applications. However, can you trust an organisation that just offers

"Both clients and vendors need to have the courage to admit that the contract will only work if operational process improvement is taken as the primary raison d'être for outsourcing rather than short-term cost reduction"
John Willmott

to reduce costs without knowing how they are going to do it? Probably not - the level of complaints from enraged users would be too high and the low-cost provider would almost certainly reallocate the person whose sole function is to ensure that any help-desk queries from board executives are addressed within immaculate response times.

So much for job retention! Instead, it is necessary to turn the problem around. Rather than seeking cost improvement by any means, organisations must seek process improvement that subsequently leads to cost reduction. As demonstrated by the application management vendors who have based their services around the SEI Capability Maturity Model, an improvement in process maturity, although requiring an initial investment, leads to a process cost reduction of 10% to 20% per annum because the process now contains fewer errors.

The same applies to business support services - ongoing process improvement is the principal benefit that should be sought by clients and delivered by vendors. The ultimate aim is a process with 6 Sigma quality.

In the short-term, there are principally two tests needed to judge "process improvement":

    • Does it improve customer satisfaction and quality of service?

  • Does it improve process cost-effectiveness?

If the "business process service" will pass these two tests over the life of the contract, then the chances of success are high.

So how do you check that a vendor can meet these criteria? The simplest test is: "Do they have demonstrable operational experience in the process?" Overall, clients should look for the following:

    • Proven operational experience

    • Track record of achievement from the end customer perspective

    • Ability to add business value

  • A strong background in the appropriate IT applications.

In addition, clients need to judge how a vendor will react if, or when, problems occur. For example:

    • Can they operate under pressure, or will the service collapse if problems occur?

    • Do they have good commercial judgment?

  • Can they work well with your company at all levels of the organisation?

Thirdly, if you are transferring a business process to a third-party organisation, you need to ensure that process improvement will be continuous and that the style of contract management reflects this need, rather than solely adopting a day-to-day focus. So review meetings should emphasise service improvement targets and consider ways in which these will be achieved rather than just monitoring performance against existing service levels.

This is an area where many of the original IT outsourcing contracts suffered significant shortfall. The focus on historical IT service levels and IT cost reduction led to stagnation in use of IT. It is important that this doesn't happen in the adoption of business support services. The organisation's business processes are too important for this. Both clients and vendors need to have the courage to admit that the contract will only work if operational process improvement is taken as the "primary raison d'être" for outsourcing rather than short-term cost reduction.

This rationale applies just as strongly to internal processes, such as accounting, as it does to customer-facing processes. For example, Xchanging has focused on changing the culture within traditional back-office functions such as accounting into a more front-office mentality, where internal clients are recognised as "clients" and supported in the style that the organisation would use for "external" clients.

Similarly, customer-facing processes need to recognise cost-reduction opportunities. Here, cost reduction can also be achieved by process improvement, for example, incorporating self-service models, improved personalisation and customer segmentation.

So for both front and back-office processes, it is possible to achieve both improved customer service and process cost reduction. However, the start-point and ongoing emphasis to achieve this must be "How do I improve the process?" not short-term cost reduction.

So, how do vendors succeed in this environment? The key perspective is to view both customer-facing and internal processes from the perspective of the end user of the service and demonstrate a strong operational commitment.

In IT development, vendors can sometimes win the business by talking a good game. In business support services, it is necessary to show clients the video of your on-pitch performance.

John Willmott is managing director of NelsonHall, an analyst company specialising in business process outsourcing and IT services. He has analysed developments in business process outsourcing for the past decade.

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