Introduction Outsourcing represents a long-term, results-oriented relationship between two organizations.

And, companies are no longer just outsourcing basic support services, such as, cafeteria, cleaning or mailroom operations. Increasingly, they are outsourcing activities integral to their operations, including such things as, customer sales and support, information technology, integrated product design and manufacturing, logistics, human resources and financial functions. Sometimes, the activities being performed by the outsider are replacing in-house operations. In other cases, they are new activities tied to the company's business growth and new markets. As organizations outsource more and more of their operations, it is the relationship itself that becomes the new strategic asset. Outsourcing relationships demand the same care and attention to sound management principles and practices as do in-house operations and valued employees. Managed well, continuous improvement, increasing value, and constant innovation can be expected. Managed poorly, the services and overall relationship deteriorates resulting in higher costs, operational disruption and lost business opportunities. The primary purpose of this report is to identify the best practices for managing the outsourcing relationship and to provide a road map for their implementation. Along the way, the report looks at the central problems organizations face in managing outsourcing relationships, identifies resources available to assist in addressing these problems, and provides insight into the future challenges organizations can expect as they continue to expand their use of outsourcing. Today's Problems Problems with outsourcing -- poor service, un-met expectations, cost overruns -- often gain a high profile. Sometimes the problems are only visible to the two parties. Sometimes they become visible to the customer's customers. Sometimes they receive national notoriety. There have certainly been very visible outsourcing failures. The reality is, however, that on the whole, organizations are pleased with the results of their outsourcing efforts.

For example, at The 1998 Outsourcing World Summit, 70% of the attendees reported that the results of their company's outsourcing efforts had met, exceeded, or significantly exceeded their expectations. When problems do occur, they can typically be attributed to a few common scenarios. Poor Foundation-Setting The first, is a failure to set a solid foundation for the outsourcing relationship. The first aspect of this foundation is a clear understanding of why the organization is outsourcing. Outsourcing is nothing more and nothing less than a management tool. It is used to achieve specific management objectives. Organizations do not outsource because they want to be outsourced, they outsource because they want to accomplish something. In many cases, the goal is to reduce and control costs while meeting or improving service levels, quality and other performance objectives. In others, the organization may be outsourcing to better allocate capital dollars -- to make sure that it has only the most productive assets on its books. In still other cases, revenue growth may be the goal. Outsourcing may be being used to get the right product, o the right market, as quickly as possible. Here the expertise and resources of the outside organization is often the critical element in achieving the desired end. Whatever the reasons, in whatever mix of priorities, the problem is that too often organizations do not understand these goals at the outset. The goals drive the actions. There is no right or wrong, but there is right and wrong within the context of what the organization is trying to accomplish. High-profile failures are often the simple result of having entered into the wrong relationship for the wrong reasons -- mainly because the organization didn't truly understand its goals in advance. The second foundation element, which when poorly addressed leads to problems, is the careful consideration as to what to outsource. The failure here is often one of outsourcing what is instead of what should be. Companies can set themselves and their providers up for failure by prescribing not only the results they're looking for but how the work is to be done. Outsourcing along classic organizational functional lines may not serve an organization very well when its business processes need to be redefined. At the same time, the scope of the services selected is

critical. Set too large, the results may not be definable. Set too narrowly, the desired results may not be obtainable because of the continuing internal dependencies. The final foundation element is simply who. Who should be the provider? When selecting an outsourcing provider it is their total capabilities that will matter in the long run. It is also easy at this point to find judgment errors from the earlier steps compounding. The organization finds that it has selected the wrong partner to outsource to because it didn't understand why it was outsourcing and didn't do its homework on the best way to package the desired services. When this happens, it is not uncommon to find that the partner simply does not have the ability to meet the customers needs on anything approaching a sustainable basis. Problems with the Relationship Structure Assuming that a solid foundation has been set, the next most common set of problems can be found in the way the relationship is structured. Possibly the most common problem of this type is as old as management itself. Organizations can only achieve what they can measure. Organizations have reported significant difficulty in measuring and reporting the things that matter most the quality of the services they are receiving, continuous improvement, comparison to industry standards, and the actual business value realized. They even report some difficulty in measuring the more basic aspects of the services quantity, costs, and customer satisfaction. Other problems created during the formulation of the relationship are: over promising, both internally and by the provider, which naturally leads to unrealistic expectations; failure to budget and allocate sufficient resources for the ongoing management of the relationship, and; an over reliance on penalty clauses, especially contract termination, as the sole vehicle for ensuring shared interests between the organizations. Problems with the Management Structure Unresolved differences in culture and management styles between the organizations is a frequently cited problem. Too often, no management system for the relationship is put in place until after problems surface. Similarly, direct personality conflicts between individuals with different organizational backgrounds can easily occur.

Even a lack of employee training on the workings of the new environment can cause serious problems. Problems with the Leadership Skills No less important, managers simply do not, generally speaking, have the experience needed to manage outside relationships. The traditional skills that made managers successful technical skills within their field, operational planning and oversight, resource allocation are not the skills needed for success in managing an outsourcing contract. Establishing results-based goals, communications and negotiations are what is needed. Dr. Michael Useem at Wharton refers to this as lateral leadership leading out instead of managing down. The good news is that none of these problems undermine the essential value proposition for outsourcing. But, they do suggest that the anticipated benefits are not automatic and that organizations both customers and providers need to do a better job of applying sound management principles to this rapidly expanding business approach. Improving Results... Moving Toward Best Practices There are a number of very sound, very basic management principles that can be applied to improve the results of an organization's outsourcing efforts. In many ways, they reflect a maturing of our view of outsourcing and how it contributes to improved business performance. The overriding principle is that outsourcing is not abdicating, it is leveraging. Managers need to move away from the notion that they are outsourcing activities because they are unimportant or because they do not need to be managed. Nothing could be further from the truth. Organizations are outsourcing because they want to leverage the unique skills and resources of the other organization to the benefit of their company and their company's customers. With this in mind, the relationship between the company and the service provider needs to develop out of a strategic analysis of both firms and of their potential for a long-term fit. The goal is not to get the very best deal. The goal is to get the very best partner. Because of this, the relationship must be one that can grow over time. Equally important, the pricing and contract terms need to be designed so that both parties will have an

alignment of interests over a long-term relationship. A scorecard that clearly and simply defines the desired results should be agreed to in advance. In fact, outsourcing in the absence of an agreed to scorecard is a high-risk undertaking at best. The relationship must then be surrounded by a cohesive management system. This system should create organizational links between the companies at the operational, tactical and strategic levels. Change must be expected and the process for dealing with change understood by all. Problems must also be expected and the process for escalation and resolution understood by all. Technology has become a powerful tool for managing the relationship between the organizations. Videoconferencing, advanced teleconferencing, email, collaborative online tools, intranets, extranets, and the internet can all be used. Technology enables outsourcing, it also enables its management. Finally, organizations need to really invest in developing the new leadership skills demanded by outsourcing. The managers entrusted with these relationships should have a desire to manage, not to do. They should be champions of change with a proven ability to build trust. They need solid communications, negotiation, strategic planning, project management, team leadership, and even marketing skills. What they need, is the skill set historically associated with successful general managers. The need for a balanced attention to the relationship structure, the management structure and the leadership skills is a very important finding of this report. Companies that do not focus, in a balanced way, on all three of these areas will not be successful. The notion that organizations can create a turnkey relationship is simply not supported by the findings. Outsourcing requires the same purposeful management as does any other organizational activity. Summary Over the past two years, the attention on outsourcing has shifted from doing the deal to managing the relationship. This shift is well justified. There have been notable, highprofile failures. At the same time, the attention being paid to these failures has led some to conclude that outsourcing relationships are difficult to manage, high-risk undertakings. The reality is quite different. Most organizations are continuing to realize significant benefits from outsourcing. The redefinition of organizations around core competencies

and long-term strategic outside relationships is expanding rapidly. As this happens, we need to retool our management systems to keep pace. Outsourcing is no more difficult than any other management activity, but it is different and it does demand new thinking and new skills. Outsourcing's Next Wave Business changes come as waves gathering shape, gaining energy and momentum, then crashing across the companies that find themselves in their path. Those companies that anticipate and react quickly to these waves of change can often rise with the tide; those that dont are often crushed by the impact. Technology, reengineering, the Internet, globalization, terrorism, Enron-itis are some of the waves reshaping business today. Outsourcing is another. James Brian Quinn, best-selling author and resident Dartmouth College business visionary, calls outsourcing One of the greatest organizational and industry structure shifts of the century. Harvard Business Review similarly ranks outsourcing on its list of top business ideas of the past 100 years. Dun & Bradstreet estimates outsourcing to be a $1 trillion global market and the Outsourcing Research Council reports that the typical executive will soon be spending one-third of his or her budget on outsourcing. In fact, some believe that it is still in its infancy. So, what will outsourcings next wave be? And, where will it come from? Harnessing the Power of Outsourcing's Next Wave - In Europe A BRIEF HISTORY OF OUTSOURCING According to Websters 10th Dictionary, the word outsourcing was coined in 1982. However, the power of outsourcing to transform businesses really only began to be widely discussed in the late 1980s. At that time some of the early information technology outsourcing deals at places like Kodak, American Standard, and the U.S. division of Rhone-Poulenc (now Aventis) began

to grab headlines. As Kathleen Hudson, then Kodaks CIO, said, her goal was to plug into the wall and have data come out. That type of thinking, spurred along by writings such as Peter Druckers still-read 1989 Wall Street Journal op-ed piece entitled, Sell the Mailroom, put outsourcing on the map. Over the next few years, as outsourcing grew in recognition, it also grew in controversy. Some asked if it was fad or fantastic; others compared it to a Trojan horse, or simply labeled the whole idea outsourcery. But in spite of these trepidations and characterizations, outsourcing gained momentum. Fast-forward to today. In the past four years, outsourcing spending, as a percentage of the average executives budget, has almost doubled from 16 percent in 1998 to 31 percent by the end of 2002. And Europe is beginning to move into a central role. Outsourcing spending in Europe is now growing faster than in the U.S. and is expected to double from 2001 to 2003 reaching 23 percent of total global outsourcing spending.

HOW OUTSOURCING CREATES VALUE But, why is this happening? Why is it that large, vertically integrated firms are giving way to todays increasingly outsourced model? There are a number of factors, but I like to point to three in particular. First, the emergence of world-class service providers has been absolutely central. Often these companies got their start responding to the demands of one or more of their current

customers; after all, you cant outsource in a vacuum. But once the marketplace got defined, the force of that free market economy took over and propelled it forward. The second factor is technology. Technology has made much of the work of the modern organization placeless. It no longer matters where information is processed, where accounting is done or where a toll-free number call is answered. Once we break the physical barrier of where the work is done, breaking the organizational barrier becomes a whole lot easier. The third factor is competition local, global, bricks, and clicks. As competition intensifies, organizations must simultaneously get more efficient and more effective to survive. The idea that any organization can go it alone that even the largest and best funded companies can on their own out innovate and outperform every competitor and every provider is simply wrong. But, theres a final and most important factor: Outsourcing works. In the 2002 Strategic Outsourcing Study, conducted by my company and responded to by some 500 executives around the world, outsourcing got high marks for improving their organizations focus on core, reducing costs, increasing the speed of the business and improving quality.

EUROPES OUTSOURCING JUGGERNAUT

Outsourcing has taken on new energy in Europe as the areas being outsourced have moved from the traditional physical aspects of the business, such as facilities operations and manufacturing, to the more specialized information technology and process operations. I forecast that the greatest activity from 2001 through 2003 will be in information technology and human resources outsourcing especially in the pharmaceutical, computer and electronics, government and diversified financial services industries. Others agree. According to Nelson Hall, the UK-BPO market grew 45 percent last year alone and Input forecasts a 17 percent compound annual growth rate in government outsourcing in Europe from 1998 through 2004 more than twice that in the U.S. Outsourcing in Europe is also going global. Certainly China (for manufacturing) and India (for technology services) immediately come to mind. But, there are also nearshore outsourcing opportunities in Iceland, Ireland, Eastern Europe and Russia all becoming equally attractive sources for a wide-range of reasons including the availability of skilled labor and local government incentives. In summary, outsourcings next wave in Europe is all about transforming business operations by bringing in the best to help make companies even better. Its all about tapping that best where ever and whenever needed. Its far from using outsourcing to shore up weaknesses or to get a quick savings; its about creating powerful new advantages for businesses and governments. CUSTOMER BAe Systems RCI Europe Thomas Cook UK, Ltd. Finnair TYPE DESCRIPTION BPO $1.12b contract for human resources and procurement. BPO 7-year contract for financial operations (accounting, payroll). ITO/BPO Create shared services centre to manage finance and IT for the company's business in the UK. ITO 10-year, $400 million contract for the airlines IT infrastructure; established a jointly operated technology iPSL development center. ITO/BPO Barclays, Lloyds join with Unisys to create UKs top check

clearing operation. AGENCY TYPE U.K. Department ITO of Services Consignia Social (UK FM* DESCRIPTION $3b 10-year contract for application development and system deployment and management. $1b-plus outsourcing and joint venture creating facilities management arm, Romec. Software and services to help the Swedish government implement state pension reform. Fulfillment, warehousing and distribution software to transform logistics operations.

Post Office) PPM (Swedens ITO Pension Authority The Royal ITO Netherlands Air Force * Facilities Management.

Outsourcings Evolving Value Proposition One wave is certainly outsourcings emerging power as a business tool of unique versatility and flexibility. Because outsourcings impact comes from leveraging the capabilities of outside providers and since businesses are getting better and better at doing it well, its now more a question of how best to use outsourcing than one of whether or not to outsource at all. In fact, very few decisions that an executive can make have the ability to immediately change every aspect of the operations of a business its people, processes and technologies; its financial structure; its relationship with its customers, suppliers, and shareholders the way outsourcing does. As Peter Bourke, president of Spherion Outsourcing, puts it, Big gains in performance only come about through business transformation. And outsourcing has the power to do just that.

In some cases, outsourcing means essentially selling the existing assets of a company to an outside service provider and then working with that providers experts to improve those assets. The result: better use of capital and potential gains in quality, productivity, and throughput. In other cases, outsourcing is a way to take an existing fixed cost structure and turn it into a variable one in which expenses can move up or down as the business climate dictates. Even before September 11, businesses were beginning to realize the importance of this. Today, having a more variable cost structure has become a real priority for most executives. Creating that variability is now one of the top three reasons companies outsource. Why Companies Outsource

Cost reduction continues to matter and to be a key goal of outsourcing. Businesses must constantly increase both their efficiency and quality and therein drive greater profits to their bottom lines. But almost as important as reducing costs is making sure that a business stays focused on its core. Modern businesses are simply too complex, and attempting to excel on your own at every aspect of your operations is just not possible. A classic example: telecommunications networks. Many companies have literally built mini telephone companies within their businesses, says Michael Dennis, Avaya group vice president, services. Outsourcing that to us allows them to put their energy into other activities where they create greater value for their customers. Business Process Outsourcing Another wave to watch for is business process outsourcing, or BPO. What businesses are now realizing is that outsourcing what is can certainly provide marginal gains. Better yet is to outsource what should be, and thats where business process outsourcing comes in. Business process outsourcing means examining the processes that make up the business and its functional units, and then working with specialized service providers to both reengineer and outsource these at the same time. What areas lend themselves to this approach? Certainly, all of the transaction-intensive activities that exist within the finance department, human resources department, and purchasing groups and others not to mention document management. A companys documents are central to its business processes. As one IKON customer, Alcon Laboratories, knows, a specialized partner in this field is a real asset. Troy King, Alcons director of R&D operations services, says: IKONs copy center manager regularly works with our researchers and executives to better understand their needs and the nuances of our specialized regulatory documents. Offshore Outsourcing

Finally, there is offshore outsourcing. Although not new, this is an area that is clearly gaining momentum, and its probably not long before any company thats not leveraging the global talent pool will find itself at a severe competitive disadvantage. India is currently receiving a great deal of attention; however, Eastern Europe, the Philippines, Vietnam, and, perhaps most notably China, are moving swiftly onto the playing field as well. India, for example, has an enormous talent pool from which to draw highly skilled outsourcing professionals. It has a population of more than 1 billion people, of which 300 million speak English. At any given moment, more than 6 million people are enrolled in the subcontinents 200 universities, 5,000 colleges, and 100,000 secondary schools. Technology is shrinking global distances to the point where, in reality, having work performed halfway around the world is not that much different from having it done in an office building across the street. As outsourcings next wave hits, businesses that dont figure out a way to ride it will be sacrificing significant competitive advantage. Yet, as with all management tools, it will continue to be the ability of forward-thinking executives to see around corners, anticipate and adapt to change, and use outsourcing effectively within an overall framework of continuous improvement that matters. As the recent dot-com implosion has indelibly reminded all of us, the principles of sound business dont change, just the techniques available to us as managers for their execution. Building a Case for BPO

Why haven't companies recognized the value proposition?

Business process outsourcing (BPO) has been a highly successful business solution strategy for several years now. Fortune 500 organizations know the value proposition of outsourcing important, non-core business processes and have adopted BPO as a cornerstone of their strategic objectives. If you are a corporation that is accountable to shareholders, and you've not yet begun to develop and execute an enterprise outsourcing strategy, you are behind the curve and will find it more difficult to compete in a marketplace where your competitors are using BPO as a means of focusing their time, talent, and capital on their core competencies. Yet many executives still are trying to build the case for BPO in their organizations. This is primarily because of misconceptions about what has been happening in the BPO arena and also because many executives don't understand what business processes should be considered for BPO - or why. Lessons Learned in Recent Years In the last two years, the volume and size of BPO transactions continues to increase; indeed, several huge BPO deals in the finance and accounting (F&A) and human resources (HR) space have changed the face of the industry. Not unlike the IT outsourcing deals of the 60's, 70's and 80's, some BPO arrangements were painful to transition and operate effectively. This does not mean, however, that BPO doesn't work. What it tells us is companies need more expertise in structuring mutually beneficial deals for both the buyer and the service provider. Initially, IT deals were quite rocky. In the 1960's, EDS pioneered a deal to take over the IT functions for Frito Lay. This deal became the foundation of IT outsourcing as we

know it today. IBM, which excelled in data processing, quickly countered this market advance; and the IT outsourcing war began. Many more companies followed, including Andersen Consulting (now known as Accenture), CSC and Digital Equipment Group (acquired by Compaq Computer Corporation and now known as HP), among others. While these companies were great at selling hardware and software, "renting" these services to clients was a pretty new game, and there were some early disasters. Despite some early disappointments, IT outsourcing successes thrived; and more than just the Fortune 500 companies have have turned to some form of IT outsourcing. According to Gartner, worldwide spending on IT outsourcing services reached almost $165 Billion in 2001. Although BPO is no longer just a trend and has now seen some striking successes, it is still in early stages of developing the characteristics that ensure win-win situations. Even so, BPO is set to change the face of business as we know it. Accenture, ACS, EDS, Exult, KPMG and PwC (apparently it's good to have an acronym for a name to compete in the outsourcing space) are just a few examples of companies that are already strong providers in the BPO arena. BPO Shifts Risk In lieu of the highly competitive market conditions of the last few years, we have seen an increased desire for companies to focus on their core business, and more importantly, a recognition of the necessity to implement governance on an ongoing basis for business solutions. A good example of the need for ongoing governance is in the F&A space. With all the accounting issues of late, I predict boards of directors and C-level executives (CEO, COO, CFO, CIO, etc.) are going to want to shift accounting (don't confuse this with auditing) and other potential financial process risks, to a third party with world-class expertise in these functions. They are going to want a single neck to strangle when the books aren't correct and shareholders start complaining. Thus, BPO of F&A processes is becoming a necessity for companies. FYI: F&A Is Not Core

Many chief financial officers have tried over the last few years to convince me that F&A functions are core to their business and that their accounting department gives them a distinct advantage over their competition. For some reason they are convinced that their set of accountants are capable of processing financial transactions better than their competition. Whether they are or not, why does it matter when a company produces widgets? In contrast, the chief executive officers of these same companies have told me that F&A is not core to their business and their objective is to decrease costs while retaining access to critical information. Along these lines, there are a few F&A functions that are critical and core to most businesses. Managing cash flow, budgeting, capital planning and financial analysis are strategic and unique to a company. On the other hand, accounts payable (AP), accounts receivable (AR), billing, (fixed asset) and general accounting are critical, but not core functions. Aservice provider that can process AP, AR and other F&A functions for multiple clients in the same facility can provide significant economies of scale leverage and efficiencies, resulting in lower costs. As an investor, I would be hesitant to invest in a company whose C-level management is focused on running the best accounting shop in the business. Summary: Leave it to people whose core business is accounting. HR: People are Core, Administration is Not In discussions with senior executives about HR outsourcing, I often hear that people are the most important asset in a company. Thus, they are "not interested in outsourcing the HR department." On the surface, this argument makes sense. However, if you visit the HR department of most companies, you will find they spend most of their time managing issues with third parties on behalf of their employees. Benefits administration, payroll, 401(k), and some aspects of recruiting (they aren't a valuable asset until you've actually hired them) are necessary to run a company. But a technology products company, for example, doesn't add to its top line by performing these functions.

On the other hand, team building, continuous learning (training), employee recognition and overall corporate culture should be core to a business and will create a powerful and unique organization if done properly. The HR staff members who have skills that can contribute in these areas arecore to your business; the person who administers the company dental plan is not core and should be folded into a BPO strategy. Recently we at Everest have seen service providers gaining a lot of traction in the HR outsourcing space. Companies like Accenture, Exult and a few others have been groundbreakers for some HR functions that many companies previously considered off limits to outsourcing. While HR outsourcing is taboo to many organizations, forward thinkers are moving in this direction at a rapid pace. As more large F&A and HR deals meet with success and companies recognize the value that BPO can add, we will see these kinds of transactions becoming the norm.

For

Buyers'

Eyes

Only

In Part One, published in the July issue of the BPO Journal, I touched on core versus non-core functions and gave a few examples of each. To summarize: A function that is core to your business is one that distinguishes your company from your competitors; a non-core function is one that may be critical, but does not directly contribute to shareholder value and the ability to distinctively compete in the marketplace. Unfortunately, many organizations struggle with deciphering critical versus core, making it difficult to adopt a BPO strategy. The reality is that core versus non-core is still difficult to determine for most organizations. For example, recently I spoke with a chief

financial officer (CFO) who was convinced that processing accounts payable and accounts receivable was core to his company's business. I told him while I agree that both of these processes (and the information they provide) are critical to any business, the ability to process better and faster than the next guy simply is not core. It does not differentiate his company from the competition. How Do We Find Value in BPO? The most important thing to identify as a buyer of BPO services is the benefits or value you plan to gain from outsourcing. In our work with clients, we strive to help buyers focus outsourcing efforts on the true value they can receive by outsourcing a function. In many cases the outsourcing initiative is driven solely by a desire to reduce operating costs, when, in fact, there are several other business issues that an outsourced solution can address. If the only value you plan to obtain is cost reduction, I would challenge you to look deeper into your organization to discover what other business and strategic value you could obtain through outsourcing. Some examples include increased speed, better flexibility, improved financial insight, access to capital, etc. As we learned from the history of IT outsourcing, relationships that focus strictly on cost and have no partnering qualities often fail before they begin. Buying BPO Now that we have reviewed the fundamentals about core versus non-core, we can talk about spending money wisely (we all like to spend, but nobody likes to waste). Here are the four most common questions we hear from buyers: 1. What do I need to keep in mind as I go about the process? 2. How do I select a service provider? 3. How should I structure a win-win BPO deal? 4. Where can I go shopping? Who are the key players? 1. What do I need to keep in mind as I go about the process?

The best way to procure BPO and maintain a focus on adding value is to drive the transaction from a strategic level and facilitate an interactive process with the potential service providers. It is critical to keep the focus on the value and the outcomes, not the cost. Otherwise, the aspects of success will be hard to maintain. This often requires a different procurement process than most of us are used to. There are two things to keep in mind. First, you must define your outsourcing objectives using the criteria important to your organization. Then, you must formulate your buying criteria. Your executives can do this by assessing which non-core processes could help meet your company's strategic objectives and what outcomes a service provider would need to deliver through better operation of those the non-core processes. Second, in order to achieve the desired strategic and business outcomes of BPO, it is critical to treat the potential service providers you are working with as partners. Engaging a service provider early on in the "strategy" development phase will allow you to understand its capabilities and incorporate its thinking into your solution. Developing a concise set of specifications and desired outcomes will help you and the service providers concentrate on the best solution. 2. How do I select a service provider? Due to the complexity of BPO, it will be difficult to attempt the selection process if you begin with more than a few service providers. It is critical to understand the service providers' various skills in order to invite the right ones to the "dance." In order to find the most appropriate service providers, you can research them yourself, rely on thirdparty information, or hire a consultant who has worked with the service providers before and understands their strengths and weaknesses. In identifying the requirements, most companies we work with decide to pursue a Request for Proposal (RFP) process. However, sole sourcing approaches are common in cases where there is a long standing relationship in place, particularly for more complicated BPO transactions that require a very strong buyer-service provider relationship due to the lack of competition. The RFP process is somewhat like a trip to the dentist for both the buyer and the service provider. For BPO initiatives, it often becomes difficult to compare the service providers'

responses because their solutions vary based upon their competitive strengths. The challenge becomes comparing apples to oranges. In these situations, the evaluation must focus on the potential value provided by the solution. 3. How do I structure a win-win BPO deal? The goal in structuring a successful BPO deal is to achieve the desired results while building and maintaining a strong relationship. We often refer to outsourcing as a marriage for a couple of reasons: 1. You are committing a significant amount of resources to the relationship. 2. No one wants this relationship to end before "death do us part" (or the period of the contract.) The most critical aspect of structuring the deal is to align the pricing and incentives with the desired outcomes. Since recent trends have been towards driving greater business and strategic value through BPO, pricing has shifted to reflect this new emphasis. We're finding value-based pricing is becoming increasingly common. Value-based transactions are structured around strategic outcomes and business profitability. In many cases, performance incentives and gain sharing are put in place if these objectives are met or exceeded. This changes the pricing method to one of investment and expected return based on actual business results. 4. Where can I go shopping? Who are the key players? The BPO landscape is changing rapidly. The most notable recent change was the July announcement by IBM that it plans to acquire PwC Consulting (which includes its BPO group) to complement its technology expertise with business process expertise. The landscape of BPO service providers consists primarily of three distinct groups: 1. Big 5 players or spin-offs (e.g., Accenture, Deloitte Consulting, OPI/KPMG spinoff, Cap Gemini Ernst & Young);

2. Venture capital-funded niche players (e.g., Exult, SourceNet, Equitant, Creditek); and 3. Traditional outsourcers (e.g., ACS, EDS, IBM, CSC) The Big 5 players build upon traditional consulting strengths to enter the BPO marketplace. In addition, strong executive level relationships and market permission derived from their business consulting and process reengineering backgrounds have given them traction in this space. In addition, many have "purchased" capacity in order to gain quick acceptance and critical mass. The strategy for the VC-funded niche players is to use capital infusions and technology to gain a foothold in a single area (e.g., accounts payable, HR) for which they have a strong value proposition but initially have limited delivery capability (often requiring them to "acquire" a cornerstone client). After successfully establishing a foothold, the players may begin moving into adjacent processes. The traditional outsourcing firms are taking advantage of market opportunities to acquire struggling BPO and finance and accounting (F&A) organizations. These companies leverage their IT infrastructure capabilities along with strong client relationships in large companies. Across the three groups of competitors, there are no clear winners yet. Based on our experience and market knowledge, we believe there will be further consolidation as well as new entrants into the space. From the Service Providers' Perspective

In earlier issues we've discussed business processes outsourcing (BPO) in great detail. We've discussed how to assess core functions and

differentiate from non-core. We've discussed the issues that BPO buyers face in developing a strategy, determining their goals, defining the specifications and ultimately selecting the service provider that they are going to 'marry' for the next five to 10 years. This segment looks at outsourcing from a service providers' viewpoint. The goal: to have both parties in an outsourcing relationship focus on creating a win-win situation. Due to the complexity of BPO, it is in the best interest of buyers and service providers to focus on the true value that outsourcing can create, and the service providers' needs in order to deliver on the promise of value creation. Value Creation As the BPO marketplace becomes increasingly competitive, BPO is in danger of suffering a similar fate to that of ITO: commoditization. Service providers ought to look deeply into their organizations and discover new ways to create value for their clients and structure relationships accordingly. In addition, the necessity to continue to innovate and revolutionize the industry is critical to the success of outsourcing as we know it. However, buyers must also realize that in order to have a successful outsourcing arrangement, the service provider needs to make money on the deal. Many view the term 'value creation' as "consultantese," but the ability to differentiate your services from that of the competition is what drives value creation. Furthermore, as BPO increases in popularity, it will be increasingly important to offer services and structure deals that will not fall into the bucket of commoditization. From a service provider's perspective, creating value means bringing a solution to the buyer that will meet or exceed his business needs at a price that will make his wallet smile. Given the current economic conditions, companies are trying to reduce costs as much as possible while meeting or increasing the quality of the service they receive from their current operations. As service providers strive to increase the value of their relationships, it is critical for buyers to structure their specifications and Requests for Proposal (RFP) in a way that will challenge the service provider to search for business value.

Understanding the Service Providers' Needs Although most buyers envision their service providers as the enemy, in truth, their intentions are generally good. At Everest we have had the opportunity to work with just about every service provider in the BPO marketplace on at least one transaction. Most service providers we've worked with have the desire to bring a meaningful solution to their buyers that will have true business impact on their organizations for years to come. Recently, we've actually seen service providers begin to back away from deals that they know will not be viable or add value to the client in the future. Deals that are not structured around business value - deals that have a valid approach for achieving cost reduction and increased efficiency -- are destined to fail from Day One. The service providers know this. All the major service players are accountable to their shareholders; the only way to increase revenues and provide healthy profits is to sell and structure deals that work for both the buyer and the provider. Just because the service provider has to make a profit doesn't mean the opportunity to significantly reduce costs through outsourcing doesn't exist, because it does. What is does mean is this: In their efforts to get the best deal, buyers must recognize the service provider has to make money for the relationship to work. Buyers must add this perspective to their negotiating strategy. For example, I recently purchased a new car, and despite my negotiating skills (or lack thereof), the dealer wasn't willing to sell the car for less than invoice. He actually wanted (and needed) to make money. The bottom line is that service providers must share the rewards in order to continue to fund the innovation, training, and improvements they will use to decrease the buyers' costs over time and add strategic value to the relationship. Shared learning and leverage are what give outsourcing its power in the marketplace.

Best Practices for Deciding What Should be Outsourced

Selecting the best candidates for outsourcing is a complex business issue. The decision is at times obvious, at other times constrained by the realities of the economic and political moment, and certainly influenced by the enduring corporate culture.

When the executive is faced with a blank slate the best advice is to begin with the end in mind. What is the desired end-state of the business units and business activities in your area of responsibility? For some buyers of outsourcing services, thinking about the desired end-state means that there is more time to focus on the activities that bring the most value to customers. Other buyers are looking for relief from activities that are bogging down their own staff or require skills and expertise that aren't available internally. In any case, when considering the best candidates from among the business activities in your area of responsibility, consider the goals and reasons for pursing a change and where your organization can achieve the most value by using service providers. The selection of best candidates is not

only based on current productivity issues and sources of "pain" but also on the possibilities of what could be accomplished with a change and a new approach to business. Six paths are offered for identifying the best candidates for outsourcing among the business activities in your area of responsibility. Best Practice #1: Select Non-Core Competencies The first and most obvious candidates for outsourcing are those activities that are purely administrative or supportive in naturethose activities that are the farthest from the business' core activities. For reasons elaborated on elsewhere (see Discipline #2: Core Competencies), business activities and processes that are far removed from the firm's customers and those value chain links that deliver value to customers are prime candidates for outsourcing. Best Practice #2: Select work processes where the resistance to change is low, and the need for change is the greatest Best candidates for outsourcing are those areas where the internal resistance to change will be weakest, and the need for change is the greatest. There may be elements of the organization that welcome and invite the opportunity to fundamentally alter the way they work, and begin to partner with an outside provider. Units that find themselves overwhelmed with their work loads, chronically under staffed, unable to retain employees, and looking to change focus may welcome a change. Conversely, business activities that are consistently under performing represent areas for increased managerial attention and change. Outsourcing is one viable change option. Best Practice #3: Select work processes where the chances of success are high Our research consistently finds that those who use outsourcing the most and those who are most successful with outsourcing are those who have used outsourcing in the past. Managers and organizations that are experienced with outsourcing tend to use

outsourcing in new situations. Early successes with outsourcing build confidence in the usefulness of the tool and also build experience with the process of enabling future applications of outsourcing in ways that add increasing levels of value to the organization. The area of the organization where the chances of success are highest varies and may be a combination of a host of situational factors. Frequently, a good place to start is with a limited and well-defined set of business activities, and a set that many organizations already outsource, like payroll or applications development, where the value proposition is easily made and the business case can be built. Best Candidates #4: Select Work Processes where change is already afoot Change presents a significant opportunity to introduce outsourcing. Change and changing business conditions often present an opportunity for outsourcing because the need for change has already been recognized and much of the resistance to change has already been overcome. For example, when Egghead Software moved its corporate headquarters across the state of Washington, many of the employees in human resources were reluctant to move. Because many employees were choosing to leave the firm and not move, Egghead used that change as an opportunity to introduce outsourcing in the HR function. Other situations such as the introduction of new products lines or businesses represent opportunities for outsourcing. Reengineering efforts are often followed by drives to outsource the work when the benefits of reengineering begin to diminish. Best Candidates #5: Select work processes that will transform the organization Selecting best candidates for outsourcing based on where outside providers can provide the most leverage to transform the company represents a more recent approach to using outsourcing. Managers are increasingly looking at the new skills and processes that a world-class outsourcing provider can offer. They are also envisioning their organization's highest goals achieved where internal limitations and constraints previously stood in the way. Mission Foods is a perfect example of a firm reaching for new goals with the assistance of an outsourcing provider. Mission Foods is reaching a national and international market with its products through a partnership with Ryder Logistics.

Best Candidates #6: Select work processes that are discrete and separable Candidate areas for outsourcing should include activities that are discrete and that are separable parts of the firm. These are areas where an outside organization can manage the process with their own staff and where a great deal of intertwined activities do not take place. For example, a discrete candidate for outsourcing might be a hospital's transcription services. The work of the provider is separate and discreteit may be time sensitive and importantbut as a process it is an independent work activity. By outsourcing activities that are easier to pull out of an organizations' workflow, a firm can use more of its time working on activities that require a continuous interaction, and that are more central to the company's core competencies.

The Toronto Hospital: A Case Study Toronto Hospital's efforts to outsource in the mid 1990s are a great example of an organization shedding its non-core activities and shifting from being vertically integrated to using outsourcing providers.

At Toronto Hospital the primary objective is delivering top-notch health care to patients, and the hospital's core competencies are centered around direct patient care, research, and training medical professionals. The core competencies, and those activities that contribute to them, did not include parking management, grounds maintenance, and facilities management. These activities were deemed to be the best candidates for outsourcing at Toronto Hospital. Toronto Hospital is the major teaching hospital at the University of Toronto. In 1993, the Toronto Hospital began a program of creating relationships with a large number of organizations in the private sector in order to reduce the operating costs of the hospital, while improving quality and productivity. According to James Stonehouse, formerly of The Toronto Hospital, "the hospital offers a broad range of medical and surgical

specialties and actively supports the research and teaching activities associated with them. The Toronto Hospital manages revenues of $475 million and employs about 6,000 full-time equivalent employees." A number of pressing internal issues pushed the hospital to consider outsourcing. These issues involved severe financial pressures, along with a number of complexities concerning the hospitals operations. "A strategic decision was made to alter the traditional pattern of in-house services, and an assortment of privatepublic partnerships had emerged." Outsourcing is typically done when a company decides that it is more beneficial to withdraw from certain activities that other firms can do better and at a lower cost. Now The Toronto Hospital has relationships with many different providers. James Stonehouse points out that "each relationship is tailored to the hospital's requirements and takes into account a myriad of human resources issues, statutory obligations and internal performance expectations. It is fair to say that having made the decision to leverage external skills and resources to reduce costs and sustain levels of productivity, Toronto Hospital proceeded to identify opportunities that would give it the greatest return in the shortest time." When outsourcing activities for the first time, risks may be introduced into an organization. Toronto Hospital was aware of the risks of possibly not selecting the right providers, not defining the right requirements. However, their approach was to identify each risk and manage to it. Opportunities The opportunities for The Toronto Hospital centered on focusing on core competencies (and therefore positively effecting revenues) and reducing costs. The functional areas in the hospital with the highest potential for cost reductions, as well as the highest potential for generating new revenue streams, were in Nutrition Services, Plant Operations and Maintenance, Housekeeping, Transportation, Materials Management/Logistics and Laboratory Services. These areas represented important activities to the hospital, yet they were not deemed critical to direct patient care.

Selecting Providers When looking for the right providers, The Toronto Hospital looked for partners that would "take the time to understand the dynamics of the organization and be willing to take the longer view of things. Unconventional solutions were sought, and exposure to risk was not shunned but rather viewed as something to be managed." If the structure of a deal was not satisfactory for both parties, then a relationship would not be pursued, since it would most likely be problematic. Stonehouse explains that "if the relationship is right, the contract itself becomes more of a legal artifact than a daily scorecard or mechanism of enforcement." When the Toronto Hospital first began outsourcing, it certainly had some lessons to learn. In one case, the hospital had failed to set specific service standards for one of its providers, which resulted in poor performance with an Information Technology provider. In 1995 a provider was chosen to deliver a wide variety of IT support services for the The Toronto Hospital's network of 4,000 users. Aileen Crowley of PC Week Online, reported that "within two years, the hospital knew it needed to change providers." Karalee Miller, Director of Corporate Planning at Toronto Hospital, explained that the outsourcing arrangement was "a bad situation on both sidesthey were losing money and we weren't getting the services we needed." Miller and her colleagues learned a valuable lesson from the not-so-great performance of the first IT services provider. The reason that the original deal did so poorly was because requirements weren't laid out with enough detail. Also, there were no provisions for enforcement, except through termination. After that particular IT outsourcing deal went sour for The Toronto Hospital, Miller and her colleagues moved to including a third party consultant in the discussions and negotiations with potential providers. Analysts from Compass America joined Miller as she arranged and negotiated the next outsourcing relationship. This new IT agreement involved clearly defined mission-critical service levels. Server down time was a critical issue for the patient care servers because if there was even 30 minutes of downtime, it could be life threatening for patientswhere a downtime of 60 minutes on the help desk

servers did not pose a real problem. This type of service level specification was not included in Toronto Hospital's prior outsourcing arrangement. In its new 5-year contract with Digital Equipment of Canada, now Compaq Computer, Toronto Hospital has special provisions in place in order to ensure that designated service levels are met. Toronto Hospital also has the right to terminate the contract at any time without penalty after three years. This new agreement costs 40% more than Toronto Hospitals' IT services contract with its first provider. However, Miller and her team feel that the cost is well worth it. Now they can concentrate their efforts on creating new services, instead of reacting to emergencies. The Importance of Project Teams to Outsourcing Success Project teams are usually necessary for any large and complicated undertaking. Outsourcing often covers many activities requiring an organization to bring to bear a number of skills. Teams are often necessary because many outsourcing engagements require the involvement of organizational members with wide reaching responsibilities and decisionmaking authority. Outsourcing involves distinct phases. The fact that outsourcing contracts run many years means many skills are necessary to successfully initiate and execute the contract. Project teams cross three crucial dimensions of an outsourcing engagement. Phase One: Strategic Team The beginning of the project centers on developing a general vision for the relationship and the goals for outsourcing. By its nature this phase involves high level executives and takes place long before any intentions are announced. A strategic team will typically involve people with expertise in finance, legal issues, human resources, and operations. The heads of these areas are frequently strategic team members.

The importance of the strategic team's buy-in and mandate are critical. Outsourcing is very much a top down change at the inception. The strategic team will often either have or conduct a thorough strategic review. This involves reviewing the current strategy, analyzing market forces, and examining the competition. The team updates the strategy as necessary. This group with its wideranging corporate perspective discusses and identifies core competencies. Typically this team will do or oversee a decomposition of those core competencies to identify all the critical supporting activities and processes and finally deliver an initial best candidates list for outsourcing. The traditional approach is for the strategic team to develop and set aside a list of core competencies and direct supporting activities. The tendency to include traditional core competencies on the best candidate list is growing. However, the best candidates list usually starts with the non-core activities of the firm. A second list of longer-term outsourcing candidates is also selected. Opportunities may arise for longer-term candidates to be bundled with initial candidates in the right situation. If the decision to investigate more deeply is made in any one area then a transactional team is put together. Phase Two: Transactional Team This team is put together around performing the outsourcing transaction. This team begins with the initial best candidates and reviews the list. This team engages the marketplace for information, and ultimately for proposals. This team plans the transaction a contractand the transition to outside services. Finally, this team lays the ground work for performance measurement and on-going relationship management. The transaction team represents a critical bridge from the vision and goals to the implementation and everyday management. The team will typically include the functional executive whose area of responsibility is under consideration. They bring the authority and experience and a direct line to the strategic team. The senior functional managers and process experts bring hands-on experience with the work. Consultants are brought in for perspective on the work,

experience with the provider community, and insight on the outsourcing process itself. Purchasing and legal departments are included for their insights and expertise. Finance and human resources are important considerations in any outsourcing initiative and bring critical perspectives to the transactional team. The transaction team will typically make final recommendations on best candidates, collect and manage supplier information, present recommendations on provider selection to the strategic team, and put together a transition plan. The transition plan includes information on timing and processes for switching over to the supplier's services, compensation packages and plans for all affected employees, and plans for the transfer of assets if applicable. The skills necessary at this phase include defining requirements, negotiating and contracting, communications, human resources, and performance management. All of these are considered later in Disciplines five through eight. Phase Three: Implementation and Management Teams As the decision to outsource is made and a relationship is established, an implementation and management team is identified. A management team is created when an outsourcing deal is imminent. This team implements the transition plan, manages the on-going relationship, and seeks out new opportunities for continuous improvement. The team is formed after a transition plan is established identifying personnel remaining connected to the work activity. This team may include up to three sub-teams (executive committee, management committee, and operations committee) depending on the size and complexity of the relationship. The team has three committees each serving a distinct purpose in the on-going management of the relationship. This team includes executives from different levels of management.

The first set of responsibilities of the implementation and management team are those of the executive committee. They review strategic plans, monitor the relationship, and resolve major issues. This executive committee may meet annually but represents a senior level of dispute resolution if it becomes necessary. Members of the executive committee of the implementation and management team may also have been senior members of the transaction team or strategy team at one point. The management committee meets quarterly. This committee reviews and approves key contract deliverables and changes, reviews functional and operating plans on a regular basis, approves new service levels and new customer requirements, resolves general issues, and conducts performance management using balanced scorecards (see Discipline 11). Finally, the operating committee may meet on an on-going basis or at least be in continuous contact. These managers and supervisors have day-to-day responsibility for over-seeing the work.

Moving Forward: Pricing Models that Share Gains Pricing methodologies for outsourcing contracts have changed significantly since the late 1980s and continue to evolve today. The trend is to tie the performance to compensation.

The original and most basic pricing methodologies are simple definitions of the units provided multiplied by a rate or price to be charged for each unit. Services can be measured in terms of such units as:

People employed such as hours or days, categorized by skill level, such as junior or senior, or by time of day, such as normal hours or off-hours Resources employed such as call center workstations dedicated, machine cycles utilized, equipment hours expended, and supplies consumed Events handled such as customer calls taken/placed, units shipped, square feet cleaned, automobiles maintained, and transactions processed

Similarly, prices for these units of service can be expressed in many different ways:

Fixed price per unit Fixed price with guaranteed minimum and maximum utilization Variable price per unit based on consumption ranges or other factors Prices based on cost plus profit margin Prices based on prevailing marketplace rates

The goal of this most basic pricing model is to determine both the amount paid based on the amount of services provided and the price for each consumed unit. Few, if any, outsourcing contracts written today rely on this simplistic formula because the incentives for this pricing formulation work against the expressed desire of both parties to create and sustain a long-term, mutually beneficial relationship. Under a simple units-of-service-times-price model, the provider has incentive over time to drive up the amount of services consumed by the client and to drive down their own per unit costs, thereby ensuring increased revenues and higher profit margins. The client, on the other hand, has incentive to reduce the units of service consumed and to constantly "shop around" for lower per unit rates. Over time, the interests of the two parties diverge and the relationship ends. Consequently, modern outsourcing contracts will, at a minimum, layer service level and performance criteria over the basic unit-of-services-times-price model. Service level

guarantees will put some percent of the provider's revenue at risk based on its ability to deliver the services at or above specified performance levels measured in terms of quality, timeliness, and the like. These can also be indexed to industry-wide performance standards for the activities involved with the intent of achieving continuous improvement. Closely related to this model is the further addition of customer satisfaction measures which provide both incentives and penalties for the provider to not only deliver against objective performance measures but also against the more subjective expectations of the ultimate end user. Other techniques can be added as well to the basic pricing model so that both parties have the incentive to perform in each other's mutual best interests. A common example is the addition of a gain-sharing clause to the contract. In this case, the provider has incentive to continually drive down the cost of services to the customer by giving the provider an opportunity to share in the savings. The provider might, for example, receive 50% of the first year's savings for any improvements that reduce client costs. Similarly, the client might receive revenue credits for helping the vendor win new business or for additional revenue accrued through leveraging the client's resources that were transferred to the provider as part of the transaction. Adding incentives to the basic model is common practice for many of today's outsourcing contracts. Most recently, however, pricing methodologies have developed which link the provider even closer to the client's ability to achieve its business objectives. These types of contracts, often referred to as business-value based, include:

Contracts tied to production targets or similar measures of the client's business volumes Contracts based on a percent of the total savings realized by the customer Contracts based on a percent of the revenue realized by the client from the process supported Contracts with the same performance measures as those of the client company's executive management Contracts that include stock options or other incentives for the vendor based on the client company's overall financial performance

The following chart lists a number of outsourcing contracts that have significant business-value components of the pricing methodology. Examples of Gain Sharing Contracts

Customer/Provider Mercedes-Benz/IBM

How gain-sharing applied Compensation tied to achieving production quota

Duke Medical Center/Baxter

50/50 split of cost savings or cost overruns

Grand River Hospital/HBO & Co. Jointly created new revenuebased (ISO) British Petroleum/I-Net, Inc. Payments based on percent of cost saving produced Elf Atochern/Keane, Inc. Provider's profits tied to Information Services

specific performance targets The Toronto Hospital/Multiple Client receive revenue credits based on helping providers develop new business Mutual of New York/CSC Created Insurance Technology Center and share results

Principles for Negotiating a Win-Win Relationship Negotiation is an integral part of outsourcing that takes place throughout the process. Successful negotiating involves both parties understanding their values and goals. Every agreement is unique and the goal is to achieve the best price and performance reasonable

given the responsibility and risks involved; and every negotiation is an opportunity to build the relationship. Principle #1: Focus on Interests In negotiation, it is important to focus on interests, not opinions. Negotiating works only when both parties are satisfied with the outcomes, making it necessary to create as many mutually beneficial options as possible. Using objective criteria is also important when measuring outcomes. Principle #2: Continuous Negotiation With outsourcing, there is continuous negotiation. There is negotiation internally and negotiation externally with the provider. Much of the meaningful negotiation takes place after the contract is signed. Managers are negotiating to try to come up with creative solutions that are really going to make a difference. In one negotiation scenario, Kodak actually sent its key project people and the provider's key project liaisons to the same negotiating program together, because what it really wanted to do was recognize that this was going to be an integral part of the ongoing relationship. Kodak wanted to develop a principal set of negotiating techniques that both organizations were comfortable with. Principle #3: Every Situation is Unique Because of so many variables, it is important to recognize that every outsourcing effort, negotiation, and outcome are unique. There are many different pricing structures, categorized into different areas. Recognize the fact that organizations don't enter into deals to get the lowest price, but rather, to get the lowest total cost and reasonable prices based on the risks and responsibilities, making the negotiating a critical step. Dr. Fisher, from Harvard's Negotiation Project, commented that when negotiation is really thought about properly, managers will come around to the notion that every negotiation is an opportunity to build the relationship between the organizations. This

view breaks with the traditional win-lose approach that comes into most of the negotiation, where the net result is a diminished relationship. If negotiations are approached properly, with the right kind of perspective, managers will get to the point where they realize that negotiations are very healthy and they build the relationship. Principle #4: Negotiate Internally First Negotiating occurs with an organization on a continual basis. In fact, negotiations should be done inside the organization first before sitting down to negotiate specific points with potential providers. The negotiation process should be used as a way to surface the interests of the organizations and see what is important to the organizations. The negotiation should be used as an opportunity to invent options for mutual gain, thereby utilizing negotiation as a way to strengthen and build the relationship. Principle #5: Identify the Role of Competition within Outsourcing In the competitive marketplace there are a number of high-quality service providers who are advancing their capabilities and competing for businesses looking to outsource certain non-core activities. Organizations may be aware of the competitiveness of providers and use that to negotiate too good of a dealone that ends up being unfair or too unrealistic in the providers eyes. Executives need to be aware of the role of competition, but also use it to find the most appropriate and effective deal with a supplier whose capabilities best fit the organization's outsourcing needs. Principle #6: Use Objective Criteria Insisting on the use of objective criteria is crucial for negotiation. One of the best ways to take the position-battling out of negotiation is for both organizations to agree in advance that as they are working together, the focus will be on developing objective criteria for making the right decisions. Principle #7: Separate the People from the Problem

Separate the people from the problem. Recognize that there might be a very serious problem that needs resolution. Thus, it is important to separate the personal relationships from the problem. When negotiating, it is critical to move to a relationship where both parties are sitting next to each other on the same side of that table looking at solving the problem, instead of sitting across from each other. Negotiating should bring parties together, not push people away from each other. Principle #8: Know Your BATNA One concept that should really be focused on is the concept of a BATNA, which is the Best Alternative To a Negotiated Agreement. Real strength in negotiation comes from strengthening your BATNA. The better an executive understands his/her BATNA, the better his/her negotiation power will be. When an executive knows his/her BATNA, it means he/she has a fallback position in place if the initial negotiation is not successful. It is not a question of staking out positions, but rather a question of seeing what can be done without a negotiated agreement. By having a decision plan in place if negotiations are unsuccessful, an executive will be fully prepared to follow alternate means of achieving success and capturing his/her organization's interests. Principle #9: Train the Players Receiving formal training in negotiating is critical for managers who are involved in outsourcingespecially if they have not had formal training or formal life experience in negotiating. The outcomes are better when negotiating is conducted by experienced people. Attending a class or studying (by reading some of the materials available) is also helpful in learning the discipline. Negotiating is an integral part of the outsourcing process and executives need to develop these skills. There are two highly recommended programs for negotiation training. First, one program is Conflict Management Inc. (CMI), which was started by some students of Dr. Fisher at Harvard. Dr. Fisher, head of Harvard's negotiation project, is the author of "Getting to

Yes" and has written several other texts on the subject. His students created CMI and do training on negotiating. Another highly recommended training program on negotiation is The Negotiation School at MIT. This skill is necessary throughout the life of an outsourcing agreement. There is a general conception that negotiation only takes place in preparation for signing the contract. In other words, as soon as the contract is signed, people think the negotiation is over. Best Practices for Negotiating a Win-Win Relationship Learn the best practices for negotiating a win-win relationship. This simple negotiation checklist will help executives form better contracts and enhance their relationships with outsourcing providers. Guidelines for Negotiating a Win-Win Relationship Focus on interests, not opinions

The key to negotiating a win-win relationship is achieving mutually satisfying terms for each party. Focusing on interests relative to both parties' needs enables groups to be equally satisfied with negotiation outcomes. Both parties have to be satisfied with the outcomes

When both parties are equally satisfied with the outcomes of negotiation, they have satisfied each other's needs and are content that positive outcomes for each party have arose from the negotiation. This equal satisfaction is an element that further nourishes a lasting win-win relationship. Your negotiations should focus on interest, as opposed to positions

When individuals take positions on issues during negotiation, the process of attaining equal satisfaction in the interests of both parties is hindered. When interests can be shared, the relationship is more likely to be mutually beneficial. Agree in advance that you (both organizations) are working together

When both companies agree that they are working together, it allows the relationship to

move forward with both companies acting as a team, working towards mutually beneficial interests. Sit on the same side of the table when looking at solving the problem If a relationship is going to be win-win, both parties should not sit on the opposite sides of the table, but rather, on the same side. Both groups are entering the relationship together to meet common goals and interests. Mutually beneficial relationships begin when both parties are sitting on the same side of the table when solving a problem. Have a complete understanding of the other organization's values and interests Showing a genuine concern for the other organization's interests reveals a company's compassion for attaining the best interests of all involved. Be flexible and creative

Being flexible and creative involves getting all the principles, issues, and things that need attention out in the open for discussion. While going through the negotiation process, it's important to call a time-out if unanticipated issues arise. This way, an organization will have more time to internally discuss the matter, instead of being unprepared while talking over the issue. An executive should be rigid about his/her commitment to the process A rigid commitment to the negotiation process shows that although an organization is open to the interests of the other party, it stands on solid ground for capturing its interests. Be innovative and flexible in terms of inventing solutions

With both parties developing solutions for a problem, there is an opportunity to develop innovative and flexible resolutions. These solutions occur since more minds are available to brainstorm potential resolutions to issues. An organization should put forth the same amount of effort that they would anticipate the selling side put forth By putting forth a large amount of effort, an executive reveals that he/she is genuinely

concerned with the outcome of the negotiation, with the hope that both sides' best interests will come to fruition.

Managing the People Impact of Outsourcing Through outsourcing, executives can redefine virtually every aspect of their companys operations not only how the work gets done, but how much it costs, how capital dollars are spent, and how the company relates to its suppliers and customers. The results can often be lower, more flexible costs, an increased focus on those unique activities that produce the greatest value for customers (the so-called core competencies of the business), better quality, faster speed, better use of capital, increased innovation, and even new sources of revenue. But, how do executives both improve the operations of their company through outsourcing and create better opportunities for their employees at the same time? When an organization outsources an activity, it is directly affecting the jobs and careers of the employees currently doing that work and, indirectly, the jobs and careers of all of its employees. Too frequently outsourcings benefits are seen as coming at the expense of the companys current employees. For in-scope employees, their jobs change immediately. They may be offered a job with the new outsourcing company, offered a different job within their current company, or may be told that they no longer have a job. Things change, although far less dramatically, for out-of-scope employees, as well. They will now be working not with fellow employees but employees of the new contractor. Outsourcing affects their view of the company and the way it treats its employees. They may wonder: Am I next? How outsourcing impacts employees

Of course, changes in the workplace like outsourcing are unavoidable. Any organization that isnt constantly changing simply cant survive, let alone prosper. As Englands 19th century Prime Minister Disraeli said, Change is inevitable. Change is constant. Outsourcing is just one of many changes being thrust upon people at work, especially in todays very unstable business environment. To be successful in managing outsourcings impact on employees, executives must first understand how their employees will be impacted and then take personal responsibility in shaping that impact. Outsourcing need not be a zero-sum game -- the outcomes can be made positive for both the company and its employees. Keep in mind that outsourcing impacts every aspect of the employees job. Financially, the amount and structure of their pay and benefits packages may change. So will their job the nature of their work, who their boss is, their company, work location and future opportunities. The employee may not have chosen to be outsourced, but management did. Therefore, management is responsible for each and every aspect of that decision what to outsource, what provider to outsource to, and the resulting character and scope of its impact on employees. Creating positive employee outcomes There are a number of keys to creating positive employee outcomes. The first is recognizing that in most cases, the customers current employees are critical to the service providers ability to deliver high-quality results. If designed into the outsourcing initiative from the beginning, it is possible to seek service providers who can offer better training and long-term career opportunities for employees than they currently have. When employees go to work for an outsourcing service provider, they have the opportunity to align their personal core competencies with those of their new employer.

A decade ago Peter Drucker first pointed out how outsourcing can create new opportunities for employees. In one large hospital-maintenance company, some of the women who started 12 or 15 years ago pushing vacuum cleaners are now division heads or vice presidents. As hospital employees, most of them would still be pushing vacuum cleaners, he wrote. Other career building opportunities can be created, even for employees staying with the customer organization. Joint management and quality improvement teams can expose employees to new skills and new ways of doing things. Rotational and permanent job opportunities can be created. Outsourcing can provide an important opportunity for reassessing and retraining a companys employees. Management action determines results As leaders, the organizations management has the responsibility to make certain that employees understand the business, how it operates, and the key measures and drivers of its success. The goal is to help the organizations employees come to see that as changes take place, whatever they are, they are not gratuitous that is, they are sound responses on the part of management to the opportunities and challenges that the business faces, as opposed to unjustified and unreasonable actions by management. Management must be prepared to work with people to help them work through the personal and professional impacts of the decisions management makes. It can not and should not abdicate this responsibility. Finally, management must itself have and then articulate a positive vision for the future a vision that demonstrates that everyone will be ultimately better off once they adjust to the ever-changing environment in which businesses now operate. Managements action must follow its words. The vision must be clear, the goals and measures of success defined, and the commitment to achieving positive outcomes for both the employees and the organization unquestionable.

Problem Statement Problem #1: Organizations only achieve what they can measure. Organizations report significant difficulty in measuring and reporting the quality of the services they are receiving through their outsourcing contract, the relevant continuous improvement in these services, how they compare to industry norms for those services and, most importantly, measuring and reporting the business value actually realized as a result of the outsourcing contract. Some difficulty in measuring and reporting more basic characteristics as service quantities, costs and customer satisfaction are also reported. Problem #2: Managers don't know how to manage relationships. Outsourcing demands an entirely new management style. In fact, the very technical, operational and administrative skills that make the traditional executive successful, have far less importance when it comes to managing an outsourcing contract. Communications, negotiations, and lateral leadership leading out instead of managing down are critical to success in the outsourced world. Similar problems exist on the provider side with undeveloped skills in the areas of: industry expertise, operational facilitation, credibility development, and mentoring and coaching.

Problem #3: Over promising creates unobtainable expectations. Gaps between expectations and outcomes can occur as a result of over promising during the decision process. Both providers and internal champions can cause this. This, combined with a lack of attention to details during the early transition phases, can result in negative early experiences which then become very difficult to overcome.

Problem #4: Under investment in management resources.

The number of people and supporting systems needed to effectively manage the outsourcing contract are typically much higher than customers anticipate. There is a pervasive attitude that since the work is outsourced the relationship doesn't need to be managed. As a result, the oversight team is ill prepared to ensure that the relationship is driven toward achievement of the intended results. Some experts suggest that 5-10% of the contract value should be spent in creating and sustaining the management resources and systems needed to keep the relationship on track. Overall customers report that the amount resources required to manage the relationship are, in fact, generally the same as those required to manage internal operations. Customers report that this amounts to at least 1-3% of the annual contract costs. Similarly, providers are under-investing in the areas of ongoing investigation of the client's business objectives and needs.

Problem #5: Penalties are poor motivators of good performance. The most common form of performance incentive is the threat of early contract termination. The absence of performance incentives makes it difficult to drive the overall relationship, let alone the performance of the individuals delivering the service, toward continuous improvement and increased value. Problem #6: Differences in organizational and management personalities. One expert suggests that 75% of failed partnerships are due to corporate personality problems; 68% involve individual managers' personalities, and 57% have to do with project priority differentials. Cultural differences between organizations erode the relationship over time. Problem #7: Lack of employee training on the new environment. Adoption of the specialized service provider's systems and technologies is often central to the anticipated value. This requires an investment in training of company employees. Without this training results will be below expectations and relationships will be strained. Creating an effective working relationship between in-house and outside employees is

particularly important during the transition phase. The same issues exist in training the provider's employees on the clients business environment and objectives.

A Diagnostic Tool One way to improve current performance in the management of an outsourcing relationship is to compare is in an objective way to the best practices discussed earlier. The following Diagnostic Tool does exactly that. Each of the seven Best Practices is broken down into its elements and then each element is presented on a scale from needs improvement through achieves best practices. A description of what would be seen in an organization performing at that level on the scale is presented. By comparing an organization's current performance to these points on the scale, a the gap between current performance and best practices can be gauged. This gap analysis then forms the basis for identifying where improvement is most needed and what the desired state would look like. 1. Objective Performance Criteria are Negotiated, Measured, and Reviewed Successful outsourcing relationships focus on results not activities and resources. To be meaningful, these results must be objectively measured, that is, described in quantifiable terms, and must be compared on an ongoing basis against pre-established performance criteria. Improvement Recommended Measurements of Objective criteria for Objective service and costs. quantity service defined, quantities defined, or, criteria measured, are Continuous improvement follow-up, and Meets Minimal Standards Achieves Best Practices

and realized through joint action

and costs are not reviewed on a regular basis plans,

if by both the customer and benchmarking against world-

defined, collected reviewed.

are

not the provider. and

class

standards

of

performance.

Measurements of Objective criteria are Objective service satisfaction quality, customer not business value. collected

criteria

for Objective criteria based on

levels, not defined or are service levels, quality and business-value achieved are and customer satisfaction are defined, measured, and are the defined, measured, and basis for continuous reviewed on a regular basis improvement. by both the customer and the provider. and reviewed.

2. Formal Management Reporting Structure A formal, typically multilevel, management reporting structure exists linking the customer and vendor. Each level is comprised of teams that have clearly defined roles, responsibilities, agendas, frequency of meetings, and relationships to the other teams and to each organization. Improvement Recommended Management reporting structure Contract (customer provider) identified, and or managers Contract and (customer not identified roles defined and with roles managers Multi-level provider) with clearly and teams roles exist, tactical and Meets Minimal Standards Achieves Best Practices

day-to-day, strategic

and responsibility defined.

responsibilities responsibilities.

not clearly defined. Meeting Meetings occur on an Regularly planned meetings Regularly planned meetings

frequency, regularity

ad hoc or crisis-only take basis

place

with take

place

with

predetermined agenda and predetermined agenda and consistent attendance consistent attendance are highly in

Issue resolution

Resolution after a crisis.

of Problems are recognized as Meetings interactive

identification and problems occurs only they occur and are resolved.

resulting

identification and resolution of problems, often.

3. Performance-Based Pricing Performance-based pricing ensures that the provider is continuously incented to meet or exceed the stated performance criteria. Incentives exist at both the organizational and individual level. Improvement Recommended Organizational Incentives Provider payments Meets Standards are Incentives tied and Incentives exist for Minimal Achieves Best Practices

based solely on amount of penalties service delivered and a fee specifically for unit of service.

are continuous improvement and to ongoing value engineering.

performance criteria. individual All key personnel for both the tied to provider and the customer have related individual incentives to directly

Individual Incentives

Individual incentive plans Some do not exist or are not tied incentives to incentives. incentives

organizational organizational

organizational incentives.

4. Internal Training and Communications on Business Goals and Relationship Management The individuals responsible for managing the outsourcing relationship for the customer receive specific training on how to do this job. Furthermore, this same information is communicated to the larger end-user community. Improvement Recommended Relationship Manager Training Relationship Managers Relationship receive Training No managers Role of relationship manager Meets Minimal Standards Achieves Best Practices

formal receive detailed guidance is treated as a specialized on the organization's goals, skill, supported by ongoing intended relationship and training, the manager's role and continuous improvement. formal responsibilities. feedback, and process

End-user Training

Little

or

no

formal Formal communications of Ongoing of goals, objectives,

communications

and communications to identify facilitate improvement. continuous

goals and objectives to management structure at and resolve problems and the end-users of the time of transition. provider's services.

5. Vendor Training on Customer's Business Environment and Goals The fifth best practice is training for the vendor's personnel on the customer's business environment and goals. Although the vendor personnel are experts in their field, they require specific, ongoing training on the client's business and its goals. In this way, they develop the needed sensitivity to the issues driving their client's needs and how their services relate to them.

Improvement Recommended Vendor personnel Training

Meets Minimal Standards

Achieves Best Practices

Vendor personnel receive Key no training on business and its goals.

vendor

personnel All relevant vendor personnel them into the

client's receive formal training on receive ongoing training to client's business and goals integrate as part of transition. client. business and goals of the

6. Cultural Normalization The culture of an organization reflects its value system, what is and what isn't important. As such, it is a powerful factor in establishing how individuals perform their jobs and how they respond to various situations. Improvement Recommended Cultural awareness No effort Meets Standards to Relationship managers Relationship managers have identified have identified cultural cultural differences and meet regularly differences. to discuss and refine their mutual understanding. formal Regular joint meetings Multi-faceted program including: of cultures.

Minimal Achieves Best Practices

understand organizational cultures.

Culture integration

No

program to blend to facilitate integration organizational cultures. meetings and social events; education on company heritage and history;

rotating employees; participation meetings; in "internal"

participation in the partner's internal improvement programs, such as quality teams; jointly sponsored recognition.

7. Ongoing Exchange of Knowledge and Expertise The ongoing, free exchange of knowledge and expertise between the companies is a trademark of successful outsourcing engagements. Each partner has their own specialties which when shared, contribute to both the success of the relationship and the success of the partner. Improvement Recommended Programs Ongoing exchange expertise. Meets Standards for identifying exchanging organizations. Minimal Achieves Best Practices

for Little or no exchange Ad hoc exchange of Formal programs of expertise between expertise of the organizations. opportunities identified. as opportunities are expertise Might include:

and

between

Seminars, On-the-job experiences, Access to experts, Participation in jointly

sponsored task forces.

What's

Driving

the

Growth

of

BPO?

The Impact of Labor Arbitrage

To the casual observer, the fundamental sources of leverage - technology, best practices and scale -- that were behind the growth of IT outsourcing are now driving the pace of BPO outsourcing. But a deeper look reveals that the primary driver is the combination of labor arbitrage with these leverage points. Labor arbitrage modifies the fundamentals of outsourcing. This article outlines those changes. Adding Labor Arbitrage To the Outsourcing Tool Box Labor arbitrage is simply the ability to pay one labor pool less than another labor pool for accomplishing the same work, typically by substituting labor in one geography for labor in a different locale. The outsourcing industry is now applying labor arbitrage widely; it is transitioning from a novel approach to a competitive requirement. India, Eastern Europe, Latin America, Southeast Asia, and other regions are all serving as labor markets for outsourcing of activities. Historically, companies have applied labor arbitrage to manufacturing activities. Manufacturing moves tangible product from one geography to another; outsourcing moves information. Successfully doing this requires significant thought regarding work segmentation. Outsourcers have to break apart the work process into well-defined subactivities that can then be assigned to different resources in different geographies. The

challenge of managing across geographies heightens the importance of a careful segmentation. Additionally, labor arbitrage poses a significant challenge in managing risks (e.g., political and civil unrest, languages, currency, taxes) and in sustaining a labor arbitrage benefit as the demand for labor in a market increases. Done correctly, the leverage gained can be significant, ranging from a 30 to 80 percent savings. Some of these potential savings are "given back" through the increased cost of managing remotely and implementing a disciplined process, but companies are willing to carefully think through these other issues in order to achieve a significant impact. In Everest's experience, the best case scenario purely from exploiting labor arbitrage after all additional costs have been added back is in the 50 to 60 percent range. So, when is labor arbitrage an appropriate strategy? Typically, the content of the process to be moved offshore is people intensive with at least 40 percent of the process cost relating to labor expenses. Examples include software application development, claims processing, and many clerical functions. Clearly, the labor content is not the only factor impacting the decision or else face-to-face sales forces would be gone forever! Indeed, the decision on what, if anything, to move offshore must be taken seriously. Although the exact approach will differ, a tiered philosophy is emerging as the preferred strategy. In this strategy, customer intimate functions are performed on-site, high trust functions such as inbound call center are in-country or near shore (e.g., Canada), and well-defined transaction processing is performed at offshore locations. Impact on Technology's Role The segmenting of work flows required to use labor arbitrage as a leverage point typically changes the role of technology: It now plays a larger role in the process and it requires different types of technologies. For example, in paper-driven processes like benefits or claims processing, the paper must be converted into digital images that can be quickly and economically transferred across the globe. The actual activities completed by the lower cost labor may not be significantly different, but the process utilizes technology more intensively (i.e., electronic filing of forms, not paper). Additionally, suppliers deploy new technologies to make the redesigned process

efficient (e.g., imaging equipment, telecommunications networks). In some cases, these new technologies must address multi-lingual issues not previously considered. This technological "turbocharging" of formerly mundane processes has a cost that frequently diminishes some of the potential labor-only savings. Impact on Best Practices The tremendous economic benefits of labor arbitrage also drive increased investment in reengineering the process for maximum efficiency and effectiveness. Traditionally, outsourcers have expended some effort on reengineering people processes, but seldom at the level required in offshore situations. Additionally, the reengineered processes are more rigid in order to drive the standardization that allows for management of the process across geographies. Since no one person can literally see what is going on, the process must be so well-defined that issues seldom arise and when they do, the trouble-shooting process is straightforward. Outsourcers face another challenge in developing best practices: allowing some degree of customer-specific customization without losing the benefits of standardization. The trick in overcoming this challenge is to define the overall process in such a way that the buyer can tailor the most important requirements, while still allowing the outsourcing supplier to retain the required leverage points. In short, the best practice must reflect both the supplier's need for operational efficiency and buyer's need for customization. In an IT environment this can generally be handled through some level of automation not so with labor arbitrage. The customization impacts employee training and required skills sets. Impact on Scale In an offshore labor arbitrage situation, scale must be managed at three different levels: in-home country, local offshore sites, and across offshore sites. In-home country The infrastructure required to transmit the work material to the offshore site must be designed to achieve sufficient scale. In some cases, the required scale can be significant.

For example, imaging centers only become economical when designed for high volumes with 24 hour operations. However, the transportation cost of paper (both time and money) to an imaging center can also be significant. In this situation, outsourcing suppliers must be able to create regional imaging centers that achieve the required scale. Offshore sites In many cases offshore efforts require that the outsourcing supplier develop an entire "community" within a country. These sites typically employ thousands of resources (people), thereby requiring large scale recruiting and training efforts (and sometimes even housing). The facilities must also be operationally robust, often requiring redundant power systems, satellite up-links for data transmission, and large-scale computer systems. Across offshore countries Over time outsourcing suppliers are developing the ability to move work between different offshore sites. The potential for short-term disruptions or longer-term changes in the labor market necessitate that work become "portable" across sites. This places another burden of scale on suppliers and their ability to quickly and cost-effectively rebalance work across different geographic regions. Labor arbitrage is playing a significant role in accelerating the pace of BPO. However, buyers and suppliers must not forget that labor arbitrage is only part of leverage equation for successful outsourcing relationships. When labor arbitrage utilizes best practice processes designed around appropriate technologies and is executed at scale, the power of the solution can be tremendous. What's The Driving Emergence the of Growth Transaction of BPO? Engines

In Part 1 in November's BPO Journal, we discussed how labor arbitrage impacts the ability of outsourcing providers to capture leverage benefits. Due to the significant cost savings potential offered purely by labor arbitrage (30 to 80 percent depending upon the geography), outsourcing providers are compelled to find new ways to utilize other sources of leverage such as technology, best practices, and scale. After applying those additional sources of leverage, the maximum potential cost savings is typically reduced to 50 to 60 percent because of the additional cost of remotely running and managing operations in a lower cost labor market. We term the resulting solution that an outsourcing provider offers by applying labor arbitrage with other sources of leverage a "transaction engine." Definition of a "Transaction Engine" The term transaction engine is intended to capture the repetitive and scalable nature of the solutions outsourcing providers develop to provide BPO services through the use of labor arbitrage. "Transaction" refers to the well defined and repeatable nature of how an outsourcing provider manages the activities of the solution. For example, as described in Part 1 of this series, the outsourced process must be carefully defined and disaggregated to ensure that roles and responsibilities are exceptionally clear for a process to be managed across time zones, cultures, and multiple locations. This is not to suggest that the activities are simple or completely automated, but rather that the inputs, outputs, and working rules are so well-defined that there is no doubt as to how the work will be completed.

"Engine" refers to the scalable nature of the solutions of providers. Much like the engine of an automobile, many different components (or companies) can draw power from the engine. In an automobile, the transmission, air conditioner, and radio all draw power from the engine. Similarly, in a BPO transaction engine, different companies can derive similar benefits (power) from the engine, although each company's benefits may be put to slightly different uses. For example, an outsourced human resources (HR) service may provide each client with reliable and efficient management of employee records, payroll, and benefits. However, some companies may capture value from this service through simple cost reductions while others may receive benefits from the ability to more quickly scale their organizations and operations through mergers and divestitures. Accordingly, the service offering is typically built around the principle of "mass customization" - the ability to tailor critical aspects of the service while retaining the underlying leverage provided by the scalable solution. The Two Types of Repetitive Activities in a Transaction Engine Much of the transaction engine is designed to handle activities that are automated. However, not all of these activities are completed by computer systems transferring information to and fro. Some automated activities are completed by humans working within explicit guidelines that leave no room for judgment or analysis. For example, clerical resources may work from scanned images to code the information on an application or invoice into an information system. In addition to automated activities, a second set of activities that we call analytical activities are critical components of transaction engines. These activities may be significantly supported by information systems, but, at the end of the day require human judgment and analysis. Example activities requiring analysis include:

Finance and Accounting

o o o

Exercising discretion in release of payments. Deciding whether customers meet conditions to receive discounts. Identifying additional opportunities to reduce working capital.

Appropriately interpreting tax laws or amortization guidelines for items booked to the general ledger.

HR
o o

Counseling employees on understanding benefits or 401k plans Coaching managers on how to apply HR policies

Although the analysis activities are not naturally top-of-mind when people think about BPO, they are often critical components of the transaction engines developed by providers. These analysis activities become critical because the ability of a provider to deliver business impact beyond simple cost savings is directly linked to the provider's ability to develop and act upon insights that aid in better managing the business impact of the processes for which they are responsible. Synergy Across the Two Types of Repetitive Activities By combining both automated activities and analysis activities into the transaction engine, an important synergy is released: self-service. Self-service is the ability of a user to input, access, and utilize information without the support of another human. Shifting some of the work to the user (e.g., new employees filling out forms at a kiosk in HR) creates a more efficient use of time for both the company and the user. For example, when an employee wishes to change her benefit plan, a self-service model that can be completed in the evening allows input from the employee's spouse. In this situation, no human resource from the company must be involved in the process and the employee is able to make changes at a time convenient for her (and likely to have an easier decision process with her spouse). Synergies of Grouping Processes into the Transaction Engine By combining an appropriate scope of processes into a transaction engine, an outsourcing provider is able to capture synergies across processes that buyers of outsourcing services often don't recognize in their initial outsourcing plans. Examples of cross-process synergies include:

Linking benefits and payroll systems allows a change to benefits to be automatically reflected in payroll, thereby reducing clerical work. Creating a single HR system helps uncover the total healthcare costs and plan usage to better negotiate coverage and policies with insurance companies. Implementing a single GL/AP vehicle allows better analysis of spend across vendors, thereby supporting the ability to gain optimal discounts in procurement efforts.

In short, these cross-process synergies provided by a transaction engine provide increased visibility into the operation of the company. This increased visibility provides an opportunity for an outsourcing provider to both: 1. Collect new information that provides insights, and 2. Act on these insights to gain benefit for their customers. With transaction engines, buyers of outsourcing services can now hold providers of the transaction engines accountable for identifying and delivering impact from cross-process synergies. However, the scope of the processes included in the relationship must be consistent with the desire to capture cross-process synergies. Transaction engines are a powerful, new addition to BPO. Companies considering a BPO solution should carefully investigate the capabilities of different transaction engines and determine which ones are appropriate for their needs. What's Driving the Growth of BPO?

Examples of Transaction Engines By Eric Simonson, Everest Group

In Part 2 in December's BPO Outsourcing Journal, we defined the term "transaction engine." Transaction engines have emerged in BPO to provide solutions to repetitive activities. These engines incorporate labor arbitrage and economies of scale into the leverage (creation of benefits) provided by the solution. Additionally, repetitive activities in a transaction engine include both "automated" activities (clear rules) and "analysis activities" (some level of judgment). As a result, transaction engines can capture additional synergies through self-service and appropriately grouping processes to capture cross-process synergies. Here is a profile of the different types of transaction engines that are emerging. The Landscape of Transaction Engines Transaction engines should be analyzed using two primary dimensions: 1. Maturity of the solution provided by the transaction engine. 2. Relative importance of labor arbitrage to improve the overall value proposition of the solution. The maturity of a transaction engine relates to the degree to which the solution has been "packaged" to become a standardized and repeatable platform across multiple customers (versus being highly customized for each customer). To become mature, a solution must identify the critical components of the processes that can be used across different customers and then build the solution to provide this platform. The more mature the solution, the greater the benefit to buyers of the solution because:

The supplier's solution can be used "off the shelf," eliminating the need to invest in building a solution for the next customer and more efficiently spreading the benefit of ongoing investments in the solution to all customers of the solution.

More of the process can be built around principles of self-service, which further improves the value proposition. Self-service can both decrease the cost of the process (e.g., shifting work to employees or customers) and improve the service levels of the solution (e.g., information is more readily available, transactions can be completed quickly and easily).

A common platform provides additional opportunities to aggregate the procurement of services and products (e.g., tax filing, COBRA administration, employee benefits) within the solution, thereby helping achieve greater purchasing power on behalf of all customers of the solution.

Not surprisingly, transaction engine solutions often reach maturity when focused on an industry with common issues, conventions and sub-processes around which the solution can be built. Accordingly, finance and accounting (F&A) solutions, which must often reflect the differences of industries (e.g., revenue recognition rules, accounting conventions), are typically not as mature as human resources (HR) solutions, which focus on processes that tend to be more common across industries (e.g., maintaining employee records, payroll, managing benefits). Depending upon the labor content in the scope of work, labor arbitrage becomes more or less important to developing a powerful transaction engine. In some cases, the relatively small share of labor in the overall cost structure of a transaction engine suggests little, if any, offshore labor components. For those processes with significant labor requirements, effectively utilizing offshore approaches has become a strategic imperative. Given this understanding of the two primary dimensions that help define transaction engines, we will now review four examples of transaction engines. Example #1: TPA for Life Insurance Policies

Third-Party Administration (TPA) for servicing customers of life insurance policies is among the oldest and most mature of transaction engines, although historically not broadly utilized. This is on the verge of changing significantly. For many years life insurance companies have used TPA suppliers to take over "closed book" policies (often acquired during a merger, bankruptcy or market exit) or to provide the initial support for entering new markets that do not yet warrant significant investment on the part of the insurance provider. This modest use of an outsourced TPA solution was driven by the economic case in which transition costs generally outweighed the modest ongoing cost savings. The exceptions were situations in which investment was required regardless of who supported the ongoing solution. Since TPA has a tremendous component of labor, the emergence of labor arbitrage is fundamentally changing the ongoing cost structure, thereby altering the economic case to favor outsourced solutions. Example #2: Human Resources HR transaction engines are reaching maturity, although they typically do not merit the same level of offshore labor arbitrage as TPA. The rapid emergence of broad, multiprocess HR solutions has been aided by the fact that companies have outsourced a subset of the broad solution processes--like payroll and benefits administration--for some time. The solutions of Accenture and Exult are the furthest along on this path. Exult's myHRSM toolkit has basically reached "plug and play" status for those companies willing to implement a solution that can be shared basically "as-is." This solution is highly automated and built upon self-service principles, thereby limiting the amount of labor content required to deliver the overall solution. Exult conducts much of the application development and maintenance of the solution offshore but operates its call center support in the United States. Kevin Campbell, Exult Chief Operating Officer, says, "While each client has different needs for its self-service HR applications, we've found large employers desire many of the same functions. myHR's flexible tool kit allows us to quickly enhance the employee/manager experience without re-inventing the wheel each time. And because we have experience implementing self-service across multiple clients, we apply the

cumulative lessons learned to continually enhance the speed and ease of use of each new implementation." Indeed, the ability to reduce customization of existing solutions is an important driver for capturing value. According to Glenn Davidson, head of marketing for Accenture HR Services, "The less customization required by the client, the better the solution's economics." Besides those suppliers that already have leverageable, multi-customer solutions, other suppliers are in the process of aggressively building their own solutions. A good example is ACS's acquisition of Motorola's business. Over time, ACS will seek to take this customized solution and convert it into a more broadly applicable option. Example #3: Finance and Accounting No mature transaction engine has yet emerged in the F&A space, although a number of solutions are starting to take form. For example, IBM is currently serving a number of customers out of its Tulsa operations center. The typical solution supports accounts payable, accounts receivable, general ledger, financial reporting, and other processes. F&A transaction engines should emerge more slowly than their HR counterparts for two reasons: 1. Many F&A processes are specific to individual industries, thereby requiring a longer timeframe to develop sufficient scale within an industry. 2. A significant portion of F&A processes contain significant labor components, thereby compelling providers to eventually establish offshore capabilities. In some cases this is being done from the inception of the solution, in other cases providers are evaluating how to move existing solutions offshore. As an example of the industry-specific nature of F&A solutions, many providers are creating "revenue cycle management" capabilities for the healthcare industry. The solutions seek to dramatically shorten the cycle time from provision of services to reimbursement from insurance companies while also capturing a higher yield of reimbursement--clear value add to the bottom line.

Other industries for which specific solutions are being discussed include the oil and gas sector (complicated mineral rights and revenue recognition issues) and the railway sector (tracking the financials off hand-offs of freight between different railroads). Example #4: Procurement Many F&A transaction engines are being developed with an end goal of reaching deeply into procurement processes to create even more leverage from the solution. These solutions are clearly amongst the most nascent in the marketplace. However, Everest Group has seen the potential for tremendous value creation from these solutions--in some cases exceeding $100 million per year. The nature of procurement functions suggests that these solutions have the potential to mature rather quickly (comparatively easy to leverage across industries), but will not be significantly impacted by labor arbitrage (automated nature of solutions minimize the labor component of the process). Typically these solutions are designed to address two issues: the cost of the item being purchased and the cost of procurement transaction itself. Although few in number, these solutions can generally be utilized across industries, thereby gaining tremendous purchasing power for the provider and providing broad visibility into demand for balancing the flow of goods and services. This allows the outsourcing provider to reduce the total cost of the item being purchased. Additionally, by implementing a highly automated transaction interface, the provider gains the benefit of a lower cost purchasing interface. This interface, often in a selfservice arrangement, provides two other ancillary benefits that help drive down the cost of the purchased items. The first ancillary benefit is that the automated interface facilitates analysis of spend, thereby supporting negotiations with vendors, aggregation of spend across vendors, and many other efforts focused on decreasing the cost of purchased materials (e.g., capture of volume discounts). The second ancillary benefit is that the self-service nature of the automated engine facilitates greater compliance from across the organization, thereby ensuring benefits of vendor relationships are captured and bring even more volume into the system.

Transaction engines are powerful new solutions, although the maturity of different transaction engines varies widely. Potential buyers of outsourcing services should carefully investigate which options are available to them and how the engines might mature to provide increased benefits over time. Building an Outsourcing Practice

When Jim Smolesky got into the facilities management business, he figured he'd have to be part plumber, part electrician, even part structural engineer. But he never guessed he'd have to be part psychologist, too. Smolesky, executive vice president for Facilities West Inc., an outsourcing provider in Scottsdale, Arizona, had signed an outsourcing contract with a government agency. The agency had been housed in a building that was erected in the early 1900's which was now being modernized. Building codes today, however, are much more restrictive than they were 100 years ago. The Americans With Disabilities Act significantly reduced the useable office space because that law required wider aisles to allow a wheelchair to pass between the desks. Losing this much space turned out to be a big handicap for the government agency. Smolesky and his staff had to sit down with each department and tell them squarely about their reduced square footage. Then the outsourcing expert had to determine what items the agency, which had been parked in commodious leased space, could actually return to the new digs. An even bigger dilemma was what to do with the items that would no longer fit.

Condensing office space turned out to be harder than fixing an air conditioning condenser. These workers had collected lots of stuff that had sentimental value to them which now wasn't going to fit. "It was a real selling job," says Smolesky with a sigh.

Experience to Handle Every Problem Smolesky says companies that have multiple satellite offices form the foundation of the vendor's call center business. "Customers like it because it's a one call system," he reports. Every month the outsourcing provider sends each customer a synopsis of all its repair costs. Some clients even outsource the facility's bill payments to Facilities West. The firm also provides on site management staff. One corporate client has a call center located a long way from its corporate headquarters. The top executives want to concentrate on the activities of the call center and don't want to worry about the plumbing. So a Facilities West employee provides the facility manager who works with all repair crews. If this manager runs across a problem s/he is unable to handle, help is close at hand. Facilities West has 50 employees on its payroll, all expert in some specialty. "There's always someone on our staff who has dealt with that issue before," says Smolesky. Smolesky says facilities outsourcing makes sense because executives today don't have time to manage half a dozen different contracts or call someone else if an esoteric problem arises. Outsourcing is also the perfect solution for short term projects. Facilities West has been known to turn down business. Some prospects have shown up on the doorstep wanting to outsource "because the building down the street did." The vendor studies every prospect and then makes a recommendation. "We have told clients, 'We'd love to have your business, but outsourcing is not in your best interest,'" he reports. Smolesky says outsourcing relationships work when both parties view the contract as a partnership. "Our ideal client is a company that views outsourcing as a way to enhance their business," says the executive.

Working Out Disputes Until the Client is Happy The firm purposely has no service level agreements (SLA), although it would be happy to include them in a contract if the client asks. "We try to avoid anything that would cause us to say, 'No, that's not in the contract,'" says Smolesky. If Facilities West is not meeting a client's expectations, the vendor sits down with the client to reconfigure the program to make them happy. "We don't want to be in a confrontational relationship," he explains.

The BPO juggernaut starts rolling How technology compresses change! It is no longer the age of software, which has matured, is facing pricing pressure and has lost its stock market shine. It is now the age of business process outsourcing. Till some time ago it used to be called IT-enabled services, denoting the manner in which individual services like data entry, responding to calls, medical transcription and simple data processing were delivered. But somewhere along the line, entire business processes began to get outsourced, giving rise to BPO. The pioneers in India who first began to host outsourced services in the country were American Express and British Airways. The big break came when GE began to set up large call centres around Delhi, thus demonstrating the scalability of the operations high visibility. Today BPO is the rage. In two years time, the total number of people employed in BPO has gone up tenfold to 200,000 and on current reckoning a similar tenfold growth will take place in another couple of years. Clearly, taking after software, India has emerged as the preferred destination for companies in mature economies seeking to beat down costs and improve productivities by outsourcing entire business processes at both the front and back office.

Ireland, the Philippines, Australia and China (to serve Japan) are all competitors but, in this volume business only India has the numbers not just today, but also is likely to in the foreseeable future. As numbers come with a skill tag attached to them, Indian ability to deliver numbers also means the ability to ensure quality which keeps improving. By all accounts, in terms of potential, cross-border outsourcing has barely scratched the surface. For example, an important outsourced service, HR functions, has barely begun in India. The largest outsourcing deals to come to India so far have been under $200 million, whereas large deals within developed economies are upwards of $1 billion. Besides, notions of what can be outsourced are changing by the day. Indian ability to gain from this outsourcing potential is based on the gradual acceptance of and familiarisation with the India brand. Says a US-based Indian software professional, "The taxi driver's opening gambit nowadays is, on seeing that you are Indian, to ask you if you are in software." It is slowly becoming unnecessary for call centre agents to adopt non-Indian names. Indian names are OK so long as they are not very complicated. The Western customer now knows and accepts that his call is being answered from conceivably anywhere in the world and there is also a realisation and expectation that if the response is from India, then his technical problem will be taken care of. Within India outsourcing has followed several paths. First it was the MNCs that set up their captive centres to establish the proof of concept. Then the Indian third party BPO operations had to do the proving all over again. Thereafter has come the stage of dualism whereby outsourcers have both their own operations and access third party services.

The latest trend consists of more and more complex services like technical support 'my PC or our ERP has this glitch' and processing of tax returns under US GAAP being outsourced. And growth results from rapid upscaling. A company comes in with one process and then, within months, decides to bring in several more proceeds with rapid hiring and acquisition of office space. In the general satisfaction in India over the success in BPO taking up the slack in software growth, there is as yet inadequate realisation of its implication on a much wider area beyond its immediate vicinity. The first and most significant impact is on education. Just as software has changed the face of India's technical education, BPO will transform the market for language and professional skills. The stifling of white collar job growth as a result of all round downsizing in the organised sector will end. Already a new vista is opening up before middle class Indians: that of working in large numbers for, if not MNCs then their surrogates. Education till the undergraduate level is likely to become more skills and capabilities oriented and expand the market for private education. The rapidly expanding BPO industry is also having an impact on office space. Not only has BPO thrown a lifeline to the gasping property market, it has also forced standards to go up. There is an increasing demand for construction to conform to international standards and cities which fail to measure up are losing out. But the impact goes deeper. A rare bandh in Bangalore over Cauvery waters last year had BPO managers struggling to explain to their clients what a bandh was and how it wouldn't affect operations.

A state big in BPO cannot afford to have any kind of disruption, be it over traffic, civic amenities, electricity or even law and order. If you are manning contact centres for half the Fortune 500 companies, your show must never stop. The BPO impact does not end there. It has strategic implications. If a large chunk of corporate America and a bit of corporate Europe has a stake in Indian stability and business continuity, irresponsible Indian leaders who glibly talk of teaching Pakistan a lesson will have to be disciplined. Conversely, export of terrorism from Pakistan which destabilises India will not be tolerated by those companies. By developing a symbiotic link with Western business so that it has to depend on you for its day to day operations, you get them on your side. As US back and front offices sprout in India, its ability to lobby in Washington will improve, courtesy its MNC clients. These are some of the extensive ramifications of what BPO will be doing for India, which will go way beyond what software has so far done. How Outsourcing Builds Shareholder Value One of the great benefits to outsourcing is that it builds an organization's shareholder value. We will look at the three main components of shareholder value and discuss how outsourcing contributes to each one. Costs Reducing Operational Costs To begin with, outsourcing can impact the cost side of the profit and loss equation. Michael F. Corbett's research has shown that by outsourcing many organizations show an immediate 10-15% reductions in operating costs. These lower costs are the result of applying best in class business processes and technology. Achieving and sustaining operational cost savings requires working with a provider to change people, process and

technology, or some combination. The provider must be given the discretion to apply their judgement and expertise in ways that will by necessity deviate from the current way of doing business. Aramark, the major operations and food service provider, took on the task of delivering 16,000 meals a day at the Houston Public School District and projecting saving $16.7 million over five years, or better than 10% annually. In this case Aramark is compelled to do it without changing staff levels except by attrition. Aramark is succeeding because they radically changed the technology of food delivery, reducing spoilage and loss and revamped the management system creating huge efficiencies. Accelerate Reengineering Benefits Outsourcing is often a byproduct of another powerful management tool - business process reengineering. By outsourcing non-core activities many organizations accelerate the benefits of existing redesign or reengineering programs. Instead of being alternative strategies, outsourcing and reengineering can work hand in hand. Outsourcing allows an organization to immediately realize the anticipated benefits of reengineering by having an outside organization - one that is already reengineered to world-class standards - take over the process. Address Operational Shortcomings Where organizations are failing to stay within budget, using outsourcing service providers to deliver services is a major cost savings. In the early 1990's Blue Cross and Blue Shield or Massachusetts poured millions of dollars into a new computer system, the infamous System 21. The insurer lacked the technical and managerial ability to bring the new system on-line anywhere within sight of budget. Outsourcing was a good alternative. There are countless examples of organizations lacking the internal skills and resources to deliver world-class service, and not wanting to make the investment to get them. The Detroit Medical Center, which in 1999 signed an information services outsourcing contract for $1 Billion over ten years, believes that by working with Compucom they can address the information and technology bottlenecks in the hospital to improve accounting and payments and drive revenue, increase service levels to medical staff creating

enhanced efficiency and effectiveness, and returning the hospital system to financial good health. All this value will be created by outsourcing information technology and working with a provider who has the capability to make the hospital system better and the wherewithal to make the investments and commitments to technology. They will make these investments because they can leverage them with other clients (see Arthur Andersen and General Motors for another recent example). Assets Reduced Competition for Capital Funds When a business activity is outsourced the capital investments become the responsibility of the provider. It's of tremendous benefit to the buyer of outsourcing services because it frees their capital dollars to be directed toward the activities critical to their business. Kathy Hudson, former CIO of Kodak, explained one of the driving forces behind their decision to outsource in 1989 as being just this reason. When faced with the need to invest $90 Million in a new computer center she and Kodak made the decision that the shareholder's monies could be better invested in the company's core business. Kodak outsourced to IBM in a landmark deal that was a watershed for outsourcing in the 1990's. Cash Infusion When McDonnell Douglas outsourced it's information technology in 1993 it sold some of the assets to the provider and realized a significant cash infusion as a result. Many firms have done this with their infrastructure, facilities, and discrete assets like data centers. For McDonnell Douglas the money couldn't have come at a better time, it converted a fixed asset to cash so it could be used elsewhere. These kinds of benefits only exist when large assets are in the picture, but assets take many forms including intellectual property and human capital. Later McDonnell Douglas was bought by Boeing and which had a very difference culture when it came to outsourcing functions like information technology. In 1999 Boeing outsourced a major part of information technology and was trying to change it's culture to embrace outsourcing.

Shared Risks In a well-know print ad ADP, the giant payroll processing outsourcing service provider, states in a caption that congress gives corporate America hundreds of new reasons to work with ADP each year. Those reasons are changes to the US tax code and other legislation associated with payroll. ADP is reminding us that we all can't keep up with every little payroll related change, and that it's too risky to go it alone without the expert advice of a firm that can and will expend the effort to keep up. ADP adds value to all of its client by taking on the burden of monitoring environmental change and the risk of changenamely mistakes. This ability to share risk, to in a way shift the risk to those better equipped and prepared to manage itwhether they be risks associated with the regulatory environment with ADP, the labor market with Professional Employment Organizations (PEOs), or energy prices with companies like Excelon and Enron Energy Servicesis critical to an organization being able to focus its own attention constructively. Think of it this way, how would your organization be able to concentrate, focus and add value to your customers if you always had to worry about every environmental contingency that came up. Outsourcing is a way to share risks with firms who are better able to manage those risks, it's economic efficiency. Revenue Improve Business Focus It's difficult to imagine that by outsourcing something like facilities management, information technology, or administrative services the firm can increase its revenue but it's true. It may be indirect but by improving the business' focus by pealing off the noncore activities the firm improves its ability to focus on revenue generating activities. Do your company's top business development executives answer the main switchboard and worry about updating routers? Probably not. In your organization you've developed a division of labor which more or less assigns jobs to people and salary levels to jobs based on their relative talents, worth and contribution. Any smart CEO doesn't distract their business development people with other duties because it will ultimately affect their

ability to generate revenue. Conversely, if you can remove distractions from their work life the additional focus should allow the business development executives to generate more revenue. Extend the ideas of the division of labor and labor market beyond the artificial boundary of your organization. If you can engage another firm to perform some of the tasks that distract from your firm's ability to focus on customers and generating revenue then you are far ahead. Leverage World-Class Expertise Outsourcing can leverage world-class expertise when a non-core activity is outsourced. A provider with greater skill sets and competencies in that specific area can add tremendous value to the organization through their performance of the work. By outsourcing to providers who are best-in-class their expertise becomes funnels into your company and enables your organization to notch up to ever higher levels in your own core competencies. Leverage World-Class Resources By the very nature of their specialization, outsourcing providers bring extensive worldclass resources to meeting the needs of their customers. Partnering with an organization that has world-class capabilities can offer access to new technology, tools, and techniques that the organization may not currently possess; better career opportunities for personnel who transition to the outsourcing provider; more structured methodologies, procedures, and documentation; as well as a competitive advantage through expanded skills.

How

Do

You

Buy

BPO?

Metrics Measure Performance One of the reasons BPO outsourcing can provide economies of scale and leverage (which gives outsourcing its power) is because the finance and accounting function is similar across both industries and companies. Much of the process has been standardized. I'd estimate as much as 80 percent of the finance and accounting process is similar for each buyer. That means buyers have a limited amount of customization to make BPO fit their unique needs. This significant standardization makes BPO boundaries relatively clear. The Outsourcing Exchange provides our buyers with detailed process descriptions that have definite process boundaries, so there will be little or no misunderstanding later. The second important consideration is the metrics associated with performance. As I mentioned in my book, you get what you inspect, not what you expect. Metrics and service level agreements (SLA) provide a quantifiable yardstick for the outsourcing relationship. They show buyers they got what they paid for.

Governance becomes important once the outsourcing relationship begins. Managing an outsourcing relationship is necessary for both parties to succeed. The Outsourcing Exchange includes a detailed governance module. BPO buyers must also consider the switching and implementation costs. What is the transition really going to cost? The transition period is another place where responsibilities must be clearly defined. Who is going to do what? And both sides must agree on an appropriate time frame. All of these elements become part of your outsourcing contract. You should be able to tell your prospective vendors:

What you want to buy; How you want to measure results; How you plan to manage the relationship; The price you want to pay.

Negotiate Price Last Price is last on that list for a reason. I maintain price is the final element the two parties should discuss. As I outlined in the book, too many buyers negotiated the price first and then discussed everything else after the dollars were set in stone. What happens during the course of the relationship is the price goes up to get the services you really wanted or the quality of the work goes down because the vendor attempts to get everything done as cheaply as possible to remain in your price parameters. It's far better to negotiate the exact services you want. Then determine a price for them. If you want to drive down the price, use competition between vendors to do that. I advise having multiple vendors bidding on your process. Price becomes part of the competition. If you select a single vendor at the outset, you might get some unpleasant surprises down the road. How do you find a vendor? In finance and accounting, you can look at traditional leaders like Arthur Andersen or PricewaterhouseCoopers. New BPO outsourcers like LeapSource are coming on strong. The Outsourcing Center has the largest BPO supplier database on

the Internet. Buyers can easily sort through the extensive supplier list to build a short list that fits their needs. Outsourcing a business process can be a complicated affair. We designed our Outsourcing Exchange to assure our buyers a high quality product that can be customized to fit their needs. The Exchange compresses the contract negotiation time and substantially lowers the cost of the outsourcing contract process. In today's new economy, outsourcing may be the key to economic survival. Learning how to buy a BPO provider can be a very important lesson. How to Select a BPO Supplier

Is there a difference in the methodology of selecting a BPO supplier as opposed to a traditional IT outsourcing supplier? Robert Joslin, senior consultant with the Everest Group, says there are definitely some crucial factors that need to be taken into consideration. He sorts through the issues and here presents key points as a guide for buyers embarking into the world of BPO. Assessment You should establish a team of key people to consider all aspects of whether to outsource. The team's first task is to look at the organization's reasons to outsource. It might be to reduce or control operating costs, free up resources to be able to focus on core business, gain access to technology capabilities or any number of other reasons. Then identify areas that would fit with outsourcing. Establish your current baseline costs and the level of performance you have achieved. Your team then needs to analyze whether it makes sense

to go forward with outsourcing. You should confirm that all team members understand the ramifications of outsourcing in that your organization will be turning over the control of your outsourced process to a supplier. The supplier will manage the process, and you'll be managing the supplier. Distinguishing Features Joslin explains the most important characteristics to seek in a BPO supplier. "You should look first at the market presence of the supplier," he advises. "Is your supplier a niche player or a major player? Does it provide the scope and scale of services and service levels you are going to need?" Process expertise is always going to be a critical factor. Secondly, he says, "The BPO world sometimes reaches fingers into a lot more areas." If your outsourced process is financials or HR, for example, those processes touch everything in your organization; and you'll need a suppler with capability to integrate or interface. This is even more critical if your organization is going to outsource other processes to other vendors. You need to know how well the supplier will work with other vendors. "You don't want your supplier ever to be a roadblock to getting things done," he advises. A third critical factor is to choose a supplier that has a solid change management process and mechanism and one that can integrate into your corporate change management process. Planning for a Goal of Continual Process Improvement When it is determined that a change of process is needed, your Request for Quote (RFQ) should define the direction your company is headed toward with the process. "The RFQ must let the bidding suppliers know that you are have an expectation for continual process improvement, and that the eventual contract is to be structured as such. In this way, the suppliers will be able to map a continual improvement into their bids." Joslin recommends identifying business drivers and structuring continual process improvement around those drivers. For example, in an objective to revamp your accounts receivable process, the goal would be to improve your cash flow. One driver might be the

aging of the bills. One of your targets for continual improvement, then, might be to have the bills on hand for a shorter timeframe, thus decreasing the aging of the bills and increasing your cash flow. Regarding targets the supplier will aim to hit, he advises buyers to raise the bar annually. "Even if the supplier is already exceeding what your target for that year is, you continue raising the bar so that there won't be any slipping down in the level of service." All of the targets and algorithms are set out in detail in the contract and service level agreement. Steer Clear of Hazards Unfortunately, buyers run into problems if they don't adequately and clearly describe the scope and boundaries of the process definition. Issues arise when you think you included something in the process scope but, in reality, neglected to include it. Another challenge is not being able to isolate a component of the process as being out of scope so that you can control it. Joslin says the buyer must determine what it needs and wants and then tell the supplier what that is. Joslin advises buyers to get multiple suppliers' input and not to approach a single supplier to design solutions, even if the supplier has a consulting alliance. "It's better to drive the solution through an RFQ process and let the market help you decide what to do." This frequently happens when buyers already have a relationship with a supplier or already know of the world-renowned resources and capabilities of the supplier. "It almost seems to make logical sense to go to them and have them design a solution for you" he says. "But you don't get the advantage of multiple viewpoints. If you go to the supplier to design a solution, you will get an isolated perspective; and you'll get the version that fits best in the supplier's environment." The best way to handle it is to state the outcome you want and let multiple suppliers run it through their solution process. "You may still end up with the world-class supplier you had already considered, but they will probably sharpen the pencil a little bit more when they are competing with somebody else," Joslin explains. After 15 years of experience working with several suppliers, Joslin saw that deals went a lot smoother for both parties when there was an external consultant advising the buyer.

He decided to "get in the middle" and assist buyers. Now with two years of helping Everest Group clients in North America, Australia, South Africa and Europe with large BPO and IT agreements, his primary recommendation to buyers who have not been through an outsourcing process before is to get external assistance. "The facts clearly show that the success of your engagement is built upon how solid your initial contract, service definitions and metrics are." Learning to live with BPO success

Not so long ago, the news that HCL Technologies has won the largest ever business process outsourcing deal from a global leader like British Telecom would have been received with unalloyed joy as a sign that bigger and bigger orders are coming to India. But today the good feeling will be tempered by two considerations. The lesser one is that HCL Technologies has had to compete mightily to get this deal and must have had to quote very fine prices. (Is it left with anything?) Primarily a software services company which is doing none too well in its main line of business, the BPO deal will be a shot in the arm for it. If you read this along with the market expectation that the guidances to be issued by software companies for the just commenced year (2003-04) will be none too positive, a sobering thought strikes you: Is the BPO growth coming along with a sharp slowdown in software growth? Considering the fact that billing rates for BPO are far lower than for software services, the development has its own implication. If overall software and services export growth (software plus IT enabled services) remains below 30 per cent for too long, then the grand goal of $ 50 billion exports by this sector by 2008, now five years away, will be missed. To ensure that it is not, two strategies have to be adopted. One, get software services to grow faster and two, remove the impediments in the way of BPO services growing at 50 per cent plus for at least a few years. While the former is linked to global technology spend, over which India has little control, the latter is an

opportunity that has effectively arrived for India. It is emerging as a prime destination for BPO and everything has to be done to make the best out of that opportunity. The good feeling over the BT order has to be tempered for a second and very serious reason. A month ago the British trade union had made a strong protest against jobs leaving Britain through BPO. As Indian companies score more and more successes on the outsourcing front leading to job losses in the developed economies, resentment against the Indian IT sector is likely to grow. This is going to find expression in several ways: public campaign and protest against outsourcing, lobbying for legislation to restrict it (outlawing it is not possible) and action against the visible face of Indian IT in the developed economies -- the professionals who work onsite with customers. This brings us to the turmoil within the Indian IT sector created by the Dutch government action against Indian IT professionals. Indians have to be mentally prepared for more such developments which will be directly proportional to the success in securing BPO or software outsourcing orders. IT Minister Arun Shourie has said that Indians must realise that in this matter India is a first world country (an exporter of competitively priced skills) and mentally prepare themselves accordingly. The Japanese automobile industry has had to live with every conceivable accusation against its trade practices by the US automobile industry and bullying (fixing of export quotas) by the US government. What is needed now is mental strength so as not to get rattled and a proper strategy. The strategy has to come mainly from the commerce ministry. India should strive for the right sort of provisions to be incorporated in the General Agreement on Trade in Services at the Millennium round of trade negotiations currently on.

It should work for GATS quotas for visas, over and above the visas currently being issued on a discretionary basis, so that professionals can move and work freely in WTO member countries. India has made proposals in this regard but so far no serious response has come from developed countries. GATS was brought into the Uruguay round of agreements against initial opposition by India. It is a reflection of the changing nature of parts of the India economy that the agreement that developed countries sought and obtained to retain a degree of trade advantage, by opening up services as manufacturing activity slowly slipped out of their hands, should become a weapon in Indian hands. Says trade expert Arun Goyal, "It will be much better to get something out of GATS with binding commitments and WTO rules behind them, rather than discretionary quotas given bilaterally and withdrawn arbitrarily." Look at the German green card, issued with fanfare one day, and its withdrawal announced another day; or look at the US H1B visas whose numbers are altered at will. Visas stand at the root of the disorientation currently faced by Indian IT firms and professionals. It takes inordinately long to get a work permit issued. So to do a quick services job the business visa is often resorted to. But views differ on what you can do with a business visa. Senior IT managers say that the rules are that you can go and sell and implement a sale on a business visa, but if you have to do a maintenance job for which you are going to bill the client, then you should get a work permit. Visa issuing countries would tend to agree with this. But they have so far willingly turned a blind eye to the so called misuse of the business visa, that is until the job market changed and Indian IT professionals working onsite became a domestic political issue.

So the solution is two fold. One, be mentally prepared to live with trade friction and two, work within the WTO with a long-term focus and not be brought shouting and screaming to the signing table for agreements every time.

Haste Makes Waste: How to Avoid Outsourcing Problems Background A study of lessons learned in 50 outsourcing relationships was undertaken with the intent of determining the most frequently encountered relationship problems and learning how the parties worked together to resolve those challenges. The fact is, the study reveals a more significant finding: why the problems occurred. That finding, together with conclusions and recommendations on how to avoid the problems, is the topic of this paper.

Characteristics of the Case Studies Examined from the buyers perspective Represent government and private sectors Represent scenarios in Europe, Asia-Pacific, China, Canada and the U.S. Outsourced processes include: call center, insurance claims administration and systems, contract manufacturing, eLearning, total IT, facilities management, human resources, finance and accounting, application development, healthcare systems Large, mid-size and small companies Assessment, due diligence and contract negotiation phases occurred in 19982001

The research indicates two broad categories for the types of lessons learned, as illustrated in Figure 1 below. This paper discusses the impacts and makes recommendations only for the set of problems described below as underestimations and miscalculations.

Mistaken Approach Within the case studies are a number of different scenarios with the common theme of buyers underestimations and miscalculations. However, the real point of error is an approach to outsourcing that relies on an understanding that potential problems can be handled adequately in contract negotiations and real problems can be solved after the fact if the parties are flexible. While this understanding is correct, it does not take into account the impact of a problem or the cost to resolve it at a later stage. The better approach is to rely on methods for early detection of possible problems, eliminating or mitigating them at the point of awareness of potential existence. This approach not only addresses issues at a point in time when they are more easily handled, but it also avoids the negative impacts resulting from undetected problems. In examining which party could have avoided the problems uncovered in the lessons learned from these case studies, as well as the point of time that it could have occurred, it

became evident that the buyer was the responsible party for identifying potential problems, and the optimal time of awareness was during the assessment or due diligence phases of the relationship.

Case Study Findings The buyers underestimations and miscalculations in the case studies are best viewed according to where the impacts manifest themselves once a problem has arisen.

Among the case studies, these inherent problems were uncovered: Buyer is not prepared at various stages of the process; Buyer has unrealistic expectations; and Buyer makes poor judgments.

The study reveals that, without early detection of potential problems, one or both parties is unaware of these existing problems until their full impact hits the relationship. Figures 3 and 4 illustrate the types of impacts from problems discovered in the case study relationships.

Examination of the case study scenarios points to common characteristics. Problem: Buyer is not prepared at various stages of the process Common characteristics in this category include not knowing the value of assets (IT and human resources), lacking enough people on the buyer side to work through the transition / implementation phase, having inadequate management controls over the relationship on an ongoing basis, and transferring bad data to the provider. Frequently there are contractual ambiguities that could have been clarified early, but asset value should not be one of them. With the exception of adding risk-reward structures to an existing contract

to enhance the value in the relationship, contract modification most likely impacts pricing. It is better to have gathered asset value figures up front than to deal with hurdles on the back end once the contract is in place with incorrect data. Lacking enough people in the buyer organization assigned to work through the transition is the most frequently cited problem. Often, there is pressure to meet quick deadlines, making the problem even worse. It leads to impacts like additional costs, delays and blaming the other party. Even worse, the delays become the source of negative impressions of the buyers performance or of outsourcing itself, thus eroding the relationship. Obviously, there frequently will be unknowns during a transition or implementation phase. Nevertheless, the solution to the problem is to ask the provider during due diligence to identify up front the risk areas and critical pathways. The buyer can then budget extra time and money for errors or delays, rather than having to justify cost overruns on the back end. Having adequate management controls over the ongoing relationship is crucial to success. Among the negative impacts manifesting themselves in connection with this problem are bills not paid, administrative things slipping through the crack, and finger-pointing. Buyers should ensure they have in place an executive who is accountable for management of the ongoing relationship. Transferring bad data from the buyer organization to the provider is the second most frequently cited problem. Its impact is in delayed transition / implementation milestones or delayed progress in functionality of IT or business process. Increased costs, and even time to market, are associated with the delays. The after-the-fact solution is to put more resources on the project (thus increasing costs). However, the problem could have been detected before it occurred. The due diligence phase is the ideal time for buyers to learn of their own obligations and responsibilities in the scope of services. The parties must communicate risks and assumptions. Is either party, for example, operating on the assumption that the buyers data is clean? If not, is there a clear understanding as to who is responsible for the clean-up process?

Problem: Buyer has unrealistic expectations Buyers in this category do not understand their own roles and responsibilities, do not understand that change does not occur overnight or without hurdles and do not understand their cost drivers. Frequently, buyers assume that, once the process is outsourced, neither party needs real visibility into the process on the other partys side. This incorrect assumption will lead to impacts such as a gap in accountability for resolving issues, finger-pointing, a lack of insight into where the problem lies, and no clear understanding of process interfaces or how to implement change in the process. The solution is to produce a process map showing the touch points and responsible parties. Such a map is a component of the assessment phase and, again, during due diligence to understand the touch points that will still interface with other processes at the buyer organization after outsourcing. Impacts from not understanding the fact that change does not occur quickly include blaming and credibility loss. The due diligence phase should provide realistic expectations of the timeline for incremental process improvements. Buyers that do not understand their cost drivers will suffer significant negative impacts. First, they will not be able to quantify cost savings from the outsourced process; nor can they quantify benefits of moving from a variable cost structure to fixed costs (or vice versa). More importantly they are likely to be overpaying for a level of service. Conversely, the provider may be underpaid for services because of cost overruns. Both parties need to understand drivers (cost for a particular function) and baseline costs when new services are requested. Problem: Buyer makes poor judgments These problems usually manifest themselves in impacts surrounding ineffective service level specifications, underestimated value achievable in the relationship, or provider selection based solely on a prior existing relationship. Impacts from all three of these problems result in less-than optimal value from the relationship. In addition, each is likely to end in contract renegotiations. Ineffective service levels will cause the provider to drive its services to compliance and

satisfaction of the wrong objectives. In this case, neither party will be happy. The desired level of service, together with effective metrics, should be determined in the assessment phase so the information can be included as a component of the Request for Proposal. Todays buyers and providers often enter into sophisticated outsourcing arrangements that capture additional value by creating a new revenue stream, or gainsharing from innovations, so that both parties benefit from their efforts and aligned interests. The due diligence phase is the time to explore whether a provider might be amenable to such a value-added activity. By discovering this possibilty later in the relationship, the buyer will have missed an opportunity up front to create positive energy around the initiative if the employees understand the big picture. Buyers who sole source an outsourcing initiatve, selecting a provider with whom they have a prior relationship having nothing to do with the new outsourcing initiative, err in judgment. Without going through a formal Request for Proposal process and due diligence, the impact is likely to be miscalculated capabilities to meet objectives. While trust is an important factor in relationships, it should not be the basis of a judgment on continued competency. Just as one should not assume a skilled plumber is also a skilled electrician, buyers should not make analogous assumptions regarding providers. Conclusions and Recommendations In each case study, it is evident that the negative impacts from problems such as those shown in Figure 5 could have been avoided through early detection and activities in the assessment or due diligence phases to eliminate or mitigate the potential problems.

Most providers manage by assumptions and even price their services based on certain assumptions. Conversely, most buyers manage to compliance standards and the perception of outcomes that were sold to management and employees. Unfortunately, these are not always stated in the Request for Proposal or the contract as, indeed, they should be. Clearly, both parties are naturally prone to manage something other than their jointly pooled risks and interests. They need to spend time during due diligence gaining an understanding of each others assumptions, both also communicating their requirements and expectations. Both need to discuss their visions. As pointed out in the background section of this paper, it is a mistake to assume that problems can be easily resolved during the transition or ongoing relationship phases; impacts resulting from the problems are costly. Figures 6, 7 depict the teeter-totter difference in results of the two approaches. They illustrate the importance of supporting outcomes of an outsourcing relationship with early detection or awareness of potential problems, rather than dealing with the weight of negative impacts after the fact.

Figure 8 portrays the important (but not all-inclusive) activities in the assessment and due diligence phases which, if undertaken, will enable buyers to avoid or mitigate potential problems.

When problems are not avoided or mitigated earlier in the process, the resulting negative impacts will cause more costs (in time, IT and people resources, or both) for measures to bear up the relationship thrown off balance by the negative impacts. Figure 9 portrays this reality of after-the-fact remedies for existing problems.

However, the case study data concludes that buyers often skip important components of the assessment and due diligence phases (or entirely skip those phases of the process), thus eliminating their chances of early detection or awareness of potential problems and mitigating the potential impact. As the time-proven maxim states: haste makes waste. The importance of early detection opportunities in these two phases, as illustrated by the alternative consequences in Figure 9, cannot be overlooked. Finally, comments from buyers in these case studies reveal the causes for their overlooking the importance of assessment and due diligence. Together, they form a model (as illustrated in Figure10) for potential failed relationships because of negative impacts from future problems.

The best-practice recommendation and key for a successful outsourcing relationship is for buyers to take steps to avoid the attitudes and thought processes indicated in the Haste Makes Waste Model for Potential Failure, as illustrated in Figure 10. They are the cause of missing early detection or awareness opportunities for potential problems that can sabotage the parties ability to work together in a win-win manner to achieve mutual objectives and benefits. BPO is as large as you want it to be

How large is the BPO (business process outsourcing) market really? The truth of the matter is: the BPO market is as big as you want it to be since it is a supplier created market. It is not being driven by customers or events such as Y2K or the euro. But how different is it from software services outsourcing? This issue is still a struggle for many companies

while developing their strategies for the transition from software services to BPO, or for expansion into BPO. Although there are some basic similarities by virtue of the fact that both belong to the outsourcing pedigree there are many differences. Do we use the same marketing professionals? Do we need the same traditional skills to acquire customers? Do we still need to set up offices overseas to woo customers in spite of not having to place professionals for prolonged periods at client sites? The fact is that most customers and to some extent marketing professionals are still grappling with the complex issues in the BPO space. The traditional software services outsourcing mould needs to be broken. The BPO outsourcing market is young and offshore BPO is still in its infancy. With regard to market size, there are hundreds of BPO reports and analyses in different marketable forms screaming out the size and potential of the market. It is estimated that the world outsourcing market was in the range of US$40 bn in 1998 and that the US had the prized share of 40% with Europe claiming 30% and the rest of the world claiming the balance 30%. The geographical market shares seem likely to continue with the world market estimated to grow to around $100 bn by 2005. But it is common knowledge that it may be relatively easy to forecast figures for future years because when the time arrives most of these reports may not get a second look. What is more important for Indian companies , is what the market holds for them in the coming months and 2004. The good news about the software outsourcing and the BPO market is that it will continue to grow. There are enough indications and good evidence to back that. The India factor is strong in spite of recent happenings in Malaysia, Indonesia and The Netherlands, that have tended to undermine the seemingly unstoppable tide of our software super power status. These are but inevitable hiccups that every success story must face, but not brush aside. For example, the BPO market in the UK is expected to grow to around 10 bn by the year 2005 and evidence of this is clearly seen in the large outsourcing deals that are taking place. This has also propelled an offshore thrust since most outsourcing is now linked with an offshore element. With this in mind, many

Indian companies have eagerly spun off BPO units or attempted to associate with BPO in different forms. There is much news about Indian software in the local software community and quite often offshoring is seen as an inevitable necessity in global dynamics of survival. However, one must exert some caution here as both the US and Europe are also considering near-shore pastures which apparently yield good commercial benefit. The US is increasingly considering Mexico and Canada among others and Europe has started to look more closely at its eastern neighbours such as Hungary, Poland and the Czech Republic. There are abundant examples of this to be found all around. PriceWaterhouse Coopers has been delivering BPO services mainly in the areas of finance and accounting from its Krakow centre in Poland, Accenture has been delivering services from its specialised BPO centre in Prague in the Czech Republic and ACS apart from its interest in India has operations in Mexico and Guatemala. Or for that matter the recent establishment of the ecentre in Warsaw by Carlson Wagonlit for its client GE. In addition, competitive differentiators cannot be ignored when considering a strategy for Europe. Scottish call centres have developed expertise in 23 languages including French, German, Italian and Spanish. WNS are reported to be offering French speaking personnel from its operations in Mumbai. The list goes on. We had not seen this surge of global development with software services outsourcing. One of the important factors about BPO competition is that there is very little onsite element involved. This creates a whole new business dynamic for supplier software companies involved with BPO. The whole gamut of mastering the traditional onsiteoffshore-onsite is drowned to some extent in having process and project management experience. With BPO, you also have several foreign professionals spending months or years in India in setting up their captive units or helping their Indian partners in developing a sophisticated operation. It is almost the reverse when we had Indian project managers travelling overseas to client locations to set up project teams and get involved with account management. The manager was involved with getting the project off the

ground overseas and once the critical onsite stage was reached, to send the modules offshore for further development. The local landscape is another platform to view the comparisons between the two forms of outsourcing. During the height of software services outsourcing many overseas companies such as Intel, Motorola, SAP, Logica , EDS among others had set up shop to take advantage of the offshore experience. Many started off as captive units catering purely to their own software needs. Some companies approached the market differently by also offering their services to the Indian market such as EDS (with their PLM solutions) and Logica. In the BPO space, we observe a somewhat similar trend. WNS started as a captive unit of British Airways, established mainly to cater to the processing needs of BA. Though it still caters to BA it has several other overseas customers. We also have the likes of GE, HSBC, Standard Chartered among others which are captive units. On the other side of the spectrum we are increasingly seeing the emergence of companies such as Convergys, ACS and others catering to customer requirements around the world from India. They are unlikely at the moment to cater to any form of domestic need. That possibly would be a major differentiator for BPO. Companies doing processing, be it transaction based, niche or comprehensive will almost predominantly cater to overseas clients from their India base. In some cases the lines between BPO and software services are blurring. Customers may view BPO as an extended service from their existing software supplier. In other cases, they may feel the need for specialist BPO suppliers or pure play BPO companies who possess the relevant business process and infrastructural experience. It isnt getting easy for customers. As suppliers struggle with strategies and new ways of market entry and penetration, customers are faced with a whole new range of offshore offerings, sometimes bewildering, which they are unaccustomed to. It is a challenge for both parties. The experiences of companies with software services outsourcing provides a readyreckoner on many issues relating to the basic principles of outsourcing to India. But in the

case of offshore BPO, the rules of this new game are being written all over the world, as deals are being struck with Indian companies and as captive units are born. BPO segment to witness consolidation: MUMBAI: Business Process Outsourcing (BPO), a fast growing segment of India's IT industry, will witness a consolidation including mergers in the medium term to garner a larger share of the global BPO market, estimated to touch $234 billion by 2005, according to a Rabo India Finance study. The existing players will drive consolidation activity by acquiring/merging with specialist small outfits in the BPO segment, Rabo Finance, a investment banking outfit said. BPO involves the transfer of non-core business processes to an external vendor thus allowing the orgainsation to focus on core business activity. Some key BPO areas are financial accounting, tele marketing and supply chain management. The small and medium sized players with 300-500 seats capacity would fall short of meeting the challenges that arise unless they do not merge to attain a critical size to get acquired, Rabo said. Two-third of the growth in the sector would come from capitive business and these companies would emerge as potential targets for consolidation. Multinational companies planning to establish outsourcing facilities in India taking advantage of inherent skilled manpower, low costs would be active in driving the consolidation process, Rabo said. Indian IT services companies would begin to move into the space by establishing BPO comapanies like Progeon, an Infosys venture or buying existing BPO comapanies as in the case of Wipro acquiring control in Delhi-based Spectramind to offer end-to-end solutions to clients, Rabo said.

BPOs lose out for want of CEOs MUMBAI: This might seem a little strange, especially considering that Corporate India's countless layoffs have actually created a huge talent pool for head hunters to tap into. But, business process outsourcing (BPO) companies sprouting in India have been hunting high and low for CEOs to run their businesses. And they haven't met with much luck. The severe shortage of CEOs has forced some foreign companies to put their Indian BPO plans on hold. "The issue here is to make sure the fit is right. The CEO of a paint company would not fit into a BPO. Everyone is looking for domain expertise, and BPOs given the nascent stage they are in do not have a lot of people with that experience," says Prakash Gurbaxani, CEO, Transworks Information Services, a Mumbai-based BPO services company. GE Capital, the oldest player in the Indian BPO business, quite naturally has been the favourite poaching ground of companies looking to set up shop in India. Scope International, Standard Chartered Bank's global back-office processing business based out of Chennai, recently roped in Romi Malhotra from GE Capital to head its operations in the country. "While a lot of Indians are capable of executing on BPO skills, they are not really equipped to head a company," says R Suresh of Stanton Chase International, an executive search firm. JP MorganChase, which plans to set up a BPO company in India, has been looking for a CEO for more than four months now.

Needless to say, it hasn't found the right person yet. Though the easiest way out of the problem is to bring in expatriate CEOs, people in the business feel this is not a long-term solution. "You may be sourcing business from overseas markets, but ultimately, you are running an Indian operation, managing Indian employees," says Mr Gurbaxani. First Ring, which recently hired Rick Singer as CEO, is the only known BPO services company to have gone for an expatriate hire. "While there are a lot of very good managers in India with an IT background, they don't have the critical service-level concept that is required to run BPO services companies," says Sunit Mehra of Horton International, a CEO search firm. Research and consulting firm, Gartner Inc., estimates that the BPO business will be worth $234bn globally by 05, growing at a compounded annual growth rate of 14% from the year 00. Nasscom estimates that remote processing services in India could touch $17bn by '08. But, the bulk of this will be the work of foreign units or joint ventures. During the year ended March 31, '02, India's revenues from BPO, both captive and third-party, are estimated to have grown 107% to $583m (Rs 2,915 crore), employing 35,000 people. Some of the biggest global names already have their own BPO operations in India. GE Capital, American Express, British Airways, Ford Motors, the World Bank, HSBC and Pfizer are just some of them. Not a lot of people know that Bangalore-based Global e-Business Operations, a whollyowned subsidiary of Hewlett Packard Europe, handles the key accounting functions of the group's world-wide operations. Or that the global accounts of American Express Travel Related Services are consolidated in Gurgaon.

A clear objective for multinationals setting up captive BPO operations in India is cost savings, primarily from the lower cost of labour in India. Outsourcing HP's accounts to India reduces costs to just a sixth of what it might have been in the US, without compromising on quality. Amazon, for instance, uses an Indian vendor in Gurgaon to outsource a significant portion of its customer support. For Amazon, such an arrangement makes immense sense. It pays a full-time customer service representative based in Seattle an average of $1,900 per month whereas an equivalent customer service representative in India costs only $109-175 per month.

The

BPO

question:

To

specialise

or

not

Although the BPO (Business Process Outsourcing) market is not mature enough for a detailed process specialisation by country yet, global research firm Gartner has said companies with a niche focus on a particular process or industry would be able to differentiate themselves in the long run. Indian BPO companies would now need to seriously consider whether they want to be full service providers or niche specialists in a particular area, such as human resource or accounting, according to Gartner Dataquests, senior analyst for business process outsourcing, Rebecca Scholl. Countries wanting to get a larger share of the BPO market would need to equip themselves with specific skills, such as change management, business process consulting and human resources in order to have an edge over competing markets or countries. Gartner, as of the moment, has not classified countries or markets based on specialisation as the research firm feels the Indian market is too immature.

I do not think India, as a country should specialise in any vertical or process as the industry is too immature for such specialisation, unlike the Philippines that boasts of strong skills in finance and accounting, Ms Scholl says. However Indian BPO outfits have a different story to tell. According to the CEO of Mumbai-based TransWorks, Prakash Gurbaxani, specialising in a niche industry can prove dangerous. The risk is far greater if youre too specialised as opposed to undertaking an array of back-end services, particularly considering cases such as 9/11, Mr Gurbaxani says. I dont expect the trend to be towards niche services as the opportunity is far greater than just one vertical. It would take between 3 to 5 years for BPO companies to begin offering niche consulting services in a full fledged manner, Gurbaxani says. BPO players feel theres a need to demonstrate domain (vertical) expertise in the business for positioning. Indian outfits are still learning the ropes, industry watchers say. To be able to specialise, every company needs to demonstrate differentiators. At present, none of them have domain expertise in a particular sector. Satyam Computer Services, BPO subsidiary Nipuna Services, for instance, is positioning itself as a full services provider by delivering services like transaction processing, process management and function management. Nipuna banks on its parents expertise and client base. We have been handling all aspects of IT services and the BPO entity is just an extension of this, so it would obviously focus on all services and not restrict ourselves to a niche area, says the companys spokesperson.

But Infowavzs, CEO, Zia Shiekh seems to agree with Gartners analysis. According to him, customers in most mature markets such as the US and UK are used to dealing with BPO companies that specialise in process industries. As a logical extension, if Indian companies want a lucrative share of that market, they need to follow suit, as business will flow to only those players that have a focused approach, Shiekh says. Infowavz has identified activities such as payment processing, loans and claims processing under transaction processing to position itself as a niche BPO services provider. Although detailed specialisation is still a far cry, there should be a clearly outlined strategy for people, process and technology within a company to eliminate the chances of failure in delivery, companies say.