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Lesson - 1
Structure
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Introduction Business Process Management Business Process Management Life Cycle BPM Suites Principles of Business Process Management Functional Management Vs Business Process Summary Review Questions
1.1 Introduction
Business Process Management is the art of understanding, codifying, automating, and improving the way a company does business. For several years now, three-tier application development has been commonly used, or at least its importance has been recognized. In a three tier environment, there is a separation between the presentation logic, the business logic, and the data access logic. This separation can be complete in the sense that every tier is running on a different machine. Consider the example of a browser-based application. The browser, driven by HTML, is responsible for the personalization layer. The business logic is encapsulated in an application server. The
2 data that you access from the application sewer can be managed by a database server on a remote machine.
BPM as a management-through-processes method which helps to improve the companys performance in a more and more complex and ever-changing environment. Management through processes is a management method based on two logical levels: process governance and process management:
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Process governance is all of the companys governance activities which, by way of allocating on the processes, work towards reaching its objectives, which are both operational and progress-related.
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Process management is all the management activities of a given process which work towards reaching the objectives allocated for this process. Roughly speaking, the idea of business process is as traditional as concepts of
tasks, department, production, and outputs. The management and improvement approach as of 2010, with formal definitions and technical modelling, has been around since the early 1990s (see business process modelling). Note that the IT community often uses the term business process as synonymous with the management of middleware processes; or as synonymous with integrating application software tasks. This viewpoint may be overly restrictive - a limitation to keep in mind when reading software engineering papers that refer to business processes or to business process modelling. Although BPM initially focused on the automation of business processes with the use of information technology, it has since been extended to integrate human-driven processes in which human interaction takes place in series or parallel with the use of technology. For example (in workflow systems), when individual steps in the business process require deploying human intuition or judgment, these steps are assigned to appropriate members within the organization. More advanced forms such as human interaction management are in the complex interaction between human workers in performing a workgroup task. In this case, many people and systems interact in structured, ad-hoc, and sometimes completely dynamic ways to complete one too many transactions. BPM can be used to understand organizations through expanded views that would not otherwise be available to organize and present, such as relationships between processes. When included in a process model, these relationships provide for advanced reporting and analysis. BPM is regarded by some as the backbone of enterprise content management. Because BPM allows organizations to abstract business process from technology infrastructure, it goes far beyond automating business processes (software) or solving business problems (suite). BPM enables business to respond to changing consumer, market, and regulatory demands faster than competitors - creating competitive advantage. As of 2010 technology has allowed the coupling of BPM to other methodologies, such as Six Sigma. BPM tools allow users to:
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vision - strategize functions and processes define - baseline the process or the process improvement
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model - simulate the change to the process analyze - compare the various simulations to determine an optimal improvement improve - select and implement the improvement control - deploy this implementation and by use of user-defined dashboards monitor the improvement in real time and feed the performance information back into the simulation model in preparation for the next improvement iteration
re-engineer - revamp the processes from scratch for better results This brings with it the benefit of being able to simulate changes to business processes
based on real-life data (not just on assumed knowledge). Also, the coupling of BPM to industry methodologies allows users to continually streamline and optimize the process to ensure that it is tuned to its market need. As of 2012 research on BPM has paid increasing attention to the compliance of business processes. Although a key aspect of business processes is flexibility, as business processes continuously need to adapt to changes in the environment, compliance with business strategy, policies and government regulations should also be ensured. The compliance aspect in BPM is highly important for governmental organizations. As of 2010 BPM approaches in a governmental context largely focus on operational processes and knowledge representation. Although there have been many technical studies on operational business processes both in the public and in the private sector, researchers have rarely taken legal compliance activities into account, for instance the legal implementation processes in public-administration bodies.
1.3.1 Vision
Functions are designed around the strategic vision and goals of an organization. Each function is attached with a list of processes. Each functional head in an organization is responsible for certain sets of processes made up of tasks which are to be executed and reported as planned. Multiple processes are aggregated to function accomplishments and multiple functions are aggregated to achieve organizational goals.
1.3.2 Design
Process Design encompasses both the identification of existing processes and the design of to-be processes. Areas of focus include representation of the process flow, the factors within it, alerts and notifications, escalations, Standard Operating Procedures, Service Level Agreements, and task hand-over mechanisms. Good design reduces the number of problems over the lifetime of the process. Whether or not existing processes are considered, the aim of this step is to ensure that a correct and efficient theoretical design is prepared. The proposed improvement could be in human-to-human, human-to-system, and system-to-system workflows, and might target regulatory, market, or competitive challenges faced by the businesses. The existing process and the design of new process for various applications will have to synchronise as such will not affect the business in major outage. The business as usual is the standard to be attained when design of process for multiple systems is considered.
1.3.3 Modelling
Modelling takes the theoretical design and introduces combinations of variables (e.g., changes in rent or materials costs, which determine how the process might operate under different circumstances).
1.3.4 Execution
One of the ways to automate processes is to develop or purchase an application that executes the required steps of the process; however, in practice, these applications rarely execute all the steps of the process accurately or completely. Another approach is to use a combination of software and human intervention; however this approach is more complex, making the documentation process difficult.
6 As a response to these problems, software has been developed that enables the full business process (as developed in the process design activity) to be defined in a computer language which can be directly executed by the computer. The system will either use services in connected applications to perform business operations (e.g. calculating a repayment plan for a loan) or, when a step is too complex to automate, will ask for human input. Compared to either of the previous approaches, directly executing a process definition can be more straightforward and therefore easier to improve. However, automating a process definition requires flexible and comprehensive infrastructure, which typically rules out implementing these systems in a legacy IT environment. Business rules have been used by systems to provide definitions for governing behaviour, and a business rule engine can be used to drive process execution and resolution.
1.3.5 Monitoring
Monitoring encompasses the tracking of individual processes, so that information on their state can be easily seen, and statistics on the performance of one or more processes can be provided. An example of the tracking is being able to determine the state of a customer order (e.g. order arrived, awaiting delivery, invoice paid) so that problems in its operation can be identified and corrected. In addition, this information can be used to work with customers and suppliers to improve their connected processes. Examples of the statistics are the generation of measures on how quickly a customer order is processed or how many orders were processed in the last month. These measures tend to fit into three categories: cycle time, defect rate and productivity. The degree of monitoring depends on what information the business wants to evaluate and analyze and how business wants it to be monitored, in real-time, near real-time or adhoc. Here, business activity monitoring (BAM) extends and expands the monitoring tools generally provided by BPMS. Process mining is a collection of methods and tools related to process monitoring. The aim of process mining is to analyze event logs extracted through process monitoring and to compare them with an a priori process model. Process mining allows process analysts to detect discrepancies between the actual process execution and the a priori model as well as to analyze bottlenecks.
1.3.6 Optimization
Process optimization includes retrieving process performance information from modelling or monitoring phase; identifying the potential or actual bottlenecks and the potential opportunities for cost savings or other improvements; and then, applying those enhancements in the design of the process. Overall, this creates greater business value.
Re-engineering
When the process becomes too noisy and optimization is not fetching the desired output, it is recommended to re-engineer the entire process cycle. BPR has become an integral part of organizations to achieve efficiency and productivity at work.
human-centric BPM integration-centric BPM (Enterprise Service Bus) document-centric BPM (Dynamic Case Management)
However, standalone integration-centric and document-centric offerings have matured into separate, standalone markets that include BPM plus much more.
Practice
Example of Business Process Management (BPM) Service Pattern: This pattern shows how business process management (BPM) tools can be used to implement business processes through the orchestration of activities between people and systems. While the steps can be viewed as a cycle, economic or time constraints are likely to limit the process to only a few iterations. This is often the case when an organization uses the approach for short to medium term objectives rather than trying to transform the organizational culture. True iterations are only possible through the collaborative efforts of process participants. In a majority of organizations, complexity will require enabling technology (see below) to support the process participants in these daily process management challenges. To date, many organizations often start a BPM project or program with the objective to optimize an area that has been identified as an area for improvement.
8 In the financial sector, BPM is critical to make sure the system delivers a quality service while maintaining regulatory compliance. Currently, the international standards for the task have limited BPM to the application in the IT sector, and ISO/IEC 15944 covers the operational aspects of the business. However, some corporations with the culture of best practices do use standard operating procedures to regulate their operational process. Other standards are currently being worked upon to assist in BPM implementation (BPMN, Enterprise Architecture, and Business Motivation Model).
BPM technology
Some define the BPM System or Suite (BPMS) as the whole of BPM. Others relate the important concept of information moving between enterprise software packages and immediately think of Service Oriented Architecture (SOA). Still others limit the definition to modelling (see Business modelling). BPM is now considered a critical component of Operational Intelligence (OI) solutions to deliver real-time, actionable information. This real-time information can be acted upon in a variety of ways - alerts can be sent or executive decisions can be made using real-time dashboards. OI solutions use real-time information to take automated action based on pre-defined rules so that security measures and or exception management processes can be initiated. These are partial answers and the technological offerings continue to evolve. The BPMS term may not survive. Today it encompasses the concept of supporting the managerial approach through enabling technology. The BPMS should enable all stakeholders to have a firm understanding of an organization and its performance. The BPMS should facilitate business process change throughout the life cycle stated above. This assists in the automation of activities, collaboration, integration with other systems, integrating partners through the value chain, etc. For instance, the size and complexity of daily tasks often requires the use of technology to model efficiently. These models facilitate automation and solutions to business problems. These models can also become executable to assist in monitoring and controlling business processes. As such, some people view BPM as the bridge between Information Technology (IT) and Business. In fact, an argument can be made that this holistic approach bridges organizational and technological silos.
Process Engine a robust platform for modelling and executing process-based applications, including business rules
Business Analytics enable managers to identify business issues, trends, and opportunities with reports and dashboards and react accordingly
Content Management provides a system for storing and securing electronic documents, images, and other files
Collaboration Tools remove intra- and interdepartmental communication barriers through discussion forums, dynamic workspaces, and message boards BPM also addresses many of the critical IT issues underpinning these business
drivers, including:
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Managing end-to-end, customer-facing processes Consolidating data and increasing visibility into and access to associated data and information
Increasing the flexibility and functionality of current infrastructure and data Integrating with existing systems and leveraging emerging service oriented architecture (SOAs)
Establishing a common language for business-IT alignment Validation of BPMS is another technical issue that vendors and users need to be
aware of, if regulatory compliance is mandatory.[14] The validation task could be performed either by an authenticated third party or by the users themselves. Either way, validation documentation will need to be generated. The validation document usually can either be published officially or retained by users.
10 Without the principles, teams can easily get lost and distracted from the intent of the journey. The 10 principles are 1. 2. 3. 4. Business change must be performance driven. Business change must be stakeholder based. Business change decisions must be traceable to the stakeholder criteria. The business must be segmented along business process lines to synchronize change. 5. 6. 7. 8. 9. 10. Business processes must be managed holistically. Process renewal initiatives must inspire shared insight. Process renewal initiatives must be conducted from the outside in. Process renewal initiatives must be conducted in an iterative, time-boxed approach. Business change is all about people. Business change is a journey, not a destination.
11 term, a team must win or its management and coaches will be fired, just having the final score after the fact does little to help our understanding of the whole game. We dont know if it was a good game for our team or not. We dont know if it was exciting and if our fans were happy, or perhaps not because we should have done better. We dont know if our strategy worked, or if it was abandoned part way through. We dont know what the team should probably do differently in the next game. We only know the result. Similarly, in business, most of us need other feedback to know whats working. A high stock price or good return on assets is nice, but how can we contribute to it with what we do every day? Earlier, I talked about evaluating human resources and intellectual capital as measured by return on management. However, this too can disconnect us from what we must do as far as many of our staff is concerned. As in sports, we need predictive measures, not just after-the-fact reports, to see the total picture. Constructing a connected measurement system is critical for us to break down overall targets into what people do every day. A popular response to this has been the balanced scorecard approach, which tries to put in place a set of measures that arent oriented just to the financial bottom line. Measures of all major components of success are required, including customer satisfaction and loyalty, innovation, knowledge and people, customers, suppliers, processes, as well as the financial side of the organization. From this perspective, the measurement-oriented approach doesnt have to be just financial numbers but can also include outsider perceptions. This means that all organizations, regardless of business mission, can find their own set of performance metrics from which all decisions regarding processes can be derived and linked to each other. This concept is normally referred to as traceability. Traceability simply means that everything we do, and every decision we make under ideal circumstances, relates through a set of linked performance measures to the organizations scorecard. After performance measurement factors are determined, the organization sets some performance targets. There may be inherent conflict among the targets. Meeting targeted measures associated with customer acquisition, such as achieving rapid market share growth, could be in direct opposition to the requirement to delight our customers. Attaining good satisfaction levels and delivering higher profits by reducing costs may be fundamentally at odds, especially if we also are striving for no headcount growth at the same time. Likewise, improving speed may fly in the face of our quality improvement initiative. Cost reduction can also be a killer of customer satisfaction, depending how its done. Management must
12 send clear messages on strategy and priority and not rely just on wishes and targets. Remember, hope is not a strategy. Both hope and business strategies are needed. The bottom line for any business improvement is that well-thought-out, targeted measurements will inspire and track progress and ensure that we allocate our scarce human and financial resources to things that matter most.
Customers and consumers Owners Staff Suppliers Community The enterprise itself
These categories will vary wildly for different companies and significantly from industry to industry. Often, significant overlaps in classification result in confusion. For example, many organizations have customers or suppliers who are also their competitors. How should the competitor be classified? Also, whats good for the customer might be not so good for the
13 staff or might violate legal and regulatory community rules? Again, a balance must be struck. In most organizations, one level of stakeholder type is insufficient, especially when we look at what certain parts of the organization do and whom they deal with. Customer segmentation is a well-developed function in many sales-oriented companies. Its the basis for marketing campaigns, sales organization design, and incentive schemes. Segmentation is used less, however, as a driver and organizer of business change initiatives and process management, an area where it holds great potential. Likewise, we can segment or structure the other stakeholder types, such as staff or suppliers, into hierarchical categories, from general types to more specific sub-types. Types should be segmented according to their different requirements and the difference in the way that they are to be treated. For example, telecommunications companies treat residential customers differently from multinational business customers. If theres no difference in treatment required, further segmentation might not be required. To analyze a stakeholder segment, we should know the current state of our relationship with that segment and what would we want it to be in the future. The gap between these two states will drive our needs for change. The future state view will provide a set of evaluation criteria for change from the current reality. From the current state, we should determine where we are with each type and subtype that warrants distinction. This evaluation includes knowing the following about each stakeholder type:
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Our principles and values as they affect the type Key performance indicators (KPIs) and actual performance measurements Interactions from and to the stakeholder type including Business events/outcomes Flows of work, material, data, knowledge, and commitments Health of current interactions
For the future state, we should know where we need to be at the end of the planning horizon with each type and sub-type that warrants distinction. This projection should cover
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Key performance indicators (KPIs) and performance targets Interactions from and to the stakeholder type including Business events/outcomes Flows of work, material, data, knowledge, and commitments
The stakeholder criteria will depend on the stakeholders actual needs, but this will be balanced with the organizations desires. The degree of importance placed on each stakeholder type will also depend on the value proposition that the organization chooses for itself. If the organization sees itself first and foremost as a customer/consumer service excellence company, it will focus heavily on the customer segmentation and customer criteria. If it sees itself as primarily an excellent manufacturer, it will focus more on suppliers and distributors, and its customer orientation will be toward quality of product more than service at all costs. If it sees itself as an innovator above all else, the organization will have a different mix of staff and community stakeholders than the others and might depend on channel partners to get products and services to market. Another factor in the stakeholder analysis will be the organizations philosophy toward its prime mission. This is especially a key factor in todays drive toward e-businesses. Many organizations have come and gonesome by design and others, not. Organizations that see themselves as built to last will have a totally different perspective from those that plan to take advantage of their intellectual property or capability in the short term and flip the firm to others purely for immediate financial gain. Executives with an incentive to haul in lots of stock options in the short term might deemphasize staff criteria for market share or growth. In any case, the organization must come up with a set of criteria based on balancing the outsiders needs and expectations that can be measured to make decisions now and to prioritize later. These stakeholder evaluation criteria reflect the value added by their relationship with the organization. Principle 3: Business change decisions must be traceable to the stakeholder criteria This principle is almost self-evident and doesnt require a lot of explanation. However, that doesnt mean its common practice. As a matter of fact, its often ignored or abused. Personal and political agendas more often form the basis for proposals, recommendations,
15 and approvals of courses of actions than criteria derived from outcomes of value to our stakeholders. The key question is, Whats the reason or justification for a particular decision? Is it business or personal? The challenge is to obtain accepted criteria before we enter into choosing among business options, even small ones, and to use those criteria instead of the personal drivers of powerful players. Conflicting personal, political drivers among decision makers can devastate a sound decision-making process. When those drivers are also misaligned to the organizations mission, vision, and values and to its stakeholders expectations, we cannot expect to optimize results, and disaster is always possible. Change initiatives that waste millions of dollars can be found in almost all organizations of size. The root cause is almost always poor decision making, or, some would say, poor management due to the factors described here. Again, insist on agreement to the future state stakeholder criteria that will determine your course of action; then and only then, select that course. This simple philosophy of tracing business change decisions to stakeholder criteria is consistent with many popular strategies for personal and professional success. Stephen Coveys second habit of highly successful people states, Begin with the end in mind. Sports psychologist Terry Orlick claims that the first thing any competitive athlete must have is a clear picture of what success is. Visualization of that end state drives the behavior to get there. If you dont know or care about where you are going, any behavior will suffice. To actually put this principle into practice, management must consciously and visibly agree on the criteria first and then publish them. Management must also empower those working on change to work creatively within those parameters. An example is the up-front agreement necessary in the process-renewal projects I have handled for various businesses. I always fight hard to get the commitment that we will use the stakeholder criteria to reach a solution. We all agree not to discuss or even try to think about any organizational structure already in place. This is hard to manage, but, if I dont get this commitment, it usually means that managers are thinking more about the drivers of direct relevance to them personally and currently. These current personal drivers seldom align within the team or with the best interests of external stakeholders. Principle 3 should be practiced in numerous situations. In deciding on design options for every aspect of the process management hexagon we should use the stakeholder criteria. In making scoping decisions, in selecting among alternatives in business cases, in
16 allocating resources to work requirements, in communication and human change management, and many other business practices, it will serve you well.
Principle 4: Business must be segmented along business process lines to synchronize change
Based on the earlier discussion in this chapter, its natural to view process as the prime segmentation strategy internal to organizations andmore and more frequently among organizations. As business cycles of products and services shrink time wise, management structures with overly rigid organizational boundaries and planning mechanisms are too slow to respond. They dont anticipate changes well enough to lead the market. Also, a customer or supplier clicks on a mouse while on a Web site, with the expectation of quick, efficient, and effective results. In both scenarios, seamless cross-functional integration is mandatory. Restructuring functional units alone wont do it. Focusing on people skills and empowerment also wont do it by itself; such approaches are aimless. A technological basis for organizing the delivery of results is likewise misdirected because technology will automate only what we want it to. Despite wider-focusing technologies, such as enterprise resource planning and customer relationship management, businesses require results-oriented structures. Only process can stake the claim of achieving enterprise-wide integration because, by definition, a process starts with the first triggering event that initiates action and doesnt end until the results of value are delivered to the appropriate stakeholders. This event/ outcome pairing defines the processes that we have. All other structures should be put in place solely to serve the event-to-outcome process and therefore to deliver added value to stakeholders. This strategy implies that in deciding how to invest in change, prioritizing along process lines is requisite. In this way, processes organize strategy and become a key link in the traceability chain between business/stakeholder criteria and the day-to-day actions of all the people in the value chain. Aggregated around events for stakeholders, process definitions become more stable. The first event will define the start of the process, and the last outcome, its end. Other events and outcomes can appear in the interim, but they are still part of the same process. For example, when a customer clicks on a Web site to order a product, he launches the Fulfil order process. The process isnt complete until satisfactory delivery has occurred,
17 and payment has been received. Other events along the way can include receipt of an inquiry regarding status of shipment, invoicing, receipt of payment, and so on. Other types of events to consider include
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Arrival events, such as Order phone rings Scheduled events, such as Invoice creation at 6:00AM every day Conditional events, such as an alert warning Out of stock condition
Each event will or should generate an appropriate business response. Process analysis doesnt rest until all actions are complete. In event/outcome analysis, the organization is treated as a black box, and we dont look inside. Looking internally in the process will only confuse uswell get to that later. In order for you to manage processes, they must be defined as independent activities. However, in their performance, its clear that they are interdependent. In identifying processes that need to be renewed to resolve a problem, start with those event/outcome pairings that involve the customers and consumers affected by the problem. These processes are referred to as core processes. Look at the customer/ consumer life cycle, which starts with the first interaction or awareness that this stakeholder has with the organization and precedes to the last interaction in that relationship. This would span everything from marketing through to, in worst case, losing the customer, or, in best case, delivery of the completed product or service. From the core processes, we can derive the processes that deliver guidance to them (guiding processes) and those that deliver reusable enablers to them (enabling processes). These processes should themselves be defined, taking into account events and outcomes but from the perspective of other stakeholders. Especially important is the need to see the core processes as customers of the guiding and enabling processes. In this way, value creation can be traced from the processes traditionally seen as overhead. Processes such as hiring staff, developing systems and guidelines, and so forth exist only to support the business objectives that are the target of the core processes. They should be measured primarily by the impact they have on the core processes, such as their impact on operational capacity. Their internal measures of efficiency, such as headcount and expense, are irrelevant in this situation. By segmenting the business along process-value added lines, we have a clear framework for organizing and prioritizing change and for measuring the impact of our efforts in terms that the business executives can understand.
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19 In this model, well-designed natural organizational units send finished products and services to one another. Process teams manage all work from business event through to business outcome. This approach upholds a very strong customer orientation and accountability for results. Feedback and information are shared broadly. The model is fully traceable, both process-wise and people-wise. It does can be very hard to transition from other models of hierarchical management to a process-organized approach because multiple processes might have to move simultaneously. Such a change clearly requires incredibly strong top management leadership. One way of making this happen is to implement a single point-of-contact for service to stakeholders. This one-stop-shopping approach widens the point of contacts job to be fully aligned with the activities in the process; the individuals performance measurement is simply tied to stakeholder value added. Clearly, this also has a significant organizational impact. Another organizational option is a mixed function-and-process approach wherein dayto-day control rests with functional line management, but monitoring and improvement responsibility goes to process owners. These might be dedicated process owners who have a very small staff and rely on advocacy and influence. They might also be line managers who also are responsible for certain processes. Process owners, then, can have a crossfunctional responsibility without the direct ability to change what people do. In this case, their success lies in their ability to influence those who do have direct control. These could be the line managers or the managers of the line managers. The critical mechanism that must be in place for ongoing process management to be effective is a forum within which processes are discussed their performance vetted, and the incentive for process outcomes shared among all involved managers. Typically, every senior manager not only has a line but also has at least one process to report against in the forum and to act on. The managers personal evaluations must rest on their reports and their success, and they must take reporting and follow-up seriously. Top management must also be decisive about the consequences of not supporting the approach. Staff involved in the day-to-day process also must see feedback on the ultimate results of the process. They must have incentives to support overall stakeholder value creation and not to do just whats convenient for them.
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21 The TTEE knowledge discovery model deals with all types of knowledge conversion tacit to tacit, tacit to explicit, explicit to explicit, and explicit to tacitin a series of iterations or learning cycles. This model has a distinct R&D flavor and is being adopted by companies that want quality products and services to enter the market quickly in a competitive environment. This approach manages a creative and collaborative process of deeply embodied knowledge discovery resulting in the deepest form of knowledge embedding that is, knowledge is embedded into our process definitions. In their analysis of successful Japanese companies, Ikujiro Nonaka and Hirotaka Takeuchi support the iterative creativity of the TTEE model. The knowledge discovery model
Examples of this business solution can be found in many internal company processes that create artifacts for other parts of the organization to use, including process design. In doing this work, its important to be cautious about too much emphasis on the models themselves. They are only one aspect of the deliverable. The other is arrival at a common understanding of the situation and its potential for improvement.
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Models and documentation are only abstractions of the real world and not comprehensive in their reach. Not everything can be explicitly modelled or documented in pictures and words. Some things are tacit and must be explained in other terms. Metaphors, scenarios, and verbal examples are often more useful than written, technical reports to assure common learning and validation, which are necessary conditions for any change to proceed. If we just focus on models, we will never bring to the surface what we are unaware of.
22 Recognition of the value of sharing insight, not just documents, is reflected in the methods discussed later in this book. A number of activities will uncover what we know, so that it can be shared across a group in workshops. These workshops will create artifacts or records of the agreements and ideas, but more importantly they will embody a deeper tacit understanding of whats important to allow better decision making and common commitment. In many cases, a discussion of strengths and weaknesses will be more valuable than the charts created. Especially regarding strategy and architecture, there are no right answers, only a better sense of how to judge. Not everything can be objective. Dont leave out activities that embody trust, commitment, and understanding in the participants.
23 each and every level of detail or decomposition. The details will come if and when they are needed.
24 of its execution, by the degree of problems encountered, by the amount of inconsistency in its methods, and so on. Those gathering knowledge should recognize that the 80/20 rule is in full play. This rule suggests that 80% of the effort in a process is consumed in 20% of the activities that 80% of the problems are caused by 20% of the process, and so on. The sessions are fixed in time and therefore must be limited in scope. Even if the participants gain only 50% of the critical understanding at any level at each iteration, the knowledge gained with each iteration will add up quickly, as shown below. Table 1.1 - The Value of Timeboxing and Iteration Iteration Number Outstanding Knowledge Gained 1 2 3 4 50% 50% 50% 50% Incremental Knowledge Gained 50% 25% 12.5% 6.25% Cumulative Knowledge Gained 50% 75% 87.5% 93.75%
It appears that theres little value studying things to death when an incremental approach will get us there. Experience bears this out. It also confirms commitment to the findings is also built incrementally. However, its important that the right knowledge be pursuedthat is, relevant knowledge to the task at hand as defined by the stakeholder criteria. Whatever is to be dealt with at any level or number of iteration must be prioritized according to those criteria and other factors that tell us where to drill and where to stop. In this way, the analysis and design might be lumpy. In other words, some parts of the process under review are known in detail because its important to know at that level, whereas other parts are known at a broader, higher level only Note that although there are different levels of detail at different points, the process remains connected without breaks from left to right. This prioritization should occur as part of the review or validation session at the end of each iteration, when we seek consensus on what we got right, what we didnt get right, what we missed, and what priority we should look at next. Weve found that a simple ABC ranking is sufficient, wherein we can be confident that we will get to the As by next time but the Cs wont be addressed now. (They might become As in later iterations.)
Not all work can be at the lowest level of detail nor needs to be. If four levels of decomposition are pursued and each level has five sub process components, there would be 5, 25, 125, and 625 chunks of detail to investigate, respectively. To avoid this, prioritization is a must. Certain overly detail-oriented staff should be kept away from this type of work. We are analyzing and developing processes, not procedures. This type of rapid-fire work can put tremendous pressure on team members, who are now living a series of short-term deadlines. Perfectionists will have a difficult time with this. What are needed are good listeners, who can develop trust and respect, and good presenters who will explain but never defend their findings. They must not take changes personally; they must be comfortable in revealing their incomplete, incorrect work products and see the changes to them as a positive. Likewise, those who tend to dominate or push their own solutions are inappropriate for this work.
26 encompassing transformation. You arent just converting technology, data, procedures, or organizations; you are converting people into enthusiastic supporters and participants who will provide you with a competitive edge that cant be matched. This is one reason that you should encourage the analysis of existing processes. This analysis fosters understanding and communication. To do this, a number of factors become paramount. In addition to your communications strategy, you must support changes with appropriate roles and responsibilities, organizational structures, empowerment within accountability, aligned performance incentives, and recognition as well as personal growth opportunities. During transition, the staff must feel that an appropriate level of trustworthy communication is happening. They should feel a sense of contribution as a result of their participation.
We dont have time to get it right, so whatever we do will have to adjust as we learn in the marketplace.
Whatever we do, no matter how right, will be short-lived and have to change anyway. Consequently, classic BPR philosophies wont work. Instead, we must build adaptable
solutions and keep our eye on what is changing to be able to adapt in the future. This essentially means that we will never arrive at the Nirvana of stability but will always be getting there.
27 We must recognize that, at any point in time, our stakeholders will have a set of requirements that are in flux. The balance among these requirements will change as each of the stakeholders contributions to us change. This will make some stakeholders more important to us than others. For example, when no one is buying, the customer relationship seems more important, and, when few skilled resources can be found, staff relationships become more valued. The ebb and flow of stakeholder and market evolution means that processes must be managed, even when they arent undergoing radical change. Without process ownership, ongoing measurement, benchmarking, and constant attention to stakeholders of all types, we will fall behind through attrition. Change is required even if we simply want to maintain our current position. If change is a journey, its important to pay attention to all the principles that precede this one all the time. Notice especially that seeking perfection before action is suicide. Doing something small now and learning are more valuable than getting a bigger process right later. Whatever we do, we must be prepared to do it again better on the next go around. Building learning feedback and knowledge distribution into processes is mandatory. Constantly gaining tacit insight before designing is key. Designing for change is essential. Acting fast isnt a risk if we are prepared to pay attention to outcomes and adjust accordingly.
Organization
Functionally oriented businesses organize in hierarchies, with organizational units responsible for particular functions. Integration of these functions takes place one-level higher in the organization, away from the work that is being done. This leads to good
28 performance on a functional level but poor integration between functions. Companies that are business-process oriented organize differently. They favour structures that allow interaction between functions, such as in matrix organizations. Since the focus is on activities making up a particular process, such companies perform well in achieving targets based on work done.
Coordination
Coordination between departments of a functionally oriented company is difficult because each function includes many activities. The management of each department must coordinate the output of each activity with the required input in other departments. There is no direct organizational path for such coordination in these companies. Business process-oriented companies have a different approach that encourages direct interaction between departments through the organizational matrix. These departments prioritize coordination of activities over organizational functions. This direct path for coordination leads to streamlined and efficient work flow.
Optimization
When a functionally oriented company optimizes its work, each functionally organized department optimizes its function independently. This means, for example, that sale maximizes orders received while production may not be able to manufacture what has been ordered. When companies focus on process, optimization has a different outcome. Sales and production work together to ensure that the maximum volume of orders is processed through the system. The result is better performance for the company as a whole.
Planning
Strategic planning works differently in functionally oriented and business processoriented companies. In the former, top management assigns targets to the departments based on their function. A sale receives a target in terms of sales figures and production in terms of production volume. Departments strive to achieve their targets without taking other department targets into consideration. If one department doesnt meet its target, the company as a whole suffers. In companies that are process-oriented, management assigns targets in terms of work to be done. Planning is focused on activities that make up a process. Departments work together to achieve common goals and get the work done.
29 Such companies generally achieve a higher level of performance than functionally oriented companies
1.8 Summary
Business processes today play a key role in improving the performance of companies. Faster growth rate and return on investment, increasing competitiveness, improvement of production and service deliveries, and improved customer relations can be realized through superior business process management. The ten principles of business process management are explained in this lesson.
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Lesson - 2
PROCESS MANAGEMENT
Learning Objectives
After reading this lesson, you will be able to discuss the concept of Process management distinguish core and noncore processes the process management generation
Structure
2.1 2.2 2.3 2.4 2.5 2.6 Introduction Meaning of Process Management Identify the Core Noncore Processes Measurement of Competitive Advantage Summary Revie Questions
2.1 Introduction
The idea that work can be viewed as a process, and then improved, is hardly new. It dates at least to Frederick Taylor at the turn of the last century. And probably before. Taylor and his colleagues developed modern industrial engineering and process improvement. Though the techniques were restricted to manual labour production processes. The Taylorist approaches were widely practiced in the early l900s. But were largely forgotten by midcentury. The next great addition to process management was created by the combination of Taylors process improvement and statistical process control, by Shewart, Deming, Juran and others. Their version of process management involved measuring and limiting process variation, continuous rather than episodic improvement, and the empowerment of workers to improve their own processes. It turned out that Japanese firms had both the business need recovering from war and building global markets and the discipline to pill continuous improvement programs in place. Other firms in other societies have adopted continuous improvement and total quality management based on statistical principles, but it requires more discipline than most can muster.
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32 University: Process management, based on a view of an organization as a system of interlinked processes, involves concerted efforts to map, improve, and adhere to organizational processes This denition of process management is succinct but encompassing. It also resonates with the process enterprise concept that Michael Hammer described. Whereas traditional organizations are composed of departments and functional silos, this denition views organizations as networks or systems of processes. To manage a process, the rst task is to dene it. This involves dening the steps (tasks) in the process and mapping the tasks to the roles involved in the process. Once the process is mapped and implemented, performance measures can be established. Establishing measurements creates a basis to improve the process. The last piece of the process management denition describes the organizational setup that enables the standardization of and adherence to the process throughout the organization. Assigning enterprise process owners and aligning employees performance reviews and compensation to the value creation of the processes could accomplish this. The current theories of process management have their origins in the quality movement and business process reengineering movement of the past two decades. However, the genesis of process management and management in general, can be traced to the birth of the modern corporation. Adam Smith claimed that mass production required a new organizational form and new methods of work. In his seminal work, The Wealth of Nations (1776), Smith recognized that the division of labor was essential for increasing the productivity of workers. While observing workers at a pin factory in France, he noticed that workers performing single steps in pin manufacturing could produce far more pins than workers engaged in manufacturing whole pins. The productivity increase was orders of magnitude higher, 48,000 pins by 10 person teams compared to at most 20 per person working independently. Smith determined that the productivity Increases were due to the dexterity each worker obtained by performing the assigned tasks and the time saved by not having to switch from one task to another. Smiths idea of specialization of labor established the foundation for the functional organizations in which corporations align themselves today. Adam Smith introduced the idea of labor specialization. This necessitated dening roles and tasks performed by different individuals. This is the basis of business processes
33 spanning multiple individuals. The next revolution in process management came from Frederick W. Taylor and Henry Ford. Spurred by the introduction of mass production, Frederick Winslow Taylor, an engineer also known for inventing carbon steel machine tools, expanded on Smiths labor specialization with the introduction of the scientic method and measurements to the manufacturing processes. In his book, The Principles of Scientic Management (1911), Taylor stressed that corporations needed to remove production in efficiencies and improve the division of labour. He proposed to accomplish these with scientic management techniques. These techniques include the following:
N
Time and motion studies to observe how different workers perform their jobs and standardize work activities on the most efficient work procedures
Standardization of materials, equipment, and work methods for all activities in the manufacturing process
Systematic methods for selecting the best workers suited for each job and provide them with training to perform tasks that are standardized
Alignment of the workers pay to their output The functional organization served corporations well from the beginning of the century
to the post-war boom of the 1950s and 1960s. After the Second World War, the Marshall Plan established the United States as the sole economic superpower supplying goods and services for rebuilding Europe. On the domestic front, spending was skyrocketing for building new Suburbs to house the G.I.s home from the war and for government sponsored urban renewal programs. Investment dollars diverted to military use during the war years were now redirected to civilian projects. Demand for American goods was so high that corporations main concern was in sufficient capacity. This meant there was little concern for product quality or catering to customer requirements. Consumers, starved of goods during the Depression and war years, bought anything American companies were selling. The happy days ended in the 1970s when the economic environment changed and corporate competition increased. Several economic factors contributed to the change in the economic environment. In 1971, faced with increased foreign decits from war-induced ination, the United States
34 Withdrew from the gold standard, ending the Bretton Woods world monetary system. Under the Bretton Woods system, the dollar was xed at $35 per ounce of gold. Other currencies had xed exchange rates against the United States dollar. The various central banks were obligated to buy/sell their currency to limit uctuation to within 1 percent of the xed parity. The collapse of the Bretton Woods monetary system ushered in an era of increased volatility in world currency markets. This translated into increased volatility in demand for products and services. This volatility in demand was detrimental to the mass production strategy that corporations were pursuing. Further adding volatility to demand, the world economy also experienced severe recessions due to the energy crisis. Around this time, Europe and Japan re-established their economic bases. As trade barriers lowered in the 1970s, United States corporations began to and competition from European and Japanese companies both in domestic and export markets. The increased competition led to consumer choice in purchases. Complicating matters further for American corporations was the maturation of the consumers. From 1949 to 1969, the average family income increased from $14,000 to 28,000 in the United States. Because of higher average income, consumers demanded more customized goods and services. They were no longer satised with whatever corporations sold them. All of these factors created challenges for corporations built for mass production. Instead of the supplier-driven economy that existed before, corporations were faced with a customerdriven economy. This set up our current environment in which customers demand quality products that cater to their needs. Customers are also now demanding a satisfactory purchasing experience and customer service. Corporations that do not provide an easy buying experience risk exclusion from future sales. This increased competition and the resulting shift from the supplier driven economy to a customer-driven economy have forced corporations to rethink their organizations and business practices.
35 In this context we can divide all business processes into three categories:
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Core activities are the essential, defining activities of an organization. If the organization gave those activities to an external party, it would be creating a competitor or dissolving itself.
Critical but non-core activities, if not performed exceptionally well, will place an organization at a competitive disadvantage or even create a risk. There are many examples of companies failures to manage their logistics processes adequately leading to product shortages and loss of market share. Logistics is a critical but noncore activity for a producer, but it is a core activity for a transportation company.
Non-core, non-critical activities supply no competitive advantage. Even if performed poorly, they are less likely to seriously harm an organization in the short term, although they are still important. Examples include cleaning, catering and security. The increased focus on core business operations and developing competitive
advantage has left companies wondering what to do with their non-core, less strategic processes, such as distribution and inventory management, accounting and HR, credit card processing and product testing. Although these processes are vital to the day-to-day operations of many organizations, users view them as overhead functions that do not define their business and, therefore, contribute little to their identity and bottom line. This notion, however, is changing as outsourced processes help companies save money or increase productivity. In other words, a non-core business process may start to contribute to the bottom line by being outsourced. Companies are currently determining which functions or processes are core to their business, and which are non-core yet critical. Competition and rapidly changing IT options are driving companies to realize the potential benefits of outsourcing functions and processes to parties that specialize in these areas. The total number of processes that companies consider core is inevitably shrinking, while the proportion of non-core yet critical processes will continue to expand as margins in a competitive environment are squeezed and customer service becomes increasingly competitive. Corporations must consider all their business processes as mission critical, examining and optimizing them where possible. Outsourcing non-core processes to vendors helps to accomplish this goal. Since these outsourced processes will then be
36 in the hands of a vendor for which they are core, the chosen vendor must be the best of its type, excellent at the processes it does. Todays competitive corporation must optimize every process to achieve the best possible business performance. The core/non-core definition merely distinguishes the processes that are best kept in-house from those that are best outsourced. The issue is not which processes are important or unimportant, since all functions contribute to overall performance. In fact, the market tendency is to reconsider which processes make up the core set, and to outsource even some processes previously considered as integral to the internal structure, such as accounting, tax reporting, debt collection, customer support and so on. Using outsourcing effectively is therefore a great way to keep your business streamlined and functioning at the best of its competitive ability.
37 in developing constructs. Three approaches that are widely used for developing constructs are: 1. Narrative Approach 2. Classificatory Approach 3. Comparative Approach Narrative approach is a case based tradition that characterizes that Competitive Advantage should be described only in its holistic and contextual form. While this approach is useful for conceptual development, it has limited use for testing theories of effectiveness and differing environments-organizational and temporal conditions. In the classificatory approach, a conceptual classification term typology, was given by Rumelt. Hofer &Schendel, Miles 8: Snow and Porter. The typologies are rooted in a set of parsimonious classificatory variables or conceptual criteria. The empirical classifications are referred to as taxonomic: and reflect empirical existence of internal consistent configurations. They are comprehensive and capture the integrative nature of competitive advantage. But do not reflect the within group` differences among the underlying variables. Purpose of any measurement is to estimate the score that would be obtained if all items in the domain were used. However. In practice. One does not use all items. Only a sample of` them. The sample of items to the extent they correlate with the the scores is good. Crombach alpha coefficient is one of the important measures used to determine internal Consistency. It provides an unbiased estimate. It provides an unbiased estimate. A low alpha co-efficient indicates that the sample of items perform poorly in capturing the construct. As a thumb rule, an item that has nearly zero correlation, and also those that produce a substantial and sudden drop in the item to total correlations, should be eliminated. Factor Analysis. either exploratory or confirmatory, can be used to examine the dimensionality of the construct. exploratory Factor Analysis helps in ascertaining the underlying dimensions of data. Sometimes, the result in the dimension of the factors may not be interpretable. This is partly due to garbage items` that do not have a common core and, hence. Should be eliminated. However, there are no unambiguous criteria to determine the number of underlying factors. Hence, a conclusion supported by independent criteria, like principal component analysis and maximum likelihood analysis, Should be accepted.
38 Confirmatory factor analysis can help in testing hypotheses with respect to the number of dimensions. It is meaningful when there are specific expectations regarding which variable is likely to load on which factor. For the construct to have face or content validity the sample of items should be appropriate. Adherence to steps helps in producing content mild measures. The domain sampling model encompasses all errors that occur within the test. This tends to lower average correlation among the items within the test but the average correlation among the items is all that is needed to estimate reliability. Alpha coefficient is used for determining the reliability of a measure based on internal consistency. However, it does not adequately estimate errors caused by factors External to environment. Such as difference in testing situations and respondents over time. Hence new data should also be subject to the same analysis as above and the results should be compared. At this stage. Alternative methods of reliability can be employed. All preceding steps produce an internal, consistent and homogeneous. Set of items. This is a necessary but not sufficient condition for ensuring validity of the construct. Construct validity refers to the extent to which a measure actually appraises the theoretical construct it connotes to assess. When a measure correlates highly with other measures designed to measure the same construct, there is evidence of convergent validity. Low correlation between the measures considered and other measures not measuring the same construct indicate discriminate validity. The construct should have both convergent and discriminate validities. It should also have predictive validity. That means the unit should behave as expected in relation to other constructs The First step in the operationalisation n of a construct is delineation of its domain. Four questions central to Strategic Management Constructs help delineate the conceptual domain of the proposed construct. These are discussed below. Scope the strategies can be viewed either as means or as goods. The scope of the construct SCORE is the means adopted to achieve the desired goals. Hierarchical Level BPR strategy concept is categorized at three levels, namely corporate level, business level and functional level. Corporate level smug is concerned with top level issues. Business level strategy is concerned more with the strategies at the Strategic Business Unit (SBU) level. Functional
39 level strategies are derived from business level strategy. The construct SCORE used is defined at the business level. Impact of BPR can be expressed at different levels in a business enterprise. They are: (i) Internal: These impact the efficiency and effectiveness of organizational structures and processes so as to achieve goals and objectives. (ii) Competitive: These affect the ability of the organization to outmanoeuvre competition in the industry in which does business. (iii) Business Portfolio: These affect the decision about the industries to compete in, and how to position the organization in these industries.
2.5 Summary
Companies create value for their stakeholders via their business processes. And, as stakeholders needs change, managers should update their business processes, too. BPM, therefore, refers to the tools and techniques managers use to adapt and change their business processes.
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Lesson - 3
PROCESS REFINEMENT
Learning Objectives
After reading this lesson, you will be able to listout the importance of the Process refinement explain the Process model in Oil refinery Industry
Structure
3.1 3.2 3.3 3.4 3.5 3.6 3.7 Introduction Meaning of Business Process Refinement Importance of Process Refinement Oil Refinery in India Case study Evaluating Return on Process analysis Summary Review Questions
3.1 Introduction
Originally process refinement theory stems from the idea to check for a given abstract process model with a high level of nondeterministic u behaviour and a process model with a more deterministic behaviour whether the possible behaviours (control Hows) are consistent with each other. Interesting work in this field is done by R.I,Van Glabbeek by utilizing bisimulation techniques. However the problem addressed there is not general enough to handle process models with different granularity levels of interrelated activities. By developing business processes using Model Driven Architecture approaches it is often required to compare process models on different abstraction layers and with different granularity levels for consistency. One prominent discipline dealing with the scenario that we are interested in is action refinement. Action refinement was massively formally researched in the early 1990s by the process algebra community.
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42 contains only activities (including start and end) and gateways The task types include remodel process ,refine process, ground process etc knowledge about some typical tasks and their pre and post conditions can be described in multi language as follows 1. Remodel Process: an engineer can always remodel an existing process. Precondition: a process exists. Post-condition: the process is remodeled. 2. Refine Process: when a process is neither refined nor grounded. The process needs to be refined by another process. Pre-condition: a process neither refined nor grounded exists. Post-condition: another process is created or referred to as the refinement of the current process. 3. Ground Process: any process that can be refined can also be grounded to a Component behavior model. Pre-condition: a process neither refined nor grounded exists. Postcondition: a component behavior model is created or referred to as the grounding of the current process. When a user is modeling processes, the system should automatically tell which task is available for which artefact. When the user performance a task and hence changes the models. Task availability should also be updated accordingly
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Planning
Various aspects of planning in the oil refinery are discussed below. Selecting the Process Inventory, per se, cannot be reduced, since it is the result (effect) of various cause factors. To reduce inventory, the organization looked at the processes responsible for its build up. Hence the process selected for improvement was Procurement. Selecting the Improvement Techniques Considering in was a chronic problem; minor improvements would not have delivered the results expected by the management. In order to achieve breakthrough results. The management selected Process Reengineering technique. The methodology applied was Westinghouse Technology for improvement of process. In the five day workshop, the participants
N N N N
Planned for the process to be reengineered Analyse the current process Reengineered (Redesigned) the process Developed implementation plans
Scoping the process in order to ensure that improvement effort remained focused, the procurement process was scoped. While scoping. Care is taken that the process is neither too long nor too short. lf it is too long, it may remains shallow while mapping and analysis and some critical issues may be left unaddressed On the other hand, if it is too short, improvement attempted may not impact the business considerably. In the present case, scope of the procurement process was under: Process Begin with: Plan (Perceive) requirement Process includes: Prepare indent, Raise enquiry, Evaluate offers, Place orders, Receive material and Inspect material Process ends with stock exchange Team Formation After scoping the process. across functional team was formed to ensure that the participants were knowledgeable about the current process. This required that a supplier and a customer (internal) were pan of the team. Some of the members were from a totally different function to bring in objectivity. Team members needed to be creative, bold and willing to take risks, and question the fundamentals.
44 Usually. a team consists of 6-10 members from middle management and team leader from senior management, with executive director as the sponsor. Sponsors Expectations To set stretch targets. sponsors expectations were defined and documented. These were:
N N N N N N N
Improvement in working capital Improvement in profitability and productivity Space in stores Material planning v Simplification of process Reduction in inventory Internal and external lead time
Key Issues are problems that hinder effective performance of processes. The team members posted issues under each task and then, using Dot Voting technique, selected key issues. Some of the key issues affecting process cycle time, cost and value delivered were:
N N N N N N N N N N
Poor requirement planning (mostly over indenting and/or stock outs) Excessive bureaucracy No compliance to order terms by vendors Discrepancy in physical and computer stocks Limited computerization Incomplete indents Vendors offers received by fax not accepted Incomplete and incorrect voices Poor storage facilities Material indented and purchased but not used for years
45 Internal Customer Value Assessment (Customer Satisfaction Index) to determine the value delivered by the process, value analysis for few internal customers were done. Paradigms are the boundaries of beliefs of team members within which, according to them, the organization operates. As a result of these paradigms, improved working methods appear to be impossible. For breakthrough improvements, it is critical to identify and shift existing paradigms. Some of the existing paradigms identified were: Too many signatures would ensure control Be safeinvolve all Servants of system Rules (rules cannot be changed) Lowest bid is the best and safest inventory management is material management departments responsibility
Procure only what is needed Value engineering and standardization Integrated computerization (indentors, purchase, stores, finance) Payment against document/delivery of material System to write off obsolete and surplus items Rationalize vendor base
46 Reengineered Process Based on the outputs available from analysis of the current process, good ideas, key issues, etc., the team designed and mapped the reengineered process. Some of the main assumptions in the reengineered process were: Alternate system of payment (not through bank) Revised payment terms for payment Computerization linking indentors, purchase, stores. And finance Online vendor rating system Evaluation. Selection and monitoring of vendors Enhanced authority for management staff to place purchase orders Minimum role for finance department Minimum signatures
3.6 Summary
Actions can be refined. This means that one abstract action is refined into multiple logically related (less abstract) actions describing in more detail how the latter abstract action is performed. For example. The action judge application form can be refined into logically related actions such as check if form is complete, End customer file in information system, check customer characteristics. Etc. Moreover. The attributes can be refined as well. When refining an action. Two basic rules must be obliged: the attributes of the refinement must match the attributes of the abstract action and the context of the refinement, i.e. how it relates to its environment. Must match the context of the abstract action.
3.7 Questions
1. 2. Explain the importance of process refinement. Discuss the Oil refinery industry in process management.
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Lesson - 4
Structure
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Introduction Meaning of Business Process Reengineering Example of BPR Applications Objectives of BPR Role of Information Technology in BPR Role of IT in BPR with Practical Examples BPR Tools and Techniques Summary Review Questions
4.1 Introduction
Business Process Reengineering involves changes in structures and in processes within the business environment. The entire technological, human, and organizational dimensions may be changed in BPR. Information Technology plays a major role in Business Process Reengineering as it provides office automation; it allows the business to be conducted in different locations, provides flexibility in manufacturing, permits quicker delivery to customers and supports rapid and paperless transactions. In general it allows an efficient and effective change in the manner in which work is performed.
48 intensive competition in the business environment. Competition is continuously increasing with respect to price, quality and selection, service and promptness of delivery. Removal of barriers, international cooperation, technological innovations cause competition to intensify. All these changes impose the need for organizational transformation, where the entire processes and organization climate and organization structure are changed. Hammer and Champy provide the following definitions: Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality, service and speed. Process is a structured, measured set of activities designed to produce a specified output for a particular customer or market. It implies a strong emphasis on how work is done within an organization. (Davenport 1993 Each process is composed of related steps or activities that use people, information, and other resources to create value for customers as it is illustrated in the following example. An example of a business process: Credit card approval in a bank. An applicant submits an application. The application is reviewed first to make sure that the form has been completed properly. If not, it is returned for completion. The complete form goes through a verification of information. This is done by ordering a report from a credit company and calling references. Once the information is verified, an evaluation is done. Then, a decision (yes or no) is made. If the decision is negative, an appropriate rejection letter is composed. If the decision is positive, an account is opened, and a card is issued and mailed to the customer. The process, which may take a few weeks due to workload and waiting time for the verifications, is usually done by several individuals. Business processes are characterized by three elements: the inputs, (data such customer inquiries or materials), the processing of the data or materials (which usually go through several stages and may necessary stops that turn out to be time and money consuming), and the outcome (the delivery of the expected result). The problematic part of the process is processing. Business process reengineering mainly intervenes in the processing part, which is reengineered in order to become less time and money consuming. The term Business Process Reengineering has, over the past couple of year, gained Increasing circulation. As a result, many find themselves faced with the prospect of having
49 to learn, plan, implement and successfully conduct a real Business Process Reengineering endeavour, whatever that might entail within their own business organization. Hammer and Champy (1993) define business process reengineering (BPR) as: The fundamental rethinking and radical redesign of the business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed.
50 When applying the BPR management technique to a business organization the implementation team effort is focused on the following objectives: Customer focus. Customer service oriented processes aiming to eliminate customer complaints. Speed. Dramatic compression of the time it takes to complete a task for key business processes. For instance, if process before BPR had an average cycle time 5 hours, after BPR the average cycle time should be cut down to half an hour. Compression. Cutting major tasks of cost and capital, throughout the value chain.Organizing the processes a company develops transparency throughout the operational level reducing cost. For instance the decision to buy a large amount of raw material at 50% discount is connected to eleven cross checkings in the organizational structure from cash flow, inventory, to production planning and marketing. These checking have become easily implemented within the cross-functional teams, optimizing the decision making and cutting operational cost. Flexibility. Adaptive processes and structures to changing conditions and competition. Being closer to the customer the company can develop the awareness mechanisms to rapidly spot the weak points and adapt to new requirements of the market. Quality. Obsession with the superior service and value to the customers. The level of quality is always the same controlled and monitored by the processes, and does not depend mainly on the person, who servicing the customer. Innovation. Leadership through imaginative change providing to organization competitive advantage. Productivity. Improve drastically effectiveness and efficiency
51 and groupware applications, eliminating distances. We can work together even though we are located in different places. Empowering people. Empowerement means giving people the ability to do their work: the right information, the right tools, the right training, the right environment, and the authority they need. Information systems help empower people by providing information, tools and training. Providing Information. Providing information to help people perform their work is a primary purpose of most information systems although they provide information in many different ways. Some systems provide information that is essential in informing a business process, such as the prices used to create a customers bill at a restaurant. Other systems provide information that is potentially useful but can be used in a discretionary manner, such as medical history information that different doctors might use in different ways. Providing Tools. In addition to providing the right information, empowering people means giving them the right tools. Consider the way planning analysts produce consolidated corporate plans based on plans of individual divisions and departments. If the plans are submitted on paper, it is a major task to add up the numbers to determine the projected corporate bottom line. When the plan is changed during a negotiation process, the planning analyst has to recalculate the projected results. With the right tools, the numerical parts of the plans arrive in a consistent, electronic format permitting consolidation by a computer. This leaves the analyst free to do the more productive work of analysing the quality of the plan. Providing Training. Since information systems are designed to provide the information needed to support desired work practices, they are often used for training and learning. As shown by an expert system and a decision simulator, they sometimes provide new and unique training methods. IBM developed an expert system for fixing computer disk drives. The expert system was an organized collection of the best knowledge about fixing these disk drives, and it fostered rapid and efficient training. Before the system was developed, technicians typically took between 1 and 16 months to become certified, but with the expert system, training time dropped 3 to 5 months. Eliminating Unproductive Uses of Time. Information systems can reduce the
52 amount of time people waste doing unproductive work. A study of how professionals and managers at 15 leading U.S. corporations spent their time concluded that many professionals spent less than half of their work time on activities directly related to their functions. Although the primary function of salespeople is selling, the time breakdown for salespeople averaged 36 percent spent on prospecting and selling, 39 percent spent on prospecting an selling, 3 percent on servicing accounts, 19 percent on doing administrative chores, and 6 percent on training. Better use of information systems could save much of their unproductive time performing chores such as collecting product or pricing information, determining order status for a customer, resolving invoice discrepancies, and reporting of time and expenses. Eliminating Unnecessary Paper. One common way to improve data processing is to eliminate unnecessary paper. Although paper is familiar and convenient for many purposes, it has major disadvantages. It is bulky, difficult to move from place to place, and extremely difficult to use for analysing large amounts of data. Storing data in computerized form takes much less physical space and destroys fewer forests, but that is only the beginning. It makes data easier to analyze, easier to copy or transmit, and easier to display in a flexible format. Compare paper telephone bills with computerized bills for a large company. The paper bills identify calls but are virtually impossible to analyze for patterns of inefficient or excessive usage. Eliminating Unnecessary Variations in the Procedures and Systems. In many companies, separate departments use different systems and procedures to perform essentially similar repetitive processes, such as paying employees, purchasing supplies, and keeping track of inventories. Although these procedures may seem adequate from a totally local viewpoint, doing the same work in different ways is often inefficient in a global sense. Whenever the systems must change with new technology, new regulations, or new business issues, each separate system must be analysed separately, often by someone starting from scratch. Minimizing the Burden of Record Keeping, Data Handling, and General Office Work. Since processing data is included in most jobs, improving the way people process data is an obvious place to look for information system applications. Focus on basic data processing tasks: Reducing the burden of record keeping means being more efficient and effective with the six components of data processing. Those components are capturing, transmitting, storing, retrieving, manipulating, and displaying data. Capture data automatically
53 when generated: Capturing data automatically at the time of data generation is especially important in minimizing the burden of record keeping. In depth, BPR assumes that the current processes in a business are inapplicable and suggest completely new processes to be implemented by starting over. Such a perspective enables the designers of business processes to disassociate themselves from todays process, and focus on a new process. The BPR characteristics - outcomes include the following: 1. 2. 3. Several jobs are combined into one. Decision-making becomes part of the job of employees (employee empowerment). Steps in the processes are performed in natural order, and several jobs get done simultaneously. 4. Processes have multiple versions. This enables the economies of scale that result from mass production, yet allows customization of products and services. 5. 6. 7. Work is performed where it makes the most sense. Controls and checks and other non-value-added work are minimized. Reconciliation is minimized by cutting back the number of external contact points and by creating business alliances. 8. A single point of contact is provided to customers. A hybrid centralized/decentralized operation is used
54 system. Example 2: Amazon.com is the Internet web page address of the currently largest virtual bookstore in the world. More than one million titles are available. None of these is on store, but can be searched for and ordered interactively by remote Internet users located as far away as Herrenberg, Germany. Amazon made sure, though, to locate in Seattle, Washington, in order to have easy access to the largest physical book warehouses in the USA. Their web site even offers an alert function, which automatically sends an electronic mail (email) whenever a new book whose profile (author, title, subject, etc.) the customer is interested in is published. This Amazon selection and ordering process would not be possible without Internet technology.
55 Process and customer focus: The primary aim of BPR, according to some authors, is to redesign processes with regard to improving performance from the customers perspective.
4.8 Summary
BPR requires taking a broader view of both IT and business activity, and of the relationships between them. IT should be viewed as more than an automating or mechanizing force: it is needed to fundamentally reshape the way business is done. Business activities should be viewed as more than a collection of individual or even functional tasks in a process view for maximizing effectiveness. IT and BPR have Business Process Reengineering: Text and Cases recursive relationship. IT capabilities should support business processes, and business Processes should be in terms of the capabilities that IT can provide. Business processes represent a new approach to coordination across the firm. It promise-and its ultimate impactis to be the most powerful tool for reducing the costs of coordination. The following kinds of capabilities reflect the roles that IT can play in BPR: Transactional, Geographical, Automatically, Analytical, Informational, Sequential, Knowledge Management, Tracking, and Disintermediation.
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Lesson 5
Structure
5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 Introduction Meaning of Process Improvement Levels of Process Improvement Meaning of Process Redesign BPR Experience in Indian industry Process Identification Process Mapping SIPOC MAP Summary Review Questions
5.1 Introduction
Process can be defined as a sequence of interdependent and linked procedures that, at every stage, consume one or more resources (employee time, energy, machines, money, etc.) to convert inputs (data, material, parts, etc.) into outputs these outputs then serve as inputs for the next stage until a known goal or end result is reached. ln some organization, products are given more importance titan processes. But, the fact is that the process comes before the product. and for a product to be of good quality the process should be good. Poor process or no process ultimately harms the product.
57 Business management methods, such as Six Sigma and Total Quality Management (TQM), focus on understanding and improving a process. By focusing on process improvement, the business can achieve better results, including customer satisfaction. good financial results and employee satisfaction. A business process in an organisation is a set of processes or activities that integrate with each other to produce a particular product for a particular client, or customer: It emphasizes on how the work should be done within an organization to accomplish a particular goal. The characteristics of a business process are listed below
A business process:
1. Has a goal 2. Has specific inputs 3. Has specific outputs 4. Uses resources 5. Has a number of activities that are performed in some order 6. May affect more than one organizational unit-Horizontal organizational impact 7. Creates value of some kind for the customer. The customer may be internal or external
58 customers want, do the process, measure the results, and then identify improvement opportunities based on the data you collected. You then implement process improvements, and measure the performance of the new process. This loop repeats over and over again, and is called continuous process improvement. You might also hear it called business process improvement, functional process improvement, etc
59 across organizational boundaries on external suppliers and customers. Hence, it is required that the process reengineering team must be cross functional and include members from all impacted organizations. A corporate mission or statement or strategic plan helps an organization to identify business process. The next step is to identify customers and suppliers. Customers determine products and services from which business processes profit. Suppliers provide the raw materials which the business processes will use in building products or services. There has to be an analysis of all activities that take place in the process. Which are in the value chain between what it got from suppliers and what it delivers to its customers? Activities that add value to products and services should be strengthened and optimized and the activities that do not add value need to be reduced or eliminated.
60 During this period, M&M was in the process of considering the implementation of a Business Process Reengineering (BPR) program throughout the organization including the manufacturing units. Because of the problems at the Igatpuri and Kandivili plants, M&M decided to implement the program speedily at its manufacturing units The program, developed with the help of the UK-based Lucas Engineering Systems, was first implemented on an experimental basis at the engine plant in Igatpuri. Simultaneously, an exercise was initiated to assess the potential benefits of implementing BPR and its effect on the unions. M&Ms management was not surprised to learn that the unions expressed extreme displeasure at the decision to implement BPR and soon went on a strike. However, this time around, the management made it clear that it would not succumb to union demands. Soon, the workers were surprised to see the companys senior staff come down to the plant and work in their place. With both the parties refusing to work out an agreement, observers began casting doubts on the future of the companys grand plans of reaping the benefits of BPR
Background
Mahindra & Mahindra Ltd. (M&M) was the flagship company of the Mahindra group, one of the top ten industrial houses in India. The companys history dates back to 1945, when two brothers, J.C.Mahindra and K.C.Mahindra, decided to start a business of generalpurpose utility vehicles. The brothers formed a company, Mahindra & Mohammed Ltd., in association with their friend Ghulam Mohammed. In October 1947, the first batch of 75 jeeps was released for the Indian market. In 1948, the company was renamed Mahindra & Mahindra Ltd. Over the next few decades, the group promoted many companies in areas as diverse as hotels, financial services, auto components, information technology, infrastructure development and trading to name a few. Though M&M had established itself in the markets and was among the leading players in many of the segments it operated in, it realized that some of its businesses were not closely related to its core business. This realization marked the beginning of the biggest change exercise since the companys inception. In 1994, a major restructuring exercise was initiated as part of a BPR program. M&M introduced a new organizational model, in which various divisions and companies were regrouped into six distinct clusters of related businesses, each headed by a president. M&Ms core activities, automotive and tractors were made autonomous business units. The other activities of the group were organized into infrastructure, trade and financial
61 services, telecommunication and automotive components. According to company sources, the whole exercise was intended to develop a conceptual map to provide direction for the future growth of various business lines. It was decided that, in future, the group would confine its expansion to the identified thrust sectors. The two main operating divisions of the company were the automotive division, which manufactured UVs and LCVs, and the farm equipment division, which made tractors and farm implements. The company employed over 17,000 people and had six state-of-the-art manufacturing facilities spread over 500,000 square meters. The plants were situated at Kandivili (MUVs and Tractors), Nasik (MUVs), Zaheerabad (LCVs, Voyager, and threewheelers), Igatpuri (Engines) and Nagpur (Implements and tractors)
62 are the ones who can effect change. Their buy-in and agreement throughout the analysis is paramount. Additional information that should be obtained includes the objectives of the process, risks to the process, key controls over those risks, and measures of success for the process. In order to effectively record and maintain this information, some important worksheets have been developed. Two of the most important are the Process Profile Work Sheet, and Work Flow Surveys. The Process Profile Work Sheet includes such information as the process owner, the trigger events (beginning and ending), inputs, outputs, and, as mentioned above the objectives, risks, key controls, and measures of success. Work Flow Surveys are completed by individuals actually working on the process and request from them a list of tasks including inputs and outputs which they perform in support of the process. Only after all this is done is actual Process Mapping completed. This involves sitting with each employee and having him or her describe what it is they do. This information is recorded using a sticky-note method. Each step in the process is recorded on a stickynote and built in front of the individual completing the work. This allows them to interactively ensure the final map matches their understanding of their work. The final process maps are developed using flowcharting software. Time flows down the page, and each individual involved is represented by a separate column. In this manner, a simple map can result from a complicated process.
63 added steps, contribute towards reduction in costs, help to establish customer driven process performance measures, reduce process cycle time and increase productivity. Systematic and structured approach is necessary towards process mapping.
64 Steps to draw a SIPOC Map 1. Name Process 2. List key inputs and suppliers
Figure 5.3 Process Map The process of malting a photocopy is taken and different inputs and key factors are listed. A SIPOC map is drawn. Step I: Name the process Making a photocopy Step 2: List key inputs and suppliers Customer who takes the photocopy Person who makes the photocopy Company who supplies paper and toner Power company that supplies electricity Step 3: Identify the boundaries of the process Number of photocopies required Quality of the photocopy Step 4: Identify and name minor project steps Photocopying Step 5: List key outputs and customers Photocopies Customer who receives the photocopies
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5.9 Summary
A process is a series of activities, occurring within companies that lead to a specific goal. Business process focuses on meeting the needs of customer by delivering value driven products. It often makes use of process mapping techniques and SIPOC map to achieve high productivity in its products. The steps of a business process vary from one corporate structure to another. However, there are some elements or sub processes that can be found in almost .To some degree, these sub processes occur in an order that leads to successful completion of manufacturing process.
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Lesson 6
Structure
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 Introdution Process visioning Meaning of Benchmarking Benchmarking Categories BPR Implementation Methodology Business Process Improvement Business Process Redesign Managing Change Summary Review Questions
6.1 Introduction
In the last lesson, process refinement and process mapping had been discussed. Let us discuss process visioning and benchmarking techniques in this lesson.
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1. Shared Information
Information is an important asset, which must be well managed to provide maximum return on investment. In the present information age. Data management is becoming more and more important. Data is entered into the corporate database once and is maintained at the point of entry. It is made available wherever and whenever it is needed in whatever format and context. Along with adequate security.
2. Mission Support
Data is captured and maintained in an organization to support a defined mission. lt helps in redefining business process in such a way that activities, which support mission. Are strengthened and actions. Which do not add value, are eliminated?
3. Reduced Cost
The activity that increases cost of business without providing additional benefits to the customer should be reduced or eliminated. Managers must search for these non-value adding activities and cost and eliminate them so that scarce resources can be optimally utilized.
4. Reusable Technology
There is a shift from custom developed unique management system to use off-theshelf technology and software to support standard business processes. This involves shift from custom developed engineering methods and life cycle project management controls.
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identify the processes to be benchmarked Organize the benchmarking effort Prioritize the ideas the team finds and turn them into projects with timelines for adopting the best practices
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70 4. Plan : This step involves planning implementation of the preferred course of action by developing detailed statements of requirements, baseline impacts costs, benefits and schedule. 5. Approve : This involves extracting from the planning data the information needed to finalize functional economic analysis. This is used by senior management to approve proceeding with the proposed process improvements and any associated data or system changes. 6. Execute : This means executing approved process and data changes and providing functional management overview of any associated information system changes.
71 incremental changes, and they want them sooner than later. Because the rate of change has increased for every business, few businesses can afford a slow change process. Business process reengineering is one of the approaches for rapid change and dramatic improvement that have emerged recently
72 2. Radical Do not try to improve the existing situation, invent completely new ways of accomplishing work 3. Dramatic Do not use business process redesign to obtain marginal improvements, aim at order-of-magnitude improvements. 4. Process Focus on the business processes instead of organisational structures. So, in a nutshell, business process redesign (BPR) is an ambitious and rule-breaking approach focusing on business processes instead of organizational boundaries.
73 It is not easy to make immediate changes to an established process. When more than one process is running in parallel or series fashion, changes made in one process will reflect in another. The change process should be thought of as a process which stops the current process and makes necessary changes to the current process. The new process is then implemented. The procedure should have minimal effect on the process and the business organization. The change process may also be considered a problem solving situation. The implementation of identified changes may be viewed as solution to the problem identified in the current process or method. A broad skill set (political, analytical, business, etc.) is required for managing changes in the organization. The top management should evaluate the financial and political impacts of the changes. The workflow should be changed in such a manner as to reflect the financial changes taking place. Operations and systems should be so reconfigured that the organization gets the desired financial impact. Therefore, we can conclude that change management considers all aspects of the organization before implementing the change. Hence, it plays a vital role in the success of any business.
74 Creating new organizational structures within the corporate boundaries where new processes can be developed Spinning out an independent organization from the existing one Acquiring a different organization whose processes and values closely match the requirements of the new task Top management participation is critical to the success of change initiatives. Leaders are needed to provide vision and inspiration, demonstrate integrity, provide meaning, generate trust and communicate values. A key aspect of leaders effectiveness during change is their ability to apply different styles of leadership to different circumstances, even within short time periods. This is because different leadership styles (coercive, authoritative, democratic, pacesetting, coaching) have different effects on various aspects of organizational climate (flexibility. responsibility. standards. rewards, clarity, commitment) that affect the success of planned change in different circumstances. For addressing issues related to change management, Prosci makes use of ADKAR (Awareness, Desire, Knowledge, Ability, Reinforcement) model that allows organizations to focus their activities on specific business results. For more information, readers may visit Proscis website, www.prosci.com. BPR and Organizational Change : BPR is an important change management tool. Most BPR organizations are making significant and wide reaching changes to their organization in response to strategic business needs. McKinseys 7 S Model : The model is based on the theory that, for organizations to perform well, seven elements-structures, systems, style, staff, skill, strategy and share valuesneed to be aligned and mutually reinforced. The model is used for identifying the changes that need to be implemented to improve the performance of the organization. McKinsey model is used as a basis for assessing the extent to which organizations undertaking BPR are changing them.
6.9 Summary
Business process management (BPM), as a managerial approach, considers the processes or methods that need to be understood and managed properly to deliver quality products and value added services to the customers in general. BPM integrates changes enabled by Technology and humans. Due to this, BPM is always discussed from two different views Pointspeople and technology.
75 Benchmarking is an effective way to ensure continuous improvement or progress towards strategic goals and organizational priorities. A real benefit of benchmarking comes from the understanding of processes and practices that permit transfer of best practices or per- furnaces into the organization. Benchmarking stresses processes, quality and output.
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Lesson 7
Structure
7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Introduction Business Process Outsourcing Strategic Benefits of Outsourcing Evolution of Business Process Outsourcing Evaluation and Develop Firms Internal readiness for Outsourcing Critical Success Factors Assessing and Managing Risk of BPO Summary Review Questions
7.1 Introduction
Outsourcing is a process that a firm or an organization entering into a contract with another firm or an organization to operate and manage one or more of its business processes. Global competition is the most important issue facing top decision makers in some of the worlds largest companies today. To meet this challenge, leading companies worldwide are focusing their resources on their core competencies as a business strategy to compete profitably in a global market. Outsourcing is paving the way for leading companies to compete globally and increase profitability into the new millennium. The practice is gaining
77 widespread acceptance throughout the United States, Europe, South America, and Asia Pacific as an important new management tool to improve performance and profitability, gain competitive advantage in the global marketplace, and ultimately build shareholder value. More and more companies are looking at outsourcing not just as a tactical, reactive, but as a strategic and proactive move, states Frank J. Casale, Chairman of The Outsourcing Institute.
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Core competence:
Redirecting the business and IT into core competences.
Technology Catalyst:
Strengthening resources and flexibility in technology and service to underpin the business strategic direction.
Business transition:
Facilitating and supporting major organization change.
Business Innovation:
Improving and innovating in processes, skills and technology, while mediating financial risk through the vendor, in order to achieve competitive advantage.
New market:
Direct profit generation through joint ventures and vendor partner.
79 The more trust present between two parties, the more wealth that can be accumulated. Once a country develops a sound legal policy and infrastructure, outsourcing can take place. In essence, the very idea of paying an employee less money to do the same job is the underlying theme associated to outsourcing. Over the past half century, several countries have emerged as leaders in the world of outsourcing. Better known as BRIC; Brazil, Russia, India and China have all been able to develop their nation through the process of outsourcing. Mexico can also be placed in this category since their economic growth has skyrocketed after the North American Free Trade Agreement was put in place. The reason why these countries look so appetizing for foreign direct investment is because their currency has not inflated to the level of developed nations. Since the United States and Europe have been developed nations for quite some time inflation over the years has created higher labor costs that are incomparable to developing countries. Besides cheap labor, companies may specialize in a certain type of production to develop their competitive advantage. Depending on where the company is located, there are various ways for local and foreign companies to develop their niche in the market. The facts present outsourcing to be worth the consideration, but the process is not as clear cut as it seems. Only 54% of companies are satisfied with their outsourcing, which is down from more than 80% a decade ago. This fact is even more troubling considering the advancements in telecommunications. The environment to do business has become increasingly smaller due to the innovations in technology and will continue to do so for years to come.
80 With so many faltering or failed outsourcing projects and an increasingly stringent regulatory environment-the Sarbanes-Oxley Act, for example-is global outsourcing safe for your company? This article outlines the issues executives must consider and the steps companies should take to safely implement an outsourcing solution. Ready or Not? The first step is to determine whether your company is ready to outsource. Conduct a readiness assessment that specifically evaluates programmatic risks and opportunities associated with outsourcing as they relate to your specific company needs. Risks to be evaluated include: Functionality risk-Risk that the system may not fully meet the ultimate users demands due to the relative complexity of user requirements and interfaces. Internal political risk-Risk that the project would compromise because of antagonism within the organization, related to changes in the existing power balance or status quo. Project management risk-Risk that the company would not be familiar with the processes for managing expectations and deliverables in a distributed development environment. Financial risk-Risk that cost would exceed budget, or that the result would not deliver anticipated benefits. Technical risk-Risk that the scope of the project would be beyond the technical capabilities of the hardware, software, or available personnel. Security and compliance risk-Risk that company data or business continuity may be compromised. Geopolitical risk-Risk of political instability in a developing country where business critical applications or data reside. The assessment should also evaluate issues such as the total cost of ownership, project complexity, maturity of internal and partner infrastructure, the criticality of the project or process to be outsourced, and the projects dependence on key personnel. The outcome of this assessment should be a comprehensive picture of the outsourcing possibilities for the business processes and applications used by the company. Which projects are fairly low risks that promise reasonably high returns, and vice versa? The evaluation should include a ranking of the risks and rewards possible from implementing an outsourcing
81 plan. With this information in hand, it should be possible to determine what kind of functions or projects can be outsourced safely. Companies are outsourcing business processes every day that may not have even been thought possible in the past. From call centres, document management, information technology development, accounts receivable, accounts payable and general ledger, to tax processing, legal research, medical diagnostics, medical transcriptions and animation-outsourcing can touch almost any business function. Selecting a Candidate When evaluating whether a project is a good candidate for outsourcing, the projects or processes with the least outsourcing risk generally involve business functions with low criticality and low strategic value, where significant costs savings can be achieved. There are compelling reasons, however, to consider outsourcing in areas that do contain some degree of risk. For example, when a company implements a new approach or switches an application platform but does not have in-house support capabilities, it often makes the most sense to find a partner who can manage the process from start to finish. The management and consolidation of legacy applications is a fertile area for outsourcing. Maintaining old, but necessary, systems is usually not the best strategic use of a companys internal IT resources. Software testing also stands out as a solid outsourcing candidate. Testing needs to be independent, can be done anywhere in the world where there is expertise, and is a discrete project with a defined start and finish. The company gets something tangible in its hands when the project is complete. It also avoids the costly ramp-up and ramp-down dictated by cyclical development schedules, as well as the capital investment in testing software and annual license fees. In all these examples, there are degrees of risk associated with obtaining a rewarding outcome. It is necessary to be aware of the risks and be prepared to manage the various risk elements as they are mapped in the initial assessment. Projects that are risky candidates for offshore outsourcing generally require high levels of human interaction with business managers or process owners, or involve understanding the business rules to be designed as a large part of the project. For example, the actual configuration of an enterprise application with complex organizational interfaces is most effectively and efficiently done face-to-face with business owners. Caution is also justified in considering offshore outsourcing of systems involved in regulatory compliance programs. Public companies have spent a great deal of money on internal working processes to ensure compliance with Sarbanes-Oxley and other regulatory mandates. Make certain that an outsourcing partner will create the necessary
82 documentation and audit trails so that the outsourced facility becomes an extension of the solution that has already been implemented. Develop a Plan Once a companys internal readiness has been assessed and a project or business process to outsource identified, the next step is to develop a solid plan that clearly identifies and manages the impact of outsourcing on the organization. For the manager charged with overseeing an outsourcing project, it is helpful to ask a few basic questions:
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How will outsourcing impact our continuity plan? What effect will the project have on employee retention and morale? How do we overcome the cultural differences between our employees and our partner? The single most important thing to do to ensure business continuity and to significantly
decrease risks is to communicate the plan to employees. Often, the biggest reason for outsourcing failure is not that the company didnt pick the right partner, or failed to go to the right country, or chose the wrong project. Its employee sabotage. A company needs to develop a holistic outsourcing plan and make it known to employees, including plans to retool employee responsibilities, as well as amicable pathways, such as attrition, for those who will no longer be needed. The danger is that an exodus of employees, some with the knowledge base that is crucial to business continuity, can result from an uncertain environment. Or employees may purposely, perhaps subtly, sabotage the outsourced projects to ensure that they fail. Companies that require their soon-to-be- displaced employees to train their own replacements are creating an environment for certain failure. Implementing an effective employee communications program can help to avoid these problems. External team building is also essential to a projects success. Some of the steps or items that you may wish to consider to help manage the transition and build external teams include:
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Setting expectations clearly and upfront, acknowledging job transition or reassignment. Clearly stating the reasons why work is being outsourced (A large number of organizations evaluate function and performance first, not the potential cost savings).
Recognizing each others cultures through the celebration of birthdays and holidays and the sharing of cultural days and traditions.
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Creating reward/recognition systems that are on par for employees and contractors. For example, some companies provide the same rewards and bonuses. A piecemeal approach or creeping outsourcing is another sure recipe for disaster.
Your outsourcing plan should map out the key projects or processes to define the scope of the relationship and ensure efficient delivery of services. You will also want to work with a partner that provides multiple global outsourcing options to meet your ongoing operational needs. This is especially true if outsourcing is new to your company. Also, dont forget to update your disaster recovery plan when undertaking an outsourcing project. Managers often omit this important step, putting the business at risk. The plan needs to address critical systems and functions, so reviewing and testing the plan including the outsourced components will provide valuable information as to its effectiveness. Pick a Partner An outsourcing plan should also map out the optimal path to outsourcing projects or processes. It is a good idea to work with a partner that provides multiple global outsourcing options to meet ongoing operational needs, especially if outsourcing is new to an organization. Keep in mind that outsourcing does not necessarily mean going offshore. By keeping business critical projects on or near your site, and moving to an offshore or near shore facility, the less critical projects can be supported from remote locations. Some projects may require both an onshore and offshore presence to optimize project delivery. A partner with global delivery options will be able to access and manage the best options. This approach will allow decisions to be made about managing an outsourced project based on a companys specific technical requirements, domain knowledge, security and compliance needs, project schedule and cost goals. Another key advantage to working with a partner with multiple global delivery options is that the due diligence required to safely outsource work to offsite facilities has already been completed. The outsourcing partner has already implemented the processes and conducted the due diligence to ensure that the country to which your projects are sent is politically stable, with regulations to protect your intellectual property. In addition, security for the outsourced facility will be in order, although planning is required to ensure that data are protected, buildings secured, personnel screened and insurance for theft in place. Finally, your partner will likely have a good telecommunications infrastructure and will be easily accessible should travel be necessary.
84 In todays world, software developers change jobs and move between companies at a rapid pace. Competition for talent is also heating up in the offshore environment. A worldclass outsourcing partner will have already addressed the issue of employee retention at its outsourcing facilities to mitigate business continuity risks that result from high employee turnover. Make sure a partners staff turnover is less than 10 percent per year. An outsourcing partner should also have experience managing cultural differences that might impede a healthy client relationship. For example, the employees of a facility located in a predominantly patriarchal society need to understand a companys expectations about working with female managers based in the United States. Keep in mind that outsourcing will not enable you to reduce your project management responsibilities. By contrast you will probably have increased internal project management responsibilities. Managing a distributed team, incorporating new business processes and methodologies and navigating cultural differences are just a few of the items you may be faced with. However, following these measures will help you to build the knowledge base with your offshore partner so that the relationship matures and the return on investment continues to grow. You may think your company is too small to consider outsourcing. The reality, however, is the global marketplace is accessible to anyone. No one competing in todays economy builds a company with a permanent employee at every desk. Companies of all sizes are shopping globally to find the best resources at the right price. With careful planning, companies can reap the benefits of the global marketplace, while at the same time ensuring their risks are managed and their business continuity is preserved. Its not only about outsourcing anymore: its about smart business.
85 Critical success factors should not be confused with success criteria; those are outcomes of a project or achievements of an organization that are needed to consider the project a success or to esteem the organization successful. Success criteria are defined with the objectives and may be quantified by Key performance indicators.
Internal risks
1. 2. 3. 4. 5. 6. Transition risks Data Security risks Loss of control Brand damage Weak governance Hidden costs
1. Transition Risks As a part of internal risks, transition risks have been cited to be the most severe. These risks include errors in estimating overall time for migration, intensity of efforts involved and costs that shall accrue. To mitigate these risks, clients are adopting sophisticated approaches for identifying the critical path for successful transition and understanding the level of risk associated with realizing each key benefit area. Sensitivity analyses are also conducted to assess the probability and impact of any delay and reduction of benefit levels due to uncertainties or inter-dependencies with other projects, operations or functions during planned transition.
86 2. Data Security Risks Global customers consider network security, physical security, and customer privacy and information protection to be critical. A few respondents state that the criticality of data security is more concentrated in the areas of voice-based outsourcing, with employees often gaining access to customer ids, pin codes and other confidential data. In addition, the importance is magnified in specific strategic processes such as financial reporting, tax and legal support and in the verticals of healthcare and insurance. Service providers are aware of the privacy and IP related concerns of their clients and in a large number of cases, as per the survey, are compliant with global standards such as BS 7799, ISO 17799, COBIT and ITSM, now considered must-haves for the larger players. Further, most respondents have taken steps in the areas of physical security, technological initiatives, policies, ethical guidelines on their own initiative, to ensure that data confidentiality is maintained. Regular training on issues of security awareness, nondisclosure agreements, screening of employees and periodic compliance audits are some of the best practices that had been observed in the survey. 3. Loss of Control Risks Loss of control on offshore operations is an area that clients have traditionally been concerned of in light of the cultural, administrative and geographic distance between the client and the service-provider. The anxiety accrues due to two prime factors respondents cite perceived inability to influence the quality of the service and the inability to determine what is going wrong due to inadequate or inaccurate information. The implication of the perceived loss of control has been on high expectations from service providers and the detailed drafting of Service level agreements with respect to quality controls and communication flows. 4. Brand Risks Brand risk is another area of concern for clients, stemming from poor service by service providers resulting in end-customer dissatisfaction or service-provider practices not being in line with stated practices (ethical or otherwise) of the regulated entity. The magnitude of reputational risk is amplified with the political overtones of off shoring for which clients have begun to develop proactive external Communication plans. 5. Weak Governance An emerging area of concern for clients is the risk related to arrested evolution. These risks relate to the inability of an outsourcing solution, defined from a short-term perspective,
87 to respond to changing business requirements. Due diligence in this respect is being carried out, with focus on issues of scalability and robustness of proposed technology platforms to underpin transition of existing operations, support ongoing business and enable any future expansion of offshore strategy such as significant Increases or spikes in transaction processing requirements. 6. Risk of Hidden Costs In the financial domain, risks that clients are becoming wary of include hidden costs not foreseen in initial stages of projects. Respondents cite examples of the costs of evaluating vendors, managing major contracts, travelling to offshore sites, enhancing security, and paying severance for laid-off workers as instances of hidden costs. Exit costs are another hidden risk, as ending an arrangement prematurely exposes both buyer and provider to litigation. Clients are resorting to careful cost modelling and scenario planning which include benchmarked information and sound understanding of current activity-based performance and costing. While most companies are focused on risk issues at the off shoring decision point (e.g., contract signature/change of control/ physical move), it has been observed that the focus fades with time. It is critical to keep the ongoing commitment to risk management; risk profiles and exposures change over time, and while some risks can be eliminated or mitigated, others must be actively managed.
7.8 Summary
Business process outsourcing is the movement of functions from inside the organization to an outside service provider. It has been widely praised as a strategy for eliminating business processes that are not part of an organizations core competence, including back-office functions such as payroll and benefits administration, customer service, call center, and technical support. Despite its demonstrable bottom-line benefits, however, BPO has come under attack for eliminating jobs, often by moving them offshore to lowercost, higher-value locations.
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Lesson - 8
Structure
8.1 8.2 8.3 8.4 8.5 Introduction Financial Costs Strategic Costs Summary Review Questions
8.1 Introduction
Make or buy is the fundamental decision that faces all organizations considering their alternatives for managing a business process. The decision involves many factors, not the least of which is the cost associated with developing internal capabilities (making) or outsourcing them to an external provider (buying). Cost is one of the three primary elements of the BPO decision, along with productivity and mission criticality. Each must be weighed when analyzing BPO opportunities. In a perfect world, where all other things are equal, the decision to undertake a BPO initiative would be based purely on cost-oflabor arbitrage- firms would simply source business processes to the lowest-cost labor, wherever it may be. But this is not a perfect world, and the various costs associated with a BPO initiative are not always easy to identify or forecast. The savings that are most often associated with BPO stem from the elimination of overhead, including jobs, capital assets, and real estate. However, the true costs involve far more than head count and capital investments. Identifying and assessing the costs related to a BPO initiative are essential to the outsourcing decision and can help organizations budget appropriately. There are two primary areas of concern: 1. Financial costs. Hard costs associated with activities that must be undertaken to assess, launch, and maintain a BPO project.
89 2. Strategic costs. Soft costs that are difficult to quantify but can profoundly affect the firms ability to compete. While financial costs are often self-evident, strategic costs may not be so clear. For example, one strategic cost of outsourcing that is often cited is loss of organizational learning in the outsourced activity. This can lead to strategic blunders if the outsourced activity is important to the organizations core competence and the organization is not working closely enough with its vendor in a mutual exchange of knowledge. Strategic benefits can arise from a deep partnership arrangement between BPO buyer and vendor. Such a relationship focuses not just on cost-effective performance on the outsourced activity, but also on knowledge sharing, innovation, and reciprocal exchange across business processes, including the outsourcers core competence
90 research specialists, and change-management consultants are just some of the outside professionals the BAT may want to consider utilizing. This cost can be estimated at the beginning of the project using several indicators, including:
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Prior BPO knowledge among BAT members and the organization as a whole Organizational history with BPO, reengineering, or other transformational change programs
Top management support for BPO in the organization BAT member knowledge of BPO is a factor because lack of such background will
usually require investment in outside support. It is simply unrealistic to expect individuals with no BPO knowledge or experience to be effective BAT members. Thus, training and preparation costs should be estimated. A good rule-of-thumb estimate is to assume one week of person-time for each BAT member to read, review, and discuss what BPO is and how it can be utilized by the organization. Organizational history with major change programs can also reduce BPO analysis costs. Firms that have such a history, whether with reengineering, Total Quality Management (TQM), or something else, will likely be better suited for the self-examination process that is required for effective BAT performance. A history with transformational change, especially if the experience was positive, can ease the burden of the analysis process. Individuals throughout the firm will be more willing to cooperate and work hard to analyze BPO opportunities if they believe the process will result in positive changes. Estimating the costs associated with a lack of history in transformational change will be subjective. In general, the analysis-phase cost estimates should include an extra week of BAT member time if the organization has no history with transformational change. Top management support is critical to the success of any organizational transformation. BAT members must perceive that they are empowered to dedicate their time to the analysis process. If top managers badger them about time spent away from their central duties, team members will feel conflicted and the BPO analysis process will likely take longer and be less effective. Top managers must clear the space necessary for BAT members to do their analysis, while maintaining reasonable expectations about performance in their regular duties.
91 involved in drafting and distributing the request for propetal RFP, responding to vendor inquiries, selecting a vendor, and initiating the BPO transition. Developing internal knowledge of these aspects of an implementation means the organization has acquired the capacity for additional BPO initiatives in the future. The greatest value-added benefit is likely to be the reduced time necessary for future BPO implementations, as well as a more effective implementation phase overall. Cost mitigation benefits associated with hiring a consultant to conduct the BPO implementation include a faster process and, quite likely, a more effective vendor relationship. Professional service firms skilled in matching client needs with vendor capacities are likely to be able to provide significant value to the BPO buyer. The BPO buyer can derive even greater benefits if the consultant is compensated in part based on vendor performance. This is just one example of contracting mechanisms and innovations that can be used during the implementation phase to reduce risks and increase benefits.
Transition-Phase Costs
The transition phase is one in which the business process that formerly had been handled in house is wholly or in part shifted to the outsourcing vendor. The costs associated with this phase are driven by primary characteristics of the BPO buyervendor relationship
92 but the transition must be handled with care. It is not unusual for the BPO buyer to experience attrition, staff cuts, and reassignments during the transition phase. The vendor will often reengineer the outsourced process, reducing inefficiencies and enhancing individual productivity levels. This means that staffs that remain may harbour lingering fears for their own job securityfears that may slow the transition and affect productivity. Proper management of the in-house transition to vendor management and process ownership will reduce these potential costs.
Operational-Phase Costs
The operational phase of the BPO project refers to the period when the contract is being fully implemented and performance expectations drive the relationship. Among the endpoints that should be monitored as part of an ongoing BPO initiative are both financial and productivity ratios. Financial ratios that should be monitored range from standard return on investment (ROI) to margin enhancement. Depending on the intentions of the BPO project, the financial ratios to be monitored will vary slightly. As mentioned, some BPO projects are undertaken primarily for cost reduction purposes and others primarily for strategic advantage purposes. Cost-reduction BPO projects are intended to enhance margins through reduced overhead, which can often be achieved within 6 to 12months after commencement of the contract. In contrast, strategic BPO attempts to leverage the world-leading capabilities of the outsourcing partner and focuses more on new revenue over margin enhancement. Organizations must establish financial metrics appropriate to the intentions of their BPO project.
93 and vendor. Relationship costs are those that are involved in courting, establishing, and maintaining a relationship with a BPO vendor. This complex undertaking can be as farreaching and comprehensive as a merger or joint venture. Such transactions are distinguished by the need to mesh information systems, governance structures, and organizational cultures into a unified whole. The complexity of the challenges of merging two formerly distinct enterprises is often too overwhelming for the executives who engineered the deal. One or more top executives are often either asked or forced to leave as they become increasingly disoriented amid the chaos of the combined entity. For example, the merger of Hewlett-Packard and Compaq in 2002 led to a quick departure of Compaqs then-CEO Michael Capellas. Departures related to that merger continued well into 2003.A thoroughgoing BPO relationship can share many of the complexities of a major merger or joint venture. Firms that determine to outsource backoffice processes are entering into a relationship with a vendor that will have important competitive implications. The risk posed by this loss of functional independence requires careful prior analysis of the capabilities and integrity of the vendor. In the case of a BPO relationship, it is simply unacceptable for any breakdowns in performance or integrity to occur.
8.4 Summary
The costs of a BPO project go far beyond mere labor-cost arbitrage. They occur at all four levels of the processanalysis, implementation, transition, and maintenance and can be categorized as either financial or strategic costs. There are a number of critical factors in the cost equation, including decisions about whether to handle BPO internally or externally, development of RFPs and review of responses, and how well initiating organizations create and sustain positive relationships with vendors. At the same time, an organization must consider impacts on internal (employee) as well as external stakeholders to help maximize competitive benefits of the BPO project
94
Lesson 9
Structure
9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 Introduction Human Capital Risks Labor-Related Risk Project Risks Intellectual Property Risks Legal Risks Vendor Organizational Risks Value Risks Force Majeure Risks Managing Risks Summary Review Questions
9.1 Introduction
This lesson explores the most common BPO risk factors and discusses effective management techniques for mitigating those risks. These factors will be examined from the perspective of SMEs that seek to gain their fair share of the advantages offered by BPO. Lacking the capital and other resources to absorb the impact of major strategic decision errors, SME executives and managers must be vigilant about risk avoidance and mitigation. The discussion focuses on seven primary areas, each of which should be
95 addressed in a thorough risk-management strategy developed by the Project Management Team (PMT):. The types of business risks are lested below. 1. Human capital risks 2. Project risks 3. Intellectural Property risks 4. Legal risks 5. Vendor organizational risks 6. Value risks 7. Force majeure risks
96 subcontracting should be deemed a mandatory subject of bargaining under the National Labor Relations Act (NLRA). Beginning in the early 1980s, the National Labor Relations Board (NLRB) issued several decisions that created additional uncertainty when evaluating the bargaining status of outsourcing or subcontracting decisions. The NLRBs lack of clarity on the obligations of employers in collective bargaining is unlikely to be resolved anytime soon. To reduce risk, companies should consult with labor attorneys as part of the BPO opportunity analysis to determine the likely disposition of their preferred strategy and its implications for possible liability exposure
97 decided in the buyers preferred jurisdiction. Some give and take may be required on different contract elements, with some potential areas of conflict to be decided in a domestic forum, some in a forum preferred by the vendor, and others in an international forum such as the International Arbitration Association. BPO buyers should mix and match forums to ensure that matters of potentially greatest impact to competitive ability are decided in their preferred forum. This can be achieved if there is a willingness to concede that matters of less importance can be decided elsewhere. One technique that has been effective for avoiding legal disputes is to split outsourcing contracts depending on different deliverables and service-level agreements (SLAs). For example, many firms outsource software development as well as IT management to third-party vendors. A BPO buyer would be wise to split the software development contract from the IT services contract. IT management services are generally governed by SLAs that require regular fee payments. Firms should also be careful to separate continuous service or transaction-related terms from those that concern development of some type of output, such as software or knowledge that is the property of the BPO buyer. The transaction-related services are usually covered in the SLAs and are paid on a regular basis. Development contracts should be treated separately. It is reasonable for the BPO buyer to withhold a substantial portion of the development contract fees until the final product has been delivered and tested.
98 and technical certifications they possess and the clients they serve. This risk can be mitigated through comprehensive due diligence that insists on objective proof of certifications and permission to talk to representatives from the vendors client list. Vendors that refuse to share certification evidence or balk at client referrals should be treated with caution. Vendor organizational risk also includes its HR practices. Many manufacturers that chose to outsource to foreign companies turned a blind eye to labor practices long banned in the United States. Child labor, excessively long hours, and outright sexual and other forms of harassment or discrimination are not uncommon in some foreign labor markets. Firms choosing to outsource business processes should consider the labor practices of the vendor and determine whether the risk of participating in domestically reviled practices abroad can damage domestic reputation and goodwill.
99 the effectiveness of SLA negotiation, implementation, and management. Some international vendors have adopted extreme value-risk mitigation tactics to ensure that project deliverables meet expectations. The following case study describes how a lead generation service mitigates this risk.
100
9.11 Summary
The risks facing managers and executives in organizations seeking to outsource business processes often go beyond the easily predictable. Defined as those events or conditions that may prevent the BPO organization from achieving its projected benefits, these risks occur in both onshore and offshore environments and can be placed in seven categories: human capital risks, project risks, intellectual property risks, legal risks, vendor organizational risks, value risks, and force majeure risks. It is vital that each of these risks be assessedat both internal and external levels, as appropriateand that effective strategies be put in place to anticipate, mitigate, and respond to them as circumstances require. Failure to do so can significantly cripple the potential upside of any BPO initiative.
101
Lesson - 10
Structure
10.1 10.2 10.3 10.4 10.5 Introduction Vendor Selection Process BPO Contract Summary Review Questions
10.1 Introduction
Finding the right BPO vendor and developing an appropriate contract are essential to an organizations outsourcing initiative. Regarding the former, the promise of BPO is always tempered by the perceived risks associated with handing responsibility for an internal business process- no matter how noncore or mundane it may beto another firm. So getting the right partner is crucial. As to the latter, careful consideration of the elements in an effective outsourcing contract can help avoid many of the risks that contribute to BPO failure. The fact is, managing these functions in a way that reflects the strategic nature of the buyervendor relationshipthat is, with an eye toward mutual satisfaction, trust, and precision can go a long way toward maximizing the potential for BPO success.
102 5. Distribute the request for proposals (RFP). 6. Evaluate proposals. 7. Select a short list. 8. Select a vendor.
103 Quality Performance history Warranties and claims policies Facilities and capacity Geographic location Technical capability In addition to these, other factors come into play as well: Customer service : BPO buyers must maintain a customer mindset to derive as much value as possible from the vendor and avoid making concessions on provisions it has established as necessary for the project. A partner mindset in the BPO buyer should emerge only after the vendor has been selected and the contracting process has begun. In the partnership development stage of a BPO relationship, mutual compromise and cooperation is expected. Process expertise : This becomes less important the further from the core the outsourced process is. Processes that are close to the outsourcing organizations core competence should never be outsourced to an inexperienced vendor. Data sharing : Given that data sharing between the various commercial databases can be difficult, the technology platform of the vendor should be a qualification. If vendors do not have a system that is easily compatible with the buyers existing system, they should be responsible for demonstrating how that hurdle can be overcome. Vendors business : Understanding the emphasis of a vendors business, or what drives its revenue, is critical. For example, large vendors usually look for large contracts. Smaller contracts negotiated with large vendors are unlikely to receive the same quality of treatment as larger contracts. Industry specialization : Any vendor, other than the major consultancies, that claims to specialize in several outsourcing service areas should be treated with caution. Having a large base of multifunctional outsourcing expertise is rare, not to mention expensive to maintain. Many vendors will say that the skills from outsourcing a function in one industry transfer to another, and that may well be the case. But, in general, if the vendor is not an expert in the field, it will not know about the hidden challenges associated with providing services in that industry. Specificity : Firms interested in specific types of BPO providers can stipulate that as a qualification. Some buyers may not want to use an offshore provider, for example.
104 Others may specifically prefer the so-called pure play vendor, who specializes in a single business process. Still others may desire a shared-services provider, who serves multiple clients from a centralized location and usually bases its fees on a pay by the pound basis.
105 and is designed to assess the vendors interest before moving forward with the RFI. If there is interest, specific information should be gathered about where and to whom the RFI should be sent. The vendor should also be informed as to whether the buyer would allow a dialog before the RFI process.
106
Vendor Presentation
The VST should meet with one vendor per day. The vendor visits should be limited to four hours and be scheduled as close together as possible so the VST can compare notes on each vendor while impressions are still fresh. The VST should set the meeting agenda and share it with each vendor In advance. At the beginning of the formal presentation, the VST chairperson should: Inform the vendor that it has made the short list. Explain that the vendor has four hours for its presentation. Express interest regarding the vendors pricing model. Reiterate what the organization is looking for in a BPO vendor. Let the vendor know there will be a final telephone conference to clarify the bid submitted. Ask the vendor to submit its best bid no later than the deadline you have established. Let the vendor know when the decision will be made.
107 cited for unsuccessful relationships. The careful negotiation and drafting of a good outsourcing contract can not only preserve the potential of an outsourcing project, but also minimize the risk of failure and eliminate most other points of dissatisfaction. Negotiating BPO Contracts Although this discussion is intentionally brief and not designed to supplement the many excellent books written on the art of negotiation, it is important to examine the nature of negotiating BPO contracts. The complexity and evolving nature of the outsourcing process demands a different mindset than is required in traditional commercial contract negotiation. It is not a zero-sum game, in which each party is motivated to extract as much value as possible from the limited available resources, even to the detriment of the other party. In these types of negotiations, the outcome is winninglose in that one party or the other gets its way. Although there may be clear advantages for the winner, the relationship is likely to become adversarial rather than collaborative. This probably will not promote the kind of long-term collaboration critical to successful BPO initiatives. However, developing an effective BPO contract requires a positivism approach whereby the parties are interested in creating more value than currently exists. It aims for the proverbial winwin outcome and seeks long-term, flexible contract terms. This requires compromise by both parties. At the same time, risks associated with compromise can be mitigated through creative incentive clauses and remedies in the event of non-performance.
108 Intellectual property Industry-specific concerns Termination of the contract Transition Force majeure Dispute resolution
Service-Level Agreements
In an SLA, a vendor agrees to achieve defined levels of performance. If the vendor fails to meet these objectives, the SLA provides the buyer with various rights and remedies. A carefully crafted set of SLAs aligns the interests of the vendor and buyer. Poorly drafted SLAs almost ensure a failed relationship. Unfortunately, SLAs are among the most difficult of outsourcing contract provisions. A solid SLA requires an intimate understanding of business processes by the attorneys drafting the agreement (SLAs should not be drafted by nonlawyers).The parties must document in great detail the requirements of each outsourced process and agree on how to measure service levels and consequences for the failure to meet them Defining What to Measure The foundation of the SLA is defining which service levels and key performance indicators (KPIs) to measure. An SLA may be tied to anything that can be objectively quantified but is usually a measure of such indicators as quality, speed, availability, reliability, capacity, timeliness, or customer satisfaction. With a call center, for example, service levels might include the average time to answer a call, the duration of the call, the percentage of issues satisfactorily resolved in the first call, and customer satisfaction. .
Transition
If a BPO relationship falls apart and one or both parties decide to terminate the agreement, it may be necessary for the buyer to reabsorb the outsourced process or find another vendor. In either case, the transition of the outsourced process should be considered in the original contract. The reasons for this are clear. Consider all of the planning and implementation entailed in outsourcing a process from a buyer to a vendor. Now imagine how much more difficult that process might be when the original buyer is no longer in control of the process and its assets and personnel. To add to the challenge, consider the fact that the transition may well be from an unhappy or incompetent vendor. Thus, the
109 transition from one vendor to another, or the reintegration of the outsourced process back to the buyer, is exponentially more difficult than the original outsourcing process. As a result, careful consideration should be given as to how the transition may be effected, and detailed transition provisions included in the contract. A transition plan should have a commitment by the vendor to provide transition-planning assistance. This should include inventories of hard and soft assets, copies of relevant data, detailed descriptions of procedures, and other information relevant to the outsourced process. The buyer should have the right to use this data and disclose it to other potential vendors, to purchase the assets and hire key personnel related to the outsourced process, and to assume key contracts. Furthermore, the plan should address the need for parallel processing for some period of time while the process migrates to a new vendor or back to the buyer. There may also be a need for continued use of shared assets, such as computer networks. And just as aligning vendor buyer interests is vital to a successful contract, aligning those interests during the transition is equally significant. Usually, this takes the form of monetary incentives for a successfully implemented transition. Force Majeure Outsourcing contracts typically include force majeure clauses, which excuse the vendor from performance in the case of natural disasters such as fire and weather-related catastrophes. In light of the geopolitical postures of many of the countries where BPO vendors are located, war and terrorism are also likely triggers of force majeure clauses. However, because of the significant function that outsourced processes often play in the buyers business, a well-crafted contract should contemplate more than just excusing the vendor from performance during the force majeure event. It should also link the triggering of a force majeure event with disaster recovery plans and business continuation plans. To the extent that a buyer cannot significantly minimize its risk in that regard, insurance should be addressed. Dispute Resolution The outsourcing contract is a living document that must have change management processes integrated within it. Change, however, inevitably invites disagreement, and the contract should anticipate this. The dispute resolution process begins where corporate governance ends. When all
110 Elements of the governance process have been engaged and the parties have still failed to resolve their dispute, legal processes must be pursued. These processes can have escalation procedures built in, just like the governance process. Dispute resolution may be initiated through inform-mal, nonbinding procedures such as mediation. Beyond these procedures, however, the dispute resolution process will progress to either binding arbitration or litigation. If the parties decide to use arbitration, they must agree on the rules. In international transactions, parties often use the rules and procedures promulgated by the International Chamber of Commerces International Court of Arbitration; in domestic transactions, they often specify that arbitration will be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association. In either case, questions of venue and choice of law must be addressed. Venue is the place where the dispute is to be resolved. The parties should consider questions of efficiency in terms of proximity to the persons and facilities proximate to the dispute as well as questions of neutrality. Choice-of-law provisions determine what laws will govern the interpretation of the contract and rules of the dispute, and they are usually determined by the golden rulehe who has the gold rules.
10.4 Summary
Identifying, selecting, and contracting with the right BPO vendor is essential to the success of any initiative. The selection process should be thorough and rigorous and take on a life cycle of its own that includes appointing a vendor selection team; establishing qualifications; developing an initial long list of potential vendors; distributing a request for information, followed by the RFP; evaluating the proposals; culling the list of prospective vendors; and making a final decision. In the event that no vendor satisfies the specific requirements of the RFP, the buyer should consider abandoning the BPO project rather than altering the specifications or forcing a fit.
111
Lesson - 11
Structure
11.1 11.2 11.3 11.4 11.5 11.6 11.7 Introduction Types of infrastructures Making Buyer and Vendor Connection Human Resource Issue Status of Indian BPO Summary Review Questions
11.1 Introduction
Working with an outsourcing vendor involves the integration of a variety of formerly distinct systems, both technical and social. The social aspects of project and relationship management, including the difficulties associated with intermingling organizational cultures and managing organizational change. This lesson focuses primarily on technical infrastructure issues that arise after the BPO project has been launched and operations have begun. These issues include hardware, software, knowledge, security, and training and support. The focus here is not on the cost elements of the infrastructure considerations, but on the management issues that will arise and questions that need to be asked and answered during the transition and operating phases of the BPO Life Cycle. Companies undertaking a BPO initiative may want to revisit their cost estimates as a result of the more detailed discussion of the technical issues contained in this lesson. Fundamentally, the goal of infrastructure integration is to embed and reinforce the collaborative nature of the relationship between buyer and vendor. Before the interlinking of their respective systems, the two companies have interacted only on a surface level. There have been no process changes on either side and no threats to business continuity. The integration of buyer and
112 vendor infrastructures represents a true turning point in the BPO relationshipthe partners are now becoming familiar with one another. The transition phase is characterized by sharing systems, data, and knowledge. Each party now has additional risk exposure. The buyer is concerned about data and systems integrity. The vendor is concerned with meeting the contract terms established by the sales team. Cross-enterprise collaboration to improve performance must be the overriding objective for each organization.
Hardware Infrastructure
The first issue to consider with respect to the hardware infrastructure underlying the BPO project is whose systems to use. Because providing high levels of service in the specific business process is the vendors core competence, their hardware capabilities usually outstrip those of the buyer. Despite this common circumstance, the decision to use the vendors hardware system should not be based on technology maturity alone. Buyer and vendor must also consider other factors when determining whether to shift processes to the vendors hardware.
113
Software Infrastructure
Software compatibility is often a difficult issue within an organization. Compatibility issues are amplified in a BPO relationship when attempting to bring buyer and vendor applications into alignment. Database issues will confront nearly every BPO relationship, as data sharing is the backbone of most BPO projects. While this discussion stops short of recommending how to get disparate databases to talk to one another, BPO project managers should be alert to the difficulties often encountered when two systems attempt to connect at the database level. Organizations that use BPO to improve their service levelsas opposed to seeking mere cost savingsare those most likely to encounter difficulties because their internal systems may well lag behind the latest technology upgrades. The BPO vendor, however, has chosen to focus on the specific business process as its core business competence and is likely to be current in its software infrastructure, including its database systems. The greater the gap between buyer and vendor software maturity, the greater the challenges in database integration and data sharing. It is reasonable, if not expected, that the burden will be on the vendor to manage database integration. The cost, however, is likely to be borne, at least in part, by the buyer.
Knowledge Infrastructure
Clearly, the data and information infrastructure is a vital part of any BPO relationship. Competitive businesses are data driven, and in many cases a large part of their overall value is derived from the industry and market data they have collected, stored, and analyzed. However, a companys knowledge infrastructure is even more important, because knowledge refers to the practical application of the analyzed data and information. The knowledge infrastructure of the BPO buyer involves several components, some of which are directly affected by the BPO relationship. Knowledge is defined as analyzed and applied information that helps the organization compete and grow. Data and information are generated by raw transactions; knowledge is generated by analysis and reflection on aggregated transactions.
114 and responsibility changes. To avoid some of the problems that arise from process-related changes, and to ensure a smooth transition to the new system, training should be provided to everyoneeven those who are adamant that they do not need to be trained. One hurdle that faces many BPO project managers with respect to training employees and getting them to be more self-sufficient is obtaining support from midlevel managers. This is primarily because the middle manager is trying to learn the new processes while maintaining the units productivity. This juggling act can be challenging in the throes of a major BPO-based business transformation.
115 Global sourcing is a trillion dollar industry that continues to expand. First-generation sourcing usually involved administrative functions such as payroll and benefits management that, while important, were not directly related to the companys products and services. Then companies began moving IT, help desk and customer support functions to outside providers, propelling the sourcing industry into the realm of critical, as opposed to back office, business functions. During recent years, sourcing has extended its reach into the strategic core of many businesses, as companies now engage third parties to help develop strategies to transform their business, to research and develop new products and services, and to help position the companies more competitively within their industries. The explosive growth in outsourcing has been fuelled by the globalization of business relationships and supply chains. Companies often allow the compelling economic and strategic reasons driving their decision to outsource to overshadow the significant impact the decision has on the companies employees. When a business outsources a function, the employees who had performed the function in-house prior to its outsourcing find themselves in one of three categories. Some employees are given the opportunity to move into other areas within the company. A number of employees will become employees of the service provider (this is called re-badging) if there are post-outsourcing functions that still need to be performed on-site at the company. The remainder of the employees, and this is often a majority, will be terminated, often within the rubric of a reduction in force. The termination of employees of the company that is outsourcing is often the most controversial part of the outsourcing decision, particularly if the outsourced function is subsequently performed offshore by employees of the service provider. A detailed discussion of all of the employee-related issues associated with an outsourcing transaction is beyond the scope of these brief issues. The company that is outsourcing, however, must conduct a systematic and thorough analysis of the impact that the proposed sourcing would have on the companys employees. That kind of analysis very well may impact the parameters and scope of the sourcing. The following are among the more important issues that should be addressed in any HR outsourcing strategy:
N
Identify affected employees : The company first needs to identify all employees
to retain, either to continue working in the same functional area or to be redeployed to another area within the company.
116
N
Re-badged employees : The company should then identify which of the affected
employees are likely candidates for re-badging (i.e. transferring their employment over to the service provider). This will usually include employees who have a substantial amount of knowledge of the outsourced function and who would be critical to the success of the outsourcing. This part of the analysis should be made jointly by the company and the service provider. For a number of reasons, it is preferable to have the service provider make the final decision as to which employees will be re-badged. A number of important issues must be addressed in connection with re-badged employees. Careful consideration should be given to the employees who will lose their jobs and will not have an opportunity for redeployment elsewhere in the company and who will not be re-badged. Most U.S. states allow employers to terminate employees at will but the company should ascertain whether a given employee has a written employment agreement and, if so, whether that agreement contains a guaranteed term of employment. The company should address whether severance benefits are payable to the employees who are to be terminated under either an employment agreement or the benefit plans of the company. If the companys workforce is unionized, collective bargaining and other labor contracts should be reviewed closely for provisions that may be implicated by outsourcing. Employers should recognize that employees terminated in conjunction with an outsourcing might allege that their termination violates applicable anti-discrimination laws. The analysis recommended in this paragraph should be conducted for re-badged employees as well, since, as a technical matter, a re-badged employee is first terminated by the company, and then rehired by the service provider.
N
a decision to move forward with sourcing a function to an outside service provider, the company should communicate this decision to its employees. Ideally, the communication should come from a senior member of management and the companys HR director. Employees should have the opportunity to raise questions with a designated member of management or the companys HR staff. As soon as decisions have been made with regard to how the outsourcing will affect individual employees, those decisions should be communicated directly and privately to each affected employee. Good timing is crucial to avoid severe disruption and stress among the companys employees.
N
the HR aspects of a sourcing decision will have HR implications well beyond the companys own current employee base. A badly timed, mishandled communication strategy or a disorganized process of implementing the outsourcing can tarnish a companys public
117 reputation and make it more difficult for the company to attract quality employees. Clearly, when a business enterprise outsources, it should tie its HR communications strategy into a well-managed, broader public relations strategy because a sourcing decision is likely to have a significant impact on all of the companys constituencies, including customers, clients, vendors and other service providers.
118 with the rest of world. Most Indian BPO companies are BS 7799 and ISO 17799 certified. According to the Ernst & Young (E&Y) and The Indo-American Chamber of Commerce (IACC) Offshore Outsourcing Survey, BS 7799 and ISO 17799 security certifications are in place at 43 percent of surveyed BPO companies. An increasing number of BPO firms are getting themselves certified. On the service management front, ITIL (IT Infrastructure Library) is used as a foundation by most BPO companies. This is helping Indian BPO outfits leap frog over other industry segments that havent caught up on this front. The effective use of ITIL means that BPOs have a comparatively easier time in catching up with upcoming standards such as BS 15000 and the COBIT (Control Objectives for Information and related Technology) framework. On the quality accreditation front, an E&Y-IACC survey found that ISO 9000 is the most popular quality standard followed by COPC and Six Sigma. The graph Global quality accreditations and best practices highlight these trends. What regulator wants : Even after they get certified, Indian BPO companies still have to catch up on the regulations front. The principal regulations that affect Indian BPOs are the Sarbanes-Oxley Act, HIPAA (Healthcare Insurance Portability and Accountability Act), GLBA (Gramm Leach Bliley Act), UK Data Protection Act, FDCPA (Fair Debt Collection Practices Act) and the US-EU Safe Harbour Agreement. Most of these relate to Indian BPOs biggest clients, i.e. The U.S. and the U.K. Although the percentages of Indian BPO companies that are comply with these regulations is minuscule, the majority of them are partially compliant on the technology front. Around 25 to 30 percent of Indian BPOs are complying with regulations. However, on the partial compliance front, most companies are more or less there.
119 This is poor consolation as this industry is concerned about competing globally. The likes of Nasscom are working with the Indian government to bring regulations like the Indian IT Act 2000 to par with regulations such as the EU Data Protection Directive. Each regulation requires a different strategy to handle it due to the differing levels of complexity and coverage areas. There is no single all encompassing strategy. However, the basic strategies followed by these companies are similar. The first strategy is to have clearly documented policies and procedures. This helps satisfy the client and the certifying or regulatory authority. It also helps the organization approach new business opportunities with a greater degree of confidence and comfort. Educating users through regular training programs comes next. The knowledge of compliance policies has to percolate right down from the top management to the operational management. Organisations can achieve this through regular training and other means like online training over the intranet, poster campaigns, awareness quizzes, etc. BPO companies emphasize data security and integrity. Extensive security policies and proper configuration right from access level control for data to configuring firewalls and IDS systems is essential here. These are complemented by regular audit and review mechanisms. Audits are done at regular intervals by the internal IT team as well as by third party auditors. Reviews and modifications of the policies are also done if required. This systematic approach has made their life easier when it comes to conforming to regulations. Other measures include proper incidence management, and clearly documented and tested escalation plans. When we go into the specifics, the compliance initiatives of most BPOs basically include the following : N N N N N N N
Assessing internal controls Managing and optimizing financial reporting processes Consolidating information for managing business performance Improving business intelligence Providing financial models for high-risk operations and programs to manage risk Improve records management and audit trail Ensuring fraud detection and prevention
11.6 Summary
The process of integrating BPO buyer and vendor infrastructures is the beginning of the operating phase of the BPO project. The goal of this integration is to embed and reinforce the collaborative nature of the buyervendor relationship. While there is an array of
120 infrastructures that must be managed during the transition and operating phases of the BPO Life Cycle, they can generally be broken into four categories: (1) hardware, (2) software, (3) knowledge, and (4) training and support. As the process continues, key issues with arise. These include whether to use the vendors or the buyers system; how to manage the challenges of data exchange; assuring that analytic software systems are not corrupted or changed without intent; implementing effective system backup and security guidelines; and developing training programs that counter employee obstruction, are modular in design, and recognize the need for training vendor-side employees.
121
Lesson - 12
Structure
12.1 12.2 12.3 12.4 12.5 12.6 12.7 Introduction Privacy Laws and Regulations Maintaining Security Standards Performance Measurement System Performance Measurement Audit Summary Review Questions
12.1 Introduction
For most companies, personal information databases have become a critical asset. essential for record keeping, customer relations, product support. and other core functions. Typically. these databases might include nonpublic personal information about employees. clients, or prospects. such as home addresses, unlisted phone numbers, family status, childrens or dependents names. race, ethnicity or national origin. employment history. salary. tax withholdings, financial statements. medical information, hobbies, personal interests, travels. or membership in community or business organizations. In some cases. this information might be highly sensitive: for example. information about a persons political opinion or sexual orientation. Given the strategic and monetary value of these compilations, databases have been copied. stolen, misused or even altered. Disputes and litigation have ensued. Numerous federal and state laws were passed, and government and private actions have taken place.
122 out of concern for the protection of individuals to combat identity theft and for other purposes. In the United States. the Federal Trade Commission (FTC) and State Attorney General offices have conducted investigations of companies data management practices, which have resulted in lines and other penalties when deficiencies were identified.
Identify confidential information and specify the types of security mechanisms the employer expects of the provider.
List applicable privacy laws and regulations. Require the provider to limit access to authorized personnel; keep security patches current; install, maintain, and monitor computer systems that require passwords, use encryption technology, and contain firewalls and similar intrusion detection systems.
Specify that the provider shall be liable for complying with applicable laws and regulations and the breach of its confidentiality or security obligations.
Provide employer access to and control over the information; impose restrictions on how information may be used, transferred, or shared; and grant employer audit rights over the providers security procedures.
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124 transformative solutions to some of our most pressing social issues, including poverty, unequal access to health care, and the achievement gap in education. Imagine having at your fingertips a concise set of quantitative and qualitative data, which provides a clear picture of your organizations progress in achieving its mission and goals. Imagine a culture of learning that engages your entire staff in data-driven decision-making, helps you identify opportunities for improving your activities and operations, and ultimately accelerates your organizations progress toward enduring social impact. Imagine using data-based evidence of your organizations successes to aid in securing new and returning investments. If this scenario is not yet a reality for your organization, you are not alone. Yet getting there is less daunting than it might seem. Performance measurement fits within the vast field of evaluation, which has spawned an equally extensive body of literature, tools, and methodologies on the topic. Mastering this complex field is the work of entire careers. Nevertheless, making use of performance measurement to run the best organization possible does not have to be complicated. In the outsourcing sector, performance measurement enables for-profit organizations to collect data that help identify potential improvements to their business models. By acting on the knowledge provided by this data, an organization can ultimately increase its financial performance. As one business management article explains, a business model is just a model. It is based on a series of assump-tions that might not be valid. Performance measurement can help turn assumptions into well-understood facts and show the way to improvements that lead to more effective business models. Performance measurement serves a similar purpose when applied to advancing social innovation to address social problems. It helps identify opportunities for improvement in an organizations approach to achieving social impact, and it can inform day-to-day and longer-term decision making.
125 activities, including human resources, technology, and financial management. Together, activities and operations constitute everything an organization does to carry out its mission and realize its vision of success. The performance measurement cycle starts and ends with an organizations activities and operations, as it continually moves through the following phases: Measure: Organizations operating performance measurement systems use indicators, metrics that are tracked regularly, to assess their activities and supporting operations. Report: To compile performance measurement data into a format that is easy to analyze, organizations can use two main types of reporting tools: 1. A dashboard includes a focused selection of indicators to provide periodic snapshots of the organizations overall progress in relation to past results and future goals. All performance measurement systems should include a management dashboard, which enables an organiza-tions leadership team to track overall organizational performance. Many organizations also choose to create program-level dashboards to track individual programs or internal areas, such as marketing or human resources, at a more detailed level. 2. A report card contains highlights from an organizations internal dashboards and facilitates sharing data exter-nally with social impact investors and other stakeholders. This external reporting tool helps to establish account-ability with social impact investors. 3. Learn: Using the reporting tools listed above, an organizations leadership and other key staff members review and interpret perfor-mance data in order to make wellinformed decisions and identify opportunities for improvement and necessary course corrections. 4. Improve: The organization implements its decisions to improve its activities and operations. From there, the performance measure-ment cycle begins again
126 the organization. Be sure to include anyone who will be critical to get-ting the performance measurement system up and running once it is in place.
127 revenue; the percentage of your income sources that you consider renewable and reliable; and the distribution of your income between foundation funding, individual donors, earned income, and other sources. 2. Program performance indicators focus primarily on your organizations activities and the outputs, or the short-term results, produced by those activities. Depending on the nature of the organizations work, program performance indicators could include the number of individuals enrolled in a given program, members in an association, partner organizations, individuals engaged through advocacy efforts, or individuals reached through a communications campaign. Many organizations also find it valuable to gather demographic information on their beneficiaries or other key stakeholders. In addition, program performance indicators cover program quality, such as satisfaction level of beneficiaries, program efficiency, and program costs. 3. Social and economic impact indicators allow you to assess your organizations outcomes, its longer-term progress in meeting its mission and realizing its vision of success. For example, an organization aimed at getting high school students into college would want to know what percent of the programs graduates go on to enroll in a college or university. Depending on its mission and vision, the organization might also decide to track how many of those students complete their degrees or even the types of careers those graduates pursue and their average salaries. Social and economic impact indicators may also measure the costs of achieving an organizations outcomes. Additionally, this category includes indicators that assess the larger, systemic impact of your work. For instance, you might choose to measure how your approach has impacted the work of other organizations in your field or new stakeholders that you have helped to bring into the effort to address your target social problem. This type of impact often proves difficult to predict, and you may need to document new systemic outcomes qualitatively as they come up. For most companies, personal information databases have become a critical asset. essential for record keeping, customer relations, product support. and other core functions. These databases might include nonpublic personal information about employees. clients, or prospects. such as home addresses. Unlisted phone numbers, family status, childrens or dependents names. race, ethnicity or national origin. employment history. salary. tax withholdings, financial statements. medical information. hobbies. personal interests, travels.
128 or membership in community or business organizations. ln some cases. this information might be highly sensitive.
12.6 Summary
Privacy is a growing concern for many Indian outsourcing organisations. When business services are outsourced, outsourcing companies are given access to a variety of confidential company information and employee data. Outsourcing employers should protect employee confidential information by taking steps to maintain the confidentiality and security of employee data when retaining and transferring such data to outsourcing services. Given the sensitive nature of employee-related data, privacy concerns are particularly significant for companies outsourcing human resources functions. The performance is measurement system is also explained.
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Lesson - 13
Structure
13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 Introduction Meaning of Vendor Management Vendor Management and Relationship World Class Vendor Relationship Management Managing Vendor Relationship Technology Support and BPO Operation Types of Services Provided by the BPO Industry Summary Review Questions
13.1 Introduction
Over the past three decades almost all companies, ranging from all sizes, have realized savings by applying strategic sourcing practices. These sourcing efforts frequently yielded remarkable reductions in cost; often in the range of 5 to 25% as spend was consolidated and resources were streamlined. These efforts demonstrated substantial returns on investment making many Chief Information Officers (ClOs) heroes in the boardroom. The question at top of mind today is: What is the next wave of strategies for sustaining cost reductions and driving efficiencies in an intensifying and competitive business environment? The answer is in how companies are pushing the boundaries of outsourcing in a quest for further cost reduction by creating incentives that leverage the capabilities of their current provider partners.
130 Even as they seek new opportunities in sourcing, leading companies are finding themselves dependent on an increasingly complex multi-sourcing provider base, with the need to drive further cost and performance improvements, manage provider risk, and streamline costs of vendor management. These companies are developing a new set of Vendor Relationship Management (VRM) capabilities including processes, governance mechanisms and systems to manage vendors on a day-to-day basis over the full relationship lifecycle. Early adopters of VRM are realizing savings in existing relationships, remediating relationships that are not working, working with vendors to build joint capabilities and improve joint processes, effectively managing vendor risk, and reducing internal costs of vendor management.
131 Secure required vendor management tools and skills Put in place processes to effectively manage vendor performance and develop vendor capabilities to continuously drive innovation and improve value
132 required to manage the vendors on a day-to-day basis and how to establish a Vendor Management Organization with the right roles, activities, skills and knowledge needed for effective multi-vendor management. Formalizing these definitions across the organization can reduce duplication of effort confusion within the company and among vendors and inefficiency. In addition, a VMO structure eliminates many of the dropped hand-offs and helps operationally align among business functions and among vendors to make vendor management more proactive.
133 Vendor affiliations This is a formal business relationship that is established to facilitate the mutual pursuit and achievement of common business objectives. The partnership relationship is used for vendors and contractors having frequent and close business alignment with the relevant organization. The vendor or contractor is often an active and visible participant on the project team and has a vested interest in achieving overall project objectives. it is usually characterized by a written agreement put in effect for a period of time and reconfirmed at intervals that enables vendor or contractor participation on many or all projects within the relevant organization. Partnerships can lm established to create a more Vendor Project affiliation in collaboration with relevant project managers should determine the approach to vendor and contractor management on projects, relative to each type of vendor engaged. In particular, it would be good to specify whether the vendor or contractor will be performing its assigned role and tasks as a member of the project team or will be working independent of the project team. Vendor project management responsibility. Should establish common activities and expectations for vendor and contractor participation in project management activities and performance of their own project management efforts, per each vendor and contractor type. This deliberation also results in establishing the project managers role in overseeing vendor and contractor project participation and performance from a project management perspective. The vendor or contractor can contribute and participate in a variety of activities aligned with phases of the project management life cycle, as warranted by their established role.
134 The technical helpdesk infrastructure capabilities of the offshore partner are a significant factor in ensuring seamless transitioning of helpdesk functions. Offshore technical support centers and helpdesks in India are thus investing in cutting-edge technologies and state-of-the art technical helpdesk. BPO is a leading and respected player in the Technical Support Services segment and aims to relentlessly deliver value in addressing each Clients specific business goals. Helpdesk models are thus tailored to meet the nseeds of individual customers for successful outsourcing outcome, as the one-size-fits-all option no longer exists. Acknowledging the concerns of the market through commitment and customer feedback, the company has developed solutions for the entire Support Life Cycle Management.
1. Call Centers
A contact center is a facility for multipurpose, multi-channel interaction that serves the needs of the various constituents of an organization customers, prospects, supply chain, distribution channel and employees. Call centers are contact centers that handle only voice interactions. The outsourcing model has gained quick acceptability in contact centers, subject to strict adherence to nondisclosure contracts and service level agreements. The opportunity in India was stimulated by advancements in communications technology. U.S. and European companies such as GE and American Express pioneered this activity in India by starting their own offshore and shared service centers.
135 include data entry, patient enrolment, accounts receivable, denials/rejections analysis, rebilling, insurance follow-up, and collection agency reporting.
3. Transcription Services
Transcription services involve conversion of information from voice format into text format. Transcription services take two main forms: medical transcription and legal & business transcription. Medical, legal, and business transcription is a big business opportunity for Indian vendors by virtue of the English-speaking talent available at significantly lower costs than the United States. The level of confidentiality involved in the information shared by the client is higher and the Service Level Agreements (SLAs) and Non Disclosure Agreements (NDAs) are bound to be more complex. To benefit most from this opportunity, vendors have to ensure good quality of output, and a high degree of assurance towards their ability to successfully manage the security and confidentiality of customer data.
5. Forms Processing
Forms processing services promote speed, accuracy, and low cost. Manual key entry can be integrated with high-end tools for forms capture. Data from paper, optical and magnetic media may be converted, inputted to a database and validated. Customized data capture can span orders, invoices, warranties, survey forms, check information, customer enrollments, government statistical information, and intelligent abstraction of data from financial reports. Only a few companies in India, such as Datamatics, have been providing such services from their data-processing centers.
6. Legal Databases
Timely access to relevant laws, amendments and precedents has driven the emergence of a legal database industry in the U.S. BPO service providers train lawyers to
136 work closely with their clients to create and maintain an extensive database of their records and conduct supporting research. Salaries and qualifications are higher than those for employees engaged in other BPO activities, but so are the margins, and the cost of a lawyer in India continues to remain a fraction of the cost of his/her counterpart in the United States. Indian legal service providers are in an advantageous position over other Asian BPO providers for reasons other than cost: Indian lawyers operate in a large scale democratic environment (India is the worlds largest democracy) similar to that of the United States, and can readily understand the approach and requirements of their U.S. counterparts.
7. Data Centers
Clients typically sign up for data center services to take care of their incremental storage requirements at lower costs. Data centers are also seen as a solution for data backup as part of disaster-recovery and business-continuity policies. A data center service provider should be able to offer multiple platforms, easy scalability, reliable connectivity, and data security.
8. Digital Media
The service portfolio for digital media and animation content development includes data collection, collation, sorting into meaningful categories, data presentation and developing animated movies and cartoons for films, television, advertisements and educational media. India has a huge talent pool trained in media and animation development that is already being utilized by US filmmakers. Educational CDs (for Distance Learning) represent another significant opportunity for the Indian ITES industry.
9. Data Digitization
Data digitization services include converting data in various forms into a digital format that can be easily accessed, analyzed, and manipulated on a computer. The range of services provided by Indian ITES companies includes data capture, data conversion, software intelligence (SI) and consulting. This service differs from most other BPO services in that it is more IT-intensive and requires people with higher levels of IT and spatial skills than in other services, which also means margins are higher.
137 more valuable services in customized research, business intelligence (BI), operations research and business valuation. The Indian IT company Wipro has around 9,000 engineers designing products for about 100 companies making it the worlds largest third-party R&D outsourcer.
13.8 Summary
The first step in structuring any outsourcing transaction is to understand and define the scope of services to be provided to each of the in-scope sites. This task is in many cases more difficult than it seems, particularly if the customer does not have a centralized business department or the customer is moving to a new environment and therefore it is difficult to clearly define what the scope of services will be at each site. The types of services provided by BPO industry are also explained.
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Lesson - 14
BUSINESS OPPORTUNITY
Learning Objectives
After reading this lesson, you will be able to discuss the steps in BOP opportunity analysis list out the trends in offshore outsourcing
Structure
14.1 14.2 14.3 14.4 14.5 Introduction Steps in BPO Opportunity Analysis Risk Involved in Outsouring Trends in Offshore Outsourcing Analytical Mechanisms to Measure Off Shoring Success
14.1 Introduction
BPO was pioneered primarily by large companies that were eager to reduce their costs and bloated payrolls. Today, many small to medium sized enterprises (SMEs) have discovered BPO advantages that enable them to compete with the larger firms that have been using outsourcing for years. In 2001, for example, 75 percent of BPO users were firms with greater than $500 million in revenue. By 2002, that number had dropped to 64 percent. What is indisputable is that any business that has grown to more than about $25 million in sales has begun to encounter growth related challenges in back-office processes that may be suitable for handing over to an outsourcing partner. With these potential advantages, it is not difficult for organizations to justify a decision to at least investigate BPO opportunities. At the same time, inquiring into BPO has potential short-term organizational consequences that must be considered and addressed. The most effective way to analyze and select a BPO opportunity is through a six-step process that is deliberate, systematic, and minimizes risk. This process has been designed to integrate and align the decision-making process with long term organizational strategic
139 objectives and near-term organizational needs. If handled systematically, the BPO analysis and selection process can be an effective way for an organization to examine itself. Whether a decision to undertake a BPO initiative is made or not, this process will shine a light on organizational processes and activities.
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141 employee displacement, effects on morale, and impact on community goodwill. To establish appropriate performance metrics for a BPO initiative, it is critical to first establish project objectives. The BATs charter charges it with defining the objectives of the initiative. Objectives should be identified both for the BPO initiative and for the transition process. At minimum, project objectives should include: Timing Costs Risk mitigation Deliverables
142 first year; well below the expected 35%-40% in savings, which will only be achieved in the third year of the agreement. An increase in front-end costs may cause the outsourcing organization to agree to lengthen the initial term of the agreement in order to generate the required financial benefits, which ultimately involves making a larger commitment and therefore increases risk. Aside from costs, other risks which must be considered when outsourcing to offshore companies include:
Data/Security Protection
While most IT organizations find offshore vendor security practices impressive (often exceeding internal practices), the risk of security breaches or compromised intellectual property (IP) rights is inherently raised when working internationally. On the IP front, some Indian courts have recently demonstrated a meaningful response to the problem of respect for and enforcement of IP rights in their respective countries by awarding punitive and exemplary damages in infringement cases.
Process discipline
The Capability Maturity Model (CMM) becomes an important measure of a companys readiness to adopt an offshore model. META Group observes that approximately 70% of client IT organizations are at CMM Level 1, whereas offshore vendors require a CMM Level 5 standardized and repeatable model. This disparity creates a gap that is usually compensated for by additional vendor resources on-site. Companies lacking internal process model maturity will therefore find it challenging to realize upon the cost savings which should arise from the retention of an offshore service provider.
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Culture
Cultural differences include religion, mode of dress, social activities and even the way a question is asked or answered. Although most leading vendors have cultural education programs, the challenges and costs associated with cultural alignment may not be insignificant or trivial.
Productivity fluctuations
Most IT organizations experience a 20% decline in productivity during the first year of an agreement, largely due to time spent transferring both technical and business knowledge to the vendor. Furthermore, the cost savings achieved from an offshore arrangement often come at the expense of personnel layoffs by the client organization. Layoffs can cause significant morale problems among the in house survivors, which may sometimes lead to dissatisfaction and work slowdowns.
Competitive Procurement
Potential Pitfall: A customer may enter into an agreement with a service provider that does not generate the expected benefits and/or undermines the bargaining position the customer will have during any renewal negotiations. It is critical that the customer develop an accurate baseline of the process(es) or function(s) to be outsourced prior to entering into negotiations with the service provider.
144 The baseline will establish important negotiation input data, such as the number and type of internal resources currently required to perform the function/process and the service levels then being experienced by the internal service recipients. Once acquired, these data will assist the parties in negotiating the appropriate deal parameters including pricing, service levels and the length of the initial term. It is now the norm that outsourcing services providers are selected after robust request for proposal (RFP) processes have been followed, that RFP process having possibly been preceded by initial request for information (RFI) or request for quotation (RFQ) phases. For significant outsourcing transactions, it is now quite usual for the customer to enter into substantial negotiations with the top two bidders and to only make the final selection once further discussions have taken place and details uncovered via those negotiations.
Changes
Potential Pitfall: A service provider may become opportunistic in its pricing in the event that material changes to the relationship need to be introduced mid-stream during the initial term or any renewal term of the agreement (a likely occurrence given the usual lengthy duration of outsourcing arrangements). This risk is particularly present when, as a result of an over-reliance upon the competitive procurement process just discussed, the customer has aggressively negotiated down the profit margin accruing to the service provider pursuant to the agreement as initially negotiated. One way for the customer to manage the risk of change-related costs subsequently undercutting the economic viability of the outsourcing arrangement, is to obtain the service providers promise to use commercially reasonable efforts to quote a fixed price for implementing any proposed change. In the event a fixed price cannot be quoted, the service provider shall quote the customer a charge for the proposed change which is equal to the service providers incremental direct cost of providing the change, plus a profit margin equal to a defined amount less than its annual operating margin as reported in its most recent annual report.
Benchmarking
Potential Pitfall: A service provider may not pass on the appropriate portion(s) of the cost reductions generated during the term of an agreement, such that the customer is subsequently placed at a relative competitive disadvantage.
145 In order to have a viable means for testing whether any promises made by the service provider have been adhered to and that the expected cost reductions have materialized and have been appropriately shared during the term of the agreement, the customer will often propose that benchmarking provisions also be included in the agreement. Benchmarking provisions allow a customer to have a knowledgeable third party compare the service providers pricing with the pricing being offered to other customers operating under similar arrangements. The negotiation of benchmarking provisions can be challenging, as the service provider can be expected to resist the imposition of terms which are perceived by its negotiating team as materially enhancing the risk of an unfair clawback on the profitability of the arrangement, particularly since customer concerns about minimizing upfront transition costs generally result in outsourcing contracts that are back-end loaded (i.e. the service providers profits often only arise during the latter portion of the initial term and, of course, during any renewal terms). On the other hand, a customer would be leery to agree to provisions where the output of a time consuming and expensive benchmarking process is merely an opportunity to meet with service provider representatives to discuss the possibilities for reducing costs, and therefore pricing, under the agreement.
Service Levels
Potential Pitfall: A failure to adequately define the nature of the service expectations via the service level agreement (SLA) portion of the overall outsourcing agreement, and the initial monetary consequences in the event of failure(s) on the part of the service provider to meet those expectations, will increase the likelihood of disputes between the parties and leave the customer with inadequate means of incenting the service provider to meet its contractual commitments. It is difficult to overstate the importance of negotiating a comprehensive and realistic SLA and, generally speaking, this portion of the negotiations tends to be both challenging and time consuming. The SLA negotiations should serve to shed light on many of the existing grey areas in the relationship and so it will likely also be time well spent during the formative period of the relationship. As the service provider can be expected to resist the imposition of SLA fee clawback regimes which allow customers to impose a penalty in the event of a breach of an SLA metric, in seeking to negotiate the SLA provisions the customer should be guided by the principle that it will pay 100% of the agreed to rate(s) for full service and a reasonable amount less for less than full service up to the defined
146 point(s) where a customer termination right will arise. It is critical that the SLA also define the point at which poor service will give rise to a customer option to terminate the agreement for cause (i.e. without an obligation to pay termination fees) and it include a provision stating that termination rights not be subject to an additional cure period. This approach addresses the reality that termination tends not to be an attractive remedy for the customer in the event of poor service and thus should only be considered after less draconian options have been exhausted.
Disputes
Potential Pitfall: Not having an appropriate dispute resolution process. As is the case with other sophisticated commercial contracts, outsourcing contracts usually include dispute resolution provisions. Such provisions can provide for an initial phase during which a dispute will be escalated up through a series of suitably constituted committees staffed by representatives of the parties. This is followed by a second more formal phase during which any dispute which remains unresolved at the conclusion of the initial phase becomes the subject of: (1) litigation; (2) mediation (a voluntary, non-adjudicative process in which the mediator assists the parties in negotiating a settlement); or (3) arbitration (arbitration can be considered as providing the function of a private judge and accordingly is an adjudicative option conducted before either a panel of one or three arbitrators). Another dispute resolution mechanism sometimes used is last offer arbitration, colloquially known as baseball arbitration. In this scenario, each party submits their last best offer to the arbitrator in advance of the hearing. This process is intended to promote the submission of reasonable offer proposals by the parties as the arbitrator is limited to awarding one of the offers submitted.
Transition Out
Potential Pitfall: The customer will be in a weak position at the time the outsourcing relationship is being terminated or is expiring to negotiate transition out terms and runs the risk of being exposed to large unexpected costs. A failure on the part of the customer to be comprehensive in its approach to defining the transition out process will leave it vulnerable at a time when the service providers behaviour may not be moderated by the prospect of future revenues. Typically, this portion of an outsourcing agreement will set out the maximum duration of a termination period during which the service provider is required to provide defined termination services to the customer and/or its new third party provider under a termination services plan. The obligation to provide such termination services should be made contingent upon the payment
147 to the service provider of all prior undisputed service fees and the execution of an appropriate confidentiality agreement by any such third party provider. The service provider will generally be entitled to additional compensation (at defined rates) if, in providing the termination services, it is required to use additional resources or additional resource hours. Transitioning out provisions also usually address: the return of data and records relating to the services, each in a specified format; the return of ownership to the customer of assets previously sold by a customer to a service provider; the reassignment of contracts (including licenses) to the customer that were originally assigned by the customer to the service provider; the provision by the service provider of the necessary staff, services and assistance to effect an orderly transition and migration, which obligations will frequently encompass the hiring of staff, software training, access to personnel, provision of copies of procedures manuals, use of software, sale to the customer or the third party provider of dedicated equipment, and the disclosure of service provider proprietary information. Lastly, it is a good idea to include at least a soft cap on transition out fees. US financial crisis that started in 2008 changed several industries permanently; offshore outsourcing is not immune to the changes. Top outsource vendors successfully managed the global recession by adopting different global delivery models and by understanding customers business started providing direct business value in the projects. Customers from their part started managing their outsource vendors more efficiently and with better performance metrics they started getting maximum benefits in minimum cost.
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1. Cultural awareness:
In most cases, there is tremendous time pressure to offshore services or projects. The tight time schedule of a project plan forces the management to save costs quickly. The consequence is that often knowledge on already existing offshore experience is not sufficiently shared, not even within the company, and therefore, with respect to cultural awareness, this is very important. A misunderstanding of the Indian culture will result in higher costs later and can at times result in cost deficit disasters. Indian staff working with Western staff (on each level) and Western staff working with Indian staff must be trained on cultural differences. Very helpful for effective working relationships are mutual visits in the other country. This has shown drastic improvement on each others understanding and quality of work. Furthermore, it is beneficial to have a specific percentage of Indian colleagues work onsite (e.g. 20% onshore - 80% offshore). The assumed higher costs mostly compensate for costs that arise otherwise (see below).
3. Governance Framework:
Watching the market, it has proven that most offshore outsourcing initiatives fail with their goals unsatisfied because of the fact that a clear governance framework has not been defined. The governance framework ensures that all managerial rules, regulations and processes are explicitly stated and will be followed by all stakeholders. It is considered as the backbone for an engagement. Typically, it is aligned to internationally accepted quality models and adjusted to the project needs.
151 processes been scanned and evaluated carefully, considering maturity and risks to ensure they are suitable? What is the documentation level of the processes? In most cases, this question will be answered with 90% documentation had done while the reality shows that instead 30% documentation is done. Documentation is a time intense activity and mostly underestimated.
5. Experience:
The bigger the offshore outsourcing initiative the more important it is to have the right experience available. Identification of risks and foresights are crucial to ensure a successful engagement offshore. Wrong decisions and wrong expectations can easily result in a back transfer of the services to onshore.
6. Quality Adherence:
Services are typically offshored to save costs. Although most experienced consultancy companies today discourage this perspective, nevertheless, many offshore businesses are motivated primarily by cost advantages. It is often realized late in the process that quality is one of the top two to three driving factors for a successful offshore engagement. Lacking qualities have an impact on performance and reputation of the engagement. Poor qualities can cause considerable follow-up costs, which in turn have a negative impact on the business case. A close adherence to Industry Standards, such as ISO9000, Six Sigma, CMM, etc. is highly recommended, as well as regular quality audits and continuous quality improvements. Quality initiatives should be a standard asset for successful delivery.
7. Expectation Management:
Outsourcing engagements have a supplier (also in-house) and a recipient, which causes different expectations. The fact that a service is delivered from India, complicates the expectations. Expectations are often becoming unrealistic and sooner or later, these wrong expectations become problematic. It is important to close expectation gaps which lead to dissatisfaction. One typical example for expectation gaps is when service owners are in doubt about the service provider s capability and hesitant to give services offshore, while the service provider (also in-house) might feel unchallenged by dealing only with standard, unchallenging topics.
152 A good expectation management will ease communication and sets expectations right. This can be accompanied by innovative approaches - initiations by quality management, for example.
8. Contract:
In case the services are handed out to an external service provider, a respective contract management is needed. If there is no in-house legal department available, external legal advice is inevitable to ensure that the business is built on a stable base. Over the past several years it has proven that built for change contracts are most suitable. More and more companies are starting to negotiate penalties for lacking service quality or specific situations.
9. Onshore-Offshore Ratio:
A 100% offshore model (all resources working from offshore) is very challenging for both the service provider and service recipient. Interactions and exchange opportunities are missing which often leads to functional, technical, and cultural misunderstandings. Frequent exchanges or a ratio of 20:80 or 10:90 can be recommended and assumed to be covered in the business case. Offshore outsourcing is seen now as one out of several sourcing options. It can be selected in alignment with the overall company Multi-Sourcing strategy. India, as one of the choices for offshoring, is constantly becoming more and more expensive. While it is not clear when stagnation can be expected, India has a few advantages to offer. Today, the key players in India can offer very good experience, skilled management staff, a good infrastructure and a decent understanding of the Western IT market and needs.
14.6 Summary
The six-step approach to analyzing the BPO opportunity provides a systematic framework for decision making. The importance of developing and managing a crossfunctional BPO Analysis Team (BAT) cannot be overstated. An effective and committed BAT will be the focal point for BPO-based organizational change, including internal challenges to the BPO analysis process. Team members must be carefully chosen for their commitment to organizational strategy, their ability to deal with and manage change, and their capability to communicate and work with persons from a range of disciplinary backgrounds. Implementing the decision-making process and developing a business case should be done deliberately, with attention to deadlines and resource constraints. Although the proposed systematic process is not foolproof, it is likely to help the organization identify
153 inefficient or unproductive business processes, some of which can be outsourced and others of which can simply be fixed.
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Part-A
Answer any Five Questions All Questions Carry Equal Marks 1. 2. 3. 4. 5. 6. 7. 8. What is Business process Management? What is Business Process Outsourcing? What is Strategic Risk? What is vendor management? What is benchmarking? What is change management? What are the costs involved in BPO? What is performance measurement system?
(5 x 6 = 30 Marks)
Part-B
Answer any Five Questions All Questions Carry Equal Marks 9. 10. Explain the pro's and con's of outsourcing? Discuss the steps in vendor selection.
(5 x 10 = 50 Marks)
155 11. 12. 13. 14. 15. 16. Explain the types of business risk. Discuss the importance of process refinement. Explain the types of benchmarking. Discuss the information privacy and secure by issues related to outsourcing. How will you manage the change in BPO? Describe the trends in outsourcing?
Part-C
Compulsory Questions Case Study 17.
(1 x 20 = 20 Marks)
Recently the U.S. President Mr. Barack Obama had stated that there was no more outsourcing for Indicate. Questions : Is it a business opportunity or threat to India? Give explanations of your answer.
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PBA209E
WELCOME
Dear Student, We welcome you as a student of the Second Year Postgraduate Degree Course. The package contains learning materials pertaining to M.B.A. BUSINESS PROCESS MANAGEMENT AND OUTSOURCING The complete set of learning materials has been prepared in the self-learning format. You will receive self-learning materials for all the papers. This is a significant step taken by the University of Madras towards realising the mission to develop citizens with knowledge, skill and character leading to societal transformation and national development. We invite you to make the fullest possible use of these learning materials. They are designed so that the teacher-in-print of the materials is of constant help to you in your progress as a learner. So, stay with teacher-in-print and carry out the tasks, exercises etc. with care and diligence. In addition to these materials we also conduct Personal Contact Programmes for your benefit. Learning through the distance education mode involves self-learning and selfassessment and in this regard you are expected to put in disciplined and dedicated effort. On our part, we assure you of our help in guiding you throughout the course. Wish you all the success.
DIRECTOR
(i)
COURSE WRITER
Mr. D. VENKATESAN
Assistant Professor in Commerce T.S. Narayanasamy College of Arts & Science Navalur, Chennai
EDITING
Dr. B. DEVAMAINDHAN
Assistant Professor in Management Studies Institute of Distance Education University of Madras Chennai - 600 005.
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160 UNIT IV Outsourcing and Transition : Identify, select vendors - Contracting and legal aspects - Infrastructure consideration and challenges - Human resource issue - Government regulations - Information privacy and security issues - Performance measurement system. UNIT V Offshoring Business Process : Vendor management and relationship - Technology support and BPO operation - Off shoring BPO as Business opportunity - Risk involved in outsourcing - Trends in off shoring - Analystical Mechanism to measure offshoring success - New partiers of out sourcing - BPO Operation in India (Seminar Class) REFERENCE BOOKS 1. Sethi V and W T King, "Organizational Transformation through Business Process Reengineering", New Jersy - Prentice Hall. 2. 3. Sarikakulakarani, "Business Process Sourcing" Jaico Publishing, New Delhi. John K Halvey and John, "Business Process Out Sourcing". Wiley Publishing 2nd Edition. 4. Thomas N Ducning, "Business Process Out Sourcing the Competitive Advantage", John Wiley. 5. Anupindi, Chopra and Deshpande "Managing Business Process Flow", Prentice Hall.
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