IT Directors Disaster Recovery & Availability Summit 2010

What is business process outsourcing?

BPO stands for Business Process Outsourcing. Outsourcing is a system whereby an organisation can sub-contract certain areas of work or processes to a specialist third party organisation.

BPO or outsourcing is often referred to as ‘off-shoring’ because these companies have facilities and resources outside of the UK. This is so that they can employ highly educated personnel with lower social costs. As a result the services can be delivered at a much lower price than is possible in the UK.

BPO can be applied to most sizes of companies and many outsource some key services without actually realising it. An example of this is where a small company may retain the services of an accountant or book-keeper in order to keep financial records, VAT returns and payroll, simply because it is more cost effective to do so than to do it ‘in house’. Furthermore, it is useful to trust in the expertise of others rather than having to worry about the time and complexity of the finances. For an organisation this might include contracting out the finance, customer services and HR (Human Resources).

There are many benefits and reasons for BPO. One example would be how a small company, unable to justify a Human Resources professional, would benefit from outsourcing to a specialist contractor who could give advice and guidance as and when required. This means that the company has the expertise of a professional but not the overhead of a full-time resource.

The future of business process outsourcing

The future is set for continued positive growth within the field of business process outsourcing (BPO). This is driven generally (but there are other reasons) by cost reduction.

Forrester Research [link to: http://economictimes.indiatimes.com/articleshow/2668883.cms] estimate that Europe, by 2015 will be a major user of BPO and the market is expected to reach nearly 25% of total global BPO spending. McKinsey [link to: http://www.nationmaster.com/encyclopedia/Business-Process-Outsourcing] suggest that the total potential market for BPO is worth $122-$154 billion so the market is set for continued to growth.

Why business process outsourcing?

The main centres for business process outsourcing are India and the Far East, as well as Eastern Europe. In these regions there are pools of low cost and highly educated labour providing savings of around 20-50% on certain business operations. While there are many countries that are part of this growing market, India has by far the biggest share.

Types of business process outsourcing

Human Resources (HR)

Most companies need HR or personnel services to recruit new staff, implement new procedures and processes, draft employment contracts etc. Because HR legislation is updated regularly, and general management might not always be aware of the latest changes, potential legal implications can be expensive.

Key HR areas that can benefit from being outsourced:

benefits administration,
salaries and holiday admin,
recruitment, training and personnel development,
organisational personnel requirements,
disciplinary issues.

If certain processes and procedures are not adhered to, for example with regard to disciplinary issues, this can result in costly litigation. Typical businesses that outsource HR tend to be in the region of 25-1,500 employees. Companies that are larger tend to keep HR in-house as at that point it can be more cost effective.

Finance

Finance is one of the most important functions within an organisation and processes must be followed meticulously. Finance can be a high overhead in terms of resource and procedures even to the extent of raising invoices, matching them against purchase orders and bank reconciliation which have to be accurate and in most instances can not be replaced by accounting software.
For example, payroll is a frequently outsourced process, simply because having the resources to carry out the task just once per month are worth having. However, when it comes to critical business processes like accounts receivable, do bear in mind that any issues can have a major impact to your business so you want to retain this in-house. Ultimately the Finance Director should still retain control and have overall responsibility.
This means that (as with all business process outsourcing processes) the finance team can focus on more strategic issues or areas that are more important to the day-to-day running of the business.

Document management

By outsourcing the document management process, companies can improve their use of data and find documents quicker. Information will be more easily retrievable and stored on a computer system to save physical office space. A document management system is held online with the data being held at a third party’s premises and accessed via the web.
Even small companies generate large amounts of data and recording and storing this can be time consuming and expensive.
Furthermore, being able to access records and data quickly can help a company maximise its intellectual property. For example, if an individual has already written a particular document that can be re-used many times, then this saves time and resource.
It is also very important to be able to record and access key records for compliance purposes. All companies have to adhere to some form of legislation that compels them to retain information for a set period of time. For instance, HM Customs and Revenue in the UK require individuals and companies to keep financial records for at least seven years.

Procurement

Procurement or purchasing is a function of the Finance Department. Regardless of the size of a company, this can be an overhead especially if the finance department have to negotiate and look for appropriate suppliers.

By outsourcing procurement a company can benefit in a number of ways. The BPO service provider can:

monitor supplier performance.
implement appropriate processes and procedures,
manage requests for information or proposals and recommend the best potential suppliers,
select suppliers and issue and manage legal contracts.

The BPO service provider can help reduce costs through more thorough evaluation of supplier performance, an in depth knowledge of the markets within which they work and because they may purchase in volume for a number of customers, these savings may be passed onto the customer.

Software development

This is increasingly being outsourced or ‘off-shored’, with software development teams based in areas such as Central and Eastern Europe and Asia where there is access to highly educated, low cost personnel. This is because the social costs in these growing economies are currently far lower than in the western economies.
It is also far more productive and effective to have a team of people used as and when required rather than having full time developers on site unless the business can really warrant it. The majority of software vendors have teams based outside of their main domain for this reason.

Call centres

A call centre is a centralised office that facilitates large amounts of inbound and outbound telephone calls. Call centres have a number uses:
Telemarketing and telesales (out-bound calls)

BPO can encompass the outsourcing of sales and the sales process. Certain products and services are much easier to sell via the phone and don’t require a ‘face to face’ meeting. As a result, the costs for marketing and selling such a product will be drastically reduced. Furthermore, when this process is ‘off-shored’ because of labour costs, the cost of sale will be further reduced. BPO companies that are able to carry out this function have all the facilities including specialist phone systems and software to monitor and manage calls and the process thereafter.

Data cleansing

Data cleansing is a system where an individual or individuals phone the contacts within a database in order to ensure that all the details such as contacts, phone numbers etc. are correct. This allows sales people to phone and send emails safe in the knowledge that the information is up to date. Again, it is far more cost effective to offshore this process as the costs to do this activity in the UK can make it uneconomical.

Customer services (in-bound calls)

To outsource the inbound call process is also generally more economic. Many banks and financial services organisations have outsourced their customer services facilities. BPO companies that facilitate this, again have the up to date equipment and software that enables a seamless and fast way of dealing with queries and resolving issues. Such systems include the ability to ensure that customers never have to wait for too long for a call to be answered, if at all by using an automatic call distribution system that will route each call automatically to the next free call-centre employee. Some even have the capability to recognise when a customer is getting irritated or annoyed and automatically sends an alert to a manager who can intervene if necessary.

Legal issues

You have to keep a number of key business issues in mind when outsourcing, especially when it comes to personnel and their contracts of employment and their legal rights. This is encompassed by a piece of legislation entitled Transfer of Undertakings [link to: http://www.opsi.gov.uk/] (Protection of Employment) Regulations 2006 or TUPE as it commonly known.
In summary, TUPE ensures that:

Employees are not dismissed before or after any BPO agreement is in place. This means that BPO cannot be used as an excuse to make personnel redundant.
Employees are informed and represented throughout the process.
Employees’ rights are not affected by the BPO, i.e. their salaries and packages must not be worse. This includes pensions and pension rights, holidays etc. In essence, employees’ terms and conditions must remain the same.

If these regulations are not adhered to, and an employee is dismissed as a result of the BPO, then this will be regarded as unfair dismissal and the company may be held legally liable.
The links below may be useful for companies seeking further information and it is highly recommended that a specialist lawyer be involved at some point.

www.out-law.com/page-448
www.berr.gov.uk/employment/trade-union-rights/tupe/page16289.html

Service Level Agreements

It is important to agree upon a Service Level Agreement (or SLA) in order to ensure that any commitments made by the service provider are met. The SLA provides a framework that both customer and services provider agree to.

In broad terms, this may be that the business process outsourcing company must provide a response to an issue within a fixed time, and have specific processes in place to deal with problem management, issue resolution, and performance measurement. The SLA normally also list the services and objectives that the outsourcing company agrees to deliver.

If the SLA conditions are consistently not met, this can lead to termination of the agreement and/or call for penalties to be made. These penalties are more often than not financial but act as a deterrent of delivery of poor service unless there are extenuating circumstances.

What type of companies would benefit from business process outsourcing?

Most companies can benefit from some form of outsourcing but many are not inclined to do so because they feel uncomfortable with contracting key functions to a third party.

The key to understanding business process outsourcing is to ask these questions:

What business processes are critical to the business?
What are the areas or processes that do not work very well in-house?
Would using a business process outsourcing company improve or resolve any of these issues?
How?
What are the risks?

Benefits of business process outsourcing

Organisations can gain a number of benefits by outsourcing or using a business process outsourcing company.

Saving money. Most companies that provide BPO services are able to be able to carry out the work for considerably less. This is generally achieved through having lower operational costs themselves because labour is less expensive, social costs are lower and they don’t have to provide benefits to their workers. Typically, BPO should save companies in the region of 40-50%.

Quality of service. It is also possible in some instances to improve the quality of service through being able to have more resources and better qualified personnel.

Productivity improvements. It allows executives and management to focus on critical functions of the business. For example, it will allow expensive and skilled personnel to focus on sales and marketing strategy rather than operational issues such as preparing a VAT return or payroll. You normally find that executives spend 80% of their time in management of day-to-day issues and only 20% on strategy. Outsourcing certain processes can in many instances reverse this statistic. Giving management time to carry out other functions can enable an organisation to become more profitable and find other ways of generating income.

Access to a wider array of skills. BPO enables an organisation to access different skills sets and expertise that their company would not normally have access to. Many BPO companies have skills and intellectual assets that take many, many years to generate.

Allocation of resources. Organisations that use BPO can effectively reallocate personnel into areas that will have a positive impact upon other projects, such as expansion or opening offices in new territories.

Operational expertise. BPO companies are able to provide the relevant expertise that most companies don’t have access to or would be difficult and expensive to develop in-house.

Flexibility. BPO can help organisations become more flexible, for example by speeding up key business processes such as purchasing, and thereby ensuring that not too much or indeed too little stock is held at any one time.

By allowing organisations to retain flexibility and agility, BPO also ensures that companies do not become too bureaucratic. This is a feature of smaller and younger companies but as they grow, more processes and procedures are put in place which while allowing for control, can stifle a company and the people working for it.

Potential pitfalls

Although the benefits can be extensive, there are many risks associated with business process outsourcing.

Risk is seen as the biggest potential issue with BPO. Risk can be reflected in security issues in relation to sensitive data and privacy, risk of losing independence and potentially losing control.

Loss of flexibility in reacting to changes in business conditions. It is important that communications continue throughout the life cycle of any BPO agreement. This means informing the BPO provider of any change of strategy or conditions that might impact their ability to function properly.

Potential threat to security or access to confidential information. There are many examples where confidential data has gone ‘astray’ or been sold. Processes and procedures must be put in place to ensure that only certain personnel can access specific information, especially with payroll systems, HR and client records.

Staff turnover. It is expected that within call centres, for example there may be a fairly high turnover of staff, typically some 30%, but typically within BPO companies this can be up to 50%. This can be critical because losing key people can have a serious impact operationally, e.g. having to retrain people on a particular system or product within a call centre if people are leaving. Also, if absenteeism is high within a call centre environment, this will naturally badly impact customer service and call waiting times.

Cultural differences. If a BPO company’s staff is based abroad, for example in India, there can be potential problems. This can be anything from communications difficulties to not totally understanding what perhaps a British customer expects. Many BPO off-shoring companies train their staff in order to resolve this.

Job losses. People often believe that BPO only leads to staff losing their jobs. This could be true to a certain extent, but while there might be a perceived threat to staff’s finances, generally the roles that are outsourced are those which typically a company can have difficulty fulfilling anyhow.

Potential loss of managerial control. Naturally it can be easier to manage your own personnel than relying upon a third party, but again, this can be resolved with good communication and regular update meetings.

BPO can badly impact customer relationships as it may eliminate direct communication between a company and its’ customers.

Failure to meet service levels. This can be caused by changing needs, unclear objectives or through incompetence.

What can I expect to gain by implementing business process outsourcing?

You can gain many business benefits through using business process outsourcing but, as with most processes, you need to use a set of objectives and criteria that must be met by your BPO provider so that you can measure improvements objectively.

Apart from increasing efficiency and lowering costs, it is also extremely useful to be able to tap into the BPO company’s intellectual resource. There will be people within that organisation that have the skills and capability that perhaps your company would not normally have. Being able to refer to these skills and the BPO company’s other resources can be a major benefit. It is more than likely that they have used similar processes and methodologies many times before that can yield major improvements for your organisation.

Six steps to successfully enter into a business process outsourcing agreement

Step one

In the initial phase, an organisation must ask:

Why are we seeking to work with a business process outsourcing service provider?
What are the risks?
Do the benefits outweigh the risks?
What sort of relationship do I expect from a BPO company?
What sort of relationship will they expect?
Don’t take anything for granted.
How will we measure results and whether the relationship is working?

Step two

Analyse your business needs in the areas that you are considering outsourcing

Are you looking to save costs/money?
Are you looking to increase revenues?
Are looking to re-allocate resources?
What will happen to personnel who are currently performing this particular function now?

Step three

Identify the right supplier.

Use Conjungo. [link to www.conjungo.com]
Look through magazine and online reviews.
Talk to others who have recently installed an e-mail archiving solution in the same area as you.
Use forums, networks and personal contacts to obtain recommendations.

Ask questions such as:

Who has the experience of working with a company of the same size and profile as yours?
Are any of those suppliers local to where you are located?
How many similar installations have they made?
Ask for references – ensure that the company is capable and reliable.
Talk to a couple of their customers in order to see what benefits have been gained and what pains those customers went through when installing the system.
Obtain a credit check through ICC Credit (you can get this from any individual supplier’s listing in www.conjungo.com) to ensure that they are financially stable.

Step four

Request a detailed proposal from three or four of your preferred suppliers.

Set a deadline for when you need the proposal back.
Give out details in advance as necessary to ensure that the suppliers you have selected can give you the best proposal.
Go and meet them in person – get a good feel for whether you will be able to work with them.

Step five

Select a supplier.

Who best demonstrates that they understand your business and your requirements?
Is it cost effective? Have they shown how and where you will save money?
Does it clearly demonstrate the functional benefits – rather than just listing particular features? Does the proposal clearly show what the benefits are?
Have you spoken to a couple of your preferred suppliers’ customers?
Agree on financial terms - Will the service be payable monthly or annually?
Don’t agree to anything more than a three year agreement.

Step six

Implementation

Plan a handover with your BPO company.
You may need to run your processes in parallel for a short time until the BPO company are fully aware of your systems and operations.
Communicate regularly especially in the early days in order to address any questions and issues.

Points to remember when considering and planning business process outsourcing strategy

You must be absolutely clear as to why you are considering business process outsourcing. Make sure that terms are defined, objectives are clear and that all parties know exactly what is expected and how process improvements can be made.
What type of relationship do you want with your BPO partner? Your requirements may determine the type of company that you work with. You must measure when choosing the right BPO supplier how it may effect your company strategy.
What are you trying to achieve?

Costs savings?
Increased revenues?
Increased service levels?
Enhancing areas where perhaps your company does not have the right level of skills?

Identify and assess any potential risks. How will the BPO organisation manage and deal with these? What contingency plans will be put in place?
You need to make a balance in agreeing the scope and length of any agreement. Three years is fine, ten years can be too long. It must have long enough time to make a difference and short enough to remain flexible. The contingency plan or business continuity plan needs to be developed by all key operational areas of the company.
The agreement should allow you flexibility to change certain areas of the agreement especially when it comes to an exit.
Transitions plan. You will need to work with the BPO provider to fully work out how the services will be transferred and over what period of time. Remember that it takes time to outsource and at some time you may wish to bring those services back ‘in-house’. This too can be complex and long-winded.
You must communicate internally, i.e. within your organisation, as soon as you start to consider BPO. Outsourcing can be an emotive term and people will hear gossip, and this can impact performance as personnel may think that there will be job losses. However secret you try and keep it, people will find out. As long as you fully explain the business reasons for doing so, most people will understand.
Compliance. If your organisation is affected by, for example, legislation or codes of conduct such as Sarbanes-Oxley, this must be considered and potentially written into any agreement.
Implement a Business Continuity Management model (BCM). This is a process that helps identify, manage and control the main areas of the business that can be outsourced. The aim is to minimise any potential issues and maximise the value of the BPO.

Conclusion

Business process outsourcing can be a very effective way of reducing costs and increasing efficiencies. It brings into play the skills and resources that a BPO company has but which can never be achieved ‘in-house’.

However, outsourcing has to be extremely well planned as the BPO provider must have a deep understanding of the processes and procedures that the customer’s company has.

It is also very important to pay close attention to the legal and personnel issues and appreciate that responsibility ultimately rests with the customer. One thing that you cannot do with a BPO is abdicate responsibility and outsource ‘problems’. The management team must retain control and BPO should not be used as an excuse for failure to meet business objectives. This is why the relationship must be close from a communication perspective and any potential problems must be highlighted well before they adversely affect the company. The key issue to remember is that you cannot outsource responsibility.

Frequently asked questions

What is BPO?

BPO means Business Process Outsourcing.

How might it apply to my business?

Business process outsourcing can be applied to most sizes of companies. In fact, many outsource some key services without actually realising. Other examples of this is where a small company may retain the services of an accountant or book-keeper in order to keep financial records, VAT returns and payroll, simply because it is more cost effective to do so than to do it ‘in house’. Furthermore, it is useful to trust in the expertise of others rather than having to worry about the time and complexity of the finances.

Why might business process outsourcing benefit my organisation?

There are many benefits and reasons but the key ones are that for example, a small company that cannot justify having a human resources professional can outsource to a specialist contractor to give advice and guidance as and when required. This means that the company has the expertise of a professional but not the overhead of a full-time resource. Overall, BPO can lead to reduced costs and access to expertise that perhaps your company would have difficulty in finding.

What legal issues do I need to consider?
There are a number of key business issues that need be remembered when outsourcing, especially when it comes to personnel and their contracts of employment and their legal rights. This encompassed by a piece of legislation entitled Transfer of Undertakings [link to: http://www.opsi.gov.uk/] (Protection of Employment) Regulations 2006 or TUPE as it commonly known.