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Accenture

Organizations use business process outsourcing (BPO) to accomplish a wide range of objectives using different relationship profiles. What makes one relationship work and another one fail is examined here in detail. As the scope of BPO explodes, relationships are the key to creating value in an expanding universe.

Business process outsourcing (BPO) once had a limited place in the executive’s toolkit; its sole purpose was to achieve cost savings in transaction-intensive, back-office business processes. That has all changed. It is emerging as a flexible and powerful approach that business leaders can use to achieve a wide range of tactical and strategic aims. Consider the following achievements, which organizations have accomplished with BPO:

• Sharper Competitive Capabilities – Established organizations like the BBC, Safeway and a leading financial services firm used BPO to turn average processes into world-class capabilities through standardization, centralization, and new technology.
• Funds Released for Investment in the Business – Firms like Avaya and Kerr-McGee used BPO to significantly lower costs, enabling them to redirect money to more strategic aims.
• Greater Growth Stimulus – Innovative companies like TiVo used BPO as a catalyst for change to help stimulate company growth by achieving unique, competitive capabilities.
• Higher Revenues – Firms like BAE Systems and Bradford and Bingley established joint ventures with their BPO providers to leverage some of their own assets and knowledge in exchange for a share of BPO revenues.
• Accelerated Time to Market – Startup firms like Universal Leven and Avanade used BPO to launch their businesses, enabling them to be fully operational with state-of-the-art capabilities in weeks rather than months.

Pinning Down BPO

The BPO “big bang” has been accompanied by rising confusion about how to make it work. To navigate through the uncharted terrain of BPO, executives will need to answer three principal questions:

• What can organizations accomplish through BPO?
• How can organizations create the right relationships?
• What steps must organizations take to ensure they meet their objectives?

To help answer these questions, the Accenture Institute for Strategic Change interviewed executives responsible for BPO in 38 organizations, along with executives in 11 organizations that offer BPO services to others. We found that the nature of the relationship between the outsourcing organization and the outsourcing provider is a critical factor in realizing the expanding potential of BPO.

Higher and Wider – BPO Isn’t What it Used to Be

BPO is not new; some leading-edge relationships are more than a decade old. But what exactly is it? Defined simply it is:  “Contracting with an external organization to take primary responsibility for providing a business process or function.”

BPO now goes further than technology infrastructure or even application maintenance. The outsourcing provider takes the primary responsibility for ensuring that the process works, interfaces effectively with other company functions, and delivers the outcomes intended. Traditionally, organizations applied a simple rule about when to consider it: Outsource non-core activities to niche providers who offer best-practice processes to achieve cost savings and improve management’s focus on strategic issues.

Although this rule still applies in some cases, the potential reach and impact of BPO has been altered significantly. Some companies still contract out narrow processes to achieve cost savings. But other enterprising businesses have begun to use BPO creatively for very different goals. Trailblazing leaders are:

• Raising the Bar – Organizations intend to achieve additional objectives, including highly strategic ones (Figure 1). Only 21 percent of the firms in our study limited their aims to cost-reduction. 
• Outsourcing Several Processes to a Single Supplier – Although 95 percent of current BPO spending is still for discrete processes such as billing or payroll, 61 percent of organizations in our study ask a single provider to handle multiple processes to simplify relationships and improve integration.
• Outsourcing Strategic as Well as Tactical Processes – Only 35 percent of those studied are just outsourcing processes of low strategic value; whereas 65 percent have progressed to outsourcing processes of medium to high strategic value
• Expanding the Operational Boundaries to Drive Value – Organizations are looking further for inexpensive labor and they’re willing to share service centers – even with direct competitors – to increase scale efficiencies beyond what any firm could achieve by itself. Netsourcing (outsourcing applications that run on the Web) offers the benefits of self-service processes and accelerated technology roll out.

The Importance of Relationships

The new opportunities for using BPO have increased its potential value, but have also made it harder for organizations to capture that value. How do executives outsource business processes effectively in a shifting landscape? The short answer is: many don’t. In fact, 52 percent of the executives we interviewed felt they had limited success in achieving their objectives. 

Organizations have a better chance of succeeding with BPO when they craft a relationship that specifically meets their needs. There is no one-size-fits-all approach that guarantees good results. However, many executives and outsourcing providers lack a comprehensive approach for designing an effective relationship.

A Practical Framework for Managing BPO

To help organizations outsource successfully, we offer a comprehensive framework called the relationship compass (Figure 2). It takes a holistic look at the factors an organization must address to form effective outsourcing relationships (Figure 3). The following four questions are key.

1. How deep should the relationship be?

How deep and intimate should an organization’s relationship with its outsourcing partner be? The answer depends on what is being outsourced and how critical it is to the future of the organization. Effective relationships can be contractual – arms-length arrangements with clear performance expectations and minimum contact. They can be cooperative, requiring much more dialogue among the organizations to contract with changing business conditions. Still others may be so close that the two organizations are utterly dependent on each other for success. We call these committed relationships.

2. How broad should the relationship be?

Organizations may choose a separate provider for each narrowly defined process or favor relationships with a much broader scope. It all depends on what’s being outsourced, on the firm’s own management bandwidth, and on the specific value the partner brings.

3. Whose way of working should we use?

Do you need access to your provider’s “best practice” processes or would it generate more value for the provider to adopt your way of working? This critical choice follows directly from the kind of operational benefits you want from the outsourcing relationship.

4. Whose assets should we use?

Whose assets – people, physical resources, and technical tools – should an organization use? The answer depends on which firm can get and manage advantaged assets, maintain the right level of continuing investment, and share the assets with others for leverage. As with process ownership, assets can be provided by an organization, by an outsourcing provider, or by both in cooperation.

The same factors generally influence the three categories of assets. However, each should be considered independently; an organization may own the technology, for example, while its outsourcing provider owns the physical facilities.

BPO Success Stories

A Specialty Chemicals Firm Drives Toward Efficiencies and World-Class Practices

Frequently, organizations use outsourcing to transform an average function into a world-class performer. What do they ask from their providers? Best-demonstrated-practice capabilities and efficiencies gained through new technologies, centralization, and standardization. 

A specialty chemicals firm we’ll call RidgePark, for example, is working with an outsourcing provider to improve its finance and accounting processes, which currently run on five different systems.  Executives are looking for better management information and decision-making in addition to efficiency-driven cost improvements, and they’ve crafted an approach that’s designed to give them both. To get the management information benefits, RidgePark needs an integrated process, so they’ve sought a solutions integrator rather than a portfolio of niche providers. Transferring their processes to the provider’s shared service center in Prague, Czech Republic will generate substantial cost savings – a 35 to 40 percent wage rate reduction on top of a 10 percent headcount cut. They’ve struck a cooperative relationship to accommodate the significant organizational change they anticipate.

AltaVista Utilizes Conventional Outsourcing

AltaVista, an Internet search engine company, successfully uses a conventional approach to outsourcing. The firm’s sole outsourcing objective was to reduce the cost of its email customer support division. Executives turned to a niche provider, an India-based customer service outsourcer, for help. By taking advantage of India’s lower wage rates, the provider substantially reduced AltaVista’s service costs. AltaVista needed only minimal interaction with its provider to manage the relationship because the companies clearly spelled out responsibilities, service levels, and pricing structures in their contract.

Deutsche Bank Taps Outsourcing for New Expertise

Some firms look to an outsourcing provider for expertise that increases in value when it is tailored to the organization’s specific needs. Deutsche Bank, for example, works cooperatively with a niche provider under a long-term “gentlemen’s agreement” to provide executive education.

Michael Maffucci, director of global leadership development, asserts that Deutsche Bank’s relatively new cooperative customization approach contributes directly to the organization’s successful transformation from a commercial bank five years ago to a leading European investment bank.

Universal Leven Leverages Outsourcing

Start-ups such as Universal Leven, an insurance company based in the Netherlands, leverage outsourcing as a way to gain capabilities and technology at speed. This three-person firm believed it could provide private label products to big firms inexpensively by processing applications in one day – the competition took three months – with the right process and technology.

It turned to a technology-savvy outsourcing provider, which contributed technology, physical facilities, and people assets as well as best-practice finance and accounting processes, to bring Universal Leven up to speed within a few months.

A New Kind of Service Demands a New Way of Thinking for TiVo

TiVo, a start-up television service provider, used a solutions integrator type outsourcing arrangement to quickly develop distinctive customer support capabilities to take a new market by storm. Ordinary call center scripts and routine approaches did not suit TiVo’s unique product. TiVo and its provider worked closely to jointly establish processes and develop innovative training materials and incentives to enable call center agents to think like a TiVo customer. 

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Using the BPO Relationship Compass to Achieve Success

Today, organizations use BPO to accomplish a wide range of objectives using very different relationship profiles. We counted 29 unique relationship profiles out of the 38 organizations in our study. The tactics for managing BPO relationships effectively vary as widely as the relationships themselves (Figure 4). But the firms highlighted above, and other successful organizations in our study, had several things in common. They develop:

• A comprehensive view of the relationship by considering all the factors in the compass.
• Change management programs required to implement new technologies and processes.
• Their own roadmaps for establishing and managing their relationships effectively.

In the following, we give some pointers on how organizations achieve this.

What would make the perfect partnershipfor you?

What makes some relationships work where others fail? Thirty-three percent of the firms in our study that were dissatisfied with their BPO performance had failed to take one or more of the factors in the compass into account as they crafted their working relationships.

The success stories we’ve included aren’t meant to prescribe specific relationship choices. They’re intended to illustrate that a wide range of relationships can be effective. Even organizations with similar objectives may require very different types of relationships.

Step Up to Change

Almost three-quarters of the companies in our study intended to use their outsourcing relationship as a catalyst for change. Successful organizations recognize how much internal change they require in order to make the relationship work, especially for those that choose to adopt the provider’s way of working. To some, however, this came as a surprise. To avoid missteps:

• Take your change management pulse. One outsourcing provider implemented a new, self-service human resources system for its client’s employees, but neglected training. The result? No one used the system.
• Implement formal programs to change behavior on both sides. When the BBC outsourced its finance and accounting processes, executives realized that the firm’s own ingrained behavior stood in the way of achieving the efficiencies they wanted. Tapping the provider’s expertise in change management, the two organizations launched a formal program, known as“Make It Happen” to change behavior in both organizations.
• Pilot new processes to build consensus. When the U.S. Postal Service decided to outsource customer call centers, the initiative required a massive change management effort to make it successful. Vice President of Consumer Affairs Francia Smith says, “The postmasters in our 38,000 post offices believe they and they alone own the customers. So I started slowly to prove to the postmasters that nonpostal staff could answer questions. Having an outside provider helped us execute change, but all of our efforts would have been undermined if the postmasters hadn’t supported our efforts and been willing to change the way they perform their jobs.”

Draw a Roadmap for Implementation

Implementing a conventional BPO contract means following well understood steps that many others have already used. Once an organization steps out of the comfortable, if narrow, conventional domain, it is in uncharted territory. Twenty-seven percent of the companies we talked to stumbled in their initiatives by falling back on conventional approaches that were poorly suited to the relationship they wanted. To avoid this mistake, you’ll need to:

• Broaden your view about outsourcing possibilities. Start your project with an exploratory phase to learn what your competitors and firms in other industries are doing. This will help you understand the expanding art of the possible.
• Involve senior executives in laying out the operating principles. The relationship will benefit from their big picture perspective and the commitments only they can bring to the table.
• Borrow tactics from related fields. If BPO looks as much like partnering as contracting, the lessons you’ve learned from forming business alliances should apply. Executives will want to comb through the organization’s experiences with joint ventures, partnerships, and acquisitions to take advantage of previous learning.
• Leave your options open. You’ll want to have room to maneuver if your relationship doesn’t work out the way you intend. At a minimum, make sure you always have a current copy of your information. Harry Friske, treasurer and controller for start-up Trade-Ranger, contends, “With an unproven business model, you need a flexible and scalable outsourcing contract, and you’ll also want to have a detailed exit plan.”

Putting the Relationship Compass to Work

While executives are attracted by BPO’s growing potential, they are evaluating its use cautiously because of the limited track record. By using the new relationship compass for directional guidance, they can use BPO effectively to achieve a broader range of objectives. Executives will want to:

• Use the compass to craft new relationships. By clarifying your objectives and setting clear expectations both in your own organization and with your provider, you’ll improve your chances for success.
• Push out the boundaries of BPO. Many organizations have achieved significant value by being willing to try new and creative outsourcing approaches. Use the compass to aim you in the right direction, then add your own innovations to make your relationship truly distinctive.
• Periodically review relationships as business changes. To ensure consistent, long-term alignment, you will need to make sure your relationship changes with shifts in business conditions. Set up an annual process to check your current needs against the compass. 

Endnotes

¹ Linder, Jane, Susan Cantrell, and Scott Crist, “Business Process Outsourcing Big Bang: Creating Value in an Expanding Universe,” Accenture Institute for Strategic Change, August 2002.

See www.accenture.com/isc.