Creating a BPO Strategy: Why and Why Now?

The importance of business process outsourcing (BPO) on every organization's bottom line cannot be ignored; however, it is imperative to base outsourcing decisions on more than just cost savings. Business strategy should also be included in the decision process.

The business rationale behind BPO is that outsourcing saves money and focuses scarce management time and resources on a few core competencies. The list of outsourced functions grows daily and includes call centers, order entry, billing and collection, human resources administration, cash and investment management, tax compliance, internal audit, and payroll.

The real reason behind the surge in BPO is that companies are becoming more demanding. Cost-cutting and improved service levels are no longer the only result expected from outsourcing. These days, CEOs are demanding value. They want to see, and have come to expect, transformational change from their outsourcing efforts - from changing how human resources is managed to changing the way the supply chain operates. The ultimate goal is to link business performance to increased business value.

In BPO, the metrics that matter are business metrics. For example, the key metric for a bank is the cost to administer a mortgage every month. In the insurance marketplace, it is the cost per beneficiary per month that matters. For healthcare firms, the issue is the cost per member per month. These are the crucial business metrics for which the provider is measured and rewarded.

Some of the expected benefits from outsourcing are:

• Cost reductions
• Improved service quality
• Superior competency
• Access to leading technology
• More freedom to focus on strategic activities
• Increased shareholder value
• Economy of scale
• Shared risk

Our research tells us that the biggest cost gains and efficiency improvements from outsourcing tend to come from re-engineering organizational processes and implementing best practices.

Self-Assessment: Are You Ready for BPO
In your industry, are margins getting slimmer and have you had to make up the difference through cost reduction? If you said yes, then you are a candidate for outsourcing.

Although there are numerous benefits to outsourcing, BPO is not for everyone. It is critical to conduct an upfront assessment to evaluate the positives and negatives of outsourcing. Understanding and articulating what you want to do and what you need from a potential outsourcing partner is the first step.

Outsourcing resembles marriage. Everything is great when you are dating, but once the marriage begins and the honeymoon is over, problems arise. Finding the right partner in an outsourcing arrangement is critical. Just like marriage, no one wants to see the relationship end in divorce.

Contract negotiations are an important step for avoiding problems downstream. All services and costs must be clearly defined so that both parties have the same expectation about what services will and will not be included in the outsourced agreement. In defining the service level agreement (SLA), it is important to discuss objectives for the project and measurements of success. Without defining SLAs and key metrics up-front, confusion could arise about responsibilities.

Some of the expected risks from outsourcing are less contact with your customer, lowered service quality, the possibility of valuable data falling into competitors' hands, the potential for the cost of outsourcing to exceed expectations, and the erosion of in-house knowledge.

The bottom line: BPO is a strategic business decision that has long-term implications. Most outsourcing contracts tend to be multi-year agreements. Companies that take a knee jerk approach to BPO will not see the benefits that they were expecting.