Identifying and Managing BPO Costs PDF

BUSINESS PROCESS OUTSOURCING Identifying and Managing the Costs of BPO MARIVIC L. RAMIZARES INSTRUCTOR TERMS AND DEFINITIONS Financial Cost – Hard cost associated with activities that must be undertaken to assess, launch, and maintain a BPO Project. Strategic Cost – Soft c...

BUSINESS PROCESS OUTSOURCING Identifying and Managing the Costs of BPO MARIVIC L. RAMIZARES INSTRUCTOR TERMS AND DEFINITIONS Financial Cost – Hard cost associated with activities that must be undertaken to assess, launch, and maintain a BPO Project. Strategic Cost – Soft costs that are difficult to quantify but can profoundly affect the firm’s ability to complete. Total Cost Management- It means the process of identification, forecasting and development of mitigating tactics for the costs associated with any project. This concept is like the Total cost of ownership approach used for software and hardware FULL RANGE OF COSTS 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 areas of concern: FINANCIAL COST STRATEGIC COSTS hard costs associated with soft costs that are difficult to activities that must be quantify but can profoundly undertaken to assess, launch, affect the firm’s ability and maintain a BPO project to compete TOTAL COST MANAGEMENT The total costs associated with BPO cannot be forecasted precisely. However, organizations seeking to undertake BPO can lessen the potential for expensive surprises by using an approach called total cost management (TCM). TOTAL COST MANAGEMENT the process of identifying and developing a strategy for managing the costs associated with initiating and managing a BPO project TOTAL COST MANAGEMENT BPO PROJECT LIFECYCLE PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5 Analyzing Select Develop Transition Operate Opportunity Vendor Contract Figure above provides a high-level view of what is called the BPO Project Life Cycle. Each phase of the life cycle has multiple costs associated with it, some obvious and directly attributable to the project and others hidden and less easily attributed. These hidden costs are associated with the analysis phase of the BPO project. Using a TCM approach, these costs are identified, estimated, and attributed to the project. TOTAL COST MANAGEMENT BPO TOTAL COST MANAGEMENT BPO PROJECT BPO PROJECT PHASES COSTS Analyze Opportunity Direct Costs Select Vendor Results in mitigates Develop Contract Hidden Costs TOTAL COST MANAGEMENT Transition Opportunity Costs Operate TCM involves the overt or direct costs that can be linked to the BPO project, hidden costs that are quantifiable but less easy to identify, and opportunity costs that are non-quantifiable but capable of being identified and estimated. Figure above shows a BPO project TCM model that includes these varieties of cost categories. FINANCIAL COSTS The financial costs associated with BPO are ongoing, if the project is active. Each project phase has predictable costs that can be forecasted, budgeted, monitored, and mitigated. BPO initiative has a variety of less obvious yet insidious hidden costs. This should be included in the analysis because many initiatives accumulate unanticipated costs that can threaten projects - and careers. ANALYSIS PHASE COST COST OF TRANSITION PHASE OPERATIONAL PHASE THIRD-PARTY SUPPORT COST COST 1: ANALYSIS PHASE COST The first direct cost to consider in the BPO analysis phase is associated with the internal staff that will be enlisted to conduct the assessment. Organizations should use a team approach to identify and select BPO opportunities. Organizing a BAT means employees from diverse units will take time away from their normal duties to serve on the team. The time spent away from these duties is a direct cost. 1: ANALYSIS PHASE COST Ways to calculate costs associated with removing individuals from their regular jobs during Analysis Phase: ❖ Transfer Pricing. Counting the hours spent and multiplying the figure by the hourly wage for that individual. The result of this calculation is then attributed to the BPO project. ❖ Task-Based Costing Estimate. Forecasting personnel costs associated with a project. Mitigating Analysis Phase Costs Costs associated with the BPO analysis phase can be mitigated through a variety of tactics. For example, the exercise of mapping organizational processes in the interest of determining their suitability for BPO also reveals opportunities for reengineering. Processes that have gone unexamined over time almost assuredly have become bloated and inefficient in both subtle and not-so-subtle ways. The process maps developed during the analysis phase should be used to catalyze reengineering efforts directed at those inefficient or unproductive processes that are not outsourced. The organization will derive benefits from the analysis phase if it is prepared to use its findings for organizational improvement regardless of whether a BPO project is initiated. 2: COST OF THIRD-PARTY SUPPORT Another direct cost associated with the BPO analysis phase involves third- party professional support that may be required to assist the team. BPO consultants, market 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: 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 Value of Learning from Consultants Hidden costs associated with the BPO analysis phase include those that arise from a lack of organizational capability to analyze the BPO opportunity. Reliance on third-party consultants to assist with the BPO analysis is common and, in many cases, recommended. However, overreliance on consultants can lead to additional project costs throughout the implementation, transition, and maintenance phases of the BPO initiative. To avoid these hidden costs, BAT members and others should learn as much as possible from the third-party professionals. Failure to concentrate on organizational learning and on building a knowledge base for managing BPO projects will inevitably lead to additional costs. Benefits of Organizational Major Change History 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. Importance of Top Management Support 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. 3: TRANSITION PHASE COSTS The transition phase is one in which the business process that Process formerly had been handled in Adaptation house is wholly or in part shifted Asset to the outsourcing vendor. Third-Party Ownership Involvement and Location Cost Drivers of the BPO The costs associated with this Transition phase are driven by five primary characteristics of the Breadth of Depth of Relationship Relationship BPO buyer-vendor relationship. Characteristics of BPO Buyer-Vendor Relationship 1. Asset Ownership and Location. The asset ownership and location driver concerns which firm will be better able to leverage people, technology, and other assets for competitive advantage, and where those assets should be located. In some situations, a BPO buyer may want to retain all or part of its existing assets to continue to develop internal competence in a process. For example, a firm may elect to outsource part of its call center function to a vendor as a means of freeing internal call center staff time to improve the in-house operation. Characteristics of BPO Buyer-Vendor Relationship cont… 2. Depth of Relationship. refers to the costs associated with developing and maintaining a strategic relationship with the vendor. The nature of a strategic relationship between buyer and vendor is discussed in detail in the “Strategic Costs” section; however, it should be noted that a commitment to developing such a relationship will be more costly depending on the expectations for value extraction. The greater the value expected to be extracted from the relationship, the more time and resources will be required to develop and maintain the relationship. Characteristics of BPO Buyer-Vendor Relationship cont… 3. Breadth of Relationship. The breadth of the relationship between buyer and vendor refers to the range of processes that are outsourced. In some cases, organizations outsource multiple functions to a single provider. In others, multiple providers are used for a range of different processes. The decision about the breadth of processes to outsource to a particular vendor has both direct and hidden costs. In fact, working with a single provider for multiple processes may reduce costs as familiarity and trust develop. At the same time, the potential costs associated with vendor failure increase as dependence on the vendor increases. Characteristics of BPO Buyer-Vendor Relationship cont… 4. Third-Party Involvement. A potentially significant cost associated with the transition phase of the BPO initiative is based on the need for third parties to assist in the integration of both the vendor’s and the initiating organization’s systems. For example, it may be necessary to bring in specialists if the two firms have complex databases built on different platforms. This is more likely if the initiating organization has legacy systems that have not been upgraded in several years or if it has homegrown applications that are known only to a handful of individuals. Characteristics of BPO Buyer-Vendor Relationship cont… 5. Process Adaptation. Hidden costs associated with the transition phase center on the effects that outsourcing a process can have on employees who work outside that process. Employees may experience a period of adjustment as the process is transitioned. Adjustments include not only the need to understand and work with a reengineered process but also the need to interface with new people and unfamiliar systems. As usual for organizational change of this magnitude, some people will take longer than others to adjust, and some will simply resist the changes altogether. In general, organizations initiating a BPO project can expect some productivity drop-off in personnel who work internally with the outsourced process. 4. Operational Phase Cost 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. Two types of BPO depending on the intentions of the BPO project: Cost-Reduction BPO. Intended to enhance margins through reduced overhead, which can often be achieved within 6 to 12 months after commencement of the contract. 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. Figure below identifies key financial performance metrics associated with each type of BPO project. FINANCIAL PERFORMANCE MATRIX Cost-Reduction BPO Strategic BPO ROI ROI Net Margin Gross Revenue Sales/Employee Market Share Inventory Turns Customer Acquisition Cost Impact on Productivity Organizations can use several important productivity metrics to control a BPO initiative, including: Output/Employee Overhead Cost/Unit of Output Output/Capital Expenditure Output/Asset These standard productivity measures will enable the firm to assess the pre-BPO and post-BPO impact. The measures must each include a time element to account for short-term variation. It would be a mistake to pull the plug on a BPO initiative based on early returns that showed a dip in overall organizational productivity. Such fluctuation should be anticipated and accounted for before launching the project. Internal Factors to Monitor Qualitative measures of the BPO initiative are far-reaching, including internal, external, and vendor-related metrics. Internal qualitative metrics will focus on a variety of issues concerning the relative health of the organization. Effectively managing the BPO will require data collection before, during, and after the process. Before the process begins, organizations should collect data on several characteristics of the internal environment. These include: Employee’s knowledge of BPO Employee’s understanding of organizational strategy Employee’s morale and sense of job security Employee’s capacity to deal with change These various data points will help establish appropriate information and communication programs during and after BPO implementation. Three Key External Audiences 1. Customers Organizations as a rule should be collecting data regarding customer satisfaction. However, it is critical that they maintain a close watch on customer satisfaction levels during BPO implementation, regardless of whether the BPO initiative involves a customer-facing function. Three Key External Audiences 2. Competitors Competitors will respond to new moves within the industry, especially those that have potential market-shifting or disruptive capability. Careful monitoring of the competition can help determine whether the rollout strategy is working. Three Key External Audiences 3. Shareholders Organizations should also monitor the reactions of shareholders and other major organizational stakeholders to the BPO initiative. Most investors have a conservative streak so, extensive reengineering or restructuring that includes a technology component may meet with anxiety and doubt. Complex Buyer-Vendor Relationship The final qualitative data points that must be collected involve those between the organization and the BPO partner. This complex relationship will evolve over time as the BPO partner performs on its contract. Underlying each BPO partner relationship are the so-called service level agreements (SLAs) that specify actions to be taken to ensure customer satisfaction. Hidden costs associated with developing and maintaining the buyer–vendor relationship concern interpersonal skill issues. The needs and service requirements of an ongoing BPO will evolve over time, and the scope and nature of the buyer– vendor relationship must adapt as well. Strategic Costs The strategic costs associated with BPO center on the potential loss of organizational learning that results from placing a process under the control of an external service provider. Outsourcing so-called noncore processes must be undertaken with careful forethought because it is never clear how future competitive conditions will unfold and what types of competencies will be required. Firms must distinguish noncore activities as critical, key, or support. Those activities that are tightly coupled to the core and are fault intolerant (i.e., mission critical processes) should usually be retained in- house. At the very least, they should be outsourced only when the inter-organizational relationship is clearly focused on developing and deriving strategic advantages. Cost of a BPO Relationship The directly attributable costs of a BPO relationship are those associated with identification, analysis, and selection of the various vendor candidates; controlling the vendor relationship; and developing strategic knowledge management capacities with the vendor. Hidden costs associated with the vendor relationship are primarily centered on the impact of transitioning formerly internal processes to external control. For example, in many outsourcing relationships, employees of the BPO buyer become employees of the vendor. Avoiding a Cat-and-Mouse Game on Strategic Costs Strategic costs associated with outsourcing can be mitigated through appropriate vendor selection and contracting. Using stringent selection procedures ensures that the vendor chosen has the intellectual, technological, and social resources to become a true partner in the success of the BPO buyer. The buyer–vendor relationship should not become a cat- and mouse game focused on price issues. Rather, both sides should work to create positive-sum outcomes from their deep relationship. Applying the TCM Model The costs associated with a BPO initiative are many, and they can easily overwhelm a project and the project manager if they are not anticipated in advance. The TCM model discussed earlier places costs within the context of project phases. Thus, at different points during the BPO initiative, it can be determined whether costs are in line with expectations and/or whether adjustments need to be made.  TCM Applied to BPO Project Phase Figure on the left illustrates how costs can be mapped to BPO Project phases. In many cases, the costs incurred directly in one phase linger across the other phases. Hidden costs and opportunity costs are present in each phase, and they have lasting effects that accumulate over time and must be estimated to get a true idea of BPO costs.  THANK YOU FOR LISTENING!