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Lawgical Practice
Consulting Global


Assessment of Business
Process Outsourcing


Date: 15/08/2011
Business Process Outsourcing

BPO is the process of hiring another company to handle business activities for your
company as it focuses on its core business.BPO is distinct from information technology
(ITO) outsourcing, which focuses on hiring a third-party company or service provider to do
IT-related activities for instance, such as application management and application
development, data centre operations, or testing and quality assurance. Many of these BPO
efforts involve off shoring i.e. hiring a company based in another country to do the work.
India is a popular location for BPO activities.

Frequently, BPO is also referred to as ITES (information technology enabled services). Since
most business processes include some form of automation, IT "enables" these services to be
performed. An offshoot of BPO is KPO (knowledge process outsourcing). Considered by
some to be a subset of BPO, KPO includes those activities that require greater skill,
knowledge, education and expertise to handle. For example, whereas an insurance company
might outsource data entry of its claims forms as part of a BPO initiative, it may also choose
to use a KPO service provider to evaluate new insurance applications based on a set of
criteria or business rules; this work would require the efforts of a more knowledgeable set of
workers than the data entry would. The current definition of KPO encompasses R&D,
product development and legal e-discovery, as well as a number of other business functions.
Discipline where KPO has been incorporated includes;

      equity, finance, insurance research
      market research and competitive intelligent and general business research
      data analytics integration and management
      intellectual property , paralegal content and services
      research and information services in HR
      engineering and design services
      animation and simulation services
      medical content services

 Also coming into use is the term BTO (business transformation outsourcing). This refers to
the idea of having service providers contribute to the effort of transforming a business into a
leaner, more dynamic, agile and flexible operation.

History BPO

Since the Industrial Revolution, companies have grappled with how they can exploit their
competitive advantage to increase their markets and their profits. The model for most of the
20th century was a large integrated company that can “own, manage, and directly control”
its assets. In the 1950s and 1960s, the rallying cry was diversification to broaden corporate
bases and take advantage of economies of scale. By diversifying, companies expected to
protect profits, even though expansion required multiple layers of management.
Subsequently, organizations attempting to compete globally in the 1970s and 1980s were
handicapped by a lack of agility that resulted from bloated management structures. To
increase their flexibility and creativity, many large companies developed a new strategy of
focusing on their core business, which required identifying critical processes and deciding
which could be outsourced.
Outsourcing was not formally identified as a business strategy until 1989. However, most
organizations were not totally self-sufficient; they outsourced those functions for which they
had no competency internally. The use of external suppliers for these essential but ancillary
services might be termed the baseline stage in the evolution of outsourcing. In the 1990s, as
organizations began to focus more on cost-saving measures, they started to outsource those
functions necessary to run a company but not related specifically to the core business.
Managers contracted with emerging service companies to deliver accounting, human
resources, data processing, internal mail distribution, security, plant maintenance, and the
like as a matter of “good housekeeping”. Outsourcing components to affect cost savings in
key functions is yet another stage as managers seek to improve their finances. Outsourcing it
has basically resulted into strategic partnerships

What is outsourcing

Outsourcing can be defined as “the strategic use of outside resources to perform activities
traditionally handled by internal staff and resources”. Sometimes known also as “facilities
management”, outsourcing is a strategy by which an organization contracts out major
functions to specialized and efficient service providers, who become valued business
partners. Companies have always hired contractors for particular types of work, or to level-
off peaks and troughs in their workload, and have formed long-term relationships with
firms whose capabilities complement or supplement their own. However, the difference
between simply supplementing resources by “subcontracting” and actual outsourcing is that
the latter involves substantial restructuring of particular business activities including, often,
the transfer of staff from a host company to a specialist, usually smaller, company with the
required core competencies.

Why do companies outsource

Here are some common reasons:

      Reduce and control operating costs
      Improve host company focus
      Gain access to world-class capabilities
      Free internal resources for other purposes
      A function is time-consuming to manage or is out of control
      Insufficient resources are available internally
      Share risks with a partner company

In earlier periods, cost or headcount reduction was the most common reasons to outsource.
In today’s world the drivers are often more strategic, and focus on carrying out core value-
adding activities in-house where an organization can best utilize its own core competencies.

Main factors influencing successful outsourcing

The critical areas for a successful outsourcing program as identified are:

      Understanding company goals and objectives
      A strategic vision and plan
      Selecting the right vendor
      Ongoing management of the relationships
   A properly structured contract
      Open communication with affected individual/groups
      Senior executive support and involvement
      Careful attention to personnel issues
      Short-term financial justification

In a nut shell, outsourcing allows organizations to be more efficient, flexible, and effective,
while often reducing costs.

Some of the top advantages brought by outsourcing include the following:

      Staffing flexibility
      Acceleration of projects and quicker time to market
      High calibre professionals that hit the ground running
      Ability to tap into best practices
      Knowledge transfer to permanent staff
      Cost-effective and predictable expenditures
      Access to the flexibility and creativity of experienced problem solvers
      Resource and core competency focus

Some examples of BPO services are telemarketing, technical support service, customer
support service, insurance processing, data entry and conversion services, bookkeeping and
accounting and online researching, and form processing.

Hot spots for various BPOs globally are as summarised in the table;

                         Countries     Specialization BPOs
                         China         Manufacturing and technical
                         India         Engineering and technical
                         Mexico        Manufacturing
                         USA           Analysis and Creative
                         Philippines   Administrative duties


Requirements for BPOs

  i.   Skilful management i.e. Human skills, professional teams, specification of staff roles
       and training people

 ii.   Security technology i.e. system compatibility between buyer and vendor, data
       systems security

Driving factors for BPO revolutions

      Education attainment

      Broadband connection

      Inexpensive data storage

      Business specialization
   Internet security

      Online analytical processing

BPO types

      Offshore-movement of jobs and manufacturing plants outside countries to take
       advantage of low wages overseas i.e. USA to Vietnam

      Onshore- services are taken to another place but within the same country

      Near shore- outsourcing services within the same continent

Challenges Faced by the BPO Industry, Challenges for the BPO Industry

Challenges Faced by the BPO industry today

BPOs have proved a grand success. However, certain problems have cropped up in the
process for which long-term solutions are necessary.

Areas of concern in BPOs:

      Working in a BPO, many feel is a job that does not require much skill. Anybody
       possessing a basic education, good communication skills is employable after some
       training. Companies do not mind taking in people who are middle aged, and
       homemakers. There is no sense of accomplishment among the employees.
      Financial desperation on the part of some people leads them to take up jobs in BPOs-
       People out of college join BPOs to earn money to finance their higher education,
       some as a way of improving their life styles. Some others join because they could not
       find anything else. In short, very few people take up employment in BPOs for the
       love of it.
       The tasks that BPOs perform are diverse: telemarketing, technical support service,
       customer support service, insurance processing, data entry and conversion services,
       bookkeeping and accounting and online researching, and form processing. The
       problem that this creates is that there can be no standardized training program
       suitable to all the BPOs that can be given to the prospective employees before they
       are actually absorbed into the company.
      High expectations from the outsourcing companies tend to de-motivate the workers.
       In many cases, the outsourcers think only of achieving targets. They are obsessed
       with quality work, business continuity, time frame, security of information.
       However, satisfying them is not always possible. The expectations should be realistic
       taking into account the work ethics of the region of the service provider, as well as,
       its culture and polity.
      Attrition in BPOs: The single largest worry of the BPO industry is attrition. In the
       outsourcing context, attrition means a gradual reduction in the number of people
       working in a company due to retirement, resignation, or death. The rate of attrition
       in the BPO industry in India for instance is currently nearly 50%. Attrition in
       individual firms varies from 15% in the larger firms to up to 40% in the smaller ones.
       Analysts believed that if this left unchecked, there would be a shortage of
       professionals.
Analysis of KPO, BPO and LPO

                                     KPO VS BPO VS LPO

Parameter          KPO                            BPO                   LPO
Primary value      Knowledge arbitrage            Cost arbitrage        Cost arbitrage in
                                                  process               legal process,
                                                  improvement and       quality and
                                                  efficiency            efficiency
Staff skill sets   MBAs, Engineers, CFAs,         Undergraduates in     Legal studies, IT,
                   Actuarial studies etc          commerce and          attorneys and
                                                  finance and IT.       engineers etc
Billing rates      USD 10-45 per hour             USD 1-15 per hour     USD20-1000 per
                                                                        hour
Process            Highly complex                 Basic process         Highly complex
complexity                                        involving standard
                                                  procedures
Process quality Standard project                  Robust six sigma      Driven by
management      management application            drive quality         management
techniques      supplemented by in house          techniques with on    practise and
                modelling and                     accuracy and output   experience
                documentation control
Staff retention     Equity and equity            Focus on monetary     Focus on
policies               linked incentives          incentives            professionalisms
                    Technical excellence                               and international
                    Professional growth                                career growth
                    Job rotation
Regulatory          strict regulations           Focus on data         Ethical issues,
issues              focuses on intellectual      protection issues     confidentiality and
                       property and               and privacy law       discipline
                       management issues
Typical         USD 15,000-40,000 in India        USD 4,000-10,000      USD50,000-200,000
resource costs
Common          India                             India , china,        India, USA, Korea,
designations                                      Philippines,          Pakistan
                                                  Vietnam and Easten
                                                  Europe
Scalability        Staff capabilities and         Staff numbers,        Management
drivers            expertise                      volumes, and          expertise and
                                                  output                knowledge
                                                                        expertise
Control of IP      Key control required over IP   IP not an issue       IP key issue
                                                  generally
Conclusion

BPOs like ITO and LPO are outsourcing centres established to arbitrage the cost and
efficiency of business to supplement the core business.

While BPOs are more quantities and products oriented focussing on volumes and output
ITO, KPO and LPOs are more focussed to quality, High performance, Capital expenditure
minimization, flexibility and more service oriented.

BPO has a global market share of USD 100 Billion, with over 60% of Fortune 500 companies
outsource to India, Compared with LPO estimated at USD 1.5 Billion.

Generally it has been consistent that services that have been outsourced are services that
offer greatest outsourcing rewards, even though the risk perception is high too. To conclude
BPO s can be viewed as business tools used to bring improvement within a business
functions.




Resource Prepared By:

SCASS Governance Resources Team

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Assessment of business process outsourcing

  • 1. Lawgical Practice Consulting Global Assessment of Business Process Outsourcing Date: 15/08/2011
  • 2. Business Process Outsourcing BPO is the process of hiring another company to handle business activities for your company as it focuses on its core business.BPO is distinct from information technology (ITO) outsourcing, which focuses on hiring a third-party company or service provider to do IT-related activities for instance, such as application management and application development, data centre operations, or testing and quality assurance. Many of these BPO efforts involve off shoring i.e. hiring a company based in another country to do the work. India is a popular location for BPO activities. Frequently, BPO is also referred to as ITES (information technology enabled services). Since most business processes include some form of automation, IT "enables" these services to be performed. An offshoot of BPO is KPO (knowledge process outsourcing). Considered by some to be a subset of BPO, KPO includes those activities that require greater skill, knowledge, education and expertise to handle. For example, whereas an insurance company might outsource data entry of its claims forms as part of a BPO initiative, it may also choose to use a KPO service provider to evaluate new insurance applications based on a set of criteria or business rules; this work would require the efforts of a more knowledgeable set of workers than the data entry would. The current definition of KPO encompasses R&D, product development and legal e-discovery, as well as a number of other business functions. Discipline where KPO has been incorporated includes;  equity, finance, insurance research  market research and competitive intelligent and general business research  data analytics integration and management  intellectual property , paralegal content and services  research and information services in HR  engineering and design services  animation and simulation services  medical content services Also coming into use is the term BTO (business transformation outsourcing). This refers to the idea of having service providers contribute to the effort of transforming a business into a leaner, more dynamic, agile and flexible operation. History BPO Since the Industrial Revolution, companies have grappled with how they can exploit their competitive advantage to increase their markets and their profits. The model for most of the 20th century was a large integrated company that can “own, manage, and directly control” its assets. In the 1950s and 1960s, the rallying cry was diversification to broaden corporate bases and take advantage of economies of scale. By diversifying, companies expected to protect profits, even though expansion required multiple layers of management. Subsequently, organizations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility that resulted from bloated management structures. To increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business, which required identifying critical processes and deciding which could be outsourced.
  • 3. Outsourcing was not formally identified as a business strategy until 1989. However, most organizations were not totally self-sufficient; they outsourced those functions for which they had no competency internally. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. In the 1990s, as organizations began to focus more on cost-saving measures, they started to outsource those functions necessary to run a company but not related specifically to the core business. Managers contracted with emerging service companies to deliver accounting, human resources, data processing, internal mail distribution, security, plant maintenance, and the like as a matter of “good housekeeping”. Outsourcing components to affect cost savings in key functions is yet another stage as managers seek to improve their finances. Outsourcing it has basically resulted into strategic partnerships What is outsourcing Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources”. Sometimes known also as “facilities management”, outsourcing is a strategy by which an organization contracts out major functions to specialized and efficient service providers, who become valued business partners. Companies have always hired contractors for particular types of work, or to level- off peaks and troughs in their workload, and have formed long-term relationships with firms whose capabilities complement or supplement their own. However, the difference between simply supplementing resources by “subcontracting” and actual outsourcing is that the latter involves substantial restructuring of particular business activities including, often, the transfer of staff from a host company to a specialist, usually smaller, company with the required core competencies. Why do companies outsource Here are some common reasons:  Reduce and control operating costs  Improve host company focus  Gain access to world-class capabilities  Free internal resources for other purposes  A function is time-consuming to manage or is out of control  Insufficient resources are available internally  Share risks with a partner company In earlier periods, cost or headcount reduction was the most common reasons to outsource. In today’s world the drivers are often more strategic, and focus on carrying out core value- adding activities in-house where an organization can best utilize its own core competencies. Main factors influencing successful outsourcing The critical areas for a successful outsourcing program as identified are:  Understanding company goals and objectives  A strategic vision and plan  Selecting the right vendor  Ongoing management of the relationships
  • 4. A properly structured contract  Open communication with affected individual/groups  Senior executive support and involvement  Careful attention to personnel issues  Short-term financial justification In a nut shell, outsourcing allows organizations to be more efficient, flexible, and effective, while often reducing costs. Some of the top advantages brought by outsourcing include the following:  Staffing flexibility  Acceleration of projects and quicker time to market  High calibre professionals that hit the ground running  Ability to tap into best practices  Knowledge transfer to permanent staff  Cost-effective and predictable expenditures  Access to the flexibility and creativity of experienced problem solvers  Resource and core competency focus Some examples of BPO services are telemarketing, technical support service, customer support service, insurance processing, data entry and conversion services, bookkeeping and accounting and online researching, and form processing. Hot spots for various BPOs globally are as summarised in the table; Countries Specialization BPOs China Manufacturing and technical India Engineering and technical Mexico Manufacturing USA Analysis and Creative Philippines Administrative duties Requirements for BPOs i. Skilful management i.e. Human skills, professional teams, specification of staff roles and training people ii. Security technology i.e. system compatibility between buyer and vendor, data systems security Driving factors for BPO revolutions  Education attainment  Broadband connection  Inexpensive data storage  Business specialization
  • 5. Internet security  Online analytical processing BPO types  Offshore-movement of jobs and manufacturing plants outside countries to take advantage of low wages overseas i.e. USA to Vietnam  Onshore- services are taken to another place but within the same country  Near shore- outsourcing services within the same continent Challenges Faced by the BPO Industry, Challenges for the BPO Industry Challenges Faced by the BPO industry today BPOs have proved a grand success. However, certain problems have cropped up in the process for which long-term solutions are necessary. Areas of concern in BPOs:  Working in a BPO, many feel is a job that does not require much skill. Anybody possessing a basic education, good communication skills is employable after some training. Companies do not mind taking in people who are middle aged, and homemakers. There is no sense of accomplishment among the employees.  Financial desperation on the part of some people leads them to take up jobs in BPOs- People out of college join BPOs to earn money to finance their higher education, some as a way of improving their life styles. Some others join because they could not find anything else. In short, very few people take up employment in BPOs for the love of it.  The tasks that BPOs perform are diverse: telemarketing, technical support service, customer support service, insurance processing, data entry and conversion services, bookkeeping and accounting and online researching, and form processing. The problem that this creates is that there can be no standardized training program suitable to all the BPOs that can be given to the prospective employees before they are actually absorbed into the company.  High expectations from the outsourcing companies tend to de-motivate the workers. In many cases, the outsourcers think only of achieving targets. They are obsessed with quality work, business continuity, time frame, security of information. However, satisfying them is not always possible. The expectations should be realistic taking into account the work ethics of the region of the service provider, as well as, its culture and polity.  Attrition in BPOs: The single largest worry of the BPO industry is attrition. In the outsourcing context, attrition means a gradual reduction in the number of people working in a company due to retirement, resignation, or death. The rate of attrition in the BPO industry in India for instance is currently nearly 50%. Attrition in individual firms varies from 15% in the larger firms to up to 40% in the smaller ones. Analysts believed that if this left unchecked, there would be a shortage of professionals.
  • 6. Analysis of KPO, BPO and LPO KPO VS BPO VS LPO Parameter KPO BPO LPO Primary value Knowledge arbitrage Cost arbitrage Cost arbitrage in process legal process, improvement and quality and efficiency efficiency Staff skill sets MBAs, Engineers, CFAs, Undergraduates in Legal studies, IT, Actuarial studies etc commerce and attorneys and finance and IT. engineers etc Billing rates USD 10-45 per hour USD 1-15 per hour USD20-1000 per hour Process Highly complex Basic process Highly complex complexity involving standard procedures Process quality Standard project Robust six sigma Driven by management management application drive quality management techniques supplemented by in house techniques with on practise and modelling and accuracy and output experience documentation control Staff retention  Equity and equity Focus on monetary Focus on policies linked incentives incentives professionalisms  Technical excellence and international  Professional growth career growth  Job rotation Regulatory  strict regulations Focus on data Ethical issues, issues  focuses on intellectual protection issues confidentiality and property and and privacy law discipline management issues Typical USD 15,000-40,000 in India USD 4,000-10,000 USD50,000-200,000 resource costs Common India India , china, India, USA, Korea, designations Philippines, Pakistan Vietnam and Easten Europe Scalability Staff capabilities and Staff numbers, Management drivers expertise volumes, and expertise and output knowledge expertise Control of IP Key control required over IP IP not an issue IP key issue generally
  • 7. Conclusion BPOs like ITO and LPO are outsourcing centres established to arbitrage the cost and efficiency of business to supplement the core business. While BPOs are more quantities and products oriented focussing on volumes and output ITO, KPO and LPOs are more focussed to quality, High performance, Capital expenditure minimization, flexibility and more service oriented. BPO has a global market share of USD 100 Billion, with over 60% of Fortune 500 companies outsource to India, Compared with LPO estimated at USD 1.5 Billion. Generally it has been consistent that services that have been outsourced are services that offer greatest outsourcing rewards, even though the risk perception is high too. To conclude BPO s can be viewed as business tools used to bring improvement within a business functions. Resource Prepared By: SCASS Governance Resources Team