With many businesses looking to lower their costs, Business Process Outsourcing (BPO) has been cited as an increasingly popular option. But companies could be disappointed with the result if they have do not have a firm grip on the process in the first place, says Brian Plowman, FSN writer and Managing Director of CostPerform Ltd, a provider of Activity Based Costing and Profitability Analysis and Modelling software.
Often taking the BPO route is simply a salary cost initiative, with a number of countries offering degree qualified staff with lower salaries. Processes considered by a business may include those found in operations, finance and technology functions. But quite a few processes are linked directly with customers and therefore have a direct bearing on the way that a company is perceived.
Although it feels ubiquitous - everyone has personal experience of dealing with obviously outsourced operations such as Call Centres - our recent study of productivity trends showed that BPO has raised a number of concerns about BPO among executives charged with finding the means to lower costs and improve customer service levels.
What then were the concerns?
In-house control of the functions was considered important to strategy, either to maintain flexibility or to differentiate;
Evidence that higher than anticipated control costs had become an important consideration;
The business case was not sufficiently attractive given the risks. Also the real profitability of services provided via outsourcing was poorly understood (both before and after outsourcing) so executives were flying blind;
Many candidates for outsourcing (and unfortunately many current outsourced call centre operations) were simply dealing with failures of all sorts: both failures in the relationship with customers and unstable internal processes.
Protecting strategic interests
In some cases the CEO had concluded that certain processes were closer to the organisation’s strategic interests than at first glance. In some cases this was simply because the competencies are genuinely central to the organisation’s offering to customers (e.g. Accounts Receivable in a bank is really a core part of operations, it is about charging interest and collecting fees). In other cases strategic possibilities meant that outsourcing would reduce flexibility. For example, if an organisation is considering divestments of certain parts of the business, being locked into an outsourcing contract can be problematic.
High control costs
The organisation’s research about BPO had found that for some businesses the control costs were higher than expected. By control costs we mean the expense incurred checking, validating, communicating, guiding, error correcting, and risk managing the outsourced operation. The control costs will be higher the less stable the process actually is. However, control costs can also be a function of the quality of the contract signed and the associated service standards.
In one case a University outsourced its international applications process to the country where its agents were trying to recruit students. The contract required error free applications going to the UK before payment was made so ensuring that the tendency for agents to try and cut a few corners was dealt with by locals with a vested interest in getting the controls right and working.
The business case attractiveness tended to be governed by the risk-reward trade-off. There is always some degree of risk associated with outsourcing, so CEOs wanted to be sure of a payoff that would justify the risk. Indeed there are many risks to manage (e.g. contracts, exchange rates, morale). In a number of cases the scale was insufficient to give a good Net Present Value (given the risks), especially when up-front costs were taken into consideration.
But the more serious issue is that in most organisations there is a desperate lack of information about the true profitability of the organisation’s products, services and customers. The management accounts do not provide this and reporting the gross margin as a surrogate for ‘profit’ serves only to mask the sources and levels of margin erosion. Not surprisingly poor cost and profitability information in the current business is not likely to throw much light on the true benefits, or otherwise, of taking the BPO route.
In a number of cases the candidate processes will simply not be ready for outsourcing. It is a much discussed truth of BPO that processes should be stable before outsourcing but you can be fooled. Today an organisation might have a less than clear or optimal process, but it will have the staff who know how to work around those weaknesses. The processes will be routine but they won’t be documented. When the process is outsourced those staff (with their inside knowledge, contacts, relationships and workarounds) can no longer come to the rescue. Believing that you are outsourcing the documented work can leave a large blind spot.
But the issue to tackle right at the outset is to find out if the candidate processes are in place simply because there have been a failure in the product or delivery of the service that has prompted the customer to contact the business and so create many costly activities. There are then two questions to ask. Firstly “what is the root cause of the problems that are making customers contact us thus making us respond in the belief that we are providing ‘customer service’? And secondly “have we tried to tackle the cost of customer service rather than eliminate the root causes?”
If the answers are “don’t know” and “yes” then you have the worst of both worlds. You will have a high but avoidable failure cost masquerading as customer service, and your attempts to reduce the unit costs of a typical Call Centre result in exporting the ‘service’ to a cheap labour country and/or whipping staff to increase productivity by increasing their targets for number of calls handled per day. Both options carry all the inherent high risks of annoying customers (who rang because they were already annoyed about something).
Outsourcing: are there positives?
There are clear situations when the risk-reward trade-off has favoured outsourcing. Furthermore, sometimes an outsourcing partnership has strategic as well as cost benefits. For others this is about access to the latest technologies and practices in order, perhaps, to deliver the fastest possible elapsed time where this is a strategic differentiator.
But the warning bells need to sound if there is the slightest chance that you do not have complete information about costs at the activity and process level and aligned to the products and services you provide so the costs can be compared to income and true profitability established. Visibility and transparency of activity costs means that only necessary and stable processes serving the business and customers in the most appropriate and profitable manner will become candidates for outsourcing. At that point the old reasons and supposed justification for outsourcing may be unsupportable.