Guest Contributor, Dan Mahlebashian, is a recently retired General Motors executive. Dan led GM’s Global Business Services organization, the global SAP environment, and acted as the Chief Contracting Officer. Dan is an advisory board member of Ashling Partners and writes about Business Process Outsourcing. His opinions are his alone.
Structuring and managing Business Process Outsourcing (BPO) engagements can be tricky. The ground beneath the traditional BPO model and value proposition was already shifting due to advancements within intelligent automation technologies and processes. This gets further complicated when thinking about the impact from a Supply Chain perspective in a post COVID19 environment. My thoughts that follow will help define the key considerations when considering a BPO arrangement, how to measure the success of that arrangement, and how to define proper service level expectations that allow your organization to become more efficient, effective, and deliver better experiences across your stakeholders.
There are several important considerations to think through as you structure and manage your BPO engagements. Below are the top considerations that I view as vital to have a strategy around in the current business environment climate:
- Automation. Automate as much as you can. From a pre-BPO perspective look at your business processes and automate as much as you can. The best-case scenario is to eliminate the work. Not just shift it to a low-cost provider or environment but eliminate the work all together. Digitalization tools like Robotic Process Automation (RPA) are a great way to get after automation in a simple, user led manner. This same focus on automation should also be applied from a post-BPO perspective. Contractually you should motivate your Service Provider to automate as much of the outsourced work as possible. However, also be aware that this request of a traditional BPO provider will be met with ambiguity as this does not fit their model of labor arbitrage. Do right by your organization by ensuring that automation is in fact occurring and ‘throwing people at the problem’ is not the reality behind the curtain. Ask for and own the rich data that automation enables. Pre-established year-over-year structural cost reduction objectives are a great way to stimulate automation to deliver on the agreed objective.
- Business Process. Optimize your business processes as much as possible before handing them off to a third party outsourced Service Provider. And do so with automation in mind. Post award ensure that your contract commitments with the BPO provider obligate them to ensure that the busines processes they are taking over are run as efficiently as possible with year over year built in improvements. Your objective is not to simply get “the same mess for less”. Rather, what you want at the end of the BPO term is a streamlined operating environment that has your business processes being run at an optimized level of both efficiency as well as effectiveness. Also keep in mind the same applies to Automation. First ensure your business processes are optimized before automating. The last thing you want to do is automate a bad business process. Think through in the engagement the cadence of driving consolidation, standardization, automation and ultimately artificial intelligence/cognitive tools into execution of the business processes.
- Transition Planning. Ensure a well-defined transition plan and aligned understanding with your outsourced Service Provider. Critical components include timing, roles and responsibilities, knowledge transfer, transition cost break out, end of deal transition including termination assistance. Also keep in mind that it is important to obligate the BPO Service Provider to secure the clients approval associated with any material change in delivery solution over the life of the BPO engagement.
- Multi Supplier Eco System. Make sure that you identify the wholistic Supplier eco-system that will be engaged in the outsourced business process activities both directly as well as indirectly. Ensure your third party outsourced service provider clearly understands this eco-system and how they fit in. At the same time, you will want to make sure that you understand the wholistic tiered supply base engaged in delivering your outsourced business processes by the primary outsourced Service Provider (by whom, what service, where delivered).
- Supplier Relationship Management. Robust SRM is a critical enabler of successful BPOs. Remember, you will never make up for a bad Supplier relationship no matter how good you think your contract is, however you will always make up for a bad contract with a great Supplier relationship. Place your bets accordingly.
- Performance Management. Ensure a robust set of performance management metrics are defined including the associated Service Level Management routines that drive sustained continuous improvement as well as acting as a motivator to the Supplier to deliver the agreed level of service based on evolving needs over the life of the BPO engagement.
- Intellectual Property. Make sure that proper care is placed around IP rights both in terms of who owns what coming into the deal as well as who owns what associated to deliverables created during the outsourced relationship. In an increasingly automated world, this includes the automation scripts being created on your behalf.
- Security and Data Protection. Make sure the BPO is clear with respect to Supplier obligations around data protection and security.
- Contract Alignment. Ensure the Statement of Work Deliverables and Obligations are well aligned with the Service Levels and Pricing Construct. All three should work in concert to deliver the desired business benefit over the life of the BPO engagement.
- Outcomes. Make sure you and your Outsourced Service Provider are aligned on the business outcomes you desire. This goes well beyond simply cost considerations and the associated input based (PxQ) contract/pricing model. Make sure requirements are clearly and comprehensively defined. Make sure also not to cross the line on “the How”. Your job as the Client is to define “the what”. The Supplier is responsible for “the How”. Another consideration with respect to outcomes is to make sure you are clear about expectations around innovation management and timing of bringing innovation to market.
- Commitment Management. Don’t forget the commitment management routines post award. Four critical components – Performance Management, Service Level / Delivery Management, Financial Management and Contract Management
Defining Business Benefits
Now that we have defined what the important considerations are before executing any BPO engagement, it is then important that you are able to articulate the desired Business Benefits and Expectations. A number of key elements to keep in mind as you craft the BPO engagement. In addition to the business benefits below it is important to operationalize how you are going to measure realization of these business benefits in order to prove out at the end of the day the ROI associated with the BPO engagement.
- Lower Costs. Think through this from a total cost of ownership perspective. For example, if you outsource Accounts Payable what you really are trying to achieve is an optimized cost of Request to Pay not simply lowering the transactional cost of AP processing. Cost benefit comes in many forms (lower labor, cost avoidance, leveraged infrastructure, resource efficiency, geo-political costs such as tax breaks and incentives). Further the BPO engagement will allow for a more variable cost structure for the client outsourcing certain aspects of their work activities.
- Innovation. Having a Supplier engaged with specific expertise will deliver more robust innovation associated with the outsourced services at a faster pace. For example, the BPO provider may not be experienced enough across the strategy, execution, and support of an intelligent automation program needed to turn your back office into a competitive advantage.
- Automation. This is critical. The outsourced Service Provider is well positioned to deliver automation that drives both cost efficiency as well as operational effectiveness. See my last point on being opened to a specialized service provider within this capability.
- Core Function Focus and Support. Outsourcing to a BPO provider non-core functions such as back and middle office processes allows the client to focus on the business-critical activities that truly differentiate them in the marketplace.
- Globalization. One of the key benefits of establishing a BPO engagement is it allows the client to establish footholds for global expansion as well as establishing a mechanism to drive global common business processes.
Defining your Service Levels
One of the primary enablers of an effective BPO engagement is having the right Service Levels and Key Performance Indicators (KPIs) defined. These are typically found in a specific exhibit to the BPO contract called a Service level Agreement. A couple of key components.
- Types of Service Levels. What works most effectively is having Service Levels that measure both recurring or ongoing operations (e.g., Up time, response levels, quality indicators, cost per unit, etc.) as well as one time deliverables (e.g., start of operations, delivery of an application or innovation, establishment of automation around a business process, etc.)
- Incentives. It is important to properly incent the Service Provider to deliver. Putting at risk money associated with delivery of the Service Levels is a key mechanism to drive this. Keep in mind that you want to make sure you incent the Service Provider to perform. You want the Service not the incentive dollars. Remember position this as a performance incentive not a penalty. An effective way to drive this is to allow the Service Provider to “earn back” SLA failure credits with service that exceeds expectations.
- Critical Service Levels vs. Key Metrics. Structure your Service Level Agreements such that you have Critical Service Levels with “at risk” money associated with them as well as Key Metrics with no at risk money. The agreement should allow Key Metrics to be “promoted” to Critical Service Levels based on needs of the BPO engagement over time. In addition, make sure you have the ability to add both new Service Levels as well as Key Metrics over the life of the BPO Engagement.
- Meaningfulness. It is very important that the Service Levels have the right amount of weight or impact fullness so as to drive the desired Service Provider performance. You want to be able to assign a “gross up” factor to each Service Level, not to exceed an agreed upon amount with the Service Provider so as to incent the right behavior over the life of the BPO engagement and aligned with dynamic priorities as they shift during the engagement term.
- The Right Formula. Best Practice companies typically see an at-risk percentage of 15% with a gross up factor of 3.5x (15%/350).
There are also many challenges that occur when defining service levels. Below are a few of the top challenges that I have encountered during my career:
- Misunderstood Expectations. Requirements matter a great deal in defining a well structured BPO engagement. Be clear, concise, keep things simple when defining requirements. Remember also stick to the “what” and let the Service Provider define the “how”
- Roles and responsibilities. Clearly define the roles and responsibilities of both the Client as well as the BPO Service Provider. Typically, best practices have a RASIC exhibit defined in the BPO agreement.
- Governance and Performance escalation. In structuring the BPO engagement it is important to ensure a standard and recurring Governance routine including standard meetings, readiness reviews, strategy and priority alignment, etc. Included in this should be a well-defined escalation process for resolving issues and disputes.
- Adequate Resourcing Including Right Skill Sets. It is critical that the Client retains the right to sign off on the delivery solution. Often times in a BPO engagement the Service Provider will make a high-level claim to deliver but does not show the details of how they will accomplish this. A well structured BPO engagement will show the details associated with the delivery solution.
- OCM / Clashes In Culture. One of the most prevalent omissions in executing a BPO relationship is insufficient attention paid to Organizational Change Management and Cultural alignment. The Client and Service Provider are both going to go through changes to work performed by their respective resources. Both in terms of what work gets done as well as how that work gets done and how it is consumed. It is critical that the big picture, including the “why”, is robustly communicated to all stakeholders involved, both Client side as well as Service Provider side.
- Language Barriers, Time Zone Changes. Keep in mind that as work is shifted to lower cost countries and consolidated operations, language requirements and time zone implications are properly thought through and accommodated for.
- Security. In todays environment information security and data protection / access is critical to business operations. AA well structured BPO engagement puts safeguards and robust requirements around these critical elements.
- Supply Chain Disruption. This is an emerging challenge given what has recently been experienced associated with the COVID19 Global Pandemic (see next paragraph)
Supply Chain Disruptions and considerations for a post COVID world.
The last thing to consider with respect to the BPO engagements you as a client have entered into as well as what you are contemplating is how these will operate in a post COVID world and the implications of this on the critical Supply Chain supporting your business operations. Face it, Force Majeure provisions have taken on a whole new meaning. Supply Chains have been disrupted as never before. BPO engagements that send work to low cost countries on the other side of the world are being re-examined with respect to these Supply Chain implications. Automation is more important now than ever before. You should think through how you can drive the business benefits (e.g., cost take out, critical business activities focus, quality, etc.) associated with a BPO engagement by automating internally without having to outsource the work. Tools such as Robotic Process Automation, Artificial Intelligence, Business Process Mining and Optimization are just a few examples of automation tools that are user lead that can be deployed internal to your organizations and that will deliver BPO-like business benefits without having to outsource the work and take on the inherent risk (e.g., Supply Chain disruptions).
Retired General Motors Senior Executive
Executive Director – Global Business Services Chief Contracting Officer, IT/BPO