The Competitive Advantage

Business Process outsourcing The Competitive Advantage RICK L. CLICK THOMAS N. DUENING John Wiley & Sons, Inc.

Business Process outsourcing

Business Process outsourcing The Competitive Advantage RICK L. CLICK THOMAS N. DUENING John Wiley & Sons, Inc.

This book is printed on acid-free paper. Copyright 2005 by John Wiley & Sons, Inc., Hoboken, New Jersey. All rights reserved. Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Click, Rick L. Business process outsourcing : the competitive advantage / Rick L. Click, Thomas N. Duening. p. cm. Includes bibliographical references and index. ISBN 0-471-65577-5 (cloth) 1. Contracting out. I. Duening, Thomas N. II. Title. HD2365.C48 2004 658.4 058 dc22 2004008608 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

contents Foreword Preface Acknowledgments vii ix xiii PART ONE BPO Overview 1 CHAPTER 1 What Is So Revolutionary about BPO? 3 CHAPTER 2 Who Is Using BPO and How? 27 PART TWO To BPO or Not to BPO? 45 CHAPTER 3 Identify and Select the BPO Opportunity 47 CHAPTER 4 Identify and Manage the Costs of BPO 70 PART THREE BPO Vendor Selection 91 CHAPTER 5 Identify and Select a BPO Vendor 93 CHAPTER 6 BPO Contracts 112 v

vi Contents PART FOUR Executing an Outsourcing Project 133 CHAPTER 7 Managing the BPO Transition 135 CHAPTER 8 Managing the Buyer Vendor Relationship 154 CHAPTER 9 Infrastructure Considerations and Challenges 172 CHAPTER 10 Business Risks and Mitigation Strategies 189 PART FIVE The Future of BPO 207 CHAPTER 11 Future Potential for BPO 209 Endnotes 223 Index 233

foreword The topic of business process outsourcing (BPO) has become controversial and the subject of a great deal of media attention over the past year. As an executive who has been using outsourcing as a business strategy for more than a decade, the recent upsurge in interest in the topic was unexpected. Perhaps the fact that 2004 is an election year has something to do with it. Or maybe, as the authors point out, the convergence of a number of social and technological factors has only recently made BPO an option for organizations of nearly any size. My experience with BPO ranges over a number of business processes. Organizations that I manage as Chief Engineer of Occidental Oil & Gas have taken advantage of specialized labor pools around the world. As a multinational enterprise in a highly competitive industry, Occidental must be aggressive about controlling costs and employing the highest quality labor it can find. Occidental s experience with outsourcing has mostly been positive, but there have been many lessons learned. From time to time I have considered the prospect of writing about the lessons I have learned in initiating and managing a BPO project. Time and business considerations have always intruded into those thoughts and made them unrealistic. Fortunately, Rick Click and Tom Duening have taken the time to write this book, which is a fine presentation of how to organize and manage a BPO initiative. Click and Duening s book is a comprehensive guide that managers and executives in nearly any size organization will find valuable. The mix of insight and practicality that is evident in the writing will provide most readers with the confidence to launch into the BPO waters. The tools and tips contained in this book will make even the most experienced outsourcing manager think again about the methods he or she uses and whether they can be improved. Of course, no book is without its drawbacks. At times Click and Duening take their discussions to levels of detail that are more appropriate for an academic work. For example, their discussions of change management and interorganizational relationships are long on detail but a little short on examples. Still, the book reads very well and most managers and executives can usefully be reminded of the importance of effective change management to the success of transformational initiatives such as BPO. vii

viii Foreword Overall, I believe this book will be of tremendous benefit to anyone or any company currently undertaking or considering undertaking a BPO initiative. The complexities of working with offshore partners and the potential risks to the business make the investment in this book well worth the purchase price. Leading thinkers in the area of global economics assure us that free trade is a good thing for people everywhere. It is likely that the world will not reverse the course of the past several decades of ever broadening trade relationships among nations. In short, BPO is here to stay and it will be a disruptive force in many industries. Managers and executives who want to take advantage of BPO should get this book to help them become successful. Managers and executives who do not want to take advantage of BPO should get this book so they understand what their competitors are doing. In the end, no one can ignore BPO since it will surely affect the cost-structure of nearly every industry. I predict that the hype around BPO will subside quickly, but the business advantages it will bring to many are here to stay. Chief Engineer, Worldwide Operations Occidental Oil & Gas June 2004 ROBERT E. PALMER

preface Business process outsourcing (BPO) has emerged as one of the leading business and economic issues of our time. A natural extension of the free-trade juggernaut that has dominated global economics over the past two decades, BPO has been met with mixed emotions. Workers whose lives have been disrupted because their jobs have been outsourced to lower-wage workers overseas have understandably decried offshoring as a threat to their way of life. Others, especially those in the foreign locations where new jobs are rapidly being created, are elated about the opportunity to apply their hard-earned and high-value skills. Presidential politics have also weighed in on BPO with both parties articulating their positions on the issue. Rarely has there been such high-level discourse about a legal business activity that, in the long run, promises lower prices on a wide range of goods and services for U.S. consumers. In this book, we attempt to examine BPO from the perspective of its application and implementation in businesses of all sizes. We do not address the political or economic controversies swirling around outsourcing. Instead, we assume that the movement of service work to lowest-cost providers, no matter where they may reside, will continue in some form. It seems wholly unlikely that new barriers will be erected that will seriously limit global free trade. With that in mind, we have developed a rigorous methodology that businesses can use to analyze the outsourcing opportunity, to make informed decisions about choosing a vendor, and to manage change and execute an outsourcing project. The team-based approach to BPO project analysis and implementation is based on the fact that BPO is a socio-technical phenomenon. That is, a wellexecuted outsourcing project must involve both social and technical resources of the organization. BPO is transformational to the organization and requires attention to the social and human impacts that accompany business transformation. At the same time, one of the primary enablers of BPO is the set of technologies that have emerged to connect the world in a global communications network. As a socio-technical phenomenon, effective BPO management requires a diverse skill set that is not likely to be present in any single individual. Thus, we recommend a team-based approach since the necessary skills are more likely to be available in a group of people united to achieve common objectives. ix

x Preface We also develop the concept of the BPO Life Cycle to denote clear milestones in development of the BPO project and to provide more specific management and leadership guidelines to be applied at different stages of the Life Cycle. The BPO Life Cycle applies to any type of outsourcing project and to any size company. It has become clear that BPO provides far more than mere cost savings to firms that use it. BPO has become a strategic business choice that can be leveraged for competitive advantage as well. When a business outsources a process to a vendor whose core competence is centered on that process, the buyer is likely to experience service enhancements that can be turned into competitive advantages over rivals. Furthermore, when the buyer vendor relationship evolves into a business partnership, both sides will be motivated to look for mutually beneficial ways to leverage the combined asset pool. We have divided this book into five parts to mirror the various stages of the BPO Life Cycle. Part One is intended to provide an overview of BPO. Chapter 1 highlights the primary drivers and the various types of BPO that are in use today. Chapter 2 provides several case examples of firms that use BPO in a variety of ways. Part Two asks the question To BPO or not to BPO? Firms of all sizes are faced with a decision about whether outsourcing can help them achieve cost savings, or scale or competitive advantages. Chapter 3 introduces the concepts of core competence identification, process mapping, and our recommended team-based approach, beginning with the BPO Analysis Team (BAT). Chapter 4 provides a framework for analyzing the costs associated with a BPO project, both obvious and hidden. Part Three examines the variables and factors associated with BPO vendor selection. Chapter 5 describes a systematic approach to vendor selection and recommends appointing a Vendor Selection Team (VST) to manage that process. Chapter 6 examines the considerations and nuances involved in developing a workable BPO contract, including service level agreements, penalties, rewards, and remedies. Part Four is the largest of the five parts, discussing the various aspects of effectively managing an operating BPO project. Chapter 7 deals with the transition phase, where the outsourced process is formally migrated to the vendor. Chapter 8 provides tips and insights into effectively managing the buyer vendor relationship on an ongoing basis. Chapter 9 examines the organizational infrastructure issues that arise during the transition and operating phases of the BPO project. Chapter 10 explores the various business risks inherent to a BPO project and suggests mitigation strategies. Finally, Part Five briefly explores the future of BPO and the likely implications it will have on business, economics, workers, and education. Chapter 11 provides extrapolations and educated guesses about how BPO is likely to unfold in the coming years.

Preface xi Each chapter is populated with inserts that provide additional insights into the BPO revolution. Inserts include case studies, ethics and governance, and executive viewpoints. As this book is going to press, outsourcing has become an important new force in the global economy. It is our hope that the prescriptions, guidelines, concepts, and tools provided in this book will be useful to managers in organizations of all sizes as they struggle to determine their best opportunities for outsourcing. With the rapid evolution of outsourcing techniques and methodologies, we are certain that this book only makes a dent in the growing understanding of the BPO revolution. At the same time, there are timeless change management lessons in this book that apply to outsourcing and global, interorganizational business relationships. We hope that readers will enjoy this book and that it provides managers with insights and concepts to make informed decisions and choices. The BPO revolution is upon us, and we are hopeful that the global economy will become more tightly integrated and interdependent as a result. We cannot expect that all will be made well as a result of a more tightly integrated and more prosperous global economy, but it might make things a little better than they are today. Who could ask for more? June 2004 RICK CLICK TOM DUENING

acknowledgments This book has been an incredibly stimulating challenge and has introduced us to many fascinating people on several continents. Any book ultimately is the result of input and feedback from a wide range of people, and this one is no exception. We thank everyone who contributed his or her time and efforts to this project. Especially notable has been the contributions of the executives and outsourcing professionals that we consulted time and again to understand more deeply the nuances of an effective project. We also want to acknowledge Mr. David Piper of the law firm Boyer & Ketchand for his contributions to Chapter 6; Mr. Lalit Ahuja of Suntech Data Systems for his assistance on Chapter 8; and Mr. Matt Castleman for his exceptional work on the graphics and exhibits in this book. Our Wiley editor, Mr. Sheck Cho, is to be commended for his vision in signing this project before outsourcing became a household word. Of course, we take full responsibility for any errors that remain in this book. Foremost among those we feel compelled to acknowledge are the members of our families. This project consumed many hours over the course of the past year and meant that vacations, weekends, and family dinners were placed on hold as the relentless pressure of deadlines kept us at our writing tasks. Amy Click and Charlene Duening, our wives, were, as usual, our strongest supporters along the way, and we could not have written this book without them. xiii