Introducing new-age BPO: the standardization/personalization balance

The new wave of BPO deployment has arrived quicker than many of us anticipated. The recession has driven some common-sense into a BPO value-proposition that was previously centered predominantly on some form of labor arbitrage, with many service providers muddling their way through to attempt to run their clients' process for less cost - and make some sort of profit.  Sometimes they pulled it off, other times they failed.  Many are currently in a state of semi-transition, with the success of their BPO engagement still hanging in the balance. 

Now we've clearly arrived at a turning point in BPO development, which we can put into the following three categories:

1) Straight Lift and Shift:  the antiquated form of BPO where client takes "as-is" processes, hands them off to a provider, which subsequently attempts to run with lower staff costs.  In many cases it's a simple "re-badge" of existing personnel, with the provider simply employing smaller numbers of the existing delivery team to make a profit on the deal.  In most modern cases, the provider will supplement onshore staff with offshore.  There is little (or no) enhancement of software applications to standardize workflows and add a modicum of transformation into the engagement.

Likely outcome:  Inefficiencies with processes are magnified considerably, change-orders and procedural changes are cumbersome and expensive, client finds it challenging to reduce onshore headcount, and anticipated cost-reduction is not reached.

2) Lift, Shift and Transform:  Same as Lift and Shift, but the client and service provider work together to re-map existing processes onto a pre-defined new set of processes. 

These can often be standard and may adhere to a particular ERP template, of could be customized to requirements specific to the customer.  The client and provider need to determine the incremental transformation costs and price them accordingly over the course of the contract (or as a single fixed fee).

Likely outcome:  Initial challenges as processes are moved offshore, but standardization on new technology should create new efficiencies and the opportunity to eliminate unnecessary process steps.  Initial cost savings may not be as much as a pure process play, but the aggregated savings over a multi-year period are almost always greater. 

3) Tranform onto a standard offering with some degree of personalization:  My good friend at SAP, Gianni Giacomelli, sent me in some of his thoughts on this standardization/personalization balance, so am going to hand you over for his thoughts here.  Over to you Gianni:

I argue that a few service providers can and should get smarter at executing on the key vision the industry was built on: service provider being better (read: cost, quality, risk) than each individual client because it syndicates practices and scale across customers.

Trouble is, this is not “business as usual” for many service providers with a technology system-integration background, where you get paid for the extra frills you do on each customer. And it is not easy for those coming from small-scope services, who struggle with the intricacies of a consultative value-sale cycle. It will take guts and smarts, but it can be done – like it has been done in many industries where process and technology maturation suddenly help business models change. Here are some key tenets.

Decide scientifically what scope you really want

Here the concept is simple but the analysis is not banal – which means that the right people, if well determined, can build a competitive advantage out of this.

Scope decisions mean analyzing which processes benefit from standardization, i.e. for which ones the cost per unit decreases when volume goes up, or which ones can be optimized from “typical practice” to “best practice” even if at the same level of scale. In both cases providers need to standardize the way they do certain things – otherwise they do not attain the required scale, or are not able to achieve the transformation required to reach “best practice”.

Standardization can happen along two dimensions: processes (e.g. invoice management, dunning, garnishments, …) or delivery layers (automation tools, self-services, tier-1 contact centers, tier-2 global experts, tier-3 local experts). There are methodologies that can help this exercise – again concepts are simple, but implementation not trivial.  First, identify what is material: forget about the “long tail” of small subprocesses, especially the ones you know are guarded by anxious stakeholders, as they might distract you from the big picture. This is not banal, as often the cost of service delivery is not well understood at single-process level. Effectively, the provider will need to perform a BPO-specific activity-based costing (ABC) of the design, build, run phases of the service.

Then: providers can start top-down with benchmark-type data to determine the economic behavior of such processes/layers when scale or best practices are applied, or (if you suspect external benchmarks are inappropriate) they can benchmark different client organizational units of the same company and ultimately get to the same result; alternatively, they can work bottom-up and identify processes where resource utilization is poor because of demand volatility (a perfect candidate for pooling resources, thereby increasing utilization), or where fixed costs (e.g. automation, implementation of self-service portals, setting up physical facilities) are substantial and therefore scale becomes key.

This exercise will also help pinning down what should NOT be standardized, and either left to the client retained organization or kept in the outsourced scope but allowed to be personalized. While these processes may dilute the overall “provider advantage”, they can be valuable for horse-trading when it comes to agreeing with the client.

 

 

 

Gianni Giacomelli  (pictured) is Head of Strategy and Marketing for SAP’s BPO business unit.

Comments

[Phil Fersht]

Hi Manoj,

I see a standardized/semi-personalized model developing.

The future (and present) is going to entail a heavy focus on the standardization of many common processes that can be tied to the ERP core platform - i.e. order-to-cash, procure-to-pay, payroll etc. Even processes such as environmental health and safety compliance, that can be easily standardized, and where the prividers bring the content and delivery of service to the table, will become more commonly standard. Where there is little strategic edge in keeping processes inhouse, and they can be run more effectively, and at less expense, are slam-dunks to be outsurced in a standard BPO model.

It's all a matter of maturity of the service delivery, and the clients' willingness to move onto BPO models. And - of course - cost plays a majpor issue - including the transition costs and upheaval to the business to reach end-state.

Areas that are more unique to the customer will be "semi-personalized", for example financial planning/analysis, manufacturing controls and so on. Much more to follow on this topic...

PF

[Manoj K]

Hi Phil,so far I've been a steady lurker here. However, this made me participate. Having managed BPO services delivery for years, integrating BPO delivery into the clients' value chain should always have been planned for before outsourcing, and even more so, off-shoring, due to the higher risks.

What do you think of my theory that the future won't be personalization vs standardization, but mass-personalization?

[Stephen Cohen]

Some excellent and forthright views expressed here. While many of the service providers get this, too many sourcing advisors are forcing through short-term deals that still focus purely on an FTE low-cost play (lift-shift). Some of the service providers are so desperate for business, they are pandering to this model and encouraging this behavior. I suggest you add the "Lift-shift-then-hope" model too.

Stephen

[David Campbell]

You've done a very articlate job summarizing how this industry has developed.

Stardards are necessary to maintain scale, quality and pricing for areas that can be tied to core ERP, but as you rightly point out, there are always going to be areas of uniqueness (personalization) that need to be addressed by the service vendor.

There will always be a market for some of these "lift and shift" models while organizations tackle shared service center transition, but this will eventually lose popularity from the leading service vendors trying to build scaleable delivery models.

David

[gianni giacomelli]

Thanks Phil - more here: "Market opportunity for a new breed of service providers Webcast -- The emergence of the one-to-many model and how SAP can help" http://www.sap.com/community/events/2009_06_19_OTM/index.epx