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.