Schwefer is a bit of a
maverick, though. He believes that his IT requirement can be divided
into two parts-the big chunk that includes hardware and
infrastructure along with standard applications accounting for 80-85
per cent of his IT requirement; and the rest 15-20 per cent which is
a small but crucial part of his business applications. He calls
these niche business-requirement to which he pays detailed
attention. While the bulk is outsourced to a service provider, the
SLAs for which he thinks can be measured through metrics, he wants a
more controlled environment for the specialized needs by working
partly in-house and partly with a small third-party who under stands
his business and culture and can innovate accordingly.
|
BEATING
EXPECTATIONS
Given the
increasing pressure on margins in a BPO engagement, service
providers are often reluctant to do anything more than what is
provided for by the contract. Therefore, it becomes a
challenge for managers on the client-side of the engagement to
enhance the value delivered by service providers long after
the contract parameters have been defined. Leveraging
established Key Performance Indicators (KPI) analysis,
measurement and management methods enable managers to achieve
this objective. KPI-focused managers must also build
intellectual property and a culture that can communicate with
executives the way investors expect executives to communicate
with them.
For example, a BPO
engagement may have been initiated to support a
capital-markets firm serving retail investors a ‘lower price,
increase trading volumes’ strategic objective.
An astute BPO
engagement manager clearly understands that lower prices tend
to lower profitability. However, the cost-efficiencies
delivered by his BPO engagement enables the organization to
absorb the price-cut. Therefore, the BPO engagement has
contributed to the strategic objective by contributing to the
financial performance in addition to the revenues made up by
the increase in trading volume. It may have also lowered other
non-interest expense as a percentage of total income by
leveraging lower fixed costs such as market development and
occupancy expenses while increasing total income. Most of
these KPIs would have escaped the content in the contract, yet
are of utmost interest to executives and
investors.
Retaining executive support
Executive
compensation is linked directly to cost reduction and revenue
increase metrics. Last year, the U.S. Institute for Policy
Studies said in their study of executive salaries that CEO
compensation at 50 U.S. firms outsourcing the most service
jobs jumped 46 per cent last year. That compares to the 9 per
cent average among chief executives at the 365 companies
surveyed by BusinessWeek. It may be fairly deduced from this
that BPO is a powerful trigger that can be pulled to improve
KPIs that impact executive compensation.
Components of the
sponsoring executive’s bonus package get triggered by
efficiencies delivered by BPO engagements. The contract
negotiation cycle and SLA definition process usually
encapsulate these relevant metrics. However, the next level of
critical metrics linkage is rarely established i.e. the impact
of achieving SLA metrics on financial and operational KPIs.
This occurs primarily due to the lack of domain expertise
among BPO service providers and/or the assumed miniscule
impact on the relevant KPIs.
In addition, most
financial services firms have not adequately established their
baseline KPIs for certain
business processes. As a consequence, they are unable to use
gaps in financial performance drivers to determine potential
for improving business processes.
Client-side BPO
managers that can define and measure this linkage effectively
can contribute to their executive sponsor(s) bonus levers,
improving visibility and support for the engagement.
For example, BPO engagements
typically deliver benefits for the salary and employee
benefits financial driver. However, the contract rarely drills
down into the six different expense components for the
efficiency ratio. Therefore, an astute BPO engagement manager
has the opportunity to demonstrate how his BPO engagement has
closed some of these business process performance gaps and
contributed to the achievement of organizational financial
KPIs. Such an analysis will most likely roll-up into the
executive’s self-evaluation, positively impacting his bonus.
As a consequence, the BPO manager will enjoy the benefits of
improved visibility and support within the current contract
lifecycle. Increased scope of responsibility will likely
follow.
Marketable value
SLA metrics are a
barometer for contract performance and are watched closely by
operational management. However, SLA metrics can be leveraged
further as enablers of financial and operational KPIs. In
addition, executives and investors ideally want to see
contract SLA metrics rolled up another level where they
demonstrate contributions to increasing shareholder
value.
For example, in the
banking industry, most operational BPO contract managers
monitor a decrease of X per cent in AHT to the level promised
within the BPO contract. These managers have the opportunity
to present the quantitative impact of decreasing AHT on
financial KPIs such as operating margin and operating KPIs
such as customer satisfaction. One SLA metric like AHT may
have a miniscule impact on financial and operating KPIs, but
when you roll up six to ten such metrics and measure their
impact on improving interest and non-interest income, the
story becomes dramatically different. BPO becomes more
strategic than was imagined possible. BPO managers are able to
market their achievement and contributions to key stakeholders
across the enterprise.
Dramatic ROI may be
achieved by investing less than half of one percent of total
contract value to maintain a focus on KPIs and aggressively
market achievements to decision makers across the enterprise.
While BPO may be leveraged by organizations to achieve greater
operational and transformational efficiencies than they are
internally capable off, astute client-side BPO engagement
managers consistently measure and market the impact of a BPO
engagement on financial and operational KPIs from a strategic
perspective.
This category of
client-side BPO engagement managers is viewed in the industry
and enterprise as having taken a leadership position. They
have demonstrated their capability to think strategically and
extend their scope of operation within the
enterprise.
Chiranjeev R. K.
Bordoloi
Bordoloi is a Partner at Aeterno
Consulting, a boutique consulting firm
|
The likes of
Paul Schwefer have left indeligible impressions on the swinging
fortunes of the outsourcing industry. From drab technical personnel,
happy with the nitty-grities of operations have emerged suave
businessmen who can think of outsourcing as a vision and quantify
its benefits in business terms.
Square peg in a round hole?
The evolution
of CIO is partly a natural process, and partly due to the long-term
problematic deals that organizations were often forced to sign. In
the early phase of outsourcing, contracts were often designed and
written by suppliers. Sometimes this resulted in total mismatch
between the customers’ requirement and the suppliers’ solutions.
Outsourcing core applications meant that the vendor had to
understand the organizational need and design customized solutions.
And since customers themselves did not have a strategic business
approach to outsourcing, the flaws in the outsourcing proposals went
undetected.
 |
|
You have to bring
a business perspective to technology. Innovation is a must for
successful outsourcing |
PAUL SCHWEFER
VP and CIO, Continental
Group |
Often the wrong
firms were seen to walk off with contracts because fewer questions
were asked when the contract was handed to a top tier company. “No
one would lose his job if the contract was handed to an Accenture or
an IBM,” quips Gartner’s Tramacere.
Sometimes even
if CIOs did have opinions on the contrary, the views were
over-ridden by decisions makers-CEOs and Board members-who preferred
to play safe and work with top-tier companies. Sarvesh Goorha, who
owns a consultancy firm called Six Sigma Practices, was on the CIO
forum of a Fortune 500 insurance company when it had decided to
outsource its IT operations in 2002. Speaking of the experience,
Goorha says, “Even though the bids were all by top-tier companies,
the design of the proposals were flawed. Despite the flaws being
pointed out, the Board still went ahead with one of the top bidders
because no one wanted to take a risk.” However, seeing the logic,
the contract was subsequently reversed and split between multiple
vendors.
In reality,
negotiating an IT outsourcing deal is much like any other deal where
personal rapport and networking between CEOs of buyer and supplier
companies can play a significant role in deciding which way a deal
goes. “What is required for a successful outsourcing deal is
ownership at the highest level wherein CEOs and board members are
willing to make informed decisions and take a stand,” adds Goorha.
This is also advocated in the LogicaCMG report, The CEO role in
delivering strategic advantage, that ownership of outsourcing
deals by CEOs will go a long way in ensuring the success of the
contract.
The disruptive upstarts
Finally the
disruption caused by India-centric offshore players cannot be
ignored while discussing the evolution of outsourcing contracts. It
is true that Indian players were basically fence sitting marginal
players in the early days of outsourcing. But the potential was
always lurking and it was only a matter of time before the ‘genie in
the bottle’ was uncorked. There were many reasons why Indian players
made that impact. First, they were prepared to do smaller pieces of
the outsourcing processes like only database management or network
support while the top tier global companies insisted on entire
end-to-end jobs. Gradually they demonstrated niche competencies and
offered extremely competitive pricing with their offshore-centric
model, which made very compelling reasons to score over incumbent
players.
 |
|
No one is likely
to lose his job if the contract was handed to an Accenture or
an IBM
|
GIANLUCA TRAMACERE
Principal Analyst
rechearch, Gartner |
Consequently, a
number of distinct trends have begun to emerge. Organizations have
shown a preference to work with multiple vendors rather than hand
over the entire contract to one vendor. Besides spreading risks, it
allows the customer to leverage on the best of breed
solutions.
Paul Schwefer,
for instance, now wants to work with multiple vendors including
Indian vendors. (He puts a cap at a maximum of 10 vendors). This
calls for greater co-ordination and vendor management skills for
which he is willing to invest.
At the same time long-term
contracts are dwindling with increasing realization that dynamic
nature of business require frequent review of ongoing contracts.
While outsourcing is a given, there are fundamental changes
affecting the face of IT outsourcing. Terminations, renegotiations,
reviews are not blemishes but cosmetic changes in the quest for a
fair deal. The IT outsourcing ball is on the roll. Now brace
yourself for rollicking times. You ain’t seen nothing yet!
