Cathy Tornbohm, Gartner, examines business process outsourcing and highlights key areas that CEOs need to consider.
Do you know what your business processes actually cost you? I don't just mean the actual cost of doing the process - that's only half the story. I mean, do you know the full cost of how well you deliver that process for your organisation? If you performed it better, would and could you make more revenue or profit from being more effective at it? Or could you increase revenues by paying someone to do the parts of the process you realise are far from optimum, but never get around to? You could take one of the following options:
- Continue to do nothing, knowing that your energy is better focused elsewhere while hoping that the incremental gains of tackling a problem area are small in relation to your main priorities.
- Try to improve the in-house process. This involves coming to grips with measuring the component costs of the process, such as people and technology, but also understanding the costs of not doing the process well. How much are inefficiencies hurting your organisation?
- Outsource pieces of your process or all of it.
Interestingly, when an organisation starts to look into business process outsourcing (BPO), the first thing it should do is to try to establish how much the process is costing internally to deliver. This should be measured. It's a good idea to get a baseline of the processing costs, and this needs to take into account the people doing the processing and the IT systems that may also need to be outsourced. (Note, not all BPO includes the underlying software and hardware.) This is a very tangible measure and is something that can be easily compared for a negotiation and a business case, which will usually include the need to reduce costs.
But what is it costing you in terms of how effective you are at the process? This is much harder to measure. It's often hard to find comparable organisations doing the processes you want to understand - and then know what levels of investment and ability are needed to be really good at those processes.
Do you know how good you really are at your working capital and cashflow management, at generating good management data or at capitalising on negotiated discounts? You don't want to lie awake at night wondering if you could increase revenues by improving how you manage fulfilment, customer satisfaction and satisfaction.
To start to answer these questions, it's sensible to begin by looking at processes in their entirety, end to end, whether that's in the 'order to cash' or in the 'source to pay' journey through your organisation. How easily is the road travelled along these end-to-end business processes?
End-to-end process flow
Organisations have evolved to be managed as departments, not as end-to-end process flows, and it's often at the boundaries of these artificial, archaic departmental structures that the process inefficiency starts to manifest. Importantly, this can happen in the order-taking process, because if errors occur there, then the whole fulfilment and billing cycle becomes inefficient for customers and affects an organisation's ability to collect the cash.
This end-to-end process flow was the main thrust of the 1993 classic book Reengineering the Corporation: a Manifesto for Business Revolution by Michael Hammer and James Champy. It's fascinating to see how BPO companies are supporting organisations' adoption of Hammer and Champy's proposals to support many high-profile companies that want to have better control across the end-to-end processes that affect the supply of goods and customer fulfilment capabilities, but have failed to do this alone.
I don't want to lead you to think that organisations are outsourcing the full end-to-end process to a BPO company, although in some cases this is starting to happen, but they are increasingly accessing the BPO companies dedicated to cheaper near or offshore labour forces to support stages of this activity. This could be at the point of order taking or at any point of the chain through to payment services.
The final element is the opportunity cost of what is being left undone. BPO providers are starting to offer some interesting propositions where the client only pays for the upside, not the service. This could include pursuing bad debts that an organisation wouldn't pursue alone, and a BPO company may be paid 10-15% of the extra debt recovered that is typically written off.
Or the BPO firm might offer new sales-lead management and be paid on a percentage of the sales leads they contribute.
Streamlining the front and back-office connections can have a further benefit in supporting how organisations make strategic plans and generate strong data for decision-making.
Many organisations don't know what their business process costs are or how to truly optimise these across divisional boundaries.
For some businesses, an internal shared-service centre can start the journey of collating this view of the costs and the end-to-end business processes, and a BPO provider can do the same. The trick is picking one that can demonstrate they understand your world, vertical industry, processes and requirements before you give them the work.