New Rational Outsourcing article published by the Outsourcing Journal

An article I co-authored just got published by the Outsourcing Journal (monthly newsletter and website sponsored by the Everest Group and part of www.outsourcing-center.com—the largest online educational resource on outsourcing) . The article is directly related to the topic of this blog. You can read it at http://www.outsourcing-journal.com/sep2006-barnard.html. For your convenience, here is the abstract:

FOCUS ON: Back-Office Errors
Beyond merely asserting 'Quality is Key': If you can't quantify the benefits of quality, you are only paying lip service to it:
As companies rush abroad to cut back-office costs, they forget one thing: the cost of small increases in error rates can wipe out the cost reductions from cheaper labor. Based on interviews with more than 50 financial services firms, BeyondCore determined that if the data-entry associated with one document costs $1, the downstream costs incurred for one document with a data-entry error can easily add up to $300. The solution: place far greater emphasis on quality than on processing cost.

Outsourcing Mistakes -1

Don’t create the outsourcing strategy document after selecting the vendor!
In 2004-05 I helped the Yankee Group set its internal outsourcing strategy. I worked with the senior leadership to create the outsourcing strategy document including objectives and success criteria, defined the scope of the initial outsourcing project, conducted site visits, selected the outsourcing vendor, and managed the proof of concept project. I have now spoken with executives of more than 100 Financial Services firms and 30 Business Process Outsourcing vendors. In these discussions I was surprised by how rarely the above process was followed in outsourcing projects. Quite often no detailed strategy documents existed for the smaller projects. In many cases the strategy documents were created or significantly edited after the vendor had already been selected. Many managers believed that the only reason they had to write a strategy document was because it was a necessary component of the final presentation to the senior executive team that would approve the outsourcing project. Detailed strategy documents are not bureaucratic requirements. They are critical to ensuring the accountability of the whole outsourcing initiative and confirming that the project is actually delivering the promised results. If done right, clear success criteria also help the outsourcing vendor create maximum benefits for their customers.

A recent destinationcrm.com article quotes Lisa Stone (a research vice president for Gartner) who makes almost the same point:

Stone says the key to a company making the right decision when it comes to BPO is a well planned and thought out choice. Stone says companies should tackle BPO in the same manner they undertake any business venture: by developing a business case by identifying the drivers behind why BPO is being considered, constructing a business strategy, and considering and then selecting the approach that is best for entering into a BPO relationship. "Companies need to set up a BPO strategy in order to block out the hype and determine the best offering for them to achieve their goals," she says. "Then use a structured sourcing process through vendor evaluation, contracting and negotiating, and creating an internal management support team to ensure that all details are in place to support the service before signing an outsourcing contract."

To avoid this Outsourcing Mistake:

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• Executives first need to sign off on a detailed strategy document which enumerates their objectives for outsourcing, and clearly lists the success criterion against which the outsourcing relationship would be evaluated. Only then should the scope of the outsourcing project be defined and the vendor selected.
  
• The original strategy document and especially the success criterion should not be changed unless the original approvers explicitly sign off on the changes.
  
• Finally, the outsourcing project should be evaluated against the success criterion as soon as possible after the start of the project. At the Yankee Group we evaluated the project less than two months after the start of the project. For more complex projects, such an early evaluation may not be possible, but the first detailed evaluation should occur no more than six months after the start of the project. Note: The whole project should be evaluated, not just the outsourcing vendor. Often the customer itself is the source of problems that can sabotage the success of the whole project. Determining whether the outsourcing vendor delivered on its Service level Agreements is irrelevant if the overall objectives of the project are not realized.
  

Gartner sees trouble ahead for BPO

Ok. It turns out the original Gartner article costs US$495. If you can afford it, go to http://www.gartner.com/DisplayDocument?doc_cd=140117. If not, check out this IT week article that has a bit more detail, such as:

The report also warned that IT managers used to relatively mature IT outsourcing services need to be aware that the maturity of BPO services is far more mixed, with areas such as contact centre or payroll outsourcing fairly mature, while more complex BPO services are less well developed and are still subject to inflated expectations.

Stone said that this immaturity is particularly apparent among the BPO start-ups that have emerged in the past couple of years, seeking to cash in on the growth of the market. "We've seen a lot of start-ups that call themselves BPO providers, but lack the deep domain knowledge and process excellence you need to be successful," she warned.

Gartner highlighting outsourcing problems?

While I take my Gartner reports with a healthy dose of cynicism, they are usually a good indicator of where mainstream business is headed. I just picked up the following Gartner quote at a www.globalservicesmedia.com article.

Through 2009, 50% of organizations involved in Business Process Outsourcing (BPO) relationships will experience cost overruns and unacceptable service-delivery quality, according to a recent study by Gartner.

Gartner attributes this frustration by enterprises to a lack of understanding of their specific BPO offerings in terms of market hype versus true market maturity.

I will research Gartner's position on this further and post on this site. Any leads are always welcome.

So why did I start this blog and www.totalcostoferrors.com

I was born in India, and will always remain a proud Indian. I have also lived in the US for most of my adult life and I have gained a deep appreciation of the American people. I believe both Americans and Indians share a common vision of the individual’s right to compete based on his or her inherent abilities. Both nations are natural allies, yet the current negative sentiments regarding outsourcing are building a wall between us. Indians are pained by web commentary regarding “Indian slaves” stealing American jobs. Americans are equally frustrated by their apparent helplessness in the face of globalization.

America was founded on the vision that if you work hard you have a fair shot at success. Americans today believe that they are competing against Indians and Chinese on labor costs. This is rightly viewed by them as a game in which the odds are unfairly stacked against them. The anti-outsourcing brigade however claims that Americans are somehow owed a job. The American dream promises a fair shot, not a guaranteed shot at success. Both visions patently jar with the American dream.

I believe that a focus on quality and the Total Cost of Ownership of Business Processes can provide a way out of this conflict. My belief is based on my conversations with over 250 US executives, 20 outsourcing vendors, and hundreds of Americans and Indians.

Quality is of paramount importance to the Total Cost of Ownership of outsourced business processes. (Please visit www.totalcostoferrors.com for evidence supporting this claim.) Hence, relocating a process to a low-cost country is much less important per se than achieving the highest level of quality possible. Under this paradigm, workers across the world would be able to compete equally for their slice of the Business Process market based on their ability to provide the highest quality, not just the lowest labor costs. If US employees meet their employers’ financial goals through quality improvements, there may be no incentive for outsourcing to low cost locations.

This is not an anti-outsourcing message. The reality is that the best outsourcing firms deploy the latest technologies, invest heavily in best practices, and thus often provide significantly better quality. However, many upstart BPO firms are focusing merely on cost reductions and are ill-serving their customers.

We need to explicitly and aggressively shift the outsourcing debate to focus on quality. This focus on quality would present American workers a fairer competition, and one that they have a chance of winning. At the same time, the focus on quality would actually give the best outsourcing firms a competitive edge and increase the benefits their customers gain from outsourcing. I invite you to this open forum to discuss these issues.

Possible bias disclosure: Arijit (Apu) Sengupta founded a company that is focused on monitoring and improving the quality of outsourcing vendors and on helping companies meet their financial goals through quality improvement as a possible alternative to outsourcing. While this may bias his view of the world, Arijit believes this merely proves he puts his money where his mouth is.