The Rational Outsourcing Blog

Friday, October 27, 2006

China planning its way into Business Process Outsourcing?

Sometimes it seems like everyone I know in India is either starting a BPO firm or working for one! Entrepreneurs all over the country have started BPO firms focusing on every conceivable business process. While the Indian government policies have helped somewhat, most Indian BPO entrepreneurs seem to see the Indian government more as a necessary evil than as a core promoter of BPO market growth.

Interestingly enough China seems to be taking a more planned approach. Ecommerce Times reports:
The China Development Bank (CDB) will issue 5 billion yuan (US$632.7 million) worth of credit to foster service outsourcing in five cities.

Chinese Minister of Commerce Bo Xilai said at the inauguration ceremony for the five cities, which are Chengdu, Xi'an, Shanghai, Shenzhen and Dalian, that the ministry will take measures to promote the fast growth of service outsourcing in the next five years.

Under the country's 6th Five-Year (2006-2010) plan, China aims to build service outsourcing bases in 10 cities, encourage 100 multinationals to outsource services from China, and foster 1,000 large and medium-sized service outsourcing enterprises.

It will be interesting to see whether China's planned approach will be more effective than India's unruly but entrepreneurial milieu. I admit I am biased, but my bet is on India.

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Thursday, October 26, 2006

American companies spending less on BPO?

I prefer not to quote from press releases, but I will make an exception for this one from NelsonHall because it is a treasure trove of interesting data. Couple of quotes:
The value of BPO TCV (total contract value) awarded has declined by approximately 50% in North America from a peak of $15.4Bn in the 12-month period ending September 2004 to $7.5Bn for the 12- month period ending September 2006.

Eighty percent of U.S. sourcing managers state that lack of process operations knowledge within the vendor has led to rejection of BPO.

Recently a senior US executive told me that "the outsourcing debate is over." He was convinced that outsourcing was a way of life and that any businessperson questioning it must have something wrong in his head. Others I have talked to are almost in the Lou Dobbs camp and see outsourcing as evil. We need to get beyond these extreme positions and realize that while outsourcing is a very valuable tool for achieving our business goals, it is not a goal in itself. If we are not realistic about the shortcomings of outsourcing and proactively address them, then we will end up failing both Americans and Indians and jeopardizing the gains we have made in the global economy.

The NelsonHall article goes on to say:
Sourcing managers expect that the level of BPO contract awards arising from sourcing evaluations will increase in future. However, in order for this increase in activity to occur vendors will need to meet sourcing manager expectations by improving their BPO delivery capability. In particular, they will need to meet the following conditions:
-- Improved process operations knowledge
-- Proven cost reduction capability
-- Improved offshore location mix and delivery capability

I agree with NelsonHall's core points, but I disagree that these are problems that the vendor alone needs to solve. Outsourcing can not be successful without true partnership between the customer and the vendor. While vendors need to do more on each of these counts, customers also need to step up and better manage their outsourcing relationships, unambigously document their process operations before outsourcing, and sign contracts that reward vendors for value creation, not just unit cost reduction. As my mom used to say: "you can't clap with just one hand."

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Sunday, October 22, 2006

Outsourcing Mistakes -3

Don’t provide incentives to promote outsourcing, unless you also provide adequate training and oversight

I was talking to a consultant at one of the largest consulting firms in the world and he mentioned several incentives his organization has set up to maximize the amount of work sent to their captive BPO center in India. These incentives range from letters of appreciation from senior leadership, to small gifts of appreciation, to short all-expense-paid expatriate gigs in India.

My first reaction was that this is a great idea. I am a firm believer that every task should be carried out by the person best able to deliver the highest overall value regardless of his / her geographical location. Given the number of outstanding finance gurus, economists, and statisticians in India, this incentive scheme seemed to make perfect sense. [Quick aside: I especially liked the idea of the expatriate gigs. If you can get a short to medium term expatriate gig in India or China, grab it with both hands. In the next decade, lack of international experience is likely to become a major Achilles’ heel for anyone hoping to become a senior executive. I believe Infosys even has a significant internship program targeted at US students. I am sure other major firms have similar programs.]

However, this consultant was not properly trained in outsourcing management and as such ended up having a bad experience with the India center. He felt that while the Indian team charged a low hourly rate, they ended up taking way too much time to get the task done, so that net net they ended up being more expensive. The Indian team also wasted significant time trying to do one part of the task in a very complicated and ultimately incorrect way instead of asking the US team for the best practice way to do the task. While some of the problems were due to errors on the Indian team’s part, I believe the larger problem was my friend’s lack of training in outsourcing management. Most of the problems he faced could have been avoided with proper training, or even oversight / mentorship from an outsourcing expert.

To Avoid This Outsourcing Mistake:

Before outsourcing a task, ask the project owner to estimate the following costs:
  • Task documentation costs: If you are going to send a task to a team across the world, you first have to document the task as specifically as possible. Even if the outsourcing partner has carried out similar tasks previously, unless the actual individuals working on your task have recently performed a substantially similar task, you will save yourself significant grief by documenting the task as unambiguously as possible.
  • Training costs: Managers inexperienced in outsourcing invariably underestimate the amount of time they need to spend on training. This problem is actually worse for short-term projects where managers often wrongly assume that because it is just a short project, they can do the training on the fly.
  • Total outsourcing costs including quality control costs: It is imperative that you consider the number of hours it would take to carry out a project, not just the hourly rate. Also, most outsourcers carry out significant quality control and some include this cost in the hourly rate, while others do not. If they did not include the QC cost in the hourly rate, you have to explicitly add the hours spent on quality control.

    This focus on the number of hours as well as the hourly rate seems obvious, but I invariably hear complaints about how an outsourcing vendor turned out to be much more expensive than estimated, because they charged for 2 to 3 times the number of hours the customer originally expected. Personally, whenever possible, I negotiate a set price for the delivery of a specific quanta of work conforming to specific quality criteria and refuse to sign “time and material pricing” contracts.

If you sum up the above three costs, you will have a better sense of the overall cost of an outsourcing project. The sponsor of each proposed outsourcing project should be required to estimate the total cost using the above formula and then be evaluated according to the actual total cost upon the completion of the project. In the absence of such basic checks and balances, and in the presence of strong incentives to promote outsourcing, your employees are likely to over-consume outsourcing and your firm is likely to lose money due to outsourcing. As one anonymous visitor to this blog commented, “Trusting an outside supplier to perform your company's business processes must not be an impulse purchase.”

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Tuesday, October 10, 2006

Outsourcing Mistakes -2

If the vendor does not have a detailed process / quality manual for your process, either help them build such a manual, or fire the vendor. I am currently helping a very interesting US-based company improve their outsourcing strategy. In the first meeting the customer highlighted several problems that seemed to stem from very lax process guidelines. When I asked for the process manual, I was informed that the vendor had never shared the manual with the customer. This was the first red flag. When I finally received a copy of the manual, it was just 2½ pages long even though the manual was describing a fairly complex and subjective business process executed by 30 operators across multiple shifts. This was the second red flag. Today we completed the quality analysis and realized that the vast majority of documents processed by this vendor had critical errors and that a large proportion of these problems stemmed from the lack of a detailed process manual.

If your vendor did not take the time to create a detailed process manual, it probably is not taking the time to ensure that the process is being executed in an error-free manner.

To Avoid This Outsourcing Mistake:

  • If you haven’t seen the process manual for your outsourced process, ask to see it today.
  • Confirm that the manual is detailed enough. Ask the question: “Would two reasonably intelligent people perform the task exactly the same way if they followed this manual step-by-step?”
  • If some parts of your process can’t be described in an unambiguous manner in the process manual, then you might want to redesign those parts of your process. For example, if there are too many different ways to describe the category for a product, then you may wish to create a strict catalog structure that your vendor has to select the category from. The goal is to drive out ambiguity wherever possible.

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Friday, October 06, 2006

Some shameless bragging

Mr. Thomas Friedman’s latest Op Ed piece in the New York Times talks about BeyondCore as an example of how small companies are acting multinationally, and he also quotes yours truly. This article titled "Big Ideas and No Boundaries" appears in today’s (October 6th) New York Times and is also available on the New York Times website. Unfortunately you need a TimesSelect account to view it, but they do offer a free 14 day trial. I realize this article does not relate directly to Rational Outsourcing but I could not help bragging about it on this blog.

On a more serious note though, over the last week I had the opportunity to speak with Mr. Friedman for more than two hours. I came away from these conversations with a deep appreciation for his ideas and his way of thinking. I am right now working on an article based on some of the ideas triggered by our conversations. I will post parts of the article on this blog soon.