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Keys to Successful BPO Relationships

Outsourcing business processes hits much closer to home than simply outsourcing IT. Here's how some executives balance the risks and rewards.

Blue Cross Blue Shield of Rhode Island wanted to leverage the cost efficiencies and performance enhancements of business processes outsourcing, but was concerned about the risks of transferring critical functions to a third party. “There are a lot of loose strings associated with an arrangement such as this, and we wanted to make sure everything was tied up nicely to assure success,” explains George Calat, executive vice president and CFO of the Providence, Rhode Island, health insurer.

Calat was wise to take his time. In the rush to outsource, many companies fail to recognize the myriad risks posed by shifting critical business processes like HR, finance, accounting, and supply-chain systems to providers with little, if any, experience managing such processes. Some companies haven’t even taken the pains to measure their in-house performance to ascertain if BPO will improve it. “Many companies fail to benchmark process performance,” says Stan Lepeak, a vice president at Boston-based consulting firm Meta Group.

“They outsource finance and accounting because others are doing it,” adds Lepeak, “and yet they lack comparative metrics like ‘how many payables are processed per accounts payable clerk’ or the ‘spend per purchasing agent’ to compare against industry and BPO benchmarks. If you don’t have current process performance metrics, how do you know outsourcing will improve upon what you already do?”

There are other risks that can doom a well-intentioned BPO effort. So-called offshoring of customer and employee care functions — call centers are a cottage industry in India and China — invites political and public relations risks (see “Off Limits?” at the end of this article). Then there’s the risk of selecting an inferior BPO provider, one failing to live up to the expectations of the partnership. Perhaps 2,000 companies claim to offer BPO services, says Julie Giera, a research fellow with Forrester Research, a Cambridge, Massachusetts-based technology research firm. Although methods exist for measuring and comparing the IT outsourcing providers, notes Giera, “there is scant data to compare and measure the capabilities of BPO providers.”

Little wonder Calat was anxious. Blue Cross Blue Shield is Rhode Island’s largest provider of health insurance, covering some 650,000 individuals, or 65 percent of the Ocean’s State’s population. The 10-year, $600 million BPO agreement it signed with outsourcing service provider Perot Health Systems calls for the “Blues” to outsource information technology, insurance claims, and cash disbursements to Perot, and to shift significant technology and intellectual capital — the 600 employees who performed these functions — to the provider. If the relationship turned sour in, say, year three, the Blues would be more than blue.

That’s why the CFO turned to an intermediary, Houston-based outsourcing advisor EquaTerra, to craft the tightest possible deal. “EquaTerra made sure we outsourced the appropriate functions, reviewed project bids on an apple-to-apple basis and created a contract with clear service-level benchmarks,” says Calat.

“For example,” he adds, “if Perot fails to process a certain volume of claims within a specified time horizon, the contract holds them accountable.” A governance team comprised of individuals form both companies meets regularly to review performance against the benchmarks.

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