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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.

Benchmark Thyself

BPO is big stuff, with nary a day passing without the announcement of another multiyear, billion-dollar deal. But just what is BPO? Simply put, it’s the management of a related set of core business processes, as well as the underlying technology, by an organization other than your own. “Unlike traditional outsourcing of, say, the payroll administration function, BPO involves the outsourcing of payroll and other related HR functions like benefits administration and employee hiring and training, which string together to create a process — hence business process outsourcing,” explains Lepeak. “The benefits of BPO are many, but then so are the risks.”

Every BPO engagement begins with the premise that another company can perform a certain business process better than you can. Unfortunately, proving the premise is often left to the wind. “There’s an age-old maxim: If you automate a mess, it’s still a mess,” says John McCarthy, group director of research at Forrester. “Same applies to BPO. I’ve seen all this external due diligence where every vendor known to man is analyzed in 100-page RFPs, and consultants are hired for tens of thousands of dollars, when all the company really needed to do was take a good look in the mirror. Yet so many fail to answer simple things like ‘how do we do the process today, what’s the level of our documentation, and how does this compare with other organizations.’ Without doing this, how else can you prove you’re getting a good deal or not — that you’ll actually save money?”

Few companies measure the performance of internal business processes, maintains Lepeak. “What constitutes running a process well, and what constitutes running it better, are key criteria requiring evaluation before undertaking BPO,” he adds. “If you can’t understand process performance in-house, you can’t understand it outsourced. You must measure your own performance first and then benchmark it to others to understand where that stands — good, better, or worse.”

Indeed, some companies that have analyzed and measured their business process performance have determined that BPO would be inferior to current practice. “A prominent client in insurance came to us for advice about outsourcing their applications management, basically the management of their ERP system,” says Michael Doane, a Meta Group vice president and service director. “They’d received half a dozen unsolicited offers from BPO providers promising tremendous cost savings. But as the offers piled up, they had trouble seeing the value proposition. They had measured the IT costs of managing the ERP system internally and couldn’t find any savings from the providers. So they called us and asked if they were maybe missing something. In point of fact, they weren’t.”

Choose Your Partner

Other risks posed by BPO also should give pause, especially given the breadth of BPO compared with less complex IT outsourcing. Katrina Menzigian, director of BPO services research at Framingham, Massachusetts-based research firm IDC, puts it this way: “Companies need to realize that BPO is a long way away from IT outsourcing, which presented little change for the workforce at large. With IT outsourcing, the employees that experience change in the organization are those in IT, but with an HR outsourcing effort the employees that feel change are not just those in the HR department but everyone who interacts with the department.”

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