This is the second in a series of three articles. Read Part 1 here.
It’s never been easy to select the best business process outsourcing (BPO) provider—even the biggest BPO success stories have asterisks based on transition challenges or lengthy “burn-in” periods during which the buyer and outsourcer gradually adjust to the outsourced scope as well as each other’s style, capabilities and culture. With the emergence of more providers and technology-enabled alternatives to the traditional labor-based approach to BPO, the landscape is becoming even more complicated. Buyers of outsourced services today must figure out who is the best provider as well as navigate a confusing, multi-variable decision process that includes choices about approach (e.g., automation vs. labor-based outsourcing) and phasing.
The good news is that this evolution of outsourcing options provides buyers with more ways to reduce cost, improve service quality and generate value. While the Business Process as a Service (BPaaS) marketplace continues to mature, it is beginning to provide very viable solutions to either augment the traditional labor-based service model or replace labor altogether for certain activities. This innovation allows providers to deliver differentiated solutions that appeal to a broad array of clients and to remain profitable despite increasing offshore wages and additional competition.
When determining whether to select more traditional labor-based outsourcing vs. a technology-based outsourced solution, it’s important to understand that the two aren’t mutually exclusive. There are a number of similarities between the two approaches, and there may not be a wrong answer, just different flavors of “right.” The approach to selecting both is broadly the same, and both types of scenarios can be evaluated and accomplished through the same competitive sourcing process. As buyers begin to evaluate the available options, there are a number of considerations to bear in mind.
Throughout this article, accounts payable (AP) examples will be used to illustrate points, given the broad applicability of AP and the maturity of AP outsourcing and technology solutions.
Scope and Scale
A key consideration that will heavily dictate approach is whether optimization is desired as a “point solution” or as a component to a broader transformation and outsourcing initiative. If the nature of the required optimization is very specific and there is a technology solution available to automate that particular activity—such as an intelligent data capture solution for invoice data entry—the approach may become much more straightforward since BPO providers with broad, multi-tower capabilities will likely not be interested or fail to provide a competitive solution unless there is a critical mass of resources currently providing those services (e.g., dozens of invoice processors).
One Relationship vs. Many
For many enterprise-level outsourcing decisions, however, the opportunity to truly automate activities applies only to a portion of the potential scope considered for outsourcing. This requires a decision, therefore, to either (1) engage multiple services providers for the full scope of work, (2) engage a single provider to perform the full scope of services and rely upon that provider’s technology solutions, or (3) require that the traditional BPO provider partners with a BPaaS provider to deliver a comprehensive solution. This decision can be made as the result of a structured competitive selection process, where a modular request for proposal (RFP) allows providers to respond to one or more of the scenarios presented above.
The business case plays a key role in determining not only whether or not to outsource, but also what form that outsourcing should take. Both BPaaS and traditional outsourcing can be very attractive financially, hence the multi-billion dollar BPO industry. To determine which approach makes the most sense financially, a buyer needs to complete a total cost analysis based on the BPO providers’ commercial proposals. As many of the providers will have different charging mechanisms, it is essential that the various proposals are normalized, especially since the internal buyer costs will likely be different depending on the solution.
As an example, most traditional outsourcing services continue to have a significant resource-based (i.e., FTE) charging component (although this is slowly changing to include more output or outcome based pricing). Alternatively, BPaaS services are often provided based on throughput (e.g., number of invoices or pages) multiplied by a unit cost per transaction, and some may charge based on the “value” generated by the automation solution (e.g., the cost of resources reduced by utilizing the solution for a specific period of time). Additionally, trade-offs associated with elements such as the required governance (e.g., one relationship to manage vs. many) and technology integration need to be included in a total cost analysis.
As with any vendor selection process, due diligence can provide tremendous insight into which solution approach works best. Reaching out to provider references and targeting very similar industries and business environments can confirm applicability for a buyer’s specific objectives and scope attributes. Solution demonstrations are another mechanism that should be leveraged to understand and experience capabilities firsthand and evaluate differentiation. In fact, many automation solution providers will offer to demonstrate functionality by trialing actual buyer documents and data, which enables an evaluation of what capabilities are available out of the box, rather than requiring the solution to “learn” or be heavily customized/configured.
Another important consideration pertains to implementation of the selected solution, the familiar determination of whether a “lift and shift” or a more transformation approach is the best transition approach. Many traditional outsourcing providers will not propose true automation of routine tasks (without being compelled by the buyer to do so) as it cannibalizes the easiest activities to migrate to provider resources (e.g., invoice data entry). Much of their proposed technology enablement is to improve efficiency and transparency, as opposed to eliminating manual effort.
Adopting the “lift and shift” approach with a traditional BPO provider typically provides productivity improvements over time and an appealing overall business case, but it may be at the expense of true automation and effort elimination. Conversely, implementing a BPaaS solution to automate activities prior to transitioning services to a BPO provider may delay the full realization of outsourcing benefits, as it may require achieving an interim stable operating condition before the risk of a second implementation is manageable enough to complete the full services transition.
The increasing availability of BPO vendor options creates an exciting yet confusing opportunity for more impactful optimization through outsourcing and automation. As with any outsourcing decision, all the elements presented above are interdependent and need to be evaluated in concert with one another, and the benefits need to be considered in the context of the overall outsourcing and optimization objectives.
There is no “one size fits all” solution that can be universally applied to all buyers and all situations. To make the right decision, it is imperative to go through a rigorous selection process, and include the right functional and technical stakeholders that collectively can evaluate the benefits of each approach.
David Borowski is a principal at Pace Harmon, an outsourcing advisory services firm providing guidance on complex outsourcing and strategic sourcing transactions, process optimization, and supplier program management.