It’s perhaps surprising that BPO—Business Process Outsourcing—only became a thing in the 90s. Because the principle addresses one of the oldest laws of economics: the Law of Comparative Advantage. First outlined in 1815 by David Riccardo, it states that you prosper by doing what you’re best at … and buying in what you’re not.
A stockbroker since his teens, Riccardo practiced what he preached; he made millions speculating on bonds. Was he able to retire at 41 by cleaning his own house and cooking his own meals? No, instead he “outsourced processes that weren’t within core competencies”. In other words, he hired servants, giving him more time to make the equivalent of $100m today.
Today, countless business functions are outsourced, from front end, customer facing processes like Customer Service and Help Desks to back-office support functions like HR, Legal, Finance and IT. But there’s one facet of BPO worth looking into: whether it’s really operating as efficiently as initially assumed and delivering the outcomes desired to the organization’s value chain.
Is an outsourced back-office function cheap on paper, but failing to provide the right customer outcomes? Does an outsourced process beat doing it in-house, yet miss out on further economies that double the savings? Has the TCO of a process been lowered through outsourcing, but lost the tight integration required with other operational processes impacting the organization’s ability to deliver?
In an ideal world, processes should be available seamlessly to all stakeholders, internal (workers) as well as external (customers), whether they’re outsourced, in-house, or consolidated in a Shared Service Center, presenting a united face to stakeholders, no matter where they’re from. And to the great credit of operational excellence managers, they often work smoothly.
So, what’s the problem?
It’s a story of dispersed incentives. If the Purchasing Department is getting a functional flow of POs processed, it’s happy. It may not notice the cost-per-transaction is higher than expected. Or that the number of days to complete a cycle is longer than industry average. Why? Because these aren’t metrics they get measured by. The outsourced process may be paid for from a company-wide budget, rather than a departmental one—out of sight, and out of mind. Or the Finance Department, on a mission to conserve funds rather than satisfy customers, may see a days-to-pay of 45 instead of 30 in a different light.
All these pent-up inefficiencies, spread among 10,000 or more employees, can have cost impacts in the multiple millions. But beyond the cost column, there’s another, even bigger effect—on productivity, following on to competitiveness.
That’s the subject of this article: how to balance BPO with OpEx (operational excellence) for the best net outcome. Let’s head for the source.
Summarize it as sunk costs versus opportunity costs. A ten percent reduction in payments out sounds like a win. But what if the process you’ve lifted-and-shifted into a data center in Mumbai was suboptimal to begin with, and you’ve outsourced the inefficiencies along with the processes?
That’s the central problem, and it happens in countless areas of business: moving expertise to another country, moving support staff into AI-land, moving applications to the cloud, and adopting automation of process tasks and activities. And because the migration itself carries a cost, outsourcing may potentially leave you worse off.
That’s not to say we’re anti-BPO at Mavim. Quite the opposite. Mapping your business processes in detail, seeing how they interact, understanding how they are executed and what they cost you: this is our mission and we’ve been doing it for two decades plus.
BUT—and it’s a big but—our credo isn’t lift-and-shift.
It’s redesign and improve.
A back office outsourced (or even one consolidated within your organization, like a Central Buying Unit) shouldn’t just replicate the existing process with perhaps some marginal improvements, it should aim to shake things up through disruption and evolution. Ultimately changing things around to make the whole better.
Often, you’ll find established processes have accumulated grime and filth from years of use—and are a mess of exception and fringe cases, proliferation of process variants, and other grunge. That’s where you should focus your operational excellence efforts. You may find it includes some surprisingly quick wins.
SIDEBAR: CONSIDER THE MONKEY
Decades ago, a research anthropologist put a troop of monkeys in a room with food accessible by a stepladder. Upon climbing the stepladder, however, each monkey would receive a mild electric shock. They soon learned this unpleasant experience wasn’t worth an extra banana and stopped climbing.
Next, the researcher switched his electrodes off, and started swapping out old monkeys for new ones. Soon there wasn’t a single monkey from the “shocked” group left. But still, no monkey would climb the ladder. Because … that wasn’t the way we do things around here, despite the acquisition of bananas being free and painless.
Organizations are no different. They lose oversight of the goals and objectives of processes in the organization’s context, and get stuck in patterns, repeating obsolete processes when there’s no longer any reason to do so. And that’s where your opportunity lies.
Effective Business Process Management, or BPM, begins with a Mavim speciality: Process Mining (PM). Just as gold mining extracts value from a heap of rocks, Process Mining lets you dig deep into your existing processes and tease out all the areas where inefficiencies abound. Perhaps you have a dozen applications around the world all doing the same thing, ripe for consolidating, or purchasing silos and issuing POs for small lots, when making one annual order could give you big discounts.
That’s process mining: seeing where the opportunities are. And because it connects to your actual business systems—watching transactions and relationships in the real world, instead of relying on expressed opinions in interviews with your people—presents a fact based “Single Version of the Truth” people can agree on.
Mapping the process can take time, but it’s more fun than you think; it uses tools you’re already familiar with, like MS Visio and Word. Once you’ve got the collection of process maps for a business unit or function —called an operating model—you can use BPM and PM to find the best approaches, the most efficient processes, and what works best, then experiment to build a future ready target operating model. A “digital twin” of your organization where you can make changes and see their effects on all aspects of your operation before rolling them out in the real world.
The best part: process mining and business process management are just as effective for outsourced processes as for internal ones. Because no matter where a process is, they all share the same attributes; connecting to data sources, performing transactions, interacting with each other and with other roles in and outside the organization. And that’s how you build a process map.
That process map—actual and target operating models, and the methods for moving from A to B—is your tool for achieving operational excellence. Not just in individual processes, but from the perspective of how they work together across the entire organization.
If you love OpEx … think how much your outsourcing partners will love you back for helping them work with you better.
At Mavim, we’ve long realized there’s another effect of doing all this, a positive change in the employees themselves, whether they work directly for you, as an outsourced contractor, or even as freelancers plugged into your processes.
When they see how their roles contribute to a larger whole, they often start communicating and co-operating more effectively with each other and with other departments, making high performing cross-functional teams easier to build, accelerating the gaining of shared understanding and so much more that brings a positive outcome to an organization.
In the end, OpEx is about far more than the cost column that dictates so much outsourcing. It’s about customer outcomes. By concentrating on what makes the customer happy and by improving your internal and external processes, then your business is ready for even greater success.
PM and BPM are all part of the Mavim Intelligent Transformation Platform – a cloud-native platform for enterprise operations transformation, available to you through applications you know already. Talk to Mavim today.