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Reading room - -> Durable BPO Relationship

Building a Durable BPO Relationship

Developing a long term relationship with another firm is not a costless exercise. In fact,  significant investments often need to be made by both parties – the “buyer” included – before any benefits are obtained.  For example, time and energy will need to be expended in:

• Overcoming organizational inertia to “let things stay as they are” and educate others on the benefit of the proposed relationship
• Evaluating the parameters of the proposed relationship – the services,  quality levels, price levels, etc.
• Partner selection.
• Modifications of current processes that may be necessary because of the proposed relationship.

Given the above costs, it is important that the buyer develop a road map to better understand what immediate and future benefits are likely to accrue from the relationship.  This knowledge can help weed out vendors who are unlikely to be durable, long term partners and also help win support for the relationship within the organization.

This article highlights the concept of a Value Chain that provides a framework for exploring a relationship with an offshore BPO partner.  It allows a potential buyer to view the relationship in a “holistic” manner – what will I gain today and in the long term?

The Offshore BPO Phenomenon

The general benefits of an offshore BPO relationship are clear and well understood.  Leveraging low cost, high quality, English speaking offshore talent can allow firms to reduce their costs, typically by more than 40%.   That this is an attractive proposition has been confirmed by many organizations that have voted by their actions.  Consider the following facts regarding the offshore BPO market from India alone: 

• Revenues are expected to grow from $4BN in 2002 to approximately $24BN in 2008.
• Revenues grew at 71% between 2001 and 2002
• Firms that have established operations in India include:
  • GE, which has 11,000 employees in 3 centers providing support to more than 30 GE businesses globally.
  • American Express which provides credit risk management and payment authorization services through two call centers employing 2,000 employees.
  • HSBC which provides transaction support for operations in the UK, Europe and Australia.
  • Convergys  which as 2,000 employees at a call center in Gurgaon, India and is adding 300 CSR’s every month.
  • Citibank which employs more than 2,500 people for trade financing and loan processing functions
  • British Airways, with 2,400 employees, manages passenger accounting, error handling and miles tracking for itself and other airlines.

This industry is only a few years old and is very much in the nascent stage.  There is clearly an opportunity for US based firms to gain a strategic edge by changing the existing cost equations in their industries by establishing durable relationships with reliable offshore BPO vendors.

Understanding the Value Chain

The term BPO refers not to one specific function but, rather, to a suite a services (or processes) that can be performed by the vendor.  These processes can vary significantly in terms of complexity and the value they provide to the client.  It is possible, and helpful, to look at the set of all the functions that an offshore partner may be able to perform and place them in a “value chain” i.e. in order of increasing complexity and value.  Factors to consider in determining relative complexity are:

• Level of general skills required.  Examples would data entry vs. telephone conversation skills vs. analysis skills, etc.  
• Level of domain knowledge required i.e. specific knowledge of the client’s processes or unique industry processes

Would the process be transaction oriented or voice based?  This determines the kinds of technological infrastructure that will be required.    

• Level of “intrusiveness” of the process being performed offshore – how close the interaction required between offshore and onshore teams would be.
• Level of abstract decision making that may be required.
• Mission critical nature of the process

From the above, it can be seen that processes can typically be categorized – in order of increasing complexity - as: 

• Data entry intensive. These are usually the least complex and can often serve as the starting point of a relationship.
• Rules based decision making.  An example of this may be approval of insurance claims that meet very clear criteria.
• Call center support for simple applications. These are indicated as being more complex than the above two because of the requirement for voice support.
• Analysis based functions.
• Abstract decision making oriented processes.

Using the Value Chain

The point about the value chain is not to get caught in the details of the specific complexity of each process. Rather, one can use it effectively, if one has got it “almost right”.  It allows the user to understand all the potential services a vendor can provide and, therefore, allow the evaluation of different vendors.  If two different vendors can perform the process under consideration equally effectively, the firm that is in a better position to perform other processes in the value chain should be preferred.  An accounting services provider was, for example, evaluating proposals for an invoice data entry process from two very different firms. One firm – Firm A -  was in the “media conversion” business.  They specialized in scanning documents very efficiently at centralized processing locations and had offshore partners which would then convert the paper media to electronic format.  Their competing firm – Firm B - was an offshore based accounting services firm.  From the value chain it becomes clear that establishment of a relationship with Firm B provides our organization the option of performing other functions in the future. Hence it offers the possibility of a more durable and profitable partnership.

Similarly, the value chain helps define the feasible “entry point” for an offshore BPO services provider.  Some firms may perceive data entry oriented tasks at the low end of the value chain as being too low value and “not worth the hassle”.  Others may be more conservative and unwilling to take the risk with high value tasks.  Still others may feel the pressure to show results fast and may, therefore, choose the process that is simplest to implement. Firms can choose to start a relationship at whichever point in the value chain that they like and use the initial processes to establish a relationship of trust .  As we go up the chain, the level of trust required will have to increase and the vendor will have to take the existing relationship to a higher plane.  Again, both parties can move at whichever rate they are comfortable.

Finally, the value chain helps in assessing the potential profitability of a business relationship.  Firms starting with data entry tasks may expect to save perhaps 30% of their existing costs – which may not be very high for data entry in the first place. But, by looking at the road map represented by the value chain, they can assess the future value of such a relationship.  This is important because, as processes performed offshore increase in complexity, not just the amount of savings but even the percentage of savings are likely to increase.  This is, therefore, a very useful tool in winning the support of others in the organization. 

Value Chain as a Road Map

In summary, evaluation of a potential relationship requires that both parties understand the road map and where they are likely to go.  The value chain provides this road map.  For the buyer firm, it helps in evaluating competing vendors, in evaluating the financial worth of the relationship, determining where to “get going” and, finally, in getting support within the organization.