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BEST-OF-BREED, SOFTWARE-ON-DEMAND, AND INTEGRATED ERP SUITES – WHAT IS BEST FOR BPO? AN APPLES-TO-APPLES COMPARISON ACROSS THE LIFE OF A BPO AGREEMENT

BPO EXCELLENCE SERIES Position Paper

EXECUTIVE SUMMARY Many decision-makers in BPO confront themselves at some point with the choice between underpinning the delivery of the service they receive with “best-of-breed” (BoB), Software on-demand (SoD) or integrated Enterprise Resource Planning (ERP) technology. In some cases, they resort to leaving the decision completely to the BPO provider. In the past, the resulting debate could often be characterized as “CIO vs. line-ofbusiness”, with the CEO and CFO sitting on the fence. While the CIO would want to keep the technology environment simple and thus be biased pro-ERP, lines-of-business would often drive for quick solutions to impending problems and therefore favour BoB or SoD. This way of assessing options is at the core of many of BPO’s troubles, as it intrinsically focuses on means and not on ends – which distorts incentives and decision-making. While the best choice is and should be situational, the following few guiding logics can be applied across different client situations. Focus on the end-objective. Client organizations, their advisors, and their providers, must think solution (i.e. technology and related implementation by a specific BPO provider at all stages of the BPO contract), and not software only. General and Administration’s (G&A) functions costs are represented by process people much more than by technology. Focusing on technology ease-of-deployment and cost per se might be missing the point: what must be attacked is the cost of the function and related change management. Which technology deployment enables superior scale, leverage of process engineering skills, and labour arbitrage across the entire organization? Which one best underpins processes that help to reduce cost, improve process quality and risk management across the functional and country scope? Is the software deployment able to serve the new service delivery model, are all parties (client, BPO provider, software vendor) able to implement it and execute on it? Think future-proof solutions and innovation. Ensure that any chosen technology solution is able to withstand the proof of time. Do not get carried away by tactical and short-term judgments. Can you stand the prospect of defending your decision in five years? Break silos. Ensure that informed discussions happen between the process and technology experts of providers, customers and their advisors. Do you have the right people on board? Do they have enough time and support? Are they incentivized to cooperate? Any decision that prevents the short and long-term ability to connect processes of the different parts of the organizations involved, and reap economies of scale will dilute the structural advantages BPO is supposed to bring. Deciding about the use of BoB, SoD or ERP without a very thorough assessment of the current and future requirements of the BPO service delivery is very likely to generate problems. One could generalize all of the above by saying that SoD and BoB can make great tactical and point decisions within predictable boundaries, but “betting the farm” or relying on them for strategic, enterprisewide, long-term objectives is a decision that requires careful consideration.

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CONTENT

Introduction and Definition .............................................................................................. 4 Decision dynamics in a nutshell ...................................................................................... 5 Focus on the end-objective........................................................................................ 6 Think future-proof solutions and innovation................................................................ 7 Break silos ................................................................................................................ 8 Involve all relevant parties ......................................................................................... 8 Impact on Cost ............................................................................................................... 9 Set Up Costs ............................................................................................................. 9 Operations costs ..................................................................................................... 10 Innovation costs ...................................................................................................... 12 Costs of scope change ............................................................................................ 13 Exit costs................................................................................................................. 13 Impact on quality .......................................................................................................... 14 Constant quality improvement.................................................................................. 16 Impact on risk management.......................................................................................... 16 Transformation risk.................................................................................................. 17 Operations risk ........................................................................................................ 19 Strategic risk ........................................................................................................... 20 Financial Risk.......................................................................................................... 20 Legal Risk ............................................................................................................... 22 Conclusion ................................................................................................................... 22 Contact ........................................................................................................................ 22

NOTE: The purpose of this document is purely to discuss BPO-specific scenarios in the large enterprise market, and NOT software-as-a-service and on-demand in general

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INTRODUCTION AND DEFINITION Before we look at the suitability of “Best-of-Breed” (BoB), Software on-demand (SoD) and integrated Enterprise Resource Planning (ERP) technology for BPO, the discussion about the value generated by each should start from clearly defining them – beyond stereotypes. Figure 1 illustrates the relationship between the three models. Scope of process served Limited

Large

ERP SoD

ERP software comprises a typically tightly integrated set of solutions that cover a broad scope of enterprise processes, and usually features strong configurability. It can be deployed in a 1-to-1 mode either on the customer’s servers or hosted on a third party’s servers. Parts of an ERP may also be run in a 1-tomany mode as long as they are multitenant-capable; for example in SAP, all ERP modules including HCM can be run this way. With few exceptions, ERP vendors are typically large companies that can handle the substantial investments and reap economies of scale in such architectures.

BoB / pure players / niche Current availability and use of SoD for large enterprises Selected vendor examples SAP Chronos

SAP e-sourcing oD salesforce.com

Figure 1: Illustration of software delivery models

BoB a.k.a. “point solutions behind firewall” software is typically used within very specialized domains in an effort to complement or augment ERPs. BoB can be implemented in a behind firewall or hosted 1-to-1 mode, but BoB products are increasingly served in a 1-to-many model over the internet e.g. Procuri for sourcing, or Taleo for talent management. For the sake of clarity, when referring to BoB in this document, we mean the 1-to-1 version, i.e. software instances that are not shared with any other customers, even if they are not installed in-house but hosted by a 3rd party.. BoB vendors are typically smaller software vendors who have specialized in certain domains. Historically, some have been acquired by larger software vendors (e.g. acquisition of sourcing specialist Frictionless by SAP) and then have been more tightly integrated into a broader software suite. Strictly speaking, SoD is a not a type of software solution, but a deployment mode that can be applied to all types of software, including ERPs and BoB. It differs from “hosting of client software” because SoD is by nature a shared software architecture (1-to-many) in which the customer shares – at least virtually – one “instance” of the software. This is different from, for example, a simply externally-hosted implementation. Also, the partitioning of customers is based on separation of their data, rather than applications related. De facto, as of today, SoD is used for software products such as salesforce.com or WorkdayTM. The range of functionality of these products is not as deep as in BoB or ERP, while the integration within components is tighter than for BoB but less tight than ERP’s, and the “personalization” less pronounced than in both ERP or BoB. Additionally,

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as of today, there is limited concrete and viable proof of broad-scope solutions being delivered in an on-demand fashion for large enterprises. As a consequence, we will refer to SoD as relating to the case mentioned above: moderate functionality, moderate integration, moderate configuration, fully internet-based, and fully based on a shared software architecture.

DECISION DYNAMICS IN A NUTSHELL Many decision-makers in BPO confront themselves at some point with the choice between underpinning the delivery of the service they receive with “best-of-breed” (BoB), Software on-demand (SoD) or integrated Enterprise Resource Planning (ERP) technology. In some cases, they resort to leaving the decision completely to the BPO provider. In the past, the resulting debate could often be characterized as “CIO vs. line-ofbusiness”, with the CEO and CFO sitting on the fence. While the CIO would want to keep the technology environment simple and thus be biased pro-ERP, lines-of-business would often drive for quick solutions to impending problems and therefore favor BoB or SaaS. This way of assessing options is at the core of many of BPO’s troubles, as it intrinsically focuses on means and not on ends – which distorts incentives and decision-making. While the best choice is and should be situational, the following few guiding logics can be applied across different client situations. Let’s start from the end-objective. Customers usually want to access BPO providers’ superior scale, process engineering skills, and labor arbitrage to improve on three value dimensions: 1. lower cost of the entire organizational structure (i.e. including cost of the retained organization, and in general well beyond technology costs) 2. better process quality 3. improved risk management. Focus of most BPO assessments

Full value of a BPO deal based on cost, quality and risk Cost Improvement

Operations

Transition

Transition and Evolution Transfer of technology, people, processes Support & improvements

Ongoing Process Management Process steps Monitoring Errors

Quality Improvement During Transition and Evolution Short-term (first 3 months) Quality reached early on Continuous improvement process

During Operations Error level Business impact of better processes and control (e.g. working capital, global view of the organization)

Risk* Management Transformation Disruption related to migration Adherence to changing business requirements Evolution and exit scenarios

Operations Consistency and adherence of output to business objectives

Strategic Accommodate organizational evolution (e.g. restructurings, M&A) Loss of strategic capabilities

Contract expiration

Financial Keeping Long-Term Options Open Increasing scope of solutions and/or outsourcing Switching providers Re-in-sourcing * Risk= deviation from original cost/quality planning

After Contract End Retain quality after contract end Ability to build on achieved level

Predictability of cost items Control of agreement cost

Legal Compliance Contract governance Risk and cost of disputes

Figure 2: BPO value dimensions and key components throughout the BPO lifecycle

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Any technology choice must be able to help succeed on these dimensions – both in the short and long term, and across all functional silos. Focusing on technology per se – not process service delivery and related technology needed – may be a recipe for trouble. For a start, it is opportune to think solution (i.e. technology and related implementation), and not software only. Business process software capabilities as seen in a demo environment often do not bear resemblance to what the customer-specific postimplementation end-result looks like. A solution equals “software, plus process/software configuration design, plus implementation constraints, plus ongoing enhancements”. All these aspects represent “tires to be kicked”. Secondly, any technology solution underpinning business processes must be able to withstand the proof of time, be it in terms of vendor viability, ability to deliver continuous innovation, or availability of consulting resources. Thirdly, any apples-to-apples comparison must start with a clear and end-to-end understanding of the process requirements, as opposed to looking at separate functional requirements for each process silo and organizational units only. For example, one needs to look at the full picture of the complete hire-to-retire process across all lines-of-business and countries, rather than considering recruiting, personnel administration, performance management, etc. as separate and disjoint functions or considering US operations only without addressing the international ones. The implications of business process integration are often far reaching (e.g. repercussion of time management on product planning or financials), and for this reason while a SoD/BoB solution might be scoring high in specific circumstances, there are cases where it is ultimately more costly and risky to implement end-to-end. And lastly, in order to optimize the choice of software solutions for BPO, more informed discussions need to happen between the process and technology experts of providers, customers and their advisors. Often the interconnections between strategic and servicedelivery objectives on one side and technology/process design on the other, are overlooked. This situation exposes the contracting parties to the risk of a negotiationheavy but fundamentally fragile future relationship. In the following sections, we will explore each of these four considerations in more detail. Focus on the end-objective Client organizations, their advisors, and their providers, must think solution (i.e. technology and related implementation by a specific BPO provider at all stages of the BPO contract), and not software only. General and Administration’s (G&A) functions costs are represented by process people much more than by technology. Focusing on technology ease-of-deployment and cost per se might be missing the key point: what matters most is the cost of the business process execution and related change management. So the question becomes: Which technology deployment enables superior scale, process engineering skills, and labor arbitrage across the entire organization? Which helps best underpin processes to reduce cost, improve process quality and risk management across the functional and country scope? Is the software deployment able

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to serve the new service delivery model, and are all parties (client, BPO provider, software vendor) able to implement it and execute on it? Let’s look at the different software models in this context: Typically, because they are aimed at individual organizations, SoD solutions are not easy to adapt to be used in the “factory” model that BPO providers often require. Functionalities that are great for end-users or standalone organizations may fall short of what is required for BPO. BoB may help “factorize” one component, but the real, heavy-lifting economic challenge is to scale and optimize an end-to-end functional or even end-to-end enterprise processes, which also implicitly requires all parts to communicate seamlessly. Alternatively stated, integration is as valuable as – and often more valuable than – perceived functionality advantages. Similar considerations should apply to process and legal compliance, which is by definition a challenge transcending process boundaries, and that requires different approaches in BPO situations where the provider serves multiple organizations. The ability to implement quickly an SoD/BoB solution is no substitute for the solution of the root cause of G&A inefficiency and IT complexity: lack of process standardization. Not being able to enforce harmonization of processes across the organization is at the core of why many organizations cannot avoid complex implementations. In other terms, ERP costs may be just a symptom of a more thorny challenge that no amount of BoB/SoD can solve. Even when the end-state reachable with SoD/BoB is satisfactory, the “how to get there” can be a challenge superior to the equivalent in an ERP scenario. Finally, change management around SoD and BoB does not benefit from the widespread availability of consultants and methodologies available for some of the main ERP solutions. Not being able to move the organization and its infrastructure to the desired state would nullify and functionality or cost edges of SoD/BoB. Think future-proof solutions and innovation. While quick wins are surely important to achieve internal buy-in, it is essential to ask yourself: Can you stand the prospect of defending your decision in five years? Decisionmakers must not get carried away by tactical judgments, but ensure that any chosen technology solution underpinning business processes is able to withstand the proof of time. One should consider: BPO agreements last long, and their technical infrastructure must be defined at the beginning. SoD and BoB show in average less clear longevity – which may put both ongoing operations and the ability to innovate over time in a disciplined fashion at risk. During the life of the agreement, changes to the scope (functional, geography) will happen, and typically cannot be planned today. To ensure these changes can be accommodated, SoD and BoB may not be the safest options because the respective vendors have usually more limited scope and are not as widespread as the main ERP products.

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Break silos To ensure that informed discussions happen between the process and technology experts of providers, customers and their advisors, you should ask yourself some key questions: Do you have the right people on board? Do they have enough time and support? Are they incentivized to cooperate? The very nature of decision-making around SoD and BoB – that is, a particular line of business wanting minimal disruption from IT – may cause decisions that neglect end-toend thoroughness for the sake of expediency. The ability to fully leverage the processes owned by adjacent functions such as production or other HR departments may be jeopardized in those cases. BoB and SoD decisions taken by the client sometimes dispossess the BPO provider’s solution architects of their ability to exploit BPO-specific relationships with standard/default software vendors – which in turn leads to limited synergies with the provider’s previous engagements and between all parts of the service delivery infrastructure. Any decision that prevents the short and long-term ability to connect processes of the different parts of the organizations involved and reap economies of scale will dilute the structural advantages BPO is supposed to bring. Deciding about the use of BoB, SoD or ERP without a very thorough assessment of the current and future requirements of the BPO service delivery is very likely to generate problems. Involve all relevant parties As discussed, the way information technology is used as a foundation of BPO processes is crucial to the sustainability of the BPO endeavor. For the BPO provider, being deeply knowledgeable about the required solutions and related configuration/ implementation options and being able to replicate such technology and process blueprints at least in part for multiple customers are necessary to achieve economies of scale and process optimization. Another point is equally critical: that the provider takes a holistic approach to the BPO engagement, linking together the process/technology transition and operations phases from the beginning, and ensures that he has adequate resources – and continuity of those – for both. Neither will a perfectly run implementation be useful, if is not tightly aligned with everyday process operations’ requirements, nor will a provider with perfect operational skills (e.g. people- and IT-management) be successful, if process design is insufficiently enabled by the initial technology implementation. A close collaboration between the provider, his software vendor and the end customer can help ensure that the challenges identified above are met. While in principle any BoB, SoD or ERP vendor can develop a respective close relationship with the BPO provider community, only very few have done so far. As of today, some ERP vendors are clearly at the forefront of this move. One could generalize all of the above by saying that SoD and BoB can make great tactical and point decisions within predictable boundaries, but “betting the farm” or relying on them for strategic, enterprise-wide, long-term objectives is a decision that requires careful consideration. However, in order to do justice to the importance and complexity of the topic, we have analyzed it in more detail and addressed the SoD/BoB/ERP debate

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across all aspects of value generation: from cost reduction to quality improvement to risk mitigation, for each of the phases of the BPO life i.e. initial transformation, ongoing operations and evolution, and contract expiry.

IMPACT ON COST All must be kept into account: technology and people costs, and costs at all BPO stages, including set-up, normal operations, innovation, and end-of-contract. Let’s analyze them in detail, as they have different implications on technology decisions. Set Up Costs As a start, it is often taken for granted that the cost of resources involved in the initial technology setup, such as database administrators, can be substantially reduced by SoD. It is however fair to also say that such resources are not the most expensive or scarce and those savings might be partially offset by the need to onboard resources able to run internet-based software in the context of a corporate IT landscape 1. Additionally, and more importantly, set up costs of Best-of-breed and SoD may be lower than for integrated ERPs, as long as the scope is limited and the integration with adjacent functional areas relatively small. Deep integration points across the hire-to-retire chain (depicted in figure 3 below), for example, may be lost or become costly to implement with BoB/SoD.

Compliance Compensation management

Employee data

Recruiting Point solution

Benefits management

Learning management

Payroll Time management Employee data

Employee data

Point solution

Employee data

Point solution Employee performance management

Figure 3: Data and systems involved in hire-to-retire chain

Admittedly, the initial implementation of SoD/BoB is often done with short-term, tacticalsolution objectives in mind, while the cost of integration mostly manifests itself when there is a need to move away from “band-aid” solutions. Also interestingly, many organizations in the past did not have formalized business logic linking every step of end-to-end business processes such as the hire-to-retire chain, thereby reducing the need for deep integration. The increased understanding of the reach of talent management, which to be fully effective must tie in a number of HR and non-HR processes (e.g. talent management with various production and CRM processes), will likely force deeper discussions and change things.

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„Cost and benefits of SaaS vs. on-premise deployment”, Gartner, 2007

Similar examples can be found in the source-to-pay chain, where traditionally best-ofbreed sourcing solutions were a prime choice for sourcing, spend analysis and contract management, and the integration of these into the procure-to-pay steps was limited. While this approach had benefits in specific circumstances, the necessity to tightly link supplier management and strategic sourcing to the actual purchasing practices of an organization is emerging as a key pain points for CPOs. Especially CFOs will be looking to ensure that, especially for indirect goods, negotiated contracts are executed and complied with by all managers and employees. Integration points can generate substantial setup and maintenance costs, as shown in table 1. Such costs will not arise for an ERP solution that readily includes integration points (such as the SAP

Integration Complexity

Low

Moderate

High

Design

133

179

312

Development

Number of interfaces designed Labor (hrs per interface)

102

134

308

Testing

202

Implementation

Maintenance Total labor per interface

175

367

491

1,032

HCM software, which Table 1: Interface cost by integration complexity includes over 100 prebuilt integration points within its functional components). A final set of considerations should revolve around the use of integration platforms (a.k.a. middleware). Even in cases where point solutions are appropriate to augment the ERPbased systems, it is wise to discuss the use of platforms that natively integrate with the ERP system and are specifically conceived to facilitate a predictable and cost-efficient integration of the other solutions. Given that the system of record and the majority of the business logic usually resides within the ERP system, middleware that is natively compatible and integrated with the ERP platform provides a significant advantage in terms of implementation and maintenance costs as well as long-term flexibility. Operations costs Technology (hardware, connectivity) costs to run ERP environments are perceived as usually being higher than for BoB/SoD because of typically more extensive hardware requirements. While the cost difference is often overestimated (for example, SoD requires investment in resources to run online software provision within a corporate IT landscape), pure SoD technology costs are typically lower due to the one-to-many sharing of the application’s infrastructure across multiple clients. The case for BoB is less clear, since a landscape composed of multiple BoB solutions needed to deliver against large process scope does not have much – if any – technology advantage over an equivalent functional scope covered with an ERP. At any rate, these considerations both miss a crucial point. At a certain scale, which is typically reachable by large enterprises, people working on processes are much more expensive than technology (the related run-rate ratio is about 6:1, even excluding additional cost generated by occasional users) – hence the importance of ergonomics and automation across the customer’s organizations. Figure 4 illustrates this situation.

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Typical cost savings achieved through BPO

Drivers

- 20% new

Labor and related G&A

Governance Provider Margin Scale, Automation

Productivity gains

- 30% ~ 80%

Labor arbitrage

SW maintenance & implementation ~ 7% Software

~ 3%

Hardware & Operations ~ 10% Cost of pre-existing processes

Skill, Best-in-class Processes

-20 to -70% Reduced complexity

Reduction of customization

~IT0% -20 to -50%

Consolidation of infrastructure (scale)

Total cost of outsourced processes* IT-enabled

* including cost of implementation project and transition, spread over deal duration

Indirect IT influence

Figure 4: Typical structure of cost savings through BPO and impact of technology on these

The lack of sufficient integration or homogeneity of technology used may strongly dilute the impact of tools such as self-services or tier-1 contact centers for queries, reporting, compliance etc. Think of the cost impact of a self-service that cannot seamlessly pull data from all necessary back-end applications in real time, and as a consequence requires the users to contact the call center operators. Table 2 below provides some details about the integration needs of employee self services.

Table 2: Examples of integration points between SAP ERP Human Capital Management and SAP ERP Cross-applications

Ensuring such continuity across a constellation of different applications is possible but very often expensive. A common consequence is a heterogeneous user interface that simply shifts cost and “pain” onto the users.

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For SoD, an additional discussion needs to happen around configurability and “personalization”. While in principle standardization of services and the underlying software are critical to BPO economics , the software must be flexible enough to accommodate the way the provider operates to deliver “factory-like” economics (e.g. experts taking over more specialized tasks, increased process workload balancing, etc.). Otherwise, the software becomes a constraint and requires workarounds – which in turn often adversely impacts labor efficiency and effectiveness. As an example, there is a an SoD product – while being appropriate for self-service situations in which employees or managers access the service but processing is done by the HR organization – may not be the most appropriate choice for the BPO provider’s centralized-service back-office that pools resources across clients. In other words, SoD typically qualifies as a 1-to-many solution only from a pure technology perspective, but not from an overall service delivery perspective. For that, the ability to configure a solution to allow a BPO providers’ staff to serve multiple customers in parallel – such as offered by an ERP using service-centralization deployments – may be essential. Ultimately, the configuration capabilities of SoD products are often more limited than those of traditional software and may overly limit the client and provider – not in terms of functionality, but in terms of business processes optimization and scale. Similar considerations can be made for BoB, where discussions revolve around the ability to use such tools in a 1-to-many way from an overall service delivery perspective. In-depth discussions between the client and the BPO provider need to happen in order to assess this potential risk (which would ultimately result in costly workarounds or even more costly gaps in automation) and it is absolutely necessary that these conversations happen not between negotiation teams, but between process and technology experts on both sides. Innovation costs Innovation – both of the provider’s processes and the underlying IT – is a key to the ongoing and sustainable delivery of financial and service-quality benefits. Lack of innovation can cost dear, and it is no surprise that it is cited as the #1 concern by many experienced outsourcing buyers. Take self-service portals, which really became operational in the last years, and imagine not having been able to use them in the last five years – instead being forced to serve an increasingly global and fragmented workforce (or supplier base) with traditional people-based means. Being able to innovate should be a primary concern – and implementation of innovation must be cost-effective to have a realistic chance to happen. From a pure cost-of-technology perspective, a major upgrade or enhancement of an ERP-based environment is often reported as a being a substantial project. In comparison, upgrading a much smaller (and confined) BoB code base seems easier. The contrast with SoD is even stronger, as all technical upgrades happen behind the curtains, with the customer not seeing them at all. However, the situation may be dramatically different if:

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If the ERP code base has been implemented in a relatively standardized way, avoiding proliferation of custom code, ERP upgrades are simpler and less expensive The BoB / SoD system is strongly interconnected with adjacent processes and systems, or such connections need to be rebuilt or at least updated each time one of the components involved gets updated – in other words, almost permanently, once the BoB landscape has reached a critical complexity level. In these scenarios, upgrade od BoB/SoD landscapes can be complex and therefore costly. Costs of scope change Adding new processes, business units and/or countries is a potentially expensive undertaking. Not only do business processes have to be migrated to the provider, but also the underlying platform must be adapted. There is no cost difference between an ERP solution and BoB/SoD in this area – as long as functionalities supporting the new processes and countries, or the specificities of the new unit, are readily covered in the software solution being used. However, especially BoB solutions are usually restricted to a particular market segment such as recruitment (as opposed to full talent management) or “main languages” and “main countries” (as opposed to global scope). SoD solutions might have similar issue, and while they fare well as they can theoretically be just “switched on”, their adaptability and global coverage has yet to stand the test of time. Additionally, the situation described here also occurs at the end of the contract’s life, in early renegotiation, company restructurings and in mergers & acquisitions. Exit costs It is often said [Gartner “cost and benefits of SaaS vs. on-premise deployment” 2007] that SoD has cost advantages over traditional software with respect to exit costs, because the related reconfiguring and retraining are not nearly as expensive (also arguably due to more limited configuration options). While this may be true for some traditional software usage scenarios, it does not necessarily apply when it is the BPO provider who uses the software. In this case, asking a new provider to use the existing software solution forces him to change his standard way of operating – not just from a technology perspective, but also and especially from a business process operations perspective. This might lead to dilution of economies of scale and process optimization advantages that the provider is supposed to bring to the table. Being locked into an outsourcing relationship that is not a good fit anymore may be expensive, and not just for the buyer. Switching to the new processes and technology of a new provider, or asking him to take on the ones that were used in the prior relationship, can be a complex and costly affair – especially when the underlying processes and technology platforms are not harmonized and well-documented or implemented according to known standards. A BoB implementation may be theoretically cheaper and its maintenance cost-effective when it is deployed stand alone, but trying to synergize multiple best-of-breed software implementations with a new provider’s or an acquirer’s software might erase all simplification advantages. In particular, the final outcome may be that in the interest of speed, the BoB platform is deprived of complex interfaces and becomes even more of a silo. This is a common pitfall and significant hindrance to controlling newly merged/synergized processes because of the loss of visibility into some parts of the

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process ; for example data integrity and comparability, as well as measurement of process performance might be at risk. While SoD solutions are by design easier to migrate, as no or only limited configuration data has to be transferred from the incumbent to the new provider and/or the customer, clients should ask themselves whether the SoD solution will stand the proof of time? Cost-effective exit scenarios after 5+ years require availability of a healthy SoD solution for a long time in the future. In sum, cost in BPO is driven by multiple factors across the lifecycle of an engagement – not just by the cost of technology implementation and operations. To assess what the best software choices are, client and providers must ascertain the impact of the technology options across all those dimensions. Importantly, as an SAP analysis shows (see figure 5), “traditional BPO” i.e. pure lift&shift as done in the early years of the BPO market, bears substantially higher cost that building bestpractice and replicable BPO approaches which carefully codesign process and technology.

Cost reduction throughout the entire BPO lifecycle - reusing templates and best practices. + change management to bring client to more standardized/ harmonized platform/service.

-7%

-- much more economies of scale and effects of process optimization

78% -- much easier transfer of processes and data

-7%

-65%

11%

Transition Traditional "lift&shift"BPO

11%

Operation

Exit

Best-practice, replicable BPO approach

Figure 5: Results of an SAP analysis on cost of different approaches to BPO

IMPACT ON QUALITY Operations excellence of G&A functions requires both back office (i.e. processing) and front-office (i.e. interaction with the customer’s internal “clients”, be them managers or employees) process efficiency and effectiveness. This means that both professional users such as in the HR, F&A, and procurement organizations and occasional users – typically normal employees using self-services – must be enabled. Most BoB providers are free of typical ERP engineering complexities like working with a unified user interface, expecting unified data structures, etc. and can therefore develop faster more “bleeding-edge” functionalities in the most dynamic areas. However, when business processes are not easy to sever from each other (e.g. the deep integration of most of the HR and procurement processes of the future – e.g. in a full hire-to-retire or source-to-pay cycle) or require syndication of resources across geographies and business units, quality is only achieved through a holistic approach – which is typically only reasonable achievable with an integrated platform. Consider the integration of the following process flow: HR admin time payroll F&A systems. Such integration not only delivers the appropriate pay checks and postings to

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the general ledger, but also enables other qualitative results such as determining people costs by line of business. Having all data and processes on a single platform also simplifies the implementation and operation of self-service portals since data and parts of related workflows can be seamlessly integrated. This setup also enables the work of tier1 contact centers such as retained or outsourced shared services call centers that filter queries – allowing higher-skilled (and higher-paid) professionals to focus on other tasks. Similar examples can be found in the integration of the following process flows: travel & expenses controlling and financials customer work order skill check employee availability & assignment time recording order completion labor calculations payroll general ledger entries order costing & controlling constraint-based shift scheduling (skill mix, seniority, night vs. day shift) performance management compensation talent management business planning skill planning training resource allocation contract management purchasing processing accounts payable finance/ controlling other provider-client workflows that span across multiple processes and countries Figure 6 shows some touch points from HR to the rest of the organization.

Workflow Define routes, roles & relationships for process automation

Security Roles based security, profiles, authorization

Financials GL/cost center distributions of costs/expenses or time AP remittances/AR invoices Credit Management Corporate Governance

Operations MRO Staffing (skills/availability) Report hours worked on orders Time reporting

Sales Revenue per sales rep Sales training participation and targeted eLearning Team and individual targets

Management Accounting Projects – assignments based on skills/availability Track hours worked per project Budget vs. actual reporting

Services Travel Planning and expense reporting Environmental Health & Safety Analytics Balanced Scorecarding BW reporting Management Cockpit Budgeting – Simulations Profitability

Asset Management Track equipment on loan to employees Track company vehicles assigned to employees

Figure 6: Integration touch points from HCM to other business functions

Ultimately, the worst enemy of an informed choice between BoB and ERP solutions is poor process optimization discussions which are a prerequisite to process quality. The best BPO providers are able to come to the discussion table with a solid set of predefined best practices that normally already include an overview of the technology required. On this basis, and not before, an informed decision on technology can be taken.

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Constant quality improvement Last, but not least, the acquired level of service quality is not perennial: quality is relative (what was considered state-of-the-art in the 1990s is perceived as archaic now), and the pace of innovation means that service quality must be constantly improved. Constant quality improvement is a key requirement in modern BPO deals; delivering this is theoretically the task of the BPO provider – but achieving service quality through innovation depends on two items that are impacted by the technology vendor’s capabilities: Integration is value: the work involved in the evolution of a BoB might be limited – but changing only an isolated part of the technology platform will generate work to keep the connections into the rest functioning. This work is multiplied in large and complex organizations that have many country or business-unit organizations, where each might have its own processes and related integration points. When an integrated ERP solution needs to evolve, the related work is an investment that helps guaranteeing that the various functions will keep communicating well together, building on the value accumulated by past solution design. Additional considerations about the use of middleware apply (see the “set up costs” section earlier). Functionality is value: software that makes efficient use of innovations (e.g. selfservices) can turn them into large-scale process advantages and can clearly help the provider in constantly bettering service quality. In particular, technology platforms’ new releases and enhancement packages typically include ways to innovate on processes. As discussed above, ERP vendors may not always be advantaged here in the short term from a pure software standpoint, but supporting the BPO provider implementing such innovation is at least half of the way – hence the importance of BPO-specific partnership programs that typical BoB or SoD do not have the scale to fund. And additionally, any functional gaps are often closed later.

IMPACT ON RISK MANAGEMENT BPO risk management is about understanding where the planned levels of cost and quality can slip, and mitigating those events. Slippage and related value leakage can be mapped across five risk dimensions: Transformation, Operations, Strategic, Financial, and Legal Risk. Risk can surface at all stages of the BPO lifecycle – from initial transition through evolution to contract-end – and as a consequence it is not enough to ensure mitigation only at the beginning e.g. during the request-for-proposal cycle. Problems may arise years after the negotiation and implementation teams have disbanded, and the risk mitigation they should have factored into their choices must still be available. As a consequence, for example, it is important to ensure that software vendors and related consulting resources are able to continue to deliver in the medium and long term – which is a substantial advantage of some more established software vendors.

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Transformation risk Transformation risk is the risk of disrupting processes, thereby creating cost and quality issues during change management. It spans across all BPO phases: Initial transition, Evolution through upgrades, enhancement, and innovation in general, and Contract-End scenarios. Initial Transition is a volatile time for operations and people, and one in which costs are particularly difficult to control. If too long, it may generate resistance to change, damage employee satisfaction and endanger the success of the BPO project. Evolution: business requirements (e.g. geographic and functional/ organizational scope) may change in time. Accommodating such changes without massive implementation efforts or build-up of complex interfaces is critical to mitigate evolution risk. Contract-end: at this point, the risk mainly revolves around transfer of all types of knowledge. Business processes can be complex, usually because of the knowledge required in the process steps and interfaces with adjacent processes. Problems generally stem from a lack of retained process knowledge, the complexity and lack of transparency of the provider’s software platform and related data structures. As depicted in figure 7, software solutions and related deployment resources can help risk mitigation in a number of ways:

Broad Solution Scope

Extensive Standard Interfaces

A broad solution scope, which covers Mitigation of out-of-the-box most of the functional and Transformation Risk geographic requirements. While very suitable for specific purposes, BoB and Configuration & Implementation SoD typically do not score well on this Personalization Methodologies & Capabilities Consultants aspect. Their solution breadth is normally geared towards a few large markets (geographies and functions). Reconstituting the typical scope of a large or Figure 7: Ways to address transformation risk in BPO through technology multinational enterprise by assembling a host of BoB and SoD applications may be as complex as building a car from spare parts. In this respect, track record is possibly the best indicator: software companies must demonstrate being able to bring to market a constant stream of reliable scope increases for a long and sustained period of time. While BoB/SoD vendors are often at the forefront of engineering innovative solutions and listening to new trends, they have less strong track record of being able to sustain expanding scope over time, and they go out of business relatively frequently compared to ERP vendors. What often happens is that they are acquired by some larger competitor, and their software code migrated or discontinued – disrupting the ability to innovate on the best-of-breed platform as it becomes a de facto legacy. Extensive configuration and templatization capabilities, that allow large-scale “personalization” while avoiding custom code. As discussed above, these capabilities are usually better for software products engineered for shipping – not for remote hosting. There are many architectural choices that software vendors must make (and fund) to make their software able to adapt to a variety of customer situations, and some

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of these architectural/engineering decisions require substantial investments on the part of the vendor – prohibitive for smaller firms or those who do not make personalization a key part of their value proposition. SoD typically strikes the balance between adaptability and functionality by providing more limited configurability, which may result – in the absence of very thorough specifications – in implementation rigidities. These in turn might force expensive process workarounds that impact often both back and frontoffice. BoB vendors are instead more versed in enabling customers to modify the software to their liking. The challenge here is that BPO providers’ “front lines” might be tempted to please the end-customer by offering him the BoB solution extensions he wants, as opposed to trying to stick to a standardized solution for which the provider has built substantial templates for and that would generate savings and sustainability. Indeed, ERP software vendors have in the past collaborated insufficiently with BPO providers to help them build such templates – an issue that at least SAP has addressed in 2004 by forming a dedicated business unit tasked to support BPO providers and customers in implementing and operating software specifically geared to BPO situations. Extensive standard interfaces as well as out-of-the-box standard business reports and monitoring tools that avoid custom work. As discussed in the cost and quality sections above, interfaces are the connection points of business processes – and as such, their buildup is key to a successful initial setup. Often suboptimal interfaces are caused by poor attention to integration points and choice of point solutions. Also often, the answer is to reduce interface breadth to the minimum so that their initial and ongoing cost is limited. This indeed limits initial technology costs, but may increase “shadow” costs (i.e. invisible, such as ancillary organizations e.g. in F&A or industrial plants staff) and retained organization cost. All this degrades quality in at least two ways: first, a surge in cost is likely to be dealt with by “cutting corners” which jeopardizes quality; and secondly it might impact customer satisfaction because of lower data processing automation. Examples include the lack of a single sign-on; missing real-time calculation of financials, payroll, benefits, travel expenses and other data that require integration; and the absence of automatic triggering of hybrid processes which are only partially automated such as some in the hire-to-retire chain and related workflows. On all the accounts above, an integrated end-to-end solution offers substantial value that should be considered in the final decision. Finally, additional discussions about middleware strategy, in the presence of many point solutions, should be had (see “set up costs” section for details) to help integration happen whenever necessary and possible. Availability of BPO-ready implementation methodologies and consultants. Implementing software is as important as the software itself. While the use of an SoD solution at first glance avoids this problem, at a closer look it sometimes appears that the only real shortcut SoD provides is avoidance of hardware configuration. Often, a thorough process engineering analysis and related configuration work are still necessary, unless the customer accepts the default implementation parameters of the software. For example, how do you ensure that production shift staffing is checked against the skills inventory? How to make sure that different factories in different countries all do so, while at the same time complying with local labor agreements and legal constraints? Solid change-management and implementation methodologies as well as respective consultants must be readily available in case the implementation of

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the business process technology is not as straightforward as planned. Resource availability in multiple countries and with knowledge relating to multiple processes (which is necessary for process integration in case of scope expansions) is often more limited for point solutions or SoD. BoB consulting skills are both more limited at any point in time and more prone to dry up if the underlying software is no longer “hyped”. Due to the increasing complexity of large enterprises in a global economy, this risk factor hits surprisingly frequently. ERP consulting skills on the other hand have periods of scarcity, but the sheer size of the related pool of consultants and the training capacity of the main ERP software vendors are such that the problem is typically only temporary.

Operations risk Fluctuation of output timeliness and accuracy levels is a substantial problem in most organizations, often caused by volatility of human performance, environmental stress (such as higher volume) and limited process transparency. In order to limit this fluctuation and the risk associated with it, one needs to address the following aspects: Automation of end-to-end process steps and use of self-services. Thoroughly automated process steps make business processes more resilient to human errors and stress generated by high volumes and peaks. BoB and SoD solutions often automate parts of processes with very thorough business logics – but their “silo” nature may limit end-to-end process automation and complicate the implementation of self-services spanning across functions. When automation and the use of self services are constrained and consequently data flows less strictly coded (e.g. more free text, more variance of input quality), handovers from and to adjacent processes are less automated – especially when multiplied by the number of countries, lines of business and 3rd party organizations involved. Stable and scalable software and technical environment: System downtime/failures and processing errors are prime concerns on which BoB, SoD and ERP vendors have taken substantial preventive steps. SoD in particular is able to contractually guarantee both application and hardware infrastructure SLAs under the same agreement, as long as the volume is within predefined load levels. The challenge for SoD-based BPO, however, may be to ensure that the connectivity from the remotely hosted application into the client’s intranet is sufficiently robust. In other software deployment models, the BPO provider must be fully knowledgeable of the software’s stability and the implications for the infrastructure - and able to execute upon related requirements in each specific client situation. As a consequence, irrespective of the type of software used, it is essential that BPO providers work in close cooperation with the software vendor to address BPO-specific operations issues. Due to lack of scale, BoB vendors have typically not invested in this area in recent years. Detection and understanding of the root cause of errors, based on strong business intelligence, limits operations’ risks. This requires the full availability of data and visibility of workflows and other processes across functional and organizational boundaries. SoD and BoB come “out of the box” with ready-to-run analytical features, but these features only apply to a part of the process scope and extending them across other processes or countries can be a very complex undertaking. Also, trained

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consultants who are able to do so, are relatively scarce. ERP-based analytics in comparison are sometimes more complex to set up, but they allow for broader-reaching data mining and analysis. In the end, the results will be determined by how well the software vendor transfers knowledge into the BPO providers and works jointly with them to pre-build intelligence dashboards – which again is a matter of being able to invest specifically, and for the long term, into the BPO market. Availability of human resources skilled in the use of specific technology tools. A perceived strength of SoD and sometimes BoB is their capability to adopt the latest and most intuitive user interfaces. However, due to the complexity and the sensitivity of the operations involved, the professional use of technology in HR, F&A or Procurement requires training anyway. Just like solution consultants for system integration, clerks experienced in using major ERP systems are typically more abundant and at least in more predictable supply in the long term compared to point solutions and SoD. A related problem is generated by staff turnover, especially (but not only) offshore – which means that being able to recruit from ERP’s typically larger and more predictable pool may be an advantage.

Strategic risk Clients want to retain a reasonable flexibility of service scope, in particular regarding the option to add or remove a new organizational unit, process or country. This is difficult if the underlying technology platform cannot accommodate respective new requirements easily – which in turn may trigger completely new implementations and possibly the need for custom code and interfaces. What is required in the software is a large geographic and functional coverage, combined with the capability to extend and enhance the solution footprint in a standardized and disciplined way. Software’s coverage of new countries or processes is a key risk mitigation aspect because it avoids constraining future strategic moves. Examples of situations in which the software constraints a strategic move include the following: reducing the synergies between two organizational entities in a merger, saddling the business case of a new market-entry with inefficiencies created by suboptimal or non-integrated platforms, inadvertently diluting service delivery’s economies of scale by transferring a set of processes from local units into a shared service center that lacks suitable centralized technology solutions. Any gains as delivered by BoB and SoD in the short-term and in a predictable scenario may be more than offset term by losses in the long, when unpredictable or new conditions prompt a flexible redeployment of processes and related systems. Financial Risk The typical approach to financial risk is to compare the perceived predictability of SoDrelated cost with the uncertainties related to implementing and operating traditional software. It is true that keeping software implementation costs under control requires much organizational discipline and technology expertise, especially during the

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implementation phase. Importantly, the root cause of G&A inefficiency and IT complexity is typically not the ERP software in itself: it is the lack of process standardization. Not being able to enforce harmonization of processes across the organization is at the core of why many organizations cannot avoid complex implementations. In other terms, ERP costs may be just a symptom of a more thorny challenge that no amount of BoB or SoD can solve. Additionally, it is also true that not all SoD is paid “by the drink”2 [].A substantial proportion of cost is represented by one or more years “minimum term” and “minimum volume” subscription. Also, SoD typically generates additional, ancillary costs such as for support . Finally, traditional software often has the advantage of license-price certainty (because purchased upfront) while SoD – by virtue of more frequent renegotiations being possible – exposes clients to changes of price in a phase when they have undergone all change management related to setting up the software as well as trained the user – and are effectively “locked in” (). All these considerations, however, need to be expanded by a crucial point: the cost risk is incurred at the labor – not technology – level, and such costs are driven by the economics of business process service delivery. While BPO providers may shelter the client from the consequences of suboptimal process/technology design of service delivery (such as cost structure fluctuations and deviations from original business case) in the short term, they will certainly not do so over an extended period of time – irrespective of what the contract says. From a customers’ point of view, both the cost structure relating to outsourced processes and the retained organization’s cost must be predictable and controllable. Predictability of all costs, from fixed to contractually decreasing to incidental, benefits from deploying a technology solution designed in conjunction with the service delivery model it enables – and not sequentially. It is important to recognize that the cost of software applications represents a substantial portion of the total in the implementation phase of a BPO project, but is dwarfed by the cost of process staff later. While software implementation costs should indeed be controlled – a job that CIOs of both clients and providers traditionally understand – the main source of financial risks is not technology, but the loss of leverage and optimization in the usage of human resources. Unfortunately, it is a common practice to decide for BoB or SoD solutions for usage in BPO on the basis of their functionalities in isolation, with limited due diligence on their symbiosis with the rest of the organization. Such decisions carry the risk of creating functional silos that dilute both the economies of scale and the end-to-end process optimization that BPO must harness. We should not that BoB or SoD do not create breakdowns of “factory economics” per se: in fact, specialized software like bolt-on’s in F&A outsourcing can indeed be beneficial in certain cases. However, “slicing” the process and using separated systems is an exercise akin to building a car from its individual components without an assembly plan and should not be undertaken lightly. Even worse, the practice of doing “beauty contests” of isolated technology solutions encourages the BPO provider’s sales force to focus on software “gimmicks” instead of spending time on a detailed end-to-end analysis of the future service delivery. – For this, a good BPO provider should have preferred tools, clearly synergistic with the proposed (read: proven) best-practice service delivery, to increase predictability of the business case. 2

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“Cost and benefits of SaaS vs. on-premise deployment”, Gartner Group, 2007

Additional sources of financial risk can be found in the rigidity that some technology decisions force on the service delivery scope, as discussed in the “strategic risk” and “transformation risk” sections above. Legal Risk Regulatory compliance requirements change frequently. Non-compliance can impact the highest levels of the organization and sometimes affect a company’s reputation – and the related risk cannot be outsourced with the business process. While functionality-rich BoB solutions and sometimes SoD feature excellent tools enabling compliance, this may only be a part of the answer. Ongoing, accurate and timely enhancements of the required process and/or reporting and related technology are the key. In other words, legal risk is not mitigated unless there is a clear and permanent compliance safety net, and this safety net stretches across the outsourced and retained organizations. This is an issue for any service provider that does not rely on the right technology. Keeping technology up to date with legal requirements on a broad scale is a challenge that typically only the enterprise software vendors with a clear track record can safely tackle over long periods. Additionally, it is essential that the BPO provider collaboratively works together with the software vendor in an ongoing fashion to plan, execute and maintain legal risk mitigation technology measures – which is an investment not many software vendors are willing to take.

CONCLUSION Software is a means to deliver processes and enable people to do so. Ultimately, it is an integral component of the service delivery model of the BPO provider, “making or breaking” the economics of such service delivery, and a backbone that connects the outsourced processes with the retained organization. Therefore, any decision that prevents the short and long-term ability to connect different parts of the organizations involved, and reap economies of scale and end-to-end process optimization would result in dilution of the structural advantages BPO is supposed to bring. Deciding about the use of BoB, SoD or ERP without a very thorough assessment of the current and future requirements of the BPO service delivery is likely to generate problems in the long term, and is at the very least sub-optimal decision-making.

CONTACT SAP AG Business Process Outsourcing (BPO) Dietmar-Hopp-Allee 16 D-69190 Walldorf, Deutschland T +49 6227 7 -41100 E bpo@sap.com

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