Why a good service provider isn't enough for BPO by LONGUE-VUE

WHY A GOOD SERVICE PROVIDER IS NOT ENOUGH FOR SUCCESSFUL BPO DELIVERY

How Collaboration Between Providers and Software Vendors Helps the Customer

SAP White Paper

Content

^ 4 Executive Summary ^ 5 IT in BPO ^ 7 The BPO Service Provider and Software Vendor As a Team ^10 The Rewards of Tighter 足Collaboration 10 Lower Implementation Cost 10 Limited Organizational Strain 10 Better Processes ^12 A Concrete Example: How SAP Approaches BPO 足Service Delivery 12 Tiered Support for the BPO 足Provider 13 A Life-Cycle Perspective on Design and Implementation ^14 A Closer Look at the Benefits 14 Cost Benefits 14 Transition and Evolution Cost 14 Ongoing Total Process Cost 14 Cost of Keeping Long-Term Options Open 14 Risk-Related Benefits 14 Transformation Risk 14 Legal Risk 14 Quality-Related Benefits ^15 Conclusion

Executive Summary

It was logical for many early-generation business process outsourcing (BPO) deals to show patterns typical of systems integration and process reengineering – both of these disciplines matured in the ’90s. But time has shown that success in BPO is about more than just process redesign and technology. Fundamentally, it is about operational excellence, and it must leverage both the operational and transformational skills of the provider. Put another way, BPO should be driven by the COO as well as the CIO. Some BPO providers – pushed by customers and advisors, insufficiently supported by software vendors, and challenged by internal resourceallocation dynamics – have failed to realize this point in the past. Struc turally, many providers have either been good “operators,” skilled at running a given setup, or good “implementers,” skilled at designing and implementing innovation. But few managed to be both. The result in quite a few cases was a failure to leverage processes and technology solutions to fully harness the key drivers of BPO value: economies of scale, process optimization, and labor arbitrage. This explains a number of economically unsustainable deals that left customers and providers dissatisfied.

Successful BPO providers make the most out of their technology investments by ensuring that those investments serve their service delivery needs. They integrate process and technology design with operational requirements, thereby creating repli cable solutions that enable true scale leverage. The best service providers also seek the involvement and intimate support of the software vendors they choose for their process and technology platforms, to assist them in ongoing evolution and improvement. Catering to the providers’ needs is not a job a software vendor is typically structured to do, and it requires a substantial investment. Customers looking for a sustainable BPO offering are therefore advised to systematically verify the solidity of the relationship between the BPO provider and the software vendor behind the respective BPO platform.

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

The provider needs to take a holistic approach to the BPO engagement, linking together the transition phase and the ongoing operations phase from the beginning. Even a perfectly run implementation will not prove useful unless it is tightly aligned with requirements of everyday process operations.

IT in BPO

Why Business Decision Makers and IT Decision Makers Should Both Care

Customers often take a hands-off approach regarding the issue of technology in BPO. A typical comment might be, “I buy a service, and the IT should come with it – I shouldn’t need to care much about the technology.” Or you might hear, “This is a matter for the CIO to worry about; decision makers should defer it to the IT department.” Both ways of thinking miss some crucial points: • The appropriate deployment of technology as an enabler of outsourced and retained processes is critical to the delivery of the BPO services. Technology is central to the appropriate leveraging of automation, analytics, workflow, authorizations, process integration, and other key processes and activities. Furthermore, technology deployment should not be engineered in a silo – it must be designed hand in hand with process reengineering to achieve optimum “design to manufacturability,” as the equivalent concept is called in manufacturing. This includes the choice of the platform itself, its deployment, and any configuration and customization. • Technology choices made by or influenced by the customer have repercussions on the ability of the service provider to deliver the services. The technology platform of the customer and the provider is very often a shared one, or at least a heavily integrated one, and therefore the choices made by one organization impact the other. Common problems include data integrity issues as

Results from EquaTerra Survey of BPO Customers Overall importance of IT for BPO success

3.73 1 unimportant

5 very important

Recognition of IT as one of the top five success factors in BPO

Total: 42% U.S.: 52% Europe: 23% 55%

0% Figure 1: Customer Views of IT As a Success Factor in BPO

well as data synchronicity issues that occur over time when the “two sides of the fence” move in slightly different directions. Suboptimal self-service implementation is another example of a frequent concern. The early generation of BPO contracts, in particular in the mature HR outsourcing space but also to some extent in other areas, often suffered from lack of sufficient consideration being given to IT. But the market has evolved. As the results of a recent study by the outsourcing advisory firm EquaTerra show, BPO customers now assign a fairly high rating to the importance of the IT solutions used by BPO providers.1 However, the study also indicates that customers’ understanding of IT’s role in BPO is still uneven, with the United States (the most mature region when it comes to BPO) leading. Figure 1 summarizes these findings.

Companies are always striving to improve the cost, risk, and quality aspects of their operations. For a BPO provider to be able to do these things better than the customer, the provider must be in a position to leverage two capabilities: structural advantage and the ability to transition the customer organization to the state where the structural advantage is realized. Structural advantage on the part of the provider entails superior economies of scale, process optimization, and labor arbitrage. To benefit, the customer must accept some level of standardi zation around provider-driven best practices that the provider can at least partially replicate in a model used for other customers. This will also positively influence the provider’s ability to innovate and the level of documentability and portability of the platform at the end of the contract. Standardization

1. Assessing the Role of Information Technology (IT) & Enterprise Software in BPO, EquaTerra, 2007. SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

also enhances the extensibility of the platform – it is very difficult to make a highly customized platform evolve. Of course, in some cases the customer may have enough scale that a customerspecific standardization (in other words, homogenizing processes within the customer’s organization) is sufficient. However, even large multinational companies find the size of many parts of their organization (for example, countryspecific operations or particular processes) to be below critical mass for such a customized delivery model. The ability to transition the customer organization to the ideal state where the structural advantage is achieved requires that the provider be able to carry out some changes to the way operations were run when they were in-house (and the customer must be prepared to accommodate those changes). This comes as no surprise given that the main intent of service

In addition to being proficient at designing, implementing, and operating the pertinent business processes, the provider must have an excellent understanding of the technology platform that underlies those processes.

centralization is to transform the way the function in question operates, regardless of the process (HR, procurement, or any other) and the means (outsourced or via a shared service center). Consider these two provider capabilities while remembering the essential role of technology in harnessing economies of scale, process optimization, and labor arbitrage. It becomes clear that in addition to being proficient at designing, implementing, and operating the pertinent business processes, the provider must have an excellent understanding of the technology platform that underlies those processes. Unfortunately, a deep understanding of the technology platform is not always a given, especially for providers that claim to be “technology agnostic,” which is to say they can deliver services with multiple platforms and rely on the customer to determine technological direction for an engagement. This “tell me what you want” approach is often ineffective, as it relies heavily on the customer providing indications about the blueprint of the processes. By definition this is not the way a BPO provider should typically operate. Rather, providers should be able to bring in the requisite expertise and drive the process optimization. Also, deferring major platform decisions to the customer requires the provider’s consulting team to have a very broad skill set. The team needs to have the capacity to deploy good

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

The best service providers seek the involvement and intimate support of the software vendors they choose for their process and technology platforms, to assist them in their quest for ongoing evolution and improvement.

solution and process architects knowledgeable about each technology option, but this is asking a lot, given that BPOrelated implementations generate revenue only in the longer term. Often, the results of this situation have been overly proprietary, customized solutions that can easily become legacy software. Such solutions hinder innovation over the contract duration and make a transfer back in-house or to another provider difficult. Conversely, for a service provider to be just an “operator of platforms” is not sufficient either, since some level of IT transformation is usually needed, especially during initial transition phases and when innovations come into play.

The BPO Service Provider and Software Vendor As a Team Why Traditional Relationships Don’t Go Far Enough

As discussed earlier, the way information technology is used as a foundation of outsourced processes is crucial to the sustainability of the BPO endeavor. In order to benefit from economies of scale and process optimization, the provider must be knowledgeable about the required solutions and related configuration or implementation options, and must also be able to replicate such technology and process blueprints, at least in part, for multiple customers. Another point is equally crucial: the provider needs to take a holistic approach to the BPO engagement, linking together the transition phase and the ongoing operations phase from the beginning. (This requires adequacy, as well as continuity, of resources.) Even a perfectly run implementation will not prove useful unless it is tightly aligned with requirements of everyday process operations. Nor will a provider with perfect operational skills be successful if process design is insufficiently enabled by the initial technology implementation. Figure 2 depicts the way in which providers should optimally approach a BPO engagement. As mentioned, in order to make BPO commercially successful, a BPO provider must be a very good operator of processes and related systems. This actually requires different capabilities from those of a typical systems integration (SI) firm. For an “operator,” obtaining and responding to detailed customer requirements for all processes is not necessarily a high priority, and most of the economic value is derived after the

Initial Design/ Blueprinting

Implementation

Operations Redesign

Continuous Improvement

Exit/ Provider-Switch

Figure 2: Process and Systems Design in a Good BPO Engagement

implementation phase. In other words, there is strong incentive for the provider to transform any key process to a cost-effective best practice, fast. The transition phase (including process and technology reengineering) and related change management can be challenging and do require the same skills that good SI firms have. However, because of their organizational structure and the nature of their function, even BPO providers that have a strong SI heritage or dedicated SI divisions may fail to fully align the initial implementation with the operational requirements. Since a BPO implementation is typically driven (and, possibly more importantly, respective revenue is recognized) by the “operations side of the house,” the implementation project is usually an internal one, whereas the

best SI experts generally have greater incentive to work on external, immediately billable projects. The SI team typically moves on as soon as possible – at the latest upon completion of the initial transition project – leaving the provider’s operations department with the task of implementing any potential continuous improvement and redesign in isolation. In such a situation, the needed integration of transition and operations activities can easily be lost, as depicted in Figure 3. A final point to be considered from a customer perspective is the requirement for an end-to-end process view, bridging the boundaries between BPO provider and customer. This requires a deep and seamless integration of processes and solutions, linking the provider with both functional and

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

Initial Design/ Blueprinting

Implementation

Update

Operations Redesign

Continuous Improvement Exit/ Provider-Switch

Figure 3: Missing alignment of Transition and Operations Activities

c ross-functional units in the retained organization. In turn this means that providers need to leverage technology to the maximum possible degree. Based on the points made above, it is easy to see why traditional alliances between providers and software vendors, mainly aimed at marketing initiatives or punctual systems integration support, are not sufficient for BPO. The BPO providers need more substantial help with the effective deployment, maintenance, and evolution of the chosen software solution. For this reason,

some providers have been trying to fill the gaps by acquiring smaller vendorspecialized systems integration firms. In the past, failure to meet some of the challenges just described has been reflected in BPO contracts where economics were handicapped by insufficient leverage of automation and information systems. This in turn limited the access to economies of scale, process optimization, and labor arbitrage that BPO providers need to offer lower cost, better quality, and a better risk profile than the customer would have

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

been able to access alone. Problems reported include uncertainties around specific items such as migration of historical data sets into the new ones. More generally – and more dramatically – technology-related problems have arisen around the coexistence of new processes and tools (for example, self-service portals) with retained ones. Similarly, the amount of technologysupported innovation throughout the engagement lifetime was often perceived to be insufficient, which diluted the customer’s satisfaction. Ultimately, the responsibility falls on the provider to ensure that technology is appropriately deployed and leveraged. However, a close collaboration between the provider and the software vendor can make things run more optimally by reintegrating the disjointed pieces of the engagement model. In essence, such collaboration provides the glue for keeping IT-related activities during the transition and operations phase aligned. Figure 4 illustrates this idea with some examples. What all this means is that prospective BPO customers and their advisors need to pay attention to how the provider handles IT and how closely the software vendor will be involved in the engagement. They need to “kick the technology tires” of the service delivery during the RFP phase and at the same time ensure that they: • Enable the provider to use stan dardized best practices whenever appropriate • Allow enough time and resources during due diligence

Initial Design/ Blueprinting

• Best practices for configuration, deployment, and u pgrading • Blueprinting support • Optimized support access • Operations-savvy resources • Ongoing training

Implementation Update

Operations Redesign

Continuous Improvement

• Migration support • Rebuilding of know-how • Best practices fortransfer of data and process configuration

Exit/ Provider-Switch

Figure 4: Realignment of the Engagement Cycle

• Include the sufficient participation of IT-related experts in the planning and design process – even if this requires directly accessing the software vendor’s resources or asking the provider explicitly to do so • Provide enough know-how to effectively govern ongoing evolution of processes and technology by triggering and evaluating proposals for innovation • Have confidence that the chosen software vendor will back the provider appropriately

Prospective BPO customers and their advisors need to pay attention to how the provider handles IT and how closely the software vendor will be involved in the engagement. They need to “kick the technology tires” of the service delivery.

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

The Rewards of Tighter Collaboration Reaping the Benefits

In order for all the beneficial effects of best-in-class approaches and econ omies of scale to occur, processes need be standardized at least to some extent – often around the provider’s blueprints. This also results in a much “cleaner” IT implementation. In practice, however, many organizations reject standardization, citing the argument that their operations are “too specific” for it. In reality, it is often not the specificity itself that’s a problem, but rather the staff’s fear of changes. This can be expressed by a “pain curve,” which has to be balanced against the potential savings or other qualitative gains. The graph in Figure 5 illustrates the situation. The cost curve is actually a sum of the IT cost curve and – more importantly – the process cost curve. The strain caused by process changes (the “pain curve”) varies greatly by company and becomes steep at a point when the organizational discomfort with the amount of change is too large and no amount of savings can make up for it. Every company will choose a specific combination of process specificity and IT customization, based on its individual preference to balance further cost reductions and the resulting strain on the organization.

Prospective BPO c ustomers need to consider longterm costs, including costs they will incur when the engagement contract expires. Should they decide to change providers or bring processes back in-house, they will save money on migration costs if the BPO engagement has been based on a standardized ERP solution.

Cost

Company-specific processes

Strain caused by process changes

Figure 5: Strain Versus Cost – Determining the right Amount of Standardization

Within the framework illustrated in Figure 5, a tight collaboration between BPO provider and technology vendor, focused on the joint design of processes and technology deployment, would ensure the following advantages.

Company-specific combination, based on appetite for cost reduction versus tolerance for change

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

“Standard” processes

Cost

Company-specific processes

“Standard” processes

Strain caused by process changes

Figure 6: Optimization – Lower Cost, Less Strain for the Customer

Lower Implementation Cost BPO providers can often implement technology at a lower cost, if given the capabilities and the opportunity to do so. They become “power users” with significant – and replicable – implementation experience and can leverage software to the fullest extent. Their use of standardized templates allows for faster implementation.

Limited Organizational Strain Even more importantly, such BPO providers are in a position to optimize the outsourced processes while limiting the strain on the customer organization, as illustrated in Figure 6. Such optimization is easier for the BPO provider, which is more used to the tension and also has a commercial incentive (and

often an explicit mandate) to optimize. Standardized processes readily offered by BPO providers – such as advanced self-services and customer interactions – can additionally reduce strain on the customer.

Better Processes Through the combined result of the effects described above, BPO providers can achieve better business results at lower cost: automation is increased, best-in-class processes can be fully leveraged, and the need for custom code and process customization is minimized. This maximizes the structural advantage that the BPO provider can leverage to deliver economic value and related superior risk and quality to the customer. Figure 6 illustrates this concept.

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

A Concrete Example: How SAP Approaches BPO Service Delivery The SAP® Business Process Outsourcing Organization

Recognizing that optimal BPO service delivery is a collaborative endeavor, SAP has established a BPO-specific business model based on years of experience with both BPO customers and BPO providers. The goal is to maximize opportunities so that BPO as a process delivery option yields results that are successful and sustainable. SAP implements its BPO engagement model through the SAP® Business Process Outsourcing (SAP BPO) organization, which was created in 2004. Based on clear and stringent qualifi cation criteria, including a biyearly BPO-specific certification, providers can receive a license that entitles them to use SAP software for their provision of BPO services. Such BPO providers are also awarded the use of a special “Powered by SAP” logo. The first BPO provider SAP BPO worked with was ADP, via ADP GlobalView.2 Since then, SAP BPO has been involved in a large number of successful BPO engagements, helping ensure lower costs and improved risk profiles that benefit both provider and customer. The model that the SAP BPO organi zation uses to foster optimum tech nology deployment features two core aspects: tiered support and a life-cycle perspective.

BPO Provider Solution- and services-related questions and issues

Commercial questions and issues SAP SAP® BPO Global Program Manager Alignment with SAP-internal business functions

Close and constant alignment

Coordination of SAP and provider resources for joint execution of business-related activities, including: • Business plan development • Joint marketing activities • Identification and documentation of customer references • Provider sales enablement • Development of a joint value proposition

SAP BPO Global Solution Delivery Manager Alignment with SAP-internal development and services teams Coordination of SAP and provider resources for joint execution of solution- and services-related activities, including: • Implementation of BPO- specific requirements • Solution configuration and optimization • Training and education • Realization of global requirements • Project management

Figure 7: How the SAP BPO Organization supports BPO Providers

Tiered Support for the BPO Provider Playing a primary role within SAP BPO are solution delivery managers, specialists dedicated to helping providers whose service qualifies as “Powered by SAP.” Solution delivery managers serve a tier-one support function, interacting with a provider at all stages of a BPO engagement, including initial blueprinting and design activities. Solution

delivery managers also channel the tier-two support that comes from a large group of SAP specialists familiar with BPO, ranging from solution architects to enterprise resource planning (ERP) support experts. Also within the SAP BPO organization, program managers – the commercial counterpart to the solution delivery managers – work closely with BPO providers throughout the BPO life cycle. Figure 7 depicts these relationships.

2. ADP GlobalView® is an award-winning payroll and human resources outsourcing (HRO) service for large multinational employers. ADP GlobalView service experts leverage the SAP ERP Human Capital Management solution to deliver their single-source, multilingual, multicurrency HRO service worldwide. 12

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

A Life-Cycle Perspective on Design and Implementation Even before striking a deal with a customer, a provider supported by the SAP BPO organization is knowledgeable about the possibilities offered by the SAP platform, the design and implementation methodologies available, and the support requirements. A BPO program manager at SAP ensures

BPO provider Develop BPO activities Build solution support from SAP Execution Delivering a solution Expert guidance Solving key challenges Quality management Providing quality checks and continuous improvement Enablement Providing knowledge

that all stages of the engagement have adequate SAP support so that technology-related uncertainties are minimized. The program manager ensures that an SAP presence – working hand in hand with the provider – is of service in the customer operations and can provide help effectively and efficiently. Figure 8 summarizes the types of support that providers can receive throughout the BPO life cycle.

Sell Generate customer base

Implement Set customer live

Support Contribute to customer success

BPO professional services agreement Preferred access to SAP services BPO solution delivery management On-demand availability of BPO topic experts Provider certification SAP® Safeguarding services Knowledge transfer SAP Standard Support option

Services for all outsourcing providers Services for BPO providers SAP standard services Figure 8: Support Throughout the BPO Life Cycle

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

A Closer Look at the Benefits

Lower Costs, an Improved Risk Profile, and Better Quality

A range of benefits are achievable through an approach to BPO that features tight collaboration involving the software vendor. Some general examples based on SAP experience follow. For specific examples, please refer to the SAP document Improving BPO Service Delivery Through Collaboration.

Cost Benefits Having the software vendor as an active part of the team can lead to lower costs in all phases of the BPO engagement. Transition and Evolution Cost Because the providers of BPO services powered by SAP software have the support needed to fully utilize the key architectural aspects of SAP solutions, there is limited need for ad hoc code modifications. It is easier to incorporate best-practice processes into a scalable, standardized services blueprint for long-term use. Ongoing Total Process Cost The cost of process steps constitutes the bulk of the total process cost, and software-enabled automation is one way to eliminate unnecessary expenses. State-of-the-art software from SAP makes it possible to significantly limit manual intervention in both processing and hand-offs between systems and organizations. With backing from SAP, many providers are finding success at building replicable delivery platforms that generate synergies across customer operations and implementations.

Cost of Keeping Long-Term Options Open Prospective BPO customers need to consider long-term costs, including costs they will incur when the engagement contract expires. Should they decide to change providers or bring processes back in-house, they will save money on migration costs if the BPO engagement has been based on a standardized ERP solution. The availability of experienced, cost-effective transition support is another consideration. When SAP has been involved in the BPO engagement, the customer can readily benefit from a large community of SAP experts and service partners.

Risk-Related Benefits As demonstrated by SAP experience, the risk profile of a BPO engagement can be improved through a collaborative relationship between provider and software vendor. Transformation Risk A close connection between the BPO provider and SAP helps to lower the transformation risk of a BPO engagement. SAP experience shows that 40% to 70% of business process configuration is common across companies, and SAP BPO solution delivery managers and other SAP experts support BPO providers in leveraging synergies through multiclient platform architecture. For example, the provider can add new customers faster by copying a template based on SAP software. SAP technology enables a provider to adapt the business processes for an individual customer without impacting the processes of the other customers.

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

Legal Risk Keeping up with legally mandated processes and regulatory reporting requirements is a major challenge for most BPO service providers. The key to managing legal risk is having the right technology that is regularly and properly updated. As a global software supplier with more than 35 years of experience and a worldwide network of solution development and support resources, SAP is uniquely equipped to help. BPO providers with services powered by SAP software benefit from strong compliance functionality already built into the software, and a close working relationship between provider and SAP ensures seamless knowledge transfer and timely delivery of updates.

Quality-Related Benefits Providers can achieve better quality levels by lowering their cost base – which frees up resources for improvements – and making sure that the transition phase of each engagement is smooth. These gains are possible thanks to the substantial up-front involvement of SAP in the relationship with the provider and the related leveraging of synergies through multiclient BPO platform architectures. Providers can maintain high quality levels because SAP keeps them fully informed of future developments, allowing them to plan ahead and ensuring an optimum software strategy for the customer’s landscape.

Conclusion

A good BPO service provider excels at leveraging economies of scale and process optimization, and harnessing the underlying technology is a primary means of achieving this. So it is counterproductive to restrict the provider’s freedom with regard to technology deployment. But that doesn’t mean the BPO customer should pay no attention to the details. In fact, it is absolutely critical for the customer (in tandem with expert advisors) to “kick the technology tires” of the provider. This should take place carefully and systematically up front, through the RFP process. Only by doing so can the customer be confident that the provider’s proposed technology deployment will indeed reap the benefits that add up to sustainable value. An essential part of the equation is that the software vendor heavily supports the BPO provider. Traditional joint go-to-market activities do not feature the right level of support – or even the right type. The vendor has to be willing to put a large amount of resources on the table. To this end, SAP has established a dedicated organization – SAP BPO – that devotes a large part of its efforts to the support of providers in deploying technology and resolving related problems. Providers of BPO services powered by SAP software receive SAP BPO backing in under-

standing how to better automate processes, finding shortcuts for implementation, sketching what is possible with technology innovation, or simply identifying solutions to operate the technology platform more cheaply. This is a model that lets service providers excel at what they do best by fully utilizing technology. The ultimate result is successful and sustainable service delivery that benefits all parties involved. For more information about how SAP supports BPO service providers and their customers, visit www.sap.com/services/bpo or e-mail bpo@sap.com.

With backing from SAP, many providers are finding success at building replicable delivery platforms that generate synergies across customer operations and implementations.

SAP White Paper – Why a Good Service Provider Is Not Enough for Successful BPO Delivery

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