Business process outsourcing: an approach to gain ...

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Business process outsourcing: an approach to gain access to world-class capabilities Bhimrao Ghodeswar and Janardan Vaidyanathan

Business process outsourcing

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National Institute of Industrial Engineering, Mumbai, India Abstract Purpose – This paper sets out to review the different types of outsourcing, its drivers and process, and to identify world-class capabilities that host organisations can leverage. Design/methodology/approach – This paper is primarily based on a review of literature. Findings – Outsourcing helps the organisation to achieve higher levels of value creation for the final customer. Drivers of outsourcing emanate from organisational initiatives, improvement focus, financial and cost objectives, or growth objectives. A wide range of core and non-core critical business processes are increasingly being outsourced covering a large spectrum of sectors and operations, enabling host organisations to gain access to world-class capabilities. Originality/value – This paper identifies critical drivers of outsourcing and the process by reviewing available literature in this area. In doing this an attempt is made to find answers to some fundamental questions. What are the main types and drivers of outsourcing? What are the different phases in the process of outsourcing? This paper discusses in detail the significant drivers and process of outsourcing; and the world-class capabilities accessible by the host organisation. Case studies are used to illustrate these aspects further. Keywords Process management, Outsourcing, World class manufacturing Paper type Literature review

1. Introduction Outsourcing as a key business strategy has been used by companies in various industries for many decades. Competitive pressures have forced companies to look objectively and critically at business processes. Companies have been outsourcing manufacturing operations, business services and even entire business lines successfully for a long time now. Recently, contract manufacturing sector has benefited with considerable outsourcing, initiated by the electronics and pharmaceutical industries. Business processes such as information technology (IT), payroll, logistics and human resources (HR) management are among the common ones regularly outsourced in most of the industries. Outsourcing of core functions like engineering, research and development (R&D), manufacturing and marketing are being considered by corporations. Developing the ability to control and leverage critical capabilities, irrespective of whether they reside within the organisation or otherwise will be more vital than the ownership of capabilities (Gottfredson et al., 2005). Competitive pressures and the need for enhanced financial performance are driving an increase in the nature, scope and scale of outsourcing across industries worldwide. The option to transfer all or part of a company’s business function to an external entity plays an increasingly important role in the strategic arsenal of organisations (Kakabadse and Kakabadse, 2003). Traditionally organisations considered outsourcing

Business Process Management Journal Vol. 14 No. 1, 2008 pp. 23-38 q Emerald Group Publishing Limited 1463-7154 DOI 10.1108/14637150810849382

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to rapidly improve performance and reduce operating costs. In the present era companies are using strategic and transformational outsourcing to seek improved business focus, mitigate risks, build sustainable competitive advantage, extend technical capabilities and free resources for core business purposes (Bartell, 1998). Competitive advantage can be gained when the most appropriate business processes are performed more effectively and efficiently by external suppliers (Lankford and Parsa, 1999). Organisations consider outsourcing nearly all the services they need – printing, legal services, accounting and book-keeping, telecommunications, vehicle maintenance, security, payroll, recruitment and many others, thus restricting their own employees to the core functions that define the organisation’s business. 2. Methodology The focus of this paper is on offshore business process outsourcing (BPO). A literature review of articles on existing theoretical perspectives and empirical work on outsourcing was conducted by the authors. By presenting an integrated viewpoint on the drivers and process of outsourcing built up on past research findings, this paper presents a comprehensive framework of critical dimensions of outsourcing. This understanding is further enhanced by the case studies presented. This paper outlines a simple, yet an integrative framework that serves to stimulate new avenues of empirical research. 3. Outsourcing 3.1 Meaning and scope Outsourcing decision is a version of make-or-buy decision in which an organisation elects to purchase an item that previously was made or a service that was performed in-house (Monczka et al., 2005). It involves sourcing and using a supplier who provides the completed item or service rather than buying the components and manufacturing them in-house. Outsourcing is the act of transferring some of an organisation’s recurring internal activities and decision rights to outside providers, as set forth in a contract. Outsourcing today involves either IT or BPO. Information technology outsourcing (ITO) which involves a third party who is contracted to manage a particular application includes all related server networks and software upgrades. BPO generally features a third party who manages the entire business process such as accounting, procurement or HR. When the outsourcing facility is located outside the principal company’s country this is termed as offshoring. Firms essentially have three kinds of processes: core processes which give strategic advantage, critical non-core processes which are important but not competitive differentiators, and non-core non-critical processes which are needed to make the environment work. Outsourcing non-core processes frees the firm’s time and resources for core competencies. As ITO services are becoming commoditised the industry is looking forward to BPO as a means to revitalise their organisations, reduce costs and build competitive advantage. The service provider owns, administers and manages the business process, based upon defined and measurable performance metrics with an objective to improve overall business performance. Globalisation, competitive markets and mergers and acquisitions are the primary stimuli for BPO. The prime objective of BPO is to deliver the greatest value to all the stakeholders and to achieve and sustain the highest degree of productivity for an organisation.

3.2 Evolution of outsourcing Outsourcing initially began with large organisations outsourcing all of their data center operations with an objective of achieving significant cost arbitrage (Pfannenstein and Tsai, 2004). Then followed the era of transitional outsourcing in the early 1990s wherein host organisations sought expertise of the IT specialists in developing new client/server systems while still maintaining their legacy systems. As service providers understood the functions of a data center, desktop support and other standard IT areas, they began in specialising in specific domain intensive functional areas. This marked the beginning of BPO. Offshoring and outsourcing have a synergistic relationship. The traditional model for insourcing keeps the work in-house and onshore. Manufacturing work during the 1980s began to migrate to areas that offered lower labor costs. Manufacturing moved from expensive urban areas to rural areas offering relatively cheaper land, tax incentives and holidays and skilled manpower at lower wages. In their quest to achieve a higher cost arbitrage, global corporations started moving their internal manufacturing, operations, and service functions such as call centers and back-office processes to lower-cost countries while keeping them in-house as company-run operations. This move is motivated by a desire to be closer to and gain improved access to foreign markets in addition to pursuit of low-cost operations. Companies also started to outsource non-core activities to local or regional suppliers who provided specialised expertise and lower costs. The rise in the IT outsourcing, contract manufacturing and third-party logistics industries highlights this activity. The latest trend among multinationals is to get the work simultaneously outsourced and offshored to countries namely India and China, with other preferred destinations for outsourcing being Philippines, Brazil, Ireland and the Czech Republic (Monczka et al., 2005). A well-defined strategy is the key to maximising the benefits of outsourcing while avoiding its pitfalls. In most outsourcing engagements the service provider agrees to execute the process at a cost lower than what the host organisation is currently incurring and agrees to accept a service target in excess of what the host organisation is achieving. These are called service level agreements (SLAs). 3.3 Levels of outsourcing There are three levels of outsourcing namely tactical, strategic and transformational (Brown and Wilson, 2005). Tactical outsourcing is used by organisations to resolve specific problems being experienced by a firm, viz. a lack of financial resources to make capital investments, inadequate in-house managerial competence or a desire to downsize, etc. Tactical outsourcing is a form of traditional outsourcing and is based on cost comparison and the make-or-buy decision. The tactical outsourcing results in visible benefits in the form of enhanced cash savings, minimising the need for future investments and resolving staffing issues. It involves execution of a business process following the existing rules. Tactical outsourcing can also extend to outsourcing peripheral activities enabling the management to acquire industry specific capabilities by partnering with a chosen vendor (Hussey and Jenster, 2003). This is a common method used by large mature corporations for handling high-volume repetitive tasks. This is used for processes such as payroll transactions, HR administration and procurement. Strategic outsourcing is used as part of the process of redefining the organisation and results in freeing the


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management staff to refocus on the core business functions. Strategic outsourcing relationships build long-term value resulting from the client working with a fewer number of best-in-class integrated service providers. Transformational outsourcing is commonly used to redefine the business (Linder, 2004). It enables an organisation to retain leadership position, build sustainable competitive advantage and generate highest value for an organisation. Some issues addressed by transformational outsourcing are good governance, maturity of business process knowledge and adequately drafted and monitored SLAs. The levels of risk in strategic and transformational outsourcing are higher than tactical form, but are commonly shared with the outsourcing partner. Tested risk mitigation plans, high-security levels, mature project management skills and proven business continuity plans need to be put in place before an arrangement can begin in this direction. 4. Drivers of outsourcing Organisational competitiveness is determined by the ability of an enterprise to constantly meet changing customer needs better than the competition. In a market place wherein socio-techno-economic factors are dynamic, it is not feasible for an organisation to build competitiveness and sustain the same at all the stages of the value chain (Ramachandran and Voleti, 2004). Typically, the drivers for outsourcing can be internal or external and these have been a focus of study by some researchers in the past. The key drivers include financial reasons such as reducing costs, generating additional profits and reducing capital outlays with periodic payments (Bhattacharya et al., 2003). Technical reasons for outsourcing are quality improvement, gaining access to new talent and technology, the easy availability of vendors with expertise, and economies of scale. Among the tactical drivers the most prominent ones are shortage of skilled workers and cost-reduction opportunities. Strategic reasons include refocus on innovation and core-competencies. Leading organisations are shrinking their business cycles and tightening feedback loops (Brown and Wilson, 2005; Greaver II, 1999), and increasing quality standards. Drivers of outsourcing have been classified into four categories, viz. organisational, improvement, financial and cost, and revenue drivers as discussed below. Table I depicts the most popular drivers of outsourcing. 4.1 Organisational drivers The major objectives in the organisation-driven initiative are to achieve a higher quantum of focus on core business, increase flexibility to deal with ever changing business conditions, demand for products and services, leveraging emerging technologies and achieving higher stakeholder value. Outsourcing the tactical components of job functions of the management team empowers them to spend time on strategy-related issues such as market positioning and new product development. Outsourcing permits the redirection of resources from non-core activities towards activities that provide a greater return in serving the customer. Functions of this nature are identified, isolated and then outsourced to specialist vendors. The company can also proactively identify some current core functions that are expected to become less important due to market dynamics. These initiatives provide employees with a stronger career path and increased commitment and energy in non-core areas. Employees are recognised as key assets in labour intensive service industries.


Major drivers for outsourcing Organisational drivers

Improvement drivers

Financial and cost drivers

Revenue drivers

To achieve a greater focus on core business To increase flexibility to deal with ever changing business conditions To gain access to products, services and emerging technologies To assign operational issues to an outside expert To have greater thrust on market positioning and new product development To redirect resources from non-core activities to greater focus in serving the customer To improve operating performance, quality, timeliness, and productivity To obtain expertise, skills, and innovative ideas To obtain technologies which otherwise will not be available To improve management and control of operational processes including risk management To improve credibility and image by associating with superior providers To eliminate the fixed cost of internal staff by moving the function to a supplier To become more flexible, dynamic to meet the changing opportunities To reduce investment in assets To reduce the invested capital funds in non-core business functions To expanding its operations into a new geographical region To reduce or control operating costs To access an outside provider’s lower cost structure To achieve cost reduction with enhanced performance To handle varying demand more efficiently because of economies of scale To achieve aggressive growth objectives by gaining increased market access To leverage on the service provider’s best processes, capacity and systems To expand capacity to design, test and build new products and services To stretch its limits in handling the increased volume of business To manage demand efficiently through outsider’s automation, process maturity and the latest technology To focus on enablers of business growth and strategies to fulfil them

4.2 Improvement drivers The significant objectives of this initiative are to improve operating performance; obtain expertise, skills and technologies; improve management and control; improve risk management; acquire innovative ideas; improve credibility and image by associating with superior providers. Performance measures of productivity, quality, timeliness, cycle time, utilisation, etc. can be targeted for improvement. A company when realises that its in-house skill-set is inadequate for a given function as business dynamics change, it may entrust this function to a specialist service provider who is highly competent in administration, use well-trained and experienced staff and have the industry best practices. When companies outsource, they become more flexible, dynamic and competent to change themselves to exploit changing opportunities.

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Table I. Drivers for outsourcing

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This is achieved by empowering the parent organisation to handle fluctuations in the volume of work, eliminating the fixed cost of internal staff and move the function to a service provider who will be paid only for the work done. Outsourcing is the best solution for applications that need to be developed or modified for a specified time or require high-manpower resources at one point of time, e.g. Y2K compliance.

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4.3 Financial and cost drivers The objectives of this initiative are to reduce investment in assets, free-up resources for other purposes, and generate cash by transferring assets to the service provider. These business processes when outsourced reduce the investment required by the host organisation to modernise them. Outsourcing can also improve certain financial measurements by eliminating the need to show return on equity from capital investments in non-core areas. Outsourcing is a viable and important alternative to building the needed capability if an organisation is thinking of expanding its operations into a new geographical region. It also helps in reducing or controlling the operating costs. Access to an outside provider’s lower cost structure is one of the most compelling short-term benefits of outsourcing. Other benefits sought by organisations are cost reduction with enhanced performance and conversion of fixed costs into variable costs. Service providers can handle varying demand more efficiently because of economies of scale, automation, process maturity, and investment in the latest technology. 4.4 Revenue drivers The major objectives of this initiative are to achieve aggressive growth by gaining increased market access and leveraging the service provider’s best-in-class processes, capacity and systems. Most organisations have a finite capacity and limited capabilities. Expanding capacity may take several years to design, test and build the facilities, need a substantial level of investment, and result in lost market opportunity due to higher “time to market”. The host organisation can achieve higher sales and production levels even when such expansion cannot be financed internally by the organisation. Outsourcing can involve the transfer of assets from the host organisation to the service provider. Equipment, facilities, vehicles and licenses used in current operations have a value and are, in effect, sold to the provider as part of the transaction, resulting in a cash infusion. 5. Outsourcing process Figure 1 shows the typical process and phases of outsourcing ranging from decisions to continuous management and performance evaluation along with the life cycle of the relationship between the host organisation and the business process vendor. The processes illustrated in the figure are part of any outsourcing engagement (Brown and Wilson, 2005; Gonalgo et al., 2005). The strategy phase is often the take-off point for an outsourcing initiative. The host organisation determines the objectives, scope and feasibility of the outsourcing concept before furtherance in this initiative. In addition, the total time, budget and necessary resources are estimated. A request for information (RFI) may be drafted, floated and responses from interested service vendors may be obtained at this stage. This enables the host organisation to gain more insight into various particulars of the outsourcing engagement. In the next phase on

Source: Brown and Wilson (2005); Gonalgo et al. (2005)

Pre-contract

Managing partnerships

Planning transition

Renewal ?

Integrating delivery

Budgeting & forecasting

Negotiating agreement

Contractual execution

Cost/Budget Administration

Monitoring performance

Launching project

Signing of contract

Defining the scope of work

Decision to outsource

Management

Negotiation

Scope

Strategy

Implementation

End of contract

Completing contract

Delivering results

Completion

Outsourcing management

Post-contract

Support

Maintaining and supporting

Outsourcing decision


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Figure 1. Process of outsourcing

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scoping, the baselines and service levels expected from the vendors are established. Further clear delineation is agreed on the functions that are to be outsourced and the functions that will remain in-house. A request for proposal (RFP) is drafted at this stage by the host organisation. Only vendors who have qualified on the basis of merit of the RFI response are eligible for responding to the RFP. Responses of the RFP are analysed and vendors are qualified. The next phase involves negotiation. Here, the host organisation can develop a request for quotation (RFQ) wherein the host organisation attempts to understand the pricing model of the qualified vendor. The most common pricing models used are cost per full time equivalent, time and material, price per unit, volume-based pricing, managed service fee, no cure – no pay, fixed price, etc. (Bartell, 1998). This ends the pre-contractual phase. Negotiations culminate in a contract signed between the host organisation and the chosen vendor. Vendors may also be asked to demonstrate capabilities indicated in the response to the RFP/RFQ by executing a pilot project. The host organisation then examines the services provided by the vendor during the pilot phase to assess the competence of the vendor to execute the proposed service. As discussed above, the nature of the outsourced work may involve only a single time engagement for non-continuous services indicating a one-time contract. For business processes that are continuous in nature a multi-year renewable contract is signed. The implementation phase marks the transition of the in-house process to the outsourced vendor. This often involves a requirements assessment sub-phase where the process is studied in detail by the vendor. The vendor can re-engineer the process to optimise the operations. After successful transition the phase of continuous monitoring and management is carried out in the management phase. The host organisation now has external organisations performing business processes and it has to seamlessly integrate its own processes with these and define suitable interfaces between the host organisation and the service providers (Gonalgo et al., 2005). Initiation and implementation of change management is one of the key elements of this phase for a successful outcome. This marks the end of the contractual phase and marks the beginning of the post-contractual phase. Management of end-of-life arrangements is executed in the completion phase. Contracts that come up for renewal are assessed in this phase. Host organisations make vital decisions on extension of the contract, amicable separation with the vendor to consider engagement with another vendor or executing the function in-house. Renewal of a contract indicates the cyclical nature of the process. The decision to outsource has associated risk that can be mitigated by adequate planning (Aron et al., 2005). While some of the risks are strategic in nature often caused by the vendor’s action, others are operational in nature caused by the complexity of the business process itself. 5.1 Building relationships Relationships between principal corporation and vendors are decided by the strategic impact of the outsourced business process on the principal corporation and the extent of vendor substitution possible. A vendor offering services higher up in the value-chain cannot be easily substituted by another vendor. The dyadic relationship between a host organisation and a service provider is mainly based on an exchange perspective in which these two partners are working in synergy to create a new value together, higher than what each one individually can achieve (Zineldin, 2002). It is beneficial for a host

organisation to consider and establish a long-term relationship with a service provider eliminating the sources of insecurity and uncertainty. Sharing information, learnings and experiences often facilitate in building a higher level of trust and a better atmosphere for strengthening ongoing strategic business relationship. In the initiation phase the nature of relationship between both the host organisation and the service provider is transactional wherein the scope is narrow, risk of non-performance is low, degree of innovation incremental and the type of advantage the host organisation gains is tactical (Ryals and Rogers, 2006). The host organisation may have ongoing contracts with several vendors simultaneously for the same or different tasks with the sole objective of achieving operational efficiency and cost reduction. In the growth phase, the host organisation identifies suitable processes to be outsourced to the existing pool of qualified service providers. This results in a co-operative relationship where a few service providers are identified to perform higher order tasks and process greater volumes leading to reduction of risk and better predictably in executing operations. The focus is on enhancing service responsiveness, technical competence, and skills. In maturity phase, the host organisation and the service provider become interdependent wherein a minimum level of openness and trust has been already established. This marks the beginning of a long-term stable relationship by signing multi-year contracts for core business processes. The measurement focus is on cost of the outsourced service, delivery timelines (turn around times) and quality. In this stage both the host organisation and the service provider are bounded contractually and legally in the most weak form of inter-enterprise relationship. As the host organisation acquires insight into higher order tasks that can be outsourced, the scope broadens to further strengthen the relationship. The degree of innovation required by the service provider is radical as the scope of the outsourced task broadens. This leads to better risk mitigation as risk is now shared between the host organisation and the service provider. During this phase the service provider functions as an extension of the host organisation wherein the boundaries dissolve and there are permanent teams working on either side to fortify the efforts. Joint initiatives are taken to realise the full potential of both organisations with an objective of long-term relationship leading to integrated operations and higher return on investment. Host organisations may consider single sourcing as very few vendors qualify to reach to this stage and sustain thereafter. 6. Access to world class capabilities Outsourcing can empower organisations to use global assets effectively and efficiently by using the industry best practices in enhancing their value chain and enter and create new markets (Farrell, 2004). By the very nature of their specialisation, outsourcing providers bring extensive world-class resources to meet the needs of their customers. Partnering with an organisation with world-class capabilities can offer access to new technology, tools and techniques that the organisation may not currently possess; more structured methodologies, procedures and documentation; and a competitive advantage through expanded skills. Outsourcing enables the organisation to consistently perform functions better that its competitors and continually improve on the activity as markets, technology and competition evolves (Quinn and Hilmer, 1995). Host organisations thus are empowered to deliver higher value-added services to


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their customers. Manufacturing knowledge-based organisations benefit in R&D, product design, process design, logistics, market research, advertising, marketing, distribution and customer services. Grid computing allows companies to use a large number of computing resources on demand, no matter where they are located. Grid computing enables organisations to move faster, improve flexibility and resilience, bolster productivity and enhance collaboration on a global level (IBM Grid Computing, 2004). Grids let an organisation draw on resource pools within and, in some cases, outside the organisation to accomplish a given computing task. Organisations can take collective advantage of improvements in microprocessor speeds, optical communications, raw storage capacity, and the internet. By using the technique to disaggregate their computer platforms and distribute them as network resources, companies can vastly increase their computing capacity. For example, companies are using grid computing to accelerate the pace of drug development, process complex financial models, and animate movies. Linking geographically dispersed computer systems can lead to staggering gains in computing power, speed, and productivity. Outsourcing enables host organisations to build flexible long-term platforms capable of adaptation or evolution. Many organisations focus on building skills in narrow areas where they currently excel. To keep pace with the emerging market dynamics outsourcing allows host organisations to buy technology from a vendor that would have been financially intensive and difficult to build internally (Lankford and Parsa, 1999). With changing market dynamics, outsourcing enables these organisations to consciously build dominating skills that the end customer will continue to value over time and also build unique sources of leverage in the value chain leading to intellectual advantages and greater profitability in highly competitive markets (Figure 2). Based on the various outsourcing functions, the capabilities have been classified in eight groups, namely, HR services, knowledge and decision services, operations support services, back office transaction processing, marketing services, customer interaction services, IT and software, and finance and accounting services. In the growing global economy, HR services are becoming increasingly complex and resource-intensive. Outsourcing specialists facilitate the client organisation in developing HR strategies and policies, sourcing and selecting employees, leading and managing employees, creating rewards and incentive programmes, administering benefit and retirement programmes, and managing payroll. The end-to-end HR outsourcing model includes more strategic processes such as employee acquisition functions, viz. recruitment, pre-employment testing, temporary staffing in addition to optimisation functions such as absence management, compensation or incentive planning and e-learning. This enables the HR department of the client organisation on leveraging employee performance and supporting strategic initiatives. With global businesses becoming more competitive, the cycle time for introducing products and services has become shorter and customers are more demanding with respect to the quality of products and/or services provided. This has forced enterprises to adopt systems and business models that will not only provide operational efficiency, but also add strategic value to their products and services. Knowledge and decision services encompass content solutions, e-learning and education solutions, project management, supply chain management, decision support systems, data warehousing,


Human Resource Services

Operations Finance and Accounting Services

- Benefits Administration - Hiring and Recruitment - Payroll - Staffing Services- Training and Staff Development

-Content Solutions - E-learning and Education Solutions -Project Management - Supply Chain Management - Systems Integration and Consulting - Decision Support Systems - Data Analytics - Data Mining - Data Warehousing

- General Accounting & Audit - Accounts Receivable & Payable - Banking & Financial Services Solutions - Credit & Tax Services - Insurance Processing - Billing Systems - Compliance - Management Reporting

Information Technology and Software - Applications & Systems Development - Applications Maintenance & Re-engineering - Cyber security & Infrastructure Support - IT Strategy and Planning - Application Service Providers - Data Base Management - ERP Implementation

Knowledge and Decision Service

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Operations Support Services World class capabilities

- Re-engineering - Facilities Management - Global Delivery and Sourcing - Venture Capital Outsourcing - Real Estate Management - Telecommunications - Office Solutions - Logistics

Customer Interaction Services

Back Office Transaction Processing

- Call Centers - CRM & Telesales - Customer Contact Services - Government Sourcing - Order Processing - Customer Support - Warranty Administration - Customer Feedback

- Administrative and Management Support Services - Banking/ATM/transaction Processing - Document Management and Processing - General Transaction Processing - Tuition and Scholarship Services - Accounts Receivables Processing - Payment Processing - Forms Management - Billing Services

Marketing Services - Marketing Programs - Sales and Sales Management - Strategic Planning - Advertising & Business Communication - Public Relations - Web development

Source: Brown and Wilson (2005)

data mining, and data analytics. This delivers high value to organisations by providing domain-based processes and business expertise rather than just process expertise. These processes demand advanced analytical and specialised skill of knowledge workers that have in-depth domain expertise. Operations support services are crucial to the success of any organisation in the dynamic marketplace today. This includes critical services for re-engineering, facilities management, global delivery and sourcing and logistics and dispatch services. These capabilities are directed towards improving efficiency of the operations in the host organisation. Back office transaction processing is an important sector in shared services, which is responsible for performing prime tasks such as ATM and transaction processing, payment processing, forms management, general transaction processing and accounts receivables processing. Service providers handle large volumes for multiple clients in the shared facility and thus provide the client with economies of scale, process maturity, higher quality and faster turn around times.

Figure 2. World-class capabilities accessed by host organisation

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This enables the host organisation to acquire capabilities to drive their front-end tasks by a powerful back office engine. Marketing services forms an important function of several organisations. A whole host of services can be outsourced under this. Client organisations acquire capabilities in executing marketing programmes, printing and publishing, advertisement, sales and sales management, strategic planning, business communication, publications and web development. This ensures enhanced levels of success for the client organisation in addition to higher value addition to the customer and shorter time to market. Customer interaction services require unique set of capabilities that facilitate the building of customer contact centers, enable CRM and telesales, warranty administration, order processing, and customer feedback. These are important capabilities a host organisation in the services sector must acquire for sustainable competitive advantage. Information technology and software services form the backbone of any organisation in today’s era. Capabilities can be acquired to facilitate application and systems development, ERP implementation, fortifying cyber-security, providing infrastructure support and database management. Additionally, capabilities on the finance and accounting services domain can strengthen the market leadership position of the host organisation. The capabilities can encompass general accounting and audit, compliance, accounts payable and receivables, management reporting, credit and tax services, insurance processing and billing systems. 7. Case studies We adopted a case study method to examine the nature of services in two different BPO organisations in India, each one specialising in a particular domain of providing outsourced offshore services. Our objective was to examine the nature and depth of services provided by these organisations to their clients. These case studies facilitate building an understanding about the offerings made by both organisations to their target market. As elaborated, both companies A and B can provide a wide range of offshore outsourced services that gradually scale up the value chain. These services range from non-core services lower in the value offering tier to services in core areas highest in the value tier. Unique benefits are embedded in the value offerings that enable host organisations to achieve execution of processes by best-of-breed practices, have access to an experienced talent pool, cost arbitrage, process maturity, quality excellence and quicker turn around times. The outsourcing arrangement with the host organisation in providing the value offerings offshore can be a shared facility or dedicated facility. Strategically Company A and B first engage with a host organisation to provide shared services in non-core areas. As the host organisations start noticing the benefits of the partnership, the offshore offerings sought are higher up in the value chain and the relationship between partners gets stronger. 7.1 Case study: Company A Company A specialises in providing outsourcing services only in the healthcare vertical. The company has operations in Asia, Europe and USA. The company pioneered the concept of providing service solutions for the healthcare payers and providers (Figure 3). They offer clients with best shore service solutions to payers, providers and enablers. Payers are health insurance companies. Providers consist of the physicians, hospitals and entities offering long-term and ambulatory care. Enablers are

vital to the health science vertical as they provide pharmaceutical, biotechnology and biomedical products and services. For the payer segment the service offerings comprise of claims processing, claims adjudication, underwriting and risk management. The service suite also includes third party administrator services. The services move higher and closer towards the core and critical functions in the value chain. Claims processing includes conversion of paper claims into their digital counterparts for speedy adjudication. Adjudication is a rule-based processing of insurance claims which often culminate in accounts payable and providing advice on the remittance to the claimant physician or hospital. Underwriting and risk management are inherent components of an insurance system. The company began operations initially by offering services for claims processing which included an inbound mailroom, sorting, scanning and data capture using manual data entry and optical character/mark recognition for clients in the USA. The delivery of these jobs was associated with high quality and quick turn around times. For US state governments the service was executed onshore and for private insurance companies a blended shore model was used. In the blended shore model mailroom, sorting and scanning are provided on shore, whereas data capture is executed offshore. Cost to value leadership is the advantage of the blended shore operation. Skilled manpower with specialised certifications needs to be groomed into performing the above activities. Employees specialising in this domain need to be informed about the medical diagnosis and procedure codes. Claim adjudication is the process wherein the claim data are analysed by experts and clean claims are identified. Clean claims are paid in total as part of the accounts payable services in claims adjudication along with an advice on remittance provided to the physician/hospital called the “explanation of benefits”. Rejected claims are re-priced and remitted or rejected and the claimant has to represent the same. Underwriting and risk management are integral to any form of insurance. Experts from this company provide advice on topics in underwriting and risk management to a few customers in addition to handling the complete domain of underwriting and risk management. Company also offers services to the healthcare provider segment which include medical transcription and coding, revenue cycle management, electronic medical records and consulting services for business process re-engineering. Transcription is the conversion of medical notes dictated by a physician into editable text. This being a labour intensive task is relatively economical when performed in India as compared to


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Value Risk Management Underwriting Enrollment management Claims adjudication

Figure 3. Capabilities extended to health insurance organisations

Claims processing

Core processes

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the USA. Revenue cycle management includes processes to build medical claims and sends them to the insurance company. The service includes constant follow-up with the insurance company for outstanding claims and is an integral part of the accounts receivables services ensuring faster receipt of claims submitted translating into reduced outstandings. Electronic medical records and consulting services are offered to select physicians/hospitals by Company A. The service portfolio provided to the providers also moves higher in the value chain from non-core less critical areas to core critical areas. By using a unique combination of people, process and technology, the Company A offers specialised services to the customers in the healthcare industry. Operations of the company are compliant with regulations of the US Government. There is a business continuity plan for providing seamless 24 £ 7 operations to their clients. 7.2 Case study: Company B Company B is a third-party data analytics BPO which was started through a collaboration of two well-established enterprises. This company is a pioneer in offering solutions for industries specialising in market research assisting customers in analysing behavioral and attitudinal data. The company has its offshore operations located in central Mumbai. The service offerings for market research include data collection, survey designing and programming, data processing and report writing in addition to services for online research (Figure 4). Data collection uses various methodologies for primary and secondary data collection. Primary data collection instruments include mailers and panels. Survey designing and programming includes building the questionnaire (paper or web-based). Data processing includes complex data cleansing and tabulation assignments which are delivered in the client specified electronic formats. Higher value added services comprising of report writing complete the delivery chain offering end-to-end services for clients desirous of a complete offshore solution. Company B also provides consulting services to market research companies who wish to improve operational efficiency by automation, reducing processing times and increasing quality levels. The company has talent pool with rich expertise in varied analytics tools like SAS, SPSS, STATA, CART, CHAID (knowledge seeker), MARS, Treenet, Minitab, Value

Report Writing Data Processing Survey Designing

Figure 4. Capabilities extended to market research organisations

Data collection

Core processes

Neuralware (neural networks tool) and many more for solving diverse analytics problems. In addition, the workforce is also experienced in providing advanced statistical analysis and mathematical modeling. The company initially bagged a single multi-year contract with a large market research company in the USA. The services provided to this company included end-to-end solutions for data collection, analysis and reporting. These services were then offered to other companies in similar segments. The company has been certified by various independent agencies in various areas of process and output quality, people competencies and data security. 8. Conclusion The concept of outsourcing non-core functions of a business has been used in one form or the other by the companies worldwide. Divesting a business process allows a company to focus on the core functions of its enterprise and alleviates the need to build skills in areas tangible to its business goals. Outsourcing enables organisations to consistently perform the outsourced business process more effectively than any of their competitors. Data entry, transaction processing, call-centers, customer support, etc. are among the numerous business processes commonly outsourced. As illustrated in the case studies outsourcing companies can provide end-to-end full scope services for specialised functions like health insurance and market research. These enable the host organisation to access the capabilities of the service provider who has optimised people skills and competencies, processes capability and technology platforms to achieve greater focus on core businesses resulting in building competitive advantage. References Aron, R., Clemons, E.K. and Reddi, S. (2005), “Just right outsourcing: understanding and managing risk”, Journal of Management Information Systems, Vol. 22 No. 2, pp. 37-55. Bartell, S.M. (1998), “Information systems outsourcing: a literature review and agenda for future research”, International Journal of Organizational Theory and Behavior, Vol. 1 No. 1, pp. 17-44. Bhattacharya, S., Behara, R.S. and Gundersen, D.E. (2003), “Business risk perspectives on information systems outsourcing”, International Journal of Accounting Information Systems, Vol. 4, pp. 75-93. Brown, D. and Wilson, S. (2005), The Black Book of Outsourcing – How to Manage the Changes, Challenges, and Opportunities, Wiley, Hoboken, NJ, pp. 19-43. Farrell, D. (2004), “Beyond offshoring: access your company’s global potential”, Harvard Business Review, Vol. 82 No. 12, pp. 82-90. Gonalgo, M.D., Sackett, P. and Evans, S. (2005), “Breaking outsourcing into manageable phases”, IEE Engineering Management, December/January, pp. 28-30. Gottfredson, M., Puryear, R. and Phillips, S. (2005), “Strategic sourcing: from periphery to core”, Harvard Business Review, Vol. 83 No. 2, pp. 132-9. Greaver, M.F. II (1999), Strategic Outsourcing – A Structured Approach to Outsourcing Decisions and Initiatives, AMACOM, New York, NY, pp. 3-34. Hussey, D. and Jenster, P. (2003), “Outsourcing: the supplier viewpoint”, Strategic Change, Vol. 2 No. 1, pp. 7-20.


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