Gartner identifies six lessons that BPO can learn from IT outsourcing

In the current economic environment, organisations and the providers of their business process services face a constantly changing set of demands. In the last year, we have seen more businesses in the US, Western Europe, Australia and Japan examine business process outsourcing (BPO) as a viable solution to recessionary economic environments.

We strongly believe that organisations looking to start, or increase, their use of BPO must have a thorough grasp of BPO market dynamics, and seek lessons learned from the evolution of IT outsourcing to establish optimum approaches in managing interactions with providers and in the management of successful process delivery.

As BPOcontinues to mature, many challenges common to IT outsourcing are being replicated in BPO engagements. We have identified six major lessons learned from ITO that must be factored into these engagements:

BPO will NOT always achieve significant savings — don’t focus exclusively on cost

The myth that outsourcing will save the buyer money has continued through the growth of IT outsourcing and now persists in BPO. Outsourcing to lower capital expenditure, reduce labour costs, or lower operating costs is appealing — particularly in a harsh economic climate. However, in most medium- to long-term contracts, we recommend that organisations optimise their approaches through more than one economic cycle. Inevitably, this means that the outsourcing relationship will need to address such things as scalability, flexibility, responsiveness and innovation.

To address these objectives, it is critical when developing the business case to include a multi-year analysis as well as address the total cost of sourcing. Close alignment is also essential between the process owner and the IT department, which will provide the underpinning technology support. The deal must begin, and remain, focused on business objectives in the contractual wording and in the construct of the working relationships between the business (process owner), the business process provider, and the internal and/or external IT providers.

Establish and communicate the value requirement

Poor expectation setting, mixed messages or poor communications — internally as well as externally — of the value requirements of the engagement are extremely damaging. A lack of clarity in the communications between the process owner, the sourcing team and the process provider leads to misunderstandings and disjointed aims.

As well as ensuring that the deal’s plans are unambiguous, organisations need to develop a sourcing strategy. It establishes an effective alignment with the business process owners/department head, and takes inputs from key stakeholders, to understand the strategic plans, in addition to the tactical imperatives of the business. Should the focus of the deal change, due to business direction or economic change, this must be quickly and clearly communicated to all parties.

Consider alternative delivery models or providers (global delivery and industrialised services)

There is an unavoidable level of disruption risk during the transition to a new provider or delivery mode. They can be managed by applying good industry practice, but the risk of not responding quickly to a market shift is much greater — as competitors will gain advantages from adopting global delivery or business process utilities (BPUs). Continuing with highly customised, domestically delivered business process services will limit the opportunity for cost improvements, economies of scale, performance improvements and innovation.

We recommend that organisations take steps to develop a strong understanding of the market and the emerging opportunities presented by BPUs and global delivery. This includes assessing the organisation’s delivery alternatives (including evaluating non-traditional providers, “pure-play” offshore providers and emerging utility providers) and how they can help meet key objectives.

Make your deals flexible enough to cope with business and economic change

More “bad deals” are signed during recessions than at any other times, as a result of buyers attempting to lock in low prices that meet a tactical imperative. However, as the market shifts, and the business focus turns to growth, short-term thinking can lead to a contract structure that will not allow for a speedy response to changing circumstances.

Specifically, organisations must avoid signing long-term deals, and ensure that they build in a mechanism to refresh it periodically. They must ensure that they set the deal term to an appropriate level (for BPUs one to three years and for managed services three to five years), annually review and update the service metrics and assess whether flexible pricing models can be applied.

Establish business process sourcing management competencies

There are some differences between the management of BPO delivery and IT outsourcing that must be accounted for in the operation of the sourcing management team. Formulation of sourcing management techniques, which focus on the competencies required within the retained team, is essential. Some of these are consistent with the approaches required in IT sourcing management, but each competency must be re-assessed when outsourcing business processes, to ensure key focus areas are addressed.

We recommend that organisations establish or adapt their sourcing management focus and model for the specific needs of BPO, but they do not create fundamentally different governance or sourcing management approach to the one in place for ITO. It is important to involve all interested and affected parties from an early stage, and throughout the deal, to ensure that expectations are accurately set and satisfaction levels are maintained.

Build strong relationships with strategically important vendors

The outsourcing of business processes requires a high degree of trust between internal and external service providers, and the service recipient. A trust-enabled organisation is likely to gravitate toward providers of business process services that exhibit similar relationship ideals and approaches. However, most companies would admit to shortcomings here, and must formalise their approach toward achieving trust-based relationships. Relationship issues can have an equal or greater impact on trust than failure to honor agreed upon project conditions, and even seemingly minor or uncontrollable events can cause organisations to reconsider an outsourcing relationship.

Organisations need to determine how trust-enabled their organisation is and assess how much effort is required to achieve trust-based engagements with third parties. For business process services it is critical that they formalise a process that involves the business unit service recipient, vendor managers, the IT department and the service provider in assessing the importance and effectiveness of the trust and control factors in the successful delivery of each externally delivered business process — this approach is also required for internally delivered services.

About the author:

Ian Marriott will further discuss at the Gartner Outsourcing & IT Services Summit 2010, 20-21 September at the Park Plazza Westminster Bridge, in London. For more information please visit www.europe.gartner.com/outsourcing.