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Lesson - 1

BUSINESS PROCESS MANAGEMENTLearning objectives

After reading this lesson, you will be able to

define the concept of Business Process management

listout the Principles of BPM

explain the strages in the Business Process management life cycle

Structure

1.1 Introduction

1.2 Business Process Management

1.3 Business Process Management Life Cycle

1.4 BPM Suites

1.5 Principles of Business Process Management

1.6 Functional Management Vs Business Process

1.7 Summary

1.8 Review Questions

1.1 Introduction

Business Process Management is the art of understanding, codifying, automating,

and improving the way a company does business. For several years now, three-tier

application development has been commonly used, or at least its importance has been

recognized. In a three tier environment, there is a separation between the presentation

logic, the business logic, and the data access logic. This separation can be complete in

the sense that every tier is running on a different machine. Consider the example of a

browser-based application. The browser, driven by HTML, is responsible for the

personalization layer. The business logic is encapsulated in an application server. The

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data that you access from the application sewer can be managed by a database server on

a remote machine.

1.2 Business Process Management

Business process management (BPM) has been referred to as a “holisticmanagement” approach to aligning an organization’s business processes with the wantsand needs of clients. It promotes business effectiveness and efficiency while striving forinnovation, flexibility, and integration with technology. BPM attempts to improve processescontinuously. It can therefore be described as a “process optimization process.” It is arguedthat BPM enables organizations to be more efficient, more effective and more capable ofchange than a functionally focused, traditional hierarchical management approach. Theseprocesses are critical to any organization, as they can generate revenue and often representa significant proportion of costs. As a managerial approach, BPM sees processes asstrategic assets of an organization that must be understood, managed, and improved todeliver value-added products and services to clients. This foundation closely resemblesother Total Quality Management or Continuous Improvement Process methodologies orapproaches. BPM goes a step further by stating that this approach can be supported, orenabled, through technology to ensure the viability of the managerial approach in times ofstress and change. In fact, BPM offers an approach to integrate an organizational “changecapability” that is both human and technological. As such, many BPM articles and punditsoften discuss BPM from one of two viewpoints: people and/or technology.

BPM or Business Process Management is often referred to as ‘Management byBusiness Processes’. The term “business” can be confusing as it is often linked with ahierarchical view (by function) of a company. It is therefore preferable to define BPM as“corporate management through processes”. By adding BPM the second meaning of‘Business Performance Management’ used by Pr Scheer in his article “Advanced BPMAssessment”,BPM can therefore is defined as “company performance managementthrough processes”. And it’s this resolutely performance-oriented definition which is chosen[here. Dominique Thiault, in Managing Performance through Business Processes definesBPM as a management-through-processes method which helps to improve the company’sperformance in a more and more complex and ever-changing environment. Managementthrough processes is a management method based on two logical levels: processgovernance and process management:

Process governance is all of the company’s governance activities which, by way ofallocating on the processes, work towards reaching its objectives, which are bothoperational and progress-related.

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Process management is all the management activities of a given process whichwork towards reaching the objectives allocated for this process.

Roughly speaking, the idea of business process is as traditional as concepts oftasks, department, production, and outputs. The management and improvement approachas of 2010, with formal definitions and technical modelling, has been around since theearly 1990s (see business process modelling). Note that the IT community often uses theterm “business process” as synonymous with the management of middleware processes;or as synonymous with integrating application software tasks. This viewpoint may be overlyrestrictive - a limitation to keep in mind when reading software engineering papers thatrefer to “business processes” or to “business process modelling”.

Although BPM initially focused on the automation of business processes with theuse of information technology, it has since been extended to integrate human-drivenprocesses in which human interaction takes place in series or parallel with the use oftechnology. For example (in workflow systems), when individual steps in the businessprocess require deploying human intuition or judgment, these steps are assigned toappropriate members within the organization.

More advanced forms such as human interaction management are in the complexinteraction between human workers in performing a workgroup task. In this case, manypeople and systems interact in structured, ad-hoc, and sometimes completely dynamicways to complete one too many transactions.

BPM can be used to understand organizations through expanded views that wouldnot otherwise be available to organize and present, such as relationships betweenprocesses. When included in a process model, these relationships provide for advancedreporting and analysis. BPM is regarded by some as the backbone of enterprise contentmanagement.

Because BPM allows organizations to abstract business process from technologyinfrastructure, it goes far beyond automating business processes (software) or solvingbusiness problems (suite). BPM enables business to respond to changing consumer,market, and regulatory demands faster than competitors - creating competitive advantage.

As of 2010 technology has allowed the coupling of BPM to other methodologies,such as Six Sigma. BPM tools allow users to:

vision - strategize functions and processes

define - baseline the process or the process improvement

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model - simulate the change to the process

analyze - compare the various simulations to determine an optimal improvement

improve - select and implement the improvement

control - deploy this implementation and by use of user-defined dashboards monitorthe improvement in real time and feed the performance information back into thesimulation model in preparation for the next improvement iteration

re-engineer - revamp the processes from scratch for better results

This brings with it the benefit of being able to simulate changes to business processesbased on real-life data (not just on assumed knowledge). Also, the coupling of BPM toindustry methodologies allows users to continually streamline and optimize the process toensure that it is tuned to its market need.

As of 2012 research on BPM has paid increasing attention to the compliance ofbusiness processes. Although a key aspect of business processes is flexibility, as businessprocesses continuously need to adapt to changes in the environment, compliance withbusiness strategy, policies and government regulations should also be ensured. Thecompliance aspect in BPM is highly important for governmental organizations. As of 2010BPM approaches in a governmental context largely focus on operational processes andknowledge representation. Although there have been many technical studies on operationalbusiness processes both in the public and in the private sector, researchers have rarelytaken legal compliance activities into account, for instance the legal implementationprocesses in public-administration bodies.

1.3 Business Process Management life-cycle

Business Process Management activities can be grouped into six categories: vision,design, modelling, execution, monitoring, and optimization.

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1.3.1 Vision

Functions are designed around the strategic vision and goals of an organization.Each function is attached with a list of processes. Each functional head in an organizationis responsible for certain sets of processes made up of tasks which are to be executedand reported as planned. Multiple processes are aggregated to function accomplishmentsand multiple functions are aggregated to achieve organizational goals.

1.3.2 Design

Process Design encompasses both the identification of existing processes and thedesign of “to-be” processes. Areas of focus include representation of the process flow, thefactors within it, alerts and notifications, escalations, Standard Operating Procedures,Service Level Agreements, and task hand-over mechanisms.

Good design reduces the number of problems over the lifetime of the process.Whether or not existing processes are considered, the aim of this step is to ensure that acorrect and efficient theoretical design is prepared.

The proposed improvement could be in human-to-human, human-to-system, andsystem-to-system workflows, and might target regulatory, market, or competitive challengesfaced by the businesses.

The existing process and the design of new process for various applications willhave to synchronise as such will not affect the business in major outage. The business asusual is the standard to be attained when design of process for multiple systems isconsidered.

1.3.3 Modelling

Modelling takes the theoretical design and introduces combinations of variables (e.g.,changes in rent or materials costs, which determine how the process might operate underdifferent circumstances).

1.3.4 Execution

One of the ways to automate processes is to develop or purchase an application thatexecutes the required steps of the process; however, in practice, these applications rarelyexecute all the steps of the process accurately or completely. Another approach is to use acombination of software and human intervention; however this approach is more complex,making the documentation process difficult.

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As a response to these problems, software has been developed that enables the full

business process (as developed in the process design activity) to be defined in a computer

language which can be directly executed by the computer. The system will either use

services in connected applications to perform business operations (e.g. calculating a

repayment plan for a loan) or, when a step is too complex to automate, will ask for human

input. Compared to either of the previous approaches, directly executing a process definition

can be more straightforward and therefore easier to improve. However, automating a

process definition requires flexible and comprehensive infrastructure, which typically rules

out implementing these systems in a legacy IT environment.

Business rules have been used by systems to provide definitions for governing

behaviour, and a business rule engine can be used to drive process execution and resolution.

1.3.5 Monitoring

Monitoring encompasses the tracking of individual processes, so that information on

their state can be easily seen, and statistics on the performance of one or more processes

can be provided. An example of the tracking is being able to determine the state of a customer

order (e.g. order arrived, awaiting delivery, invoice paid) so that problems in its operation

can be identified and corrected.

In addition, this information can be used to work with customers and suppliers to

improve their connected processes. Examples of the statistics are the generation of

measures on how quickly a customer order is processed or how many orders were

processed in the last month. These measures tend to fit into three categories: cycle time,

defect rate and productivity.

The degree of monitoring depends on what information the business wants to evaluate

and analyze and how business wants it to be monitored, in real-time, near real-time or ad-

hoc. Here, business activity monitoring (BAM) extends and expands the monitoring tools

generally provided by BPMS.

Process mining is a collection of methods and tools related to process monitoring.

The aim of process mining is to analyze event logs extracted through process monitoring

and to compare them with an a priori process model. Process mining allows process

analysts to detect discrepancies between the actual process execution and the a priori

model as well as to analyze bottlenecks.

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1.3.6 Optimization

Process optimization includes retrieving process performance information frommodelling or monitoring phase; identifying the potential or actual bottlenecks and the potentialopportunities for cost savings or other improvements; and then, applying thoseenhancements in the design of the process. Overall, this creates greater business value.

Re-engineering

When the process becomes too noisy and optimization is not fetching the desiredoutput, it is recommended to re-engineer the entire process cycle. BPR has become anintegral part of organizations to achieve efficiency and productivity at work.

1.4 BPM Suites

Forrester Research, Inc recognizes the BPM suite space through three differentlenses:

human-centric BPM

integration-centric BPM (Enterprise Service Bus)

document-centric BPM (Dynamic Case Management)

However, standalone integration-centric and document-centric offerings have maturedinto separate, standalone markets that include BPM plus much more.

Practice

Example of Business Process Management (BPM) Service Pattern: This patternshows how business process management (BPM) tools can be used to implement businessprocesses through the orchestration of activities between people and systems.

While the steps can be viewed as a cycle, economic or time constraints are likely tolimit the process to only a few iterations. This is often the case when an organization usesthe approach for short to medium term objectives rather than trying to transform the

organizational culture. True iterations are only possible through the collaborative efforts of

process participants. In a majority of organizations, complexity will require enabling

technology (see below) to support the process participants in these daily process

management challenges.

To date, many organizations often start a BPM project or program with the objective

to optimize an area that has been identified as an area for improvement.

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In the financial sector, BPM is critical to make sure the system delivers a quality

service while maintaining regulatory compliance.

Currently, the international standards for the task have limited BPM to the application

in the IT sector, and ISO/IEC 15944 covers the operational aspects of the business. However,

some corporations with the culture of best practices do use standard operating procedures

to regulate their operational process. Other standards are currently being worked upon to

assist in BPM implementation (BPMN, Enterprise Architecture, and Business Motivation

Model).

BPM technology

Some define the BPM System or Suite (BPMS) as “the whole of BPM.” Others relate

the important concept of information moving between enterprise software packages and

immediately think of Service Oriented Architecture (SOA). Still others limit the definition to

“modelling” (see Business modelling).

BPM is now considered a critical component of Operational Intelligence (OI) solutions

to deliver real-time, actionable information. This real-time information can be acted upon in

a variety of ways - alerts can be sent or executive decisions can be made using real-time

dashboards. OI solutions use real-time information to take automated action based on

pre-defined rules so that security measures and or exception management processes

can be initiated.

These are partial answers and the technological offerings continue to evolve. The

BPMS term may not survive. Today it encompasses the concept of supporting the

managerial approach through enabling technology. The BPMS should enable all

stakeholders to have a firm understanding of an organization and its performance. The

BPMS should facilitate business process change throughout the life cycle stated above.

This assists in the automation of activities, collaboration, integration with other systems,

integrating partners through the value chain, etc. For instance, the size and complexity of

daily tasks often requires the use of technology to model efficiently. These models facilitate

automation and solutions to business problems. These models can also become executable

to assist in monitoring and controlling business processes. As such, some people view

BPM as “the bridge between Information Technology (IT) and Business.” In fact, an argument

can be made that this “holistic approach” bridges organizational and technological silos.

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There are four critical components of a BPM Suite:

Process Engine – a robust platform for modelling and executing process-based

applications, including business rules

Business Analytics — enable managers to identify business issues, trends, and

opportunities with reports and dashboards and react accordingly

Content Management — provides a system for storing and securing electronic

documents, images, and other files

Collaboration Tools — remove intra- and interdepartmental communication barriers

through discussion forums, dynamic workspaces, and message boards

BPM also addresses many of the critical IT issues underpinning these business

drivers, including:

Managing end-to-end, customer-facing processes

Consolidating data and increasing visibility into and access to associated data and

information

Increasing the flexibility and functionality of current infrastructure and data

Integrating with existing systems and leveraging emerging service oriented

architecture (SOAs)

Establishing a common language for business-IT alignment

Validation of BPMS is another technical issue that vendors and users need to be

aware of, if regulatory compliance is mandatory.[14] The validation task could be performed

either by an authenticated third party or by the users themselves. Either way, validation

documentation will need to be generated. The validation document usually can either be

published officially or retained by users.

1.5 Ten Principles of Business Process Management

Implicit in the preceding discussion are a number of fundamental principles that mustbe honoured in order to deliver business results to customers and to satisfy the needs ofthe organization’s other stakeholders. These principles underlie the methods of businessoperation and change. Understanding and living according to these principles will getmanagers and practitioners alike through some tough debates about managing processes.

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Without the principles, teams can easily get lost and distracted from the intent of thejourney.

The 10 principles are

1. Business change must be performance driven.

2. Business change must be stakeholder based.

3. Business change decisions must be traceable to the stakeholder criteria.

4. The business must be segmented along business process lines to synchronizechange.

5. Business processes must be managed holistically.

6. Process renewal initiatives must inspire shared insight.

7. Process renewal initiatives must be conducted from the outside in.

8. Process renewal initiatives must be conducted in an iterative, time-boxed approach.

9. Business change is all about people.

10. Business change is a journey, not a destination.

Principle 1: Business change must be performance driven

All change must be based on business performance measurement. All the things wedo, we should do for a reason, and measurement allows us to know if we are actingconsistently with the reason. This principle in no way says what the right measurementindicators should be. Every industry is different, and every company has its own strategyfor which a variety of indicators are possible. Nonetheless, it’s vital that each organizationchoose wisely; the old adage, “You get what you measure,” seems true for all organizations.

Clearly, profit and market share will be important performance indicators for automobilecompanies; customer satisfaction and retention for services firms; share price and staffloyalty for dot-coms. Government will have different drivers than the private sector, andmonopolies will have different drivers than free-market firms. All, however, must know theiraim in life and set a scorecard to evaluate how they’re doing.

Traditionally, competitive organizations have used physical asset-based measuresor investor-based measures, which I have likened to hearing last night’s final score withoutseeing the football game. Although we know that all teams go out to win and, in the long

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term, a team must win or its management and coaches will be fired, just having the finalscore after the fact does little to help our understanding of the whole game. We don’t knowif it was a good game for our team or not. We don’t know if it was exciting and if our fanswere happy, or perhaps not because we should have done better. We don’t know if ourstrategy worked, or if it was abandoned part way through. We don’t know what the teamshould probably do differently in the next game. We only know the result.

Similarly, in business, most of us need other feedback to know what’s working. Ahigh stock price or good return on assets is nice, but how can we contribute to it with whatwe do every day? Earlier, I talked about evaluating human resources and intellectual capitalas measured by return on management. However, this too can disconnect us from whatwe must do as far as many of our staff is concerned. As in sports, we need predictivemeasures, not just after-the-fact reports, to see the total picture. Constructing a connectedmeasurement system is critical for us to break down overall targets into what people doevery day.

A popular response to this has been the “balanced scorecard” approach, which triesto put in place a set of measures that aren’t oriented just to the financial bottom line. Measuresof all major components of success are required, including customer satisfaction andloyalty, innovation, knowledge and people, customers, suppliers, processes, as well as thefinancial side of the organization. From this perspective, the measurement-orientedapproach doesn’t have to be just financial numbers but can also include outsider perceptions.This means that all organizations, regardless of business mission, can find their own setof performance metrics from which all decisions regarding processes can be derived andlinked to each other.

This concept is normally referred to as traceability. Traceability simply means thateverything we do, and every decision we make under ideal circumstances, relates througha set of linked performance measures to the organization’s scorecard.

After performance measurement factors are determined, the organization sets someperformance targets. There may be inherent conflict among the targets. Meeting targeted

measures associated with customer acquisition, such as achieving rapid market share

growth, could be in direct opposition to the requirement to delight our customers. Attaining

good satisfaction levels and delivering higher profits by reducing costs may be fundamentally

at odds, especially if we also are striving for no headcount growth at the same time. Likewise,

improving speed may fly in the face of our quality improvement initiative. Cost reduction

can also be a killer of customer satisfaction, depending how it’s done. Management must

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send clear messages on strategy and priority and not rely just on wishes and targets.

Remember, hope is not a strategy. Both hope and business strategies are needed.

The bottom line for any business improvement is that well-thought-out, targeted

measurements will inspire and track progress and ensure that we allocate our scarce

human and financial resources to things that matter most.

Principle 2: Business change must be stakeholder based

This principle continues the thought process surrounding traceability started in the

first principle, but from the perspective of those other organizations and people that surround

the organization in focus—its stakeholders. A stakeholder is anyone or any group that’s

affected by, has a vested interest in, or can influence the organization’s performance in

some way.

Clearly some stakeholders are more important than others when it comes to the

organization’s success, and this will change over time. This principle recognizes that the

organization doesn’t exist only for its own purposes—it must serve a larger community

than itself. Stakeholders provide context for the business—its own ecosystem.

Stakeholder needs and expectations are the prime drivers of the balanced scorecard

and also help determine what that scorecard should be.

Stakeholders can be classified into a number of broad and deep types. Typical generic

categories are

Customers and consumers

Owners

Staff

Suppliers

Community

The enterprise itself

These categories will vary wildly for different companies and significantly from industryto industry.

Often, significant overlaps in classification result in confusion. For example, manyorganizations have customers or suppliers who are also their competitors. How should thecompetitor be classified? Also, what’s good for the customer might be not so good for the

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staff or might violate legal and regulatory community rules? Again, a balance must bestruck.

In most organizations, one level of stakeholder type is insufficient, especially whenwe look at what certain parts of the organization do and whom they deal with. Customersegmentation is a well-developed function in many sales-oriented companies. It’s the basisfor marketing campaigns, sales organization design, and incentive schemes. Segmentationis used less, however, as a driver and organizer of business change initiatives and processmanagement, an area where it holds great potential. Likewise, we can segment or structurethe other stakeholder types, such as staff or suppliers, into hierarchical categories, fromgeneral types to more specific sub-types.

Types should be segmented according to their different requirements and thedifference in the way that they are to be treated. For example, telecommunicationscompanies treat residential customers differently from multinational business customers.If there’s no difference in treatment required, further segmentation might not be required.

To analyze a stakeholder segment, we should know the current state of our relationshipwith that segment and what would we want it to be in the future. The gap between thesetwo states will drive our needs for change. The future state view will provide a set of evaluationcriteria for change from the current reality.

From the current state, we should determine where we are with each type and sub-type that warrants distinction. This evaluation includes knowing the following about eachstakeholder type:

Our principles and values as they affect the type

Key performance indicators (KPIs) and actual performance measurements

Interactions from and to the stakeholder type including

Business events/outcomes

Flows of work, material, data, knowledge, and commitments

Health of current interactions

Health of the overall relationship

For the future state, we should know where we need to be at the end of the planning

horizon with each type and sub-type that warrants distinction. This projection should cover

Principles and values

Expectations and relationship vision

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Key performance indicators (KPIs) and performance targets

Interactions from and to the stakeholder type including

Business events/outcomes

Flows of work, material, data, knowledge, and commitments

Critical success factors

The stakeholder criteria will depend on the stakeholders’ actual needs, but this will be

balanced with the organization’s desires.

The degree of importance placed on each stakeholder type will also depend on the

value proposition that the organization chooses for itself. If the organization sees itself first

and foremost as a customer/consumer service excellence company, it will focus heavily

on the customer segmentation and customer criteria. If it sees itself as primarily an excellent

manufacturer, it will focus more on suppliers and distributors, and its customer orientation

will be toward quality of product more than service at all costs. If it sees itself as an innovator

above all else, the organization will have a different mix of staff and community stakeholders

than the others and might depend on channel partners to get products and services to

market.

Another factor in the stakeholder analysis will be the organization’s philosophy toward

its prime mission. This is especially a key factor in today’s drive toward e-businesses.

Many organizations have come and gone—some by design and others, not. Organizations

that see themselves as built to last will have a totally different perspective from those that

plan to take advantage of their intellectual property or capability in the short term and flip the

firm to others purely for immediate financial gain.

Executives with an incentive to haul in lots of stock options in the short term might

deemphasize staff criteria for market share or growth. In any case, the organization must

come up with a set of criteria based on balancing the outsiders’ needs and expectations

that can be measured to make decisions now and to prioritize later. These stakeholder

evaluation criteria reflect the value added by their relationship with the organization.

Principle 3: Business change decisions must be traceable to the stakeholder criteria

This principle is almost self-evident and doesn’t require a lot of explanation. However,that doesn’t mean its common practice. As a matter of fact, it’s often ignored or abused.Personal and political agendas more often form the basis for proposals, recommendations,

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and approvals of courses of actions than criteria derived from outcomes of value to ourstakeholders. The key question is, “What’s the reason or justification for a particulardecision? Is it business or personal?”

The challenge is to obtain accepted criteria before we enter into choosing amongbusiness options, even small ones, and to use those criteria instead of the personal driversof powerful players. Conflicting personal, political drivers among decision makers candevastate a sound decision-making process. When those drivers are also misaligned tothe organization’s mission, vision, and values and to its stakeholders’ expectations, wecannot expect to optimize results, and disaster is always possible. Change initiatives thatwaste millions of dollars can be found in almost all organizations of size. The root cause isalmost always poor decision making, or, some would say, poor management due to thefactors described here.

Again, insist on agreement to the future state stakeholder criteria that will determineyour course of action; then and only then, select that course.

This simple philosophy of tracing business change decisions to stakeholder criteriais consistent with many popular strategies for personal and professional success. StephenCovey’s second habit of highly successful people states, “Begin with the end in mind.”Sports psychologist Terry Orlick claims that the first thing any competitive athlete musthave is a clear picture of what success is. Visualization of that end state drives the behaviorto get there. If you don’t know or care about where you are going, any behavior will suffice.

To actually put this principle into practice, management must consciously and visiblyagree on the criteria first and then publish them. Management must also empower thoseworking on change to work creatively within those parameters.

An example is the up-front agreement necessary in the process-renewal projects Ihave handled for various businesses. I always fight hard to get the commitment that we willuse the stakeholder criteria to reach a solution. We all agree not to discuss or even try tothink about any organizational structure already in place. This is hard to manage, but, if Idon’t get this commitment, it usually means that managers are thinking more about thedrivers of direct relevance to them personally and currently. These current personal driversseldom align within the team or with the best interests of external stakeholders.

Principle 3 should be practiced in numerous situations. In deciding on design optionsfor every aspect of the process management hexagon we should use the stakeholdercriteria. In making scoping decisions, in selecting among alternatives in business cases, in

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allocating resources to work requirements, in communication and human changemanagement, and many other business practices, it will serve you well.

Principle 4: Business must be segmented along business process lines tosynchronize change

Based on the earlier discussion in this chapter, it’s natural to view process as theprime segmentation strategy internal to organizations and—more and more frequently—among organizations. As business cycles of products and services shrink time wise,management structures with overly rigid organizational boundaries and planningmechanisms are too slow to respond. They don’t anticipate changes well enough to leadthe market.

Also, a customer or supplier clicks on a mouse while on a Web site, with theexpectation of quick, efficient, and effective results.

In both scenarios, seamless cross-functional integration is mandatory. Restructuringfunctional units alone won’t do it. Focusing on people skills and empowerment also won’tdo it by itself; such approaches are aimless. A technological basis for organizing the deliveryof results is likewise misdirected because technology will automate only what we want itto. Despite wider-focusing technologies, such as enterprise resource planning and customerrelationship management, businesses require results-oriented structures.

Only process can stake the claim of achieving enterprise-wide integration because,by definition, a process starts with the first triggering event that initiates action and doesn’tend until the results of value are delivered to the appropriate stakeholders. This event/outcome pairing defines the processes that we have. All other structures should be put inplace solely to serve the event-to-outcome process and therefore to deliver added value tostakeholders.

This strategy implies that in deciding how to invest in change, prioritizing along processlines is requisite. In this way, processes organize strategy and become a key link in thetraceability chain between business/stakeholder criteria and the day-to-day actions of allthe people in the value chain.

Aggregated around events for stakeholders, process definitions become more stable.The first event will define the start of the process, and the last outcome, its end. Otherevents and outcomes can appear in the interim, but they are still part of the same process.For example, when a customer clicks on a Web site to order a product, he launches the“Fulfil order process.” The process isn’t complete until satisfactory delivery has occurred,

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and payment has been received. Other events along the way can include receipt of aninquiry regarding status of shipment, invoicing, receipt of payment, and so on. Other typesof events to consider include

Arrival events, such as “Order phone rings”

Scheduled events, such as “Invoice creation at 6:00AM every day”

Conditional events, such as an alert warning “Out of stock condition”

Each event will or should generate an appropriate business response. Processanalysis doesn’t rest until all actions are complete. In event/outcome analysis, theorganization is treated as a black box, and we don’t look inside. Looking internally in theprocess will only confuse us—we’ll get to that later. In order for you to manage processes,they must be defined as independent activities. However, in their performance, it’s clearthat they are interdependent.

In identifying processes that need to be renewed to resolve a problem, start withthose event/outcome pairings that involve the customers and consumers affected by theproblem. These processes are referred to as core processes. Look at the customer/consumer life cycle, which starts with the first interaction or awareness that this stakeholderhas with the organization and precedes to the last interaction in that relationship. Thiswould span everything from marketing through to, in worst case, losing the customer, or, inbest case, delivery of the completed product or service. From the core processes, we canderive the processes that deliver guidance to them (guiding processes) and those thatdeliver reusable enablers to them (enabling processes). These processes shouldthemselves be defined, taking into account events and outcomes but from the perspectiveof other stakeholders.

Especially important is the need to see the core processes as customers of theguiding and enabling processes. In this way, value creation can be traced from the processestraditionally seen as overhead. Processes such as hiring staff, developing systems andguidelines, and so forth exist only to support the business objectives that are the target ofthe core processes. They should be measured primarily by the impact they have on thecore processes, such as their impact on operational capacity. Their internal measures ofefficiency, such as headcount and expense, are irrelevant in this situation.

By segmenting the business along process-value added lines, we have a clearframework for organizing and prioritizing change and for measuring the impact of our effortsin terms that the business executives can understand.

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Principle 5: Business processes must be managed holistically

One traditional pitfall associated with business change is an inability to deliver andsustain benefits. In process-oriented change, the problem can be exacerbated if theproponents of change can’t find appropriate champions. These sponsors must take a full-process perspective—that is, one that delivers on behalf of external stakeholders, and notjust for internal functional managers.

Typically, anyone in a position to act is also typically responsible for only a portion ofthe day-to-day process and might not have the interest, knowledge, or motivation to takethe whole process into account. This person seldom has the authority to act on behalf ofthe full process. Consequently, it’s becoming more and more prevalent to appoint a fullprocess owner, sometimes referred to as a process steward, for each process of theorganization.

The process owner acts as advocate on behalf of the process, taking responsibilityfor the process’s performance for stakeholders. The process owner works not only todeliver improvements in process projects but also to remain in the role subsequent tocompletion of these projects. This means staying on top of process and stakeholderperformance metrics and reviewing current performance against the best in the business.It also means assessing the work methods and other guides and enablers for the process,as defined in the process hexagon. The process owner is always looking for an edge andevaluating the risk of not adapting. He ensures that feedback mechanisms exist to gatherlessons learned and that knowledge from the latest experience and practices is distributed.

Primarily, the process owner makes certain that the process continues to perform torequirements for its stakeholders, and he takes corrective or anticipatory action as neededto either continuously improve or to introduce radical change. The objective is similar tothat of total quality management, although the process owner’s focus is wider and spansorganizational control boundaries. Process owners must be effective even though theymight have no direct control over the resources involved in the execution and managementof the daily work being performed.

There are several structural approaches to achieve the goals of process management.

One is full-process organization, in which all workers in the process report to the process

owner, who controls all staff and is accountable for all results. This avoids the problem of

internal organizational behavior and incentives that are misaligned with desired

outcomes. This is the utopia for process ownership and results-oriented performance

management.

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In this model, well-designed natural organizational units send finished products and

services to one another. Process teams manage all work from business event through to

business outcome. This approach upholds a very strong “customer” orientation and

accountability for results. Feedback and information are shared broadly. The model is fully

traceable, both process-wise and people-wise.

It does can be very hard to transition from other models of hierarchical management

to a process-organized approach because multiple processes might have to move

simultaneously. Such a change clearly requires incredibly strong top management

leadership. One way of making this happen is to implement a single point-of-contact for

service to stakeholders. This one-stop-shopping approach widens the point of contact’s

job to be fully aligned with the activities in the process; the individual’s performance

measurement is simply tied to stakeholder value added. Clearly, this also has a significant

organizational impact.

Another organizational option is a mixed function-and-process approach wherein day-

to-day control rests with functional line management, but monitoring and improvement

responsibility goes to process owners. These might be dedicated process owners who

have a very small staff and rely on advocacy and influence. They might also be line managers

who also are responsible for certain processes. Process owners, then, can have a cross-

functional responsibility without the direct ability to change what people do. In this case,

their success lies in their ability to influence those who do have direct control. These could

be the line managers or the managers of the line managers.

The critical mechanism that must be in place for ongoing process management to

be effective is a forum within which processes are discussed their performance vetted,

and the incentive for process outcomes shared among all involved managers. Typically,

every senior manager not only has a line but also has at least one process to report against

in the forum and to act on. The managers’ personal evaluations must rest on their reports

and their success, and they must take reporting and follow-up seriously. Top management

must also be decisive about the consequences of not supporting the approach.

Staff involved in the day-to-day process also must see feedback on the ultimate

results of the process. They must have incentives to support overall stakeholder value

creation and not to do just what’s convenient for them.

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Principle 6: Process renewal initiatives must inspire shared insight

Process renewal relies heavily on gathering information, gaining understanding, and

arriving at innovative approaches and designs for change. In many organizations,

approaches to change have mirrored the now classic debate in any knowledge management

discussion group: What form of knowledge is most appropriate to understand and

communicate the nature of change needed? Should this be done explicitly through

documents and models or tacitly through low-tech meetings and discussions? Experience

has shown that using either approach exclusively is risky.

It’s hard to argue against the fact that one learns best by being in the work environment

itself. This type of knowledge allows one to internalize the subtleties of “being there.” It’s

also true that working closely with “knower’s” rapidly accelerates the learning curve. In

small areas of an organization, this type of learning is manageable because everyone can

identify the area’s knower’s and trusts them as credible sources of process information.

This type of knowledge is hard to steal but sometimes hard to change.

As its organizational focus grows, a business requires more formal approaches to

identify, connect, and share what’s known as well as to realize the identities and

trustworthiness of its knower’s. It’s also usually impractical to learn everything required

first hand in the timeframes required by modern change. Hence, accessible knowledge

artifacts, often in the form of explicit documents, hold great importance to help bridge the

knowledge chasm between “knower” and “solution stakeholder.”

The quantum jumps in knowledge experienced by society and the associated historical

leaps in quality of life can be traced to the availability of breakthrough distribution mechanisms

and media associated with explicit knowledge artifacts. The advent of language, writing,

paper, scribes, printing presses, copy machines, and electronic media have all provided a

great acceleration in the amount of both tacit and explicit knowledge available to members

of society. With the advent of each, a leap forward in the human condition ensued. There’s

reason to believe that the current breakthrough enabled by electronically networked

distribution of such artifacts will also lead us to similar levels of tacit knowledge enhancement,

due to the democratization of access to explicit knowledge.

The prime lesson that we can learn from the past lies in how tacit and explicit knowledgeinteract with one another in a never-ending learning process. Today’s challenge is no different,with the exception of the speed with which the learning must occur.

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The TTEE knowledge discovery model deals with all types of knowledge conversion—tacit to tacit, tacit to explicit, explicit to explicit, and explicit to tacit—in a series of iterationsor learning cycles. This model has a distinct R&D flavor and is being adopted by companiesthat want quality products and services to enter the market quickly in a competitiveenvironment. This approach manages a creative and collaborative process of deeplyembodied knowledge discovery resulting in the deepest form of knowledge embedding—that is, knowledge is embedded into our process definitions. In their analysis of successfulJapanese companies, Ikujiro Nonaka and Hirotaka Takeuchi support the iterative creativityof the TTEE model.

The knowledge discovery model

Examples of this business solution can be found in many internal company processesthat create artifacts for other parts of the organization to use, including process design.

In doing this work, it’s important to be cautious about too much emphasis on themodels themselves. They are only one aspect of the deliverable. The other is arrival at acommon understanding of the situation and its potential for improvement.

Note

Models and documentation are only abstractions of the real world and notcomprehensive in their reach. Not everything can be explicitly modelled or documented inpictures and words. Some things are tacit and must be explained in other terms. Metaphors,scenarios, and verbal examples are often more useful than written, technical reports toassure common learning and validation, which are necessary conditions for any change toproceed. If we just focus on models, we will never bring to the surface what we are unawareof.

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Recognition of the value of sharing insight, not just documents, is reflected in themethods discussed later in this book. A number of activities will uncover what we know, sothat it can be shared across a group in workshops. These workshops will create artifactsor records of the agreements and ideas, but more importantly they will embody a deepertacit understanding of what’s important to allow better decision making and commoncommitment. In many cases, a discussion of strengths and weaknesses will be morevaluable than the charts created. Especially regarding strategy and architecture, there areno right answers, only a better sense of how to judge. Not everything can be objective.Don’t leave out activities that embody trust, commitment, and understanding in theparticipants.

Principle 7: Process renewal initiatives must be conducted from the outsidein

In any change initiative, it’s easy to become overwhelmed with the daunting task tobe accomplished. There are myriad concepts to master, all of which are in play concurrentlyand all of which interact with one another. If we try to deal with too much at once, we willnever finish the job; instead, we will fall prey to “analysis paralysis.” Each step of the waywill require a strong ability to focus on the work at hand with the confidence that we will getto the other aspects later when the time is right.

Managing multiple levels of detail or going to an overly complex level is the biggestrisk. It won’t be possible to understand and communicate that understanding when lookingtoo soon at 500 flow boxes with decision points throughout. Everything we do should beunderstood and validated at its own level, starting at the top box and then working down. Ateach level, the objects we are analyzing must be looked at only with regard to their owncontext before any decomposition occurs.

Processes and organizations should employ the black-box approach. For example,we will look at the organization-in-focus and how it interacts with its external stakeholdersbefore we analyze the processes of that organization. We will then identify each processfor that organization and select the priority ones to examine further. We’ll examine eachchosen process in turn to see how it works with regard to its external stakeholders andother related, internal processes. We will break down each process into its next level ofactivities, and each of those will be examined. In this way, we’ll keep analysis and design atan appropriate level of detail. We won’t spend unnecessary time analyzing work that won’teven exist later. We will focus on the key aspects, not all aspects. We will understand thedrivers and have the insight needed before moving on. The context will provide meaning at

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each and every level of detail or decomposition. The details will come if and when they areneeded.

Principle 8: Process renewal initiatives must be conducted in an iterative, time-boxed approach

The arguments in Principle 7 call for a top-down approach to conducting change.The arguments in Principle 6 call for a discovery approach that fosters learning. Principle 8extends these two ideas into an approach that encourages you to learn, create something,review it, and plan the next cycle of the same. It assumes that people don’t know everythingin advance and that they must create an environment wherein they can figure things outand articulate them incrementally. This iterative approach can be found in knowledge creationprocesses, in prototyping of technology, and in research-oriented activities. It assumesthat you will get it wrong before you get it right and that you will know the result of a changeonly when you try it. It also assumes that we need to attempt changes first at a fairly highlevel of abstraction before we get too detailed.

This concept isn’t new, but, more recently, those applying the concept have proventhe benefit of doing only a time-fixed amount of work before reviews occur. This is oftenreferred to as time boxing.

Time boxing dictates that the activity schedule is preset and the amount of workperformed varies according to what can be done within the timeframe. For example, aschedule might say, “Each Tuesday afternoon from 1:00 to 5:00, we will review what wehave learned in the past week with the key participants in the process in order to validateour findings.” Such a statement ensures that the team will not get too deep too soon, toofar off track without correction, and will be able to gain gradual commitment toward thedeliverables from the participants. It also solves one of the biggest problems in process-oriented and other change situations—that is, scheduling the participants, especiallymanagement, for key reviews. In this approach, everyone schedules weeks and months ofreviews and other workshops in advance with no surprises and no excuses.

Each time-boxed cycle includes major types of activity: knowledge gathering, analysis,reconciliation and packaging of findings, and results validation.

When gathering knowledge, the previously described approach of starting at the top

and decomposing downward into detail is a key tactic. Of all the components at any level,

only the important ones should be investigated. What’s important should be determined by

the impact of that activity on the desired outcomes of the overall process, by the frequency

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of its execution, by the degree of problems encountered, by the amount of inconsistency in

its methods, and so on. Those gathering knowledge should recognize that the 80/20 rule is

in full play. This rule suggests that 80% of the effort in a process is consumed in 20% of the

activities that 80% of the problems are caused by 20% of the process, and so on. The

sessions are fixed in time and therefore must be limited in scope. Even if the participants

gain only 50% of the critical understanding at any level at each iteration, the knowledge

gained with each iteration will add up quickly, as shown below.

Table 1.1 - The Value of Timeboxing and Iteration

Iteration Outstanding Incremental CumulativeNumber Knowledge Knowledge Knowledge

Gained Gained Gained

1 50% 50% 50%

2 50% 25% 75%

3 50% 12.5% 87.5%

4 50% 6.25% 93.75%

It appears that there’s little value studying things to death when an incremental

approach will get us there. Experience bears this out. It also confirms commitment to the

findings is also built incrementally. However, it’s important that the right knowledge be

pursued—that is, relevant knowledge to the task at hand as defined by the stakeholder

criteria. Whatever is to be dealt with at any level or number of iteration must be prioritized

according to those criteria and other factors that tell us where to drill and where to stop. In

this way, the analysis and design might be lumpy. In other words, some parts of the process

under review are known in detail because it’s important to know at that level, whereas other

parts are known at a broader, higher level only Note that although there are different levels

of detail at different points, the process remains connected without breaks from left to

right. This prioritization should occur as part of the review or validation session at the end

of each iteration, when we seek consensus on what we got right, what we didn’t get right,

what we missed, and what priority we should look at next. We’ve found that a simple ABC

ranking is sufficient, wherein we can be confident that we will get to the A’s by next time but

the C’s won’t be addressed now. (They might become A’s in later iterations.)

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Figure 1.1 - Process prioritization and decomposition

Not all work can be at the lowest level of detail nor needs to be. If four levels of

decomposition are pursued and each level has five sub process components, there would

be 5, 25, 125, and 625 chunks of detail to investigate, respectively. To avoid this, prioritization

is a must. Certain overly detail-oriented staff should be kept away from this type of work.

We are analyzing and developing processes, not procedures.

This type of rapid-fire work can put tremendous pressure on team members, who

are now living a series of short-term deadlines. Perfectionists will have a difficult time with

this. What are needed are good listeners, who can develop trust and respect, and good

presenters who will explain but never defend their findings. They must not take changes

personally; they must be comfortable in revealing their incomplete, incorrect work products

and see the changes to them as a positive. Likewise, those who tend to dominate or push

their own solutions are inappropriate for this work.

Principle 9: Business change is all about people

How to support decisions that have been made and the people who make them.

Many steps in managing change are there for no good reason other than decision support.

Intellectually, you could argue that many steps are unnecessary or a waste of time and

effort. Sadly, you are right, if you don’t consider the human element.

Change initiatives are often used simply as ways of creating a document—a

specification for a system, for example. Instead, you must see them as a vehicle of more

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encompassing transformation. You aren’t just converting technology, data, procedures, or

organizations; you are converting people into enthusiastic supporters and participants who

will provide you with a competitive edge that can’t be matched. This is one reason that you

should encourage the analysis of existing processes. This analysis fosters understanding

and communication.

To do this, a number of factors become paramount. In addition to your communications

strategy, you must support changes with appropriate roles and responsibilities, organizational

structures, empowerment within accountability, aligned performance incentives, and

recognition as well as personal growth opportunities. During transition, the staff must feel

that an appropriate level of trustworthy communication is happening. They should feel a

sense of contribution as a result of their participation.

Principle 10: Business change is a journey, not a destination

A major distinguishing feature between process management and the wave of

business process re-engineering (BPR) efforts that swept past us in the early and mid-

1990s is their approaches to continuity of effort. BPR emphasized radical change of business

processes and everything that touched them in a big-bang, “break-all-the-eggs” approach

but did little to uphold the notion of supporting the ongoing management of the implemented

change or the ongoing implementation of change. It assumed that the solution would have

stability in a stable marketplace. Perhaps for these reasons, as well as human resistance

to the inhumane approaches sometimes taken, BPR took its share of criticism and failed

to deliver the anticipated results more often than not.

Two major business factors must be taken into account today:

We don’t have time to get it right, so whatever we do will have to adjust as we learn

in the marketplace.

Whatever we do, no matter how right, will be short-lived and have to change

anyway.

Consequently, classic BPR philosophies won’t work. Instead, we must build adaptable

solutions and keep our eye on what is changing to be able to adapt in the future. This

essentially means that we will never arrive at the Nirvana of stability but will always be

getting there.

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We must recognize that, at any point in time, our stakeholders will have a set of

requirements that are in flux. The balance among these requirements will change as each

of the stakeholders’ contributions to us change. This will make some stakeholders more

important to us than others. For example, when no one is buying, the customer relationship

seems more important, and, when few skilled resources can be found, staff relationships

become more valued.

The ebb and flow of stakeholder and market evolution means that processes must

be managed, even when they aren’t undergoing radical change. Without process ownership,

ongoing measurement, benchmarking, and constant attention to stakeholders of all types,

we will fall behind through attrition. Change is required even if we simply want to maintain

our current position.

If change is a journey, it’s important to pay attention to all the principles that precede

this one all the time. Notice especially that seeking perfection before action is suicide.

Doing something small now and learning are more valuable than getting a bigger process

right later. Whatever we do, we must be prepared to do it again better on the next go

around.

Building learning feedback and knowledge distribution into processes is mandatory.

Constantly gaining tacit insight before designing is key. Designing for change is essential.

Acting fast isn’t a risk if we are prepared to pay attention to outcomes and adjust accordingly.

1.6 Functional Management Vs Business Process

A functional business orientation organizes a company along functional lines, such

as sales and production. A process orientation means that the company focuses on

business processes, such as order processing or strategic planning. In each case, the

companies optimize their activities, either within the functional units or for each process.

The main difference is that optimizing one functional unit may harm another function, but

optimizing the business processes across organizational lines helps the whole company.

Organization

Functionally oriented businesses organize in hierarchies, with organizational units

responsible for particular functions. Integration of these functions takes place one-level

higher in the organization, away from the work that is being done. This leads to good

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performance on a functional level but poor integration between functions. Companies that

are business-process oriented organize differently. They favour structures that allow

interaction between functions, such as in matrix organizations. Since the focus is on activities

making up a particular process, such companies perform well in achieving targets based

on work done.

Coordination

Coordination between departments of a functionally oriented company is difficult

because each function includes many activities. The management of each department

must coordinate the output of each activity with the required input in other departments.

There is no direct organizational path for such coordination in these companies. Business

process-oriented companies have a different approach that encourages direct interaction

between departments through the organizational matrix. These departments prioritize

coordination of activities over organizational functions. This direct path for coordination

leads to streamlined and efficient work flow.

Optimization

When a functionally oriented company optimizes its work, each functionally organized

department optimizes its function independently. This means, for example, that sale

maximizes orders received while production may not be able to manufacture what has

been ordered. When companies focus on process, optimization has a different outcome.

Sales and production work together to ensure that the maximum volume of orders is

processed through the system. The result is better performance for the company as a

whole.

Planning

Strategic planning works differently in functionally oriented and business process-

oriented companies. In the former, top management assigns targets to the departments

based on their function. A sale receives a target in terms of sales figures and production in

terms of production volume. Departments strive to achieve their targets without taking

other department targets into consideration. If one department doesn’t meet its target, the

company as a whole suffers. In companies that are process-oriented, management assigns

targets in terms of work to be done. Planning is focused on activities that make up a

process. Departments work together to achieve common goals and get the work done.

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Such companies generally achieve a higher level of performance than functionally oriented

companies

1.8 Summary

Business processes today play a key role in improving the performance of companies.

Faster growth rate and return on investment, increasing competitiveness, improvement of

production and service deliveries, and improved customer relations can be realized through

superior business process management. The ten principles of business process

management are explained in this lesson.

1.9 Review Questions

1. Explain about the Business Process Life cycle.

2. What are the principles of Business Process Management?

3. Explain the Functional management.

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Lesson - 2

PROCESS MANAGEMENTLearning Objectives

After reading this lesson, you will be able to

discuss the concept of Process management

distinguish core and noncore processes the process management generation

Structure

2.1 Introduction

2.2 Meaning of Process Management

2.3 Identify the Core Noncore Processes

2.4 Measurement of Competitive Advantage

2.5 Summary

2.6 Revie Questions

2.1 Introduction

The idea that work can be viewed as a process, and then improved, is hardly new. It

dates at least to Frederick Taylor at the turn of the last century. And probably before. Taylor

and his colleagues developed modern industrial engineering and process improvement.

Though the techniques were restricted to manual labour production processes. The Taylorist

approaches were widely practiced in the early l900s. But were largely forgotten by mid-

century. The next great addition to process management was created by the combination

of Taylor’s process improvement and statistical process control, by Shewart, Deming,

Juran and others. Their version of process management involved measuring and limiting

process variation, continuous rather than episodic improvement, and the empowerment of

workers to improve their own processes. It turned out that Japanese firms had both the

business need recovering from war and building global markets and the discipline to pill

continuous improvement programs in place. Other firms in other societies have adopted

continuous improvement and ‘total quality management based on statistical principles, but

it requires more discipline than most can muster.

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2.2 Meaning of Process Management

The effects of globalization and the technological advances of the last 20 years

profoundly increased the pace of change and the severity of competition in the business

environment compared to the previous ûve decades. In response to this rapidly changing

business environment, management theorists and scholars are constantly putting forth

new ideas to help corporations succeed in this turbulent world. These new ideas are like

the favour of the day. One idea after another would be put forth, generating excitement in

the management press, only to fade away in a few years. The uninitiated outsider might

perceive these management fads as unrelated concepts that arose independently. The

truth is most of these management ideas often built on one another and shared central

themes that have not changed through the years. Whether it is Total Quality Management

(TQM) of the 1980s or BPR of the 1990s, the one central theme common to these

management ideas is the concept of process management.

Before we discuss process management, a deûnition of process is warranted. In the

systems engineering arena, a process is a sequence of events that uses inputs to produce

outputs. This is a broad deûnition and can include sequences as mechanical as reading a

ûle and transforming the ûle to a desired output format; to taking a customer order, ûlling

that order, and issuing the customer invoice. From a business perspective, a process is a

coordinated and standardized ûow of activities performed by people or machines, which

can traverse functional or departmental boundaries to achieve a business objective that

creates value for internal or external customers. Not surprisingly, the business process

ought to create value. This is only common sense — any activities that do not contribute

value really should not be performed. Business processes should also be coordinated and

standardized. Processes should not be haphazard sets of activities to accomplish a

business objective. By coordinating and standardizing the activities, processes are reusable

and maximize the value they create while lowering the costs when compared to a no

standardized approach of executing activities. Standardization of processes entails

measurability. If processes are not measurable, it is not possible to determine the value

they create. This business deûnition of process is more familiar to business readers, and

we will use this deûnition when referring to processes.

Every management theorist has a slightly different deûnition of process management.

One deûnition that generically describes process management is from Professor Mary J.

Benner of University of Pennsylvania and Professor Michael L. Tushman of Harvard

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University: Process management, based on a view of an organization as a system of

interlinked processes, involves concerted efforts to map, improve, and adhere to

organizational processes

This deûnition of process management is succinct but encompassing. It alsoresonates with the process enterprise concept that Michael Hammer described. Whereastraditional organizations are composed of departments and functional silos, this deûnitionviews organizations as networks or systems of processes. To manage a process, the ûrsttask is to deûne it.

This involves deûning the steps (tasks) in the process and mapping the tasks to theroles involved in the process. Once the process is mapped and implemented, performancemeasures can be established. Establishing measurements creates a basis to improve theprocess. The last piece of the process management deûnition describes the organizationalsetup that enables the standardization of and adherence to the process throughout theorganization. Assigning enterprise process owners and aligning employees’ performancereviews and compensation to the value creation of the processes could accomplish this.

The current theories of process management have their origins in the quality movementand business process reengineering movement of the past two decades. However, thegenesis of process management and management in general, can be traced to the birth ofthe modern corporation.

Adam Smith claimed that mass production required a new organizational form andnew methods of work. In his seminal work, The Wealth of Nations (1776), Smith recognizedthat the division of labor was essential for increasing the productivity of workers. Whileobserving workers at a pin factory in France, he noticed that workers performing singlesteps in pin manufacturing could produce far more pins than workers engaged inmanufacturing whole pins. The productivity increase was orders of magnitude higher, 48,000pins by 10 person teams compared to at most 20 per person working independently. Smithdetermined that the productivity

Increases were due to the dexterity each worker obtained by performing the assignedtasks and the time saved by not having to switch from one task to another. Smith’s idea ofspecialization of labor established the foundation for the functional organizations in whichcorporations align themselves today.

Adam Smith introduced the idea of labor specialization. This necessitated deûningroles and tasks performed by different individuals. This is the basis of business processes

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spanning multiple individuals. The next revolution in process management came from

Frederick W. Taylor and Henry Ford. Spurred by the introduction of mass production,

Frederick Winslow Taylor, an engineer also known for inventing carbon steel machine tools,

expanded on Smith’s labor specialization with the introduction of the scientiûc method and

measurements to the manufacturing processes.

In his book, The Principles of Scientiûc Management (1911), Taylor stressed that

corporations needed to remove production in efficiencies and improve the division of labour.

He proposed to accomplish these with scientiûc management techniques. These

techniques include the following:

Time and motion studies to observe how different workers perform their jobs and

standardize work activities on the most efficient work procedures

Standardization of materials, equipment, and work methods for all activities in the

manufacturing process

Systematic methods for selecting the best workers suited for each job and provide

them with training to perform tasks that are standardized

Alignment of the workers’ pay to their output

The functional organization served corporations well from the beginning of the century

to the post-war boom of the 1950s and 1960s. After the Second World War, the Marshall

Plan established the United States as the sole economic superpower supplying goods and

services for rebuilding Europe. On the domestic front, spending was skyrocketing for building

new

Suburbs to house the G.I.s home from the war and for government sponsored urban

renewal programs. Investment dollars diverted to military use during the war years were

now redirected to civilian projects. Demand for American goods was so high that

corporations’ main concern was in sufficient capacity. This meant there was little concern

for product quality or catering to customer requirements. Consumers, starved of goods

during the Depression and war years, bought anything American companies were selling.

The happy days ended in the 1970s when the economic environment changed and corporate

competition increased. Several economic factors contributed to the change in the economic

environment. In 1971, faced with increased foreign deûcits from war-induced inûation, the

United States

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Withdrew from the gold standard, ending the Bretton Woods world monetary system.

Under the Bretton Woods system, the dollar was ûxed at $35 per ounce of gold. Other

currencies had ûxed exchange rates against the United States dollar. The various central

banks were obligated to buy/sell their currency to limit ûuctuation to within 1 percent of the

ûxed parity. The collapse of the Bretton Woods monetary system ushered in an era of

increased volatility in world currency markets. This translated into increased volatility in

demand for products and services. This volatility in demand was detrimental to the mass

production strategy that corporations were pursuing. Further adding volatility to demand,

the world economy also experienced severe recessions due to the energy crisis. Around

this time, Europe and Japan re-established their economic bases. As trade barriers lowered

in the 1970s, United States corporations began to and competition from European and

Japanese companies both in domestic and export markets. The increased competition led

to consumer choice in purchases. Complicating matters further for American corporations

was the maturation of the consumers. From 1949 to 1969, the average family income

increased from $14,000 to 28,000 in the United States.

Because of higher average income, consumers demanded more customized goods

and services. They were no longer satisûed with whatever corporations sold them. All of

these factors created challenges for corporations built for mass production. Instead of the

supplier-driven economy that existed before, corporations were faced with a customer-

driven economy. This set up our current environment in which customers demand quality

products that cater to their needs. Customers are also now demanding a satisfactory

purchasing experience and customer service. Corporations that do not provide an easy

buying experience risk exclusion from future sales. This increased competition and the

resulting shift from the supplier driven economy to a customer-driven economy have forced

corporations to rethink their organizations and business practices.

2.3 Identifying Core and Non-Core Processes

The purpose of outsourcing is to ensure best practice in key business components

such as data processing, supply-chain management, warehousing, logistics, HR,

accounting and other vital processes. By divesting themselves of these non-core activities,

companies are realizing that they can focus their energy on areas where they have

the competitive advantage, while differentiating themselves from their competitors and taking

advantage of cost savings from the outsourced functions.

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In this context we can divide all business processes into three categories:

Core activities are the essential, defining activities of an organization. If the organization

gave those activities to an external party, it would be creating a competitor or dissolving

itself.

Critical but non-core activities, if not performed exceptionally well, will place

an organization at a competitive disadvantage or even create a risk. There are many

examples of companies’ failures to manage their logistics processes adequately

leading to product shortages and loss of market share. Logistics is a critical but non-

core activity for a producer, but it is a core activity for a transportation company.

Non-core, non-critical activities supply no competitive advantage. Even if performed

poorly, they are less likely to seriously harm an organization in the short term, although

they are still important. Examples include cleaning, catering and security.

The increased focus on core business operations and developing competitive

advantage has left companies wondering what to do with their non-core, less strategic

processes, such as distribution and inventory management, accounting and HR, credit

card processing and product testing. Although these processes are vital to the day-to-day

operations of many organizations, users view them as overhead functions that do not define

their business and, therefore, contribute little to their identity and bottom line.

This notion, however, is changing as outsourced processes help companies save

money or increase productivity. In other words, a non-core business process may start

to contribute to the bottom line by being outsourced.

Companies are currently determining which functions or processes are core to their

business, and which are non-core yet critical. Competition and rapidly changing IT options

are driving companies to realize the potential benefits of outsourcing functions

and processes to parties that specialize in these areas. The total number of processes

that companies consider core is inevitably shrinking, while the proportion of non-core yet

critical processes will continue to expand as margins in a competitive environment are

squeezed and customer service becomes increasingly competitive.

Corporations must consider all their business processes as “mission critical,”

examining and optimizing them where possible. Outsourcing non-core processes

to vendors helps to accomplish this goal. Since these outsourced processes will then be

36

in the hands of a vendor for which they are core, the chosen vendor must be the best of its

type, excellent at the processes it does.

Today’s competitive corporation must optimize every process to achieve the best

possible business performance. The ”core/non-core” definition merely distinguishes

the processes that are best kept in-house from those that are best outsourced. The issue

is not which processes are important or unimportant, since all functions contribute to overall

performance.

In fact, the market tendency is to reconsider which processes make up the core set,

and to outsource even some processes previously considered as integral to the internal

structure, such as accounting, tax reporting, debt collection, customer support and so on.

Using outsourcing effectively is therefore a great way to keep your business streamlined

and functioning at the best of its competitive ability.

2.4 Measurement of Competitive Advantage

We propose a set of measures to assess the extent of competitive advantage provided

by BPR. It presents a detailed analytical case study done in the Indian context, taken largely

from the research work of one of the author’s doctoral students. This case study makes

use of a number of elements, specifically developed for the purpose of measurement. A

set of contracts is developed to facilitate the measurements.

Measurement of Competitive Advantage

Measurements of competitive advantage are necessary for choosing between

candidates and change management disciplines and practices in the business planning

stage. The risks and long term consequences of these initiatives are assessed through

impact assessment. Measures are required to demonstrate and justify the value of these

initiatives to top management while making investment decisions.

Importance of Construct Measurements

In construct measurement numerals are assessed to a concept (word that expresses

an abstraction formed by a generalisation from particulars) that has been consciously

invented or adopted for a specific scientific purpose. Measures have to be both reliable

(must not vary unreasonably due to irrelevant factors) and valid (should measure what

they are intended to). Management literature reveals the alternative approaches that exist

37

in developing constructs. Three approaches that are widely used for developing constructs

are:

1. Narrative Approach

2. Classificatory Approach

3. Comparative Approach

Narrative approach is a case based tradition that characterizes that Competitive

Advantage should be described only in its holistic and contextual form. While this approach

is useful for conceptual development, it has limited use for testing theories of effectiveness

and differing environments-organizational and temporal conditions. In the classificatory

approach, a conceptual classification term ‘typology’, was given by Rumelt. Hofer

&Schendel, Miles 8: Snow and Porter. The typologies are rooted in a set of parsimonious

classificatory variables or conceptual criteria. The empirical classifications are referred to

as taxonomic: and reflect empirical existence of internal consistent configurations. They

are comprehensive and capture the integrative nature of competitive advantage. But do not

reflect the ‘within group` differences among the underlying variables. Purpose of any

measurement is to estimate the score that would be obtained if all items in the domain

were used. However. In practice. One does not use all items. Only a sample of` them. The

sample of items to the extent they correlate with the the scores is good.

Crombach alpha coefficient is one of the important measures used to determine

internal Consistency. It provides an unbiased estimate. It provides an unbiased estimate. A

low alpha co-efficient indicates that the sample of items perform poorly in capturing the

construct. As a thumb rule, an item that has nearly zero correlation, and also those that

produce a substantial and sudden drop in the item to total correlations, should be eliminated.

Factor Analysis. either exploratory or confirmatory, can be used to examine the

dimensionality of the construct. exploratory Factor Analysis helps in ascertaining the

underlying dimensions of data. Sometimes, the result in the dimension of the factors may

not be interpretable. This is partly due to ‘garbage items` that do not have a common

core and, hence. Should be eliminated. However, there are no unambiguous criteria to

determine the number of underlying factors. Hence, a conclusion supported by independent

criteria, like principal component analysis and maximum likelihood analysis, Should be

accepted.

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Confirmatory factor analysis can help in testing hypotheses with respect to the number

of dimensions. It is meaningful when there are specific expectations regarding which variable

is likely to load on which factor.

For the construct to have face or content validity the sample of items should be

appropriate. Adherence to steps helps in producing content mild measures. The domain

sampling model encompasses all errors that occur within the test. This tends to lower

average correlation among the items within the test but the average correlation among the

items is all that is needed to estimate reliability. Alpha coefficient is used for determining

the reliability of a measure based on internal consistency. However, it does not adequately

estimate errors caused by factors

External to environment. Such as difference in testing situations and respondents

over time. Hence new data should also be subject to the same analysis as above and the

results should be compared. At this stage. Alternative methods of reliability can be employed.

All preceding steps produce an internal, consistent and homogeneous. Set of items.

This is a necessary but not sufficient condition for ensuring validity of the construct. Construct

validity refers to the extent to which a measure actually appraises the theoretical construct

it connotes to assess. When a measure correlates highly with other measures designed

to measure the same construct, there is evidence of convergent validity. Low correlation

between the measures considered and other measures not measuring the same construct

indicate discriminate validity. The construct should have both convergent and discriminate

validities. It should also have predictive validity. That means the unit should behave as

expected in relation to other constructs

The First step in the operationalisation n of a construct is delineation of its domain.

Four questions central to Strategic Management Constructs help delineate the conceptual

domain of the proposed construct. These are discussed below.

Scope the strategies can be viewed either as means or as goods. The scope of the

construct SCORE is the means adopted to achieve the desired goals.

Hierarchical Level BPR strategy concept is categorized at three levels, namely

corporate level, business level and functional level.

Corporate level smug is concerned with top level issues. Business level strategy is

concerned more with the strategies at the Strategic Business Unit (SBU) level. Functional

39

level strategies are derived from business level strategy. The construct SCORE used is

defined at the business level.

Impact of BPR can be expressed at different levels in a business enterprise. They

are:

(i) Internal: These impact the efficiency and effectiveness of organizational structures

and processes so as to achieve goals and objectives.

(ii) Competitive: These affect the ability of the organization to outmanoeuvre

competition in the industry in which does business.

(iii) Business Portfolio: These affect the decision about the industries to compete

in, and how to position the organization in these industries.

2.5 Summary

Companies create value for their stakeholders via their business processes. And, as

stakeholders’ needs change, managers should update their business processes, too. BPM,

therefore, refers to the tools and techniques managers use to adapt and change their

business processes.

2.6 Review Questions

1. Explain about the process management generations.

2. Explain the Core and non-core competency of process.

3. Discuss the competitive advantage of process management.

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Lesson - 3

PROCESS REFINEMENTLearning Objectives

After reading this lesson, you will be able to

listout the importance of the Process refinement

explain the Process model in Oil refinery Industry

Structure

3.1 Introduction

3.2 Meaning of Business Process Refinement

3.3 Importance of Process Refinement

3.4 Oil Refinery in India – Case study

3.5 Evaluating Return on Process analysis

3.6 Summary

3.7 Review Questions

3.1 Introduction

Originally process refinement theory stems from the idea to check for a given abstract

process model with a high level of nondeterministic u behaviour and a process model with

a more deterministic behaviour whether the possible behaviours (control Hows) are

consistent with each other. Interesting work in this field is done by R.I,Van Glabbeek by

utilizing bisimulation techniques. However the problem addressed there is not general

enough to handle process models with different granularity levels of interrelated activities.

By developing business processes using Model Driven Architecture approaches it is often

required to compare process models on different abstraction layers and with different

granularity levels for consistency. One prominent discipline dealing with the scenario that

we are interested in is action refinement. Action refinement was massively formally

researched in the early 1990s by the process algebra community.

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3.2 Meaning of Business Process Refinement

In every business, a hard time comes when the business owner has to make somechoice and at that time you have to choose between glows and grow. This single decisioncan alter your career. Here, grow means you are prepared to face new challenges andsome important responsibilities. Here you have to move from your present position andthen put a step forward to a higher stage. On the other hand, glowing means that you needto choose and remain behind for future polish and with the help of this you can also allowyour organization to shine along with improvements in business processes so that it canbecome best organization in the market.

With the help of Business Process Refinement you can easily determine theinefficiency and efficiencies of the business. Of you are able to actively identify these factorsthen you can easily adjust the procedures according to that, and with the help of this youcan easily have various useful flows of process

One among the major factors is that, the Business Process Refinement gives attentionto align your business progress with your goals. Suppose if your company have somedesired goals and if you are not on the correct path of achieving these goals then, BusinessProcess Refinement can help you a lot and can easily bring your company on the accuratetrack. With the help of this you can also stop unwanted actions and can also save lots oftime, efforts and money.

Need of customers is also the main point of Business Process Refinement. Thisevolving need of customer must be fulfilled so that one can continue running a business.For any company, customers are the life and blood, so the feedback and opinion of thecustomers must be appreciated and honoured. The services of company can be improvedby gathering lots of useful information.

3.3 Importance Process Refinement

Processes are important types of models in software development, they aregeneralized representations of control How, data etc. The results of a development areusually produced and utilized through a process. Therefore the modeling of processes iscrucial for the planning and organization of development. In MDSD, processes are usuallydesigned step by step on different levels of abstraction. This creates a refinement chain ofthe process Models. An ontological solution for validating BPMN process refinement ispresented. The artefacts in this example include, among others, Process Activity,Component Behavior Model. Etc. The meta-model includes constraints such as TA process

42

contains only activities (including start and end) and gateways The task types include

remodel process ,refine process, ground process etc knowledge about some typical tasks

and their pre and post conditions can be described in multi language as follows

1. Remodel Process: an engineer can always remodel an existing process. Pre-

condition: a process exists.

Post-condition: the process is remodeled.

2. Refine Process: when a process is neither refined nor grounded. The process

needs to be refined by another process.

Pre-condition: a process neither refined nor grounded exists.

Post-condition: another process is created or referred to as the refinement of the

current process.

3. Ground Process: any process that can be refined can also be grounded to a

Component behavior model.

Pre-condition: a process neither refined nor grounded exists.

Post—condition: a component behavior model is created or referred to as the

grounding of the current process.

When a user is modeling processes, the system should automatically tell which task

is available for which artefact. When the user performance a task and hence changes the

models. Task availability should also be updated accordingly

3.4 Oil Refinery in India (Case study)

The case study being presented here is of one of the largest oil refineries in India

(Sunil Thawani, 1999). The organization had the history of carrying huge inventories, right

from project stage. Over a period of time, due to wide variety of vendors, lack of

standardization and planning and non disposal of unwanted stores, an inventory of Rs 490

million (USS 13.6 million) was being ‘maintained/managed’. Managing the stores had

become a major issue. To find one item, one had to remove ten items. Nobody was

accountable for inventory build up. Mismatch of computer stocks and physical stocks

resulted in increased downtime. Thereby leading to loss of production. Management wanted

to radically reduce the inventory.

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Planning

Various aspects of planning in the oil refinery are discussed below.

Selecting the Process Inventory, per se, cannot be reduced, since it is the result(effect) of various cause factors. To reduce inventory, the organization looked at theprocesses responsible for its build up. Hence the process selected for improvement wasProcurement.

Selecting the Improvement Techniques Considering in was a chronic problem;minor improvements would not have delivered the results expected by the management. Inorder to achieve breakthrough results. The management selected Process Reengineeringtechnique. The methodology applied was Westinghouse Technology for improvement ofprocess.

In the five day workshop, the participants

Planned for the process to be reengineered

Analyse the current process

Reengineered (Redesigned) the process

Developed implementation plans

Scoping the process in order to ensure that improvement effort remained focused,the procurement process was scoped. While scoping. Care is taken that the process isneither too long nor too short. lf it is too long, it may remains shallow while mapping andanalysis and some critical issues may be left unaddressed On the other hand, if it is tooshort, improvement attempted may not impact the business considerably. In the presentcase, scope of the procurement process was under:

Process Begin with: Plan (Perceive) requirement

Process includes: Prepare indent, Raise enquiry, Evaluate offers, Place orders,Receive material and Inspect material

Process ends with stock exchange

Team Formation After scoping the process. across functional team was formed toensure that the participants were knowledgeable about the current process. This requiredthat a ‘supplier’ and a ‘customer’ (internal) were pan of the team. Some of the memberswere from a totally different function to bring in objectivity. Team members needed to becreative, bold and willing to take risks, and question the fundamentals.

44

Usually. a team consists of 6-10 members from middle management and team leaderfrom senior management, with executive director as the sponsor.

Sponsor’s Expectations To set stretch targets. sponsor‘s expectations were definedand documented. These were:

Improvement in working capital

Improvement in profitability and productivity

Space in stores

Material planning v

Simplification of process

Reduction in inventory

Internal and external lead time

3.5 Evaluating Return on Process analysis

The current process was analysed with respect to:

Process cycle time

Process cost

Value delivered to customers

Key Issues are problems that hinder effective performance of processes. The teammembers posted issues under each task and then, using ‘Dot Voting technique, selectedkey issues. Some of the key issues affecting process cycle time, cost and value deliveredwere:

Poor requirement planning (mostly over indenting and/or stock outs)

Excessive bureaucracy

No compliance to order terms by vendors

Discrepancy in physical and computer stocks

Limited computerization

Incomplete indents

Vendors offers received by fax not accepted

Incomplete and incorrect voices

Poor storage facilities

Material indented and purchased but not used for years

45

Internal Customer Value Assessment (Customer Satisfaction Index) to determinethe value delivered by the process, value analysis for few internal customers were done.

Paradigms are the boundaries of beliefs of team members within which, accordingto them, the organization operates. As a result of these paradigms, improved workingmethods appear to be impossible. For breakthrough improvements, it is critical to identifyand shift existing paradigms.

Some of the existing paradigms identified were:

• Too many signatures would ensure control

• Be safe—involve all

• Servants of system Rules (rules cannot be changed)

• Lowest bid is the best and safest

• inventory management is material management department‘s responsibility

Designing the New Process

Stretch Targets in order to achieve a quantum improvement in the needed processin line with sponsor’s expectations, certain targets with respect to quality. Cost and deliverywere set that were difficult and challenging to ac

The targets were:

• Reduction in elapse time from 306 days to 90 days

• Reduction in cost of indenting and procurement by 50%

• Standardization of items (variety reduction) 10% every year:

Good Ideas After an extensive brain storming session, and also during the course ofthe workshop, good ideas generated by the team were ‘parked’. These we evaluated andused for designing the reengineered process.

Some of the radical good ideas generated by the team were:

Procure only what is needed

Value engineering and standardization

Integrated computerization (indentors, purchase, stores, finance)

Payment against document/delivery of material

System to write off obsolete and surplus items

Rationalize vendor base

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Reengineered Process Based on the outputs available from analysis of the currentprocess, good ideas, key issues, etc., the team designed and mapped the reengineeredprocess. Some of the main assumptions in the reengineered process were:

• Alternate system of payment (not through bank)

• Revised payment terms for payment

• Computerization linking indentors, purchase, stores. And finance

• Online vendor rating system

• Evaluation. Selection and monitoring of‘ vendors

• Enhanced authority for management staff to place purchase orders

• Minimum role for finance department

• Minimum signatures

3.6 Summary

Actions can be refined. This means that one abstract action is refined into multiplelogically related (less abstract) actions describing in more detail how the latter abstractaction is performed. For example. The action judge application form can be refined intologically related actions such as check if form is complete, End customer file in informationsystem, check customer characteristics. Etc. Moreover. The attributes can be refined aswell. When refining an action. Two basic rules must be obliged: the attributes of therefinement must match the attributes of the abstract action and the context of the refinement,i.e. how it relates to its environment. Must match the context of the abstract action.

3.7 Questions

1. Explain the importance of process refinement.

2. Discuss the Oil refinery industry in process management.

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Lesson - 4

BUSINESS PROCESS REENGINEERINGLearning objectives

After reading this lesson, you will able to

Understanding the relevance of BPR

Reviewing the key elements of BPR

Understanding the tools and techniques of BPR

Structure

4.1 Introduction

4.2 Meaning of Business Process Reengineering

4.3 Example of BPR Applications

4.4 Objectives of BPR

4.5 Role of Information Technology in BPR

4.6 Role of IT in BPR with Practical Examples

4.7 BPR Tools and Techniques

4.8 Summary

4.9 Review Questions

4.1 IntroductionBusiness Process Reengineering involves changes in structures and in processes

within the business environment. The entire technological, human, and organizationaldimensions may be changed in BPR. Information Technology plays a major role in BusinessProcess Reengineering as it provides office automation; it allows the business to beconducted in different locations, provides flexibility in manufacturing, permits quicker deliveryto customers and supports rapid and paperless transactions. In general it allows an efficientand effective change in the manner in which work is performed.

4.2 Meaning of Business Process Re-engineeringThe globalization of the economy and the liberalization of the trade markets have

formulated new conditions in the market place which are characterized by instability and

48

intensive competition in the business environment. Competition is continuously increasing

with respect to price, quality and selection, service and promptness of delivery. Removal

of barriers, international cooperation, technological innovations cause competition to

intensify. All these changes impose the need for organizational transformation, where the

entire processes and organization climate and organization structure are changed. Hammer

and Champy provide the following definitions:

Reengineering is the fundamental rethinking and radical redesign of business

processes to achieve dramatic improvements in critical contemporary measures of

performance such as cost, quality, service and speed.

Process is a structured, measured set of activities designed to produce a specified

output for a particular customer or market. It implies a strong emphasis on how work is

done within an organization. “ (Davenport 1993

Each process is composed of related steps or activities that use people, information,

and other resources to create value for customers as it is illustrated in the following example.

An example of a business process: Credit card approval in a bank.

An applicant submits an application. The application is reviewed first to make sure

that the form has been completed properly. If not, it is returned for completion. The complete

form goes through a verification of information. This is done by ordering a report from a

credit company and calling references. Once the information is verified, an evaluation is

done. Then, a decision (yes or no) is made. If the decision is negative, an appropriate

rejection letter is composed. If the decision is positive, an account is opened, and a card is

issued and mailed to the customer. The process, which may take a few weeks due to

workload and waiting time for the verifications, is usually done by several individuals.

Business processes are characterized by three elements: the inputs, (data such

customer inquiries or materials), the processing of the data or materials (which usually go

through several stages and may necessary stops that turn out to be time and money

consuming), and the outcome (the delivery of the expected result). The problematic part of

the process is processing. Business process reengineering mainly intervenes in the

processing part, which is reengineered in order to become less time and money consuming.

The term “Business Process Reengineering” has, over the past couple of year, gained

Increasing circulation. As a result, many find themselves faced with the prospect of having

49

to learn, plan, implement and successfully conduct a real Business Process Reengineering

endeavour, whatever that might entail within their own business organization. Hammer and

Champy (1993) define business process reengineering (BPR) as:

“The fundamental rethinking and radical redesign of the business processes to achieve

dramatic improvements in critical, contemporary measures of performance, such as cost,

quality, service and speed”.

4.3 Example of a Business Process Reengineery Application

An applicant submits an application. The application is reviewed first to make sure

that the form has been completed properly. If not, it is returned for completion. The complete

form goes through a verification of information. This is done by ordering a report from a

credit company and calling references. Once the information is verified, an evaluation is

done. Then, a decision (yes or no) is made. If the decision is negative, an appropriate

rejection letter is composed. If the decision is positive, an account is opened, and a card is

issued and mailed to the customer. The process, which may take a few weeks due to

workload and waiting time for the verifications, is usually done by several individuals.

Business processes are characterized by three elements: the inputs, (data such

customer inquiries or materials), the processing of the data or materials (which usually go

through several stages and may necessary stops that turn out to be time and money

consuming), and the outcome (the delivery of the expected result). The problematic part of

the process is processing. Business process reengineering mainly intervenes in the

processing part, which is reengineered in order to become less time and money consuming.

The term “Business Process Reengineering” has, over the past couple of year, gained

Increasing circulation. As a result, many find themselves faced with the prospect of having

to learn, plan, implement and successfully conduct a real Business Process Reengineering

endeavour, whatever that might entail within their own business organization. Hammer and

Champy (1993) define business process reengineering (BPR) as:

“The fundamental rethinking and radical redesign of the business processes to achieve

dramatic improvements in critical, contemporary measures of performance, such as cost,

quality, service and speed”.

4.4 Objectives of BPR

50

When applying the BPR management technique to a business organization the

implementation team effort is focused on the following objectives: Customer focus.

Customer service oriented processes aiming to eliminate customer complaints.

Speed. Dramatic compression of the time it takes to complete a task for key business

processes. For instance, if process before BPR had an average cycle time 5 hours, after

BPR the average cycle time should be cut down to half an hour.

Compression. Cutting major tasks of cost and capital, throughout the value

chain.Organizing the processes a company develops transparency throughout the

operational level reducing cost. For instance the decision to buy a large amount of raw

material at 50% discount is connected to eleven cross checkings in the organizational

structure from cash flow, inventory, to production planning and marketing. These checking

have become easily implemented within the cross-functional teams, optimizing the decision

making and cutting operational cost.

Flexibility. Adaptive processes and structures to changing conditions and competition.

Being closer to the customer the company can develop the awareness mechanisms to

rapidly spot the weak points and adapt to new requirements of the market.

Quality. Obsession with the superior service and value to the customers. The level

of quality is always the same controlled and monitored by the processes, and does not

depend mainly on the person, who servicing the customer. Innovation. Leadership through

imaginative change providing to organization competitive advantage.

Productivity. Improve drastically effectiveness and efficiency

4.5 Role of Information Technology in BPR

The management commitment for change, another very important factor for

implementing BPR, is the enabling role of Information Technology. The way that businesses

are organized around departments is very logical since, for instance, there were physical

barriers in the communication of the accounting department with production department.

(The warehouse could be in another location in the another part of the city). So it wasn’t

possible for a cross-functional team to communicate efficiently. In the 90s when

telecommunication technologies were becoming abundant and low costing BPR was

becoming a world-wide applicable managing technique for business upgrade, enabled by

the technology. Employees can easily operate as a team using intranets/extranets, workflow

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and groupware applications, eliminating distances. We can work together even though we

are located in different places.

Empowering people. Empowerement means giving people the ability to do their

work: the right information, the right tools, the right training, the right environment, and the

authority they need. Information systems help empower people by providing information,

tools and training.

Providing Information. Providing information to help people perform their work is a

primary purpose of most information systems although they provide information in many

different ways. Some systems provide information that is essential in informing a business

process, such as the prices used to create a customer’s bill at a restaurant. Other systems

provide information that is potentially useful but can be used in a discretionary manner,

such as medical history information that different doctors might use in different ways.

Providing Tools. In addition to providing the right information, empowering people

means giving them the right tools. Consider the way planning analysts produce consolidated

corporate plans based on plans of individual divisions and departments. If the plans are

submitted on paper, it is a major task to add up the numbers to determine the projected

corporate bottom line. When the plan is changed during a negotiation process, the planning

analyst has to recalculate the projected results. With the right tools, the numerical parts of

the plans arrive in a consistent, electronic format permitting consolidation by a computer.

This leaves the analyst free to do the more productive work of analysing the quality of the

plan.

Providing Training. Since information systems are designed to provide the

information needed to support desired work practices, they are often used for training and

learning. As shown by an expert system and a decision simulator, they sometimes provide

new and unique training methods.

IBM developed an expert system for fixing computer disk drives. The expert system

was an organized collection of the best knowledge about fixing these disk drives, and it

fostered rapid and efficient training. Before the system was developed, technicians typically

took between 1 and 16 months to become certified, but with the expert system, training

time dropped 3 to 5 months.

Eliminating Unproductive Uses of Time. Information systems can reduce the

52

amount of time people waste doing unproductive work. A study of how professionals and

managers at 15 leading U.S. corporations spent their time concluded that many

professionals spent less than half of their work time on activities directly related to their

functions. Although the primary function of salespeople is selling, the time breakdown for

salespeople averaged 36 percent spent on prospecting and selling, 39 percent spent on

prospecting an selling, 3 percent on servicing accounts, 19 percent on doing administrative

chores, and 6 percent on training. Better use of information systems could save much of

their unproductive time performing chores such as collecting product or pricing information,

determining order status for a customer, resolving invoice discrepancies, and reporting of

time and expenses.

Eliminating Unnecessary Paper. One common way to improve data processing is

to eliminate unnecessary paper. Although paper is familiar and convenient for many

purposes, it has major disadvantages. It is bulky, difficult to move from place to place, and

extremely difficult to use for analysing large amounts of data. Storing data in computerized

form takes much less physical space and destroys fewer forests, but that is only the

beginning. It makes data easier to analyze, easier to copy or transmit, and easier to display

in a flexible format. Compare paper telephone bills with computerized bills for a large

company. The paper bills identify calls but are virtually impossible to analyze for patterns of

inefficient or excessive usage.

Eliminating Unnecessary Variations in the Procedures and Systems. In many

companies, separate departments use different systems and procedures to perform

essentially similar repetitive processes, such as paying employees, purchasing supplies,

and keeping track of inventories. Although these procedures may seem adequate from a

totally local viewpoint, doing the same work in different ways is often inefficient in a global

sense. Whenever the systems must change with new technology, new regulations, or

new business issues, each separate system must be analysed separately, often by

someone starting from scratch.

Minimizing the Burden of Record Keeping, Data Handling, and General Office

Work. Since processing data is included in most jobs, improving the way people process

data is an obvious place to look for information system applications. Focus on basic data

processing tasks: Reducing the burden of record keeping means being more efficient and

effective with the six components of data processing. Those components are capturing,

transmitting, storing, retrieving, manipulating, and displaying data. Capture data automatically

53

when generated: Capturing data automatically at the time of data generation is especially

important in minimizing the burden of record keeping.

In depth, BPR assumes that the current processes in a business are inapplicable

and suggest completely new processes to be implemented by starting over. Such a

perspective enables the designers of business processes to disassociate themselves

from today’s process, and focus on a new process. The BPR characteristics - outcomes

include the following:

1. Several jobs are combined into one.

2. Decision-making becomes part of the job of employees (employee empowerment).

3. Steps in the processes are performed in natural order, and several jobs get done

simultaneously.

4. Processes have multiple versions. This enables the economies of scale that result

from mass production, yet allows customization of products and services.

5. Work is performed where it makes the most sense.

6. Controls and checks and other non-value-added work are minimized.

7. Reconciliation is minimized by cutting back the number of external contact points

and by creating business alliances.

8. A single point of contact is provided to customers. A hybrid centralized/decentralized

operation is used

4.6 Role of IT in BPR with Practical Examples

Information technology delivers tools to and plays four distinct roles within Business

Process Reengineering projects. This is discussed in the following section.

Information Technology Enables New Processes

Information technology may help to devise innovative business processes, which

would otherwise not be attainable. Consider the following examples:

Example 1: In an early Business Reengineering project, the IBM credit corporation

reorganized the crediting function. Just one person (a so-called case manager) performs

All tasks of a former whole credit department by using a new computer application

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system.

Example 2: Amazon.com is the Internet web page address of the currently largest

virtual bookstore in the world. More than one million titles are available. None of these is on

store, but can be searched for and ordered interactively by remote Internet users located

as far away as Herrenberg, Germany. Amazon made sure, though, to locate in Seattle,

Washington, in order to have easy access to the largest physical book warehouses in the

USA. Their web site even offers an alert function, which automatically sends an electronic

mail (e—mail) whenever a new book whose profile (author, title, subject, etc.) the customer

is interested in is published. This Amazon selection and ordering process would not be

possible without Internet technology.

4.7 BPR Tools and Techniques

The various definitions of BPR suggest that the radical improvement of processes is

the goal of BPR. The tools and techniques include the following:

Process visualization: While many authors refer to the need to develop an ideal

“end state” for processes to be reengineered, Barrett (1994) suggests that the key to

successful reengineering lies in the development of a vision of the process.

Process mapping/operational method study: Cypress (1994) suggests that the

tools of operational method studies are ideally suited to the reengineering task, but that

they are often neglected. Recent evidence suggests that these concepts have been

incorporated into tools such as IDEFO (Integrated Definition Method), DFD (Data Flow

Diagrams), OOA (Object Oriented Analysis), and Prince2 (Process-based Project

Management).

Change management: Several authors concentrate on the need to take account of

the human side of reengineering, in particular the management of organizational change.

Some authors (e.g. Mumford and Beekma, 1994; Bruss and Roos, 1993) suggest that the

management of change is the largest task in reengineering. Kennedy (1994), on the other

hand, incorporates the human element of reengineering due to the perceived threat it has

on work methods and jobs.

Benchmarking: Several authors suggest that benchmarking forms an integral part

of reengineering, since it allows the visualization and development of processes which are

known to be in operation in other organizations.

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Process and customer focus: The primary aim of BPR, according to some authors,

is to redesign processes with regard to improving performance from the customer’s

perspective.

4.8 Summary

BPR requires taking a broader view of both IT and business activity, and of the

relationships between them. IT should be viewed as more than an automating or

mechanizing force: it is needed to fundamentally reshape the way business is done.

Business activities should be viewed as more than a collection of individual or even functional

tasks in a process view for maximizing effectiveness. IT and BPR have Business Process

Reengineering: Text and Cases recursive relationship. IT capabilities should support

business processes, and business

Processes should be in terms of the capabilities that IT can provide. Business

processes represent a new approach to coordination across the firm. It promise-and its

ultimate impact—is to be the most powerful tool for reducing the costs of‘ coordination.

The following kinds of capabilities reflect the roles that IT can play in BPR: Transactional,

Geographical, Automatically, Analytical, Informational, Sequential, Knowledge Management,

Tracking, and Disintermediation.

4.9 Review Questions

1. Explain the role of Information technology in BPR.

2. Explain the concept of Business process reengineering.

3. Discuss the Objectives of BPR.

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Lesson – 5

PROCESS IMPROVEMENT ANDPROCESS REDESIGN

Learning Objectives

After reading this lesson, you will be able to

listout the steps involves in Process improvement

explore the fundamental management process involved

discuss process improvement and process redesign

Structure

5.1 Introduction

5.2 Meaning of Process Improvement

5.3 Levels of Process Improvement

5.4 Meaning of Process Redesign

5.5 BPR Experience in Indian industry

5.6 Process Identification

5.7 Process Mapping

5.8 SIPOC MAP

5.9 Summary

5.10 Review Questions

5.1 Introduction

Process can be defined as a sequence of interdependent and linked proceduresthat, at every stage, consume one or more resources (employee time, energy, machines,money, etc.) to convert inputs (data, material, parts, etc.) into outputs ‘these outputs thenserve as inputs for the next stage until a known goal or end result is reached.

ln some organization, products are given more importance titan processes. But, thefact is that the process comes before the product. and for a product to be of good qualitythe process should be good. Poor process or no process ultimately harms the product.

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Business management methods, such as Six Sigma and Total Quality Management

(TQM), focus on understanding and improving a process. By focusing on process

improvement, the business can achieve better results, including customer satisfaction.

good financial results and employee satisfaction.

A business process in an organisation is a set of processes or activities that integrate

with each other to produce a particular product for a particular client, or customer: It

emphasizes on how the work should be done within an organization to accomplish a

particular goal. The characteristics of a business process are listed below

A business process:

1. Has a goal

2. Has specific inputs

3. Has specific outputs

4. Uses resources

5. Has a number of activities that are performed in some order

6. May affect more than one organizational unit-Horizontal organizational impact

7. Creates value of some kind for the customer. The customer may be internal or

external

5.2 Meaning of Process Improvement

Improving business processes is paramount for businesses to stay competitive in

today’s marketplace. Over the last 10 to 15 years companies have been forced to improve

their business processes because we, as customers, are demanding better and better

products and services. And if we do not receive what we want from one supplier, we have

many others to choose from (hence the competitive issue for businesses). Many companies

began business process improvement with a continuous improvement model. This model

attempts to understand and measure the current process, and make performance

improvements accordingly.

The figure 5.1 given below illustrates the basic steps. You begin by documenting

what you do today, establish some way to measure the process based on what your

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customers want, do the process, measure the results, and then identify improvement

opportunities based on the data you collected. You then implement process improvements,

and measure the performance of the new process. This loop repeats over and over again,

and is called continuous process improvement. You might also hear it called business

process improvement, functional process improvement, etc

Figure 5.1 Continous Process Improvement Model

5.3 Levels of Process Improvement

The levels of process improvement provide another way of looking at a business

process. Even the largest organization has five or six core business processes and

continuous improvement of these processes will allow the organization to be able to continue

to perform its mission even when its resources are depleting. Some aspects of process

improvement are possible:

1. New process design (process engineering)

2. Continuous process improvement

New Process Design : New process design is performed based on the change ofmission or strategic plan or business plan. It would be required when a previously outsourcedfunction is brought in-house. There is no baseline from which to work on new processdesign. However, bench marking can be critical for the success of the effort.

Continuous Process improvement : Continuous process improvements refer tothose improvements that can be undertaken and supported by an organization with minimumimpact on external suppliers, customers and other organizations within the functional area.The focus is on redesign, overheads associated with self imposed controls and restrictions,elimination of non-value added activities, redesign of non value added costs and optimizationof available resources with respect to process and activity output requirement, to mentiona few.

5.4 Meaning of Process Redesign

Process redesign implies significant change in output product service requirements.It may also be undertaken due to radial changes in financial resources availability. It impacts

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across organizational boundaries on external suppliers and customers. Hence, it is requiredthat the process reengineering team must be cross functional and include members fromall impacted organizations. A corporate mission or statement or strategic plan helps anorganization to identify business process. The next step is to identify customers andsuppliers. Customers determine products and services from which business processesprofit. Suppliers provide the raw materials which the business processes will use in buildingproducts or services. There has to be an analysis of all activities that take place in theprocess. Which are in the value chain between what it got from suppliers and what itdelivers to its customers? Activities that add value to products and services should bestrengthened and optimized and the activities that do not add value need to be reduced oreliminated.

5.5 BPR Experience in Indian Industry

Mahindra & Mahindra

The concept of BPR was popularized in the early 1990s by Michael Hammer andJames Champy in their best-selling book, ‘Reengineering the Corporation.’ The authorssaid that radical redesign and reorganization of an enterprise was necessary to lowercosts and increase the quality of service. According to them, IT was the key enabler for thatradical change. Hammer and Champy felt that the design of the workflow in most largecorporations was based on assumptions about technology, people and organizational goalsthat were no longer valid. They recommended seven principles of reengineering forstreamlining work processes and, consequently, achieving significant levels of improvementin quality, time management and cost.

In the mid-1990s, India’s largest multi utility vehicle (MUV) and tractor manufacturerM&M was facing serious problems at its Igatpuri and Kandivili plants in Maharashtra. Theplants were suffering from manufacturing inefficiencies, poor productivity, long productioncycle, and sub optimal output. The reason: highly under-productive, militantly unionized,and bloated workforces. The company had over the years been rather lenient towardsrunning the plants and had frequently crumbled under the pressure of union demands. Thework culture was also reportedly very unhealthy and corruption was widespread in variousdepartments.

Alarmed at the plant’s dismal condition, Chairman Keshub Mahindra tried to addressthe problem by sacking people who allegedly indulged in corrupt practices. M&M also triedto implement various voluntary retirement schemes (VRS), but the unions refused tocooperate and the company was unable to reduce the labor force.

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During this period, M&M was in the process of considering the implementation of aBusiness Process Reengineering (BPR) program throughout the organization includingthe manufacturing units. Because of the problems at the Igatpuri and Kandivili plants, M&Mdecided to implement the program speedily at its manufacturing units

The program, developed with the help of the UK-based Lucas Engineering Systems,was first implemented on an experimental basis at the engine plant in Igatpuri.Simultaneously, an exercise was initiated to assess the potential benefits of implementingBPR and its effect on the unions.

M&M’s management was not surprised to learn that the unions expressed extremedispleasure at the decision to implement BPR and soon went on a strike. However, thistime around, the management made it clear that it would not succumb to union demands.Soon, the workers were surprised to see the company’s senior staff come down to theplant and work in their place. With both the parties refusing to work out an agreement,observers began casting doubts on the future of the company’s grand plans of reaping thebenefits of BPR

Background

Mahindra & Mahindra Ltd. (M&M) was the flagship company of the Mahindra group,one of the top ten industrial houses in India. The company’s history dates back to 1945,when two brothers, J.C.Mahindra and K.C.Mahindra, decided to start a business of general-purpose utility vehicles. The brothers formed a company, Mahindra & Mohammed Ltd., inassociation with their friend Ghulam Mohammed. In October 1947, the first batch of 75jeeps was released for the Indian market. In 1948, the company was renamed Mahindra &Mahindra Ltd. Over the next few decades, the group promoted many companies in areasas diverse as hotels, financial services, auto components, information technology,infrastructure development and trading to name a few.

Though M&M had established itself in the markets and was among the leading playersin many of the segments it operated in, it realized that some of its businesses were notclosely related to its core business. This realization marked the beginning of the biggestchange exercise since the company’s inception.

In 1994, a major restructuring exercise was initiated as part of a BPR program. M&Mintroduced a new organizational model, in which various divisions and companies wereregrouped into six distinct clusters of related businesses, each headed by a president.M&M’s core activities, automotive and tractors were made autonomous business units.The other activities of the group were organized into infrastructure, trade and financial

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services, telecommunication and automotive components. According to company sources,the whole exercise was intended to develop a conceptual map to provide direction for thefuture growth of various business lines. It was decided that, in future, the group wouldconfine its expansion to the identified thrust sectors.

The two main operating divisions of the company were the automotive division, whichmanufactured UVs and LCVs, and the farm equipment division, which made tractors andfarm implements. The company employed over 17,000 people and had six state-of-the-artmanufacturing facilities spread over 500,000 square meters. The plants were situated atKandivili (MUVs and Tractors), Nasik (MUVs), Zaheerabad (LCVs, Voyager, and three-wheelers), Igatpuri (Engines) and Nagpur (Implements and tractors)

M & Ms Experience with BPR

By the mid 1990s, BPR had become a popular tool globally, with many leadingorganizations implementing it. However, when M&M undertook the exercise, it was still anew concept in India.

M&M’s workforce, as mentioned earlier, resisted this attempt to reengineer theorganization. Soon after the senior staff began working on the shop floors, the first signs ofthe benefits of BPR became evident. Around a 100 officers produced 35 engines a day ascompared to the 1200 employees producing 70 engines in the pre-BPR days.

After five months, the workers ended the strike and began work in exchange for a30% wage hike. As the situation returned to normalcy, BPR implementation gainedmomentum. M&M realized that it would have to focus on two issues when implementingthe BPR program: reengineering the layout and method of working, and productivity.

5.6 Process Identification

The first step is process identification. Many companies think they know theirprocesses — manufacturing, sales, accounting, building services. But it is just this silomentality that causes processes to lose their customer-centric approach. Instead of definingprocesses based on the company’s understanding, they must be defined by the customer’sunderstanding. Walking through customer experiences helps the reviewer identify thosetrigger points that can make or break success. These then form the basis for processidentification.

Once the processes are identified, the second step begins — information gathering.There is a large volume of information that should be obtained before trying to learn theintricacies of a process. Primary among these is identifying who the true process owners

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are — the ones who can effect change. Their buy-in and agreement throughout the analysis

is paramount. Additional information that should be obtained includes the objectives of the

process, risks to the process, key controls over those risks, and measures of success for

the process.

In order to effectively record and maintain this information, some important worksheets

have been developed. Two of the most important are the Process Profile Work Sheet, and

Work Flow Surveys. The Process Profile Work Sheet includes such information as the

process owner, the trigger events (beginning and ending), inputs, outputs, and, as mentioned

above the objectives, risks, key controls, and measures of success. Work Flow Surveys are

completed by individuals actually working on the process and request from them a list of

tasks — including inputs and outputs — which they perform in support of the process.

Only after all this is done is actual “Process Mapping” completed. This involves sitting

with each employee and having him or her describe what it is they do. This information is

recorded using a sticky-note method. Each step in the process is recorded on a sticky-

note and built in front of the individual completing the work. This allows them to interactively

ensure the final map matches their understanding of their work. The final process maps

are developed using flowcharting software. Time flows down the page, and each individual

involved is represented by a separate column. In this manner, a simple map can result

from a complicated process.

5.7 Process Mapping

Process Mapping is a workflow diagram drawn for clear understanding of the business

events that occur in series or parallel ways. The business events entail what a business

entity does. Responsibility for occurrence of events. And the factors that need to be

incorporated for the success of business and so on. The first step in any business is to

find the processes involved in the business. After finding the processes, the next step is to

build a logical connection between them. This will have direct impact on the business

operations. Process mapping also tells how major functions of the business interact with

one another and the manner in which they can be improved. Maps and flowcharts, used in

process mapping, help in better understanding of the processes. lf the processes are

visible and understood properly. they help in improving strategies towards their

implementation, improve customer satisfaction by finding methods that reduce non value

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added steps, contribute towards reduction in costs, help to establish customer driven

process performance measures, reduce process cycle time and increase productivity.

Systematic and structured approach is necessary towards process mapping.

5.8 SIPOC Map

SIPOC (Suppliers. Inputs, Process, Outputs, and Customers) is a six sigma tool. A

SIPOC map, in any business, helps to develop a high level view of process Highlights

areas of improvements and ensures focus on the customer

SIPOC map helps the management to quickly define, analyze, prioritize and

recommend solutions to certain problems as this map gives a logical connection between

various processes/methods of the organization. lf a business consists of many entities.

SIPOC map gives the inter-entity process logic. Thus providing the correct picture of the

entire organization. This directs the business towards financial and customer focused

goals.

Before the process improvement phase, it is important to identify the relevant elements

associated with the business. SIPOC map helps define these elements. it is used at the

measure phase of the six sigma DMAIC (Define, Measure, Analyze, Improve and Control)

process. The SIPOC inputs and outputs are given in Figure.

The elements on the left hand side of the ‘process’ block refer to the inputs that a

normal process will have and the output elements are given on the right hand side of the

block. As could be seen. The output can be physical products, documents. Information and

decisions taken by the organization.

Figure 5.2 SIPCO Inputs and Outputs

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Steps to draw a SIPOC Map

1. Name Process

2. List key inputs and suppliers

Figure 5.3 Process Map

The process of ‘malting a photocopy’ is taken and different inputs and key factors arelisted.

A SIPOC map is drawn.

Step I: Name the process

• Making a photocopy

Step 2: List key inputs and suppliers

• Customer who takes the photocopy

• Person who makes the photocopy

• Company who supplies paper and toner

• Power company that supplies electricity

Step 3: Identify the boundaries of the process

• Number of photocopies required

• Quality of the photocopy

Step 4: Identify and name minor project steps

• Photocopying

Step 5: List key outputs and customers

• Photocopies

• Customer who receives the photocopies

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Source : Process Mapping, CGR Rao, Joint Director, DIQA Bangalore

5.9 Summary

A process is a series of activities, occurring within companies that lead to a specificgoal. Business process focuses on meeting the needs of customer by delivering valuedriven products. It often makes use of process mapping techniques and SIPOC map toachieve high productivity in its products. The steps of a business process vary from onecorporate structure to another. However, there are some elements or sub processes thatcan be found in almost .To some degree, these sub processes occur in an order that leadsto successful completion of manufacturing process.

5.10 Review Questions

1. Explain the importance of process improvement.

2. Discuss about the BPR experiences in Indian industry.

3. Discuss about the Process Mapping.

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Lesson – 6

PROCESS VISIONING AND BENCHMARKINGLearning Objectives

After reading this lesson, you will be able to

Knowing the benefits of benchmarking for BPR

Getting acquainted with the categories and measures of bench marking

Analysing the steps involved in the BPR initiatives

Structure

6.1 Introdution

6.2 Process visioning

6.3 Meaning of Benchmarking

6.4 Benchmarking Categories

6.5 BPR Implementation Methodology

6.6 Business Process Improvement

6.7 Business Process Redesign

6.8 Managing Change

6.9 Summary

6.10 Review Questions

6.1 Introduction

In the last lesson, process refinement and process mapping had been discussed.Let us discuss process visioning and benchmarking techniques in this lesson.

6.2 Process Visioning

Process vision is based on the future which is increasingly shared by enterprisesmound the world. It is evolving to include everything that existed about management in theindustrial age and recasting it into an information age framework. This involves sharedinformation, mission support, reduced cost, reusable technology and just in time.

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1. Shared Information

Information is an important asset, which must be well managed to provide maximum

return on investment. In the present information age. Data management is becoming more

and more important. Data is entered into the corporate database once and is maintained at

the point of entry. It is made available wherever and whenever it is needed in whatever

format and context. Along with adequate security.

2. Mission Support

Data is captured and maintained in an organization to support a defined mission. lt

helps in redefining business process in such a way that activities, which support mission.

Are strengthened and actions. Which do not add value, are eliminated?

3. Reduced Cost

The activity that increases cost of business without providing additional benefits to

the customer should be reduced or eliminated. Managers must search for these non-value

adding activities and cost and eliminate them so that scarce resources can be optimally

utilized.

4. Reusable Technology

There is a shift from custom developed unique management system to use off’-the-

shelf technology and software to support standard business processes. This involves shift

from custom developed engineering methods and life cycle project management controls.

6.3 Meaning of Benchmarking

Benchmarking is a management tool that helps in identifying the important areas for

improvement in any business process so as to achieve maximum productivity and efficient.

It is considered as the initial step in the business process reengineering (BPR) and

Continuous Process Improvement (CPI) efforts. In identifying best practices, benchmarking

methods analyze and integrate important performance measures of business processes.

Once the areas are identified for improvement, reengineering methods are implemented to

improve efficiency and productivity. For this reason. Benchmarking has increasingly gained

acceptance in the last few years as a technique that enhances HPR efforts within

organizations.

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6.4 Benchmarking Categories

Benchmarking methods can be categorized into four groups. They are:

• Internal (within the business unit)

• Competitive (with competitors)

• Functional (within an industry)

• Generic (between unrelated industries)

Internal Benchmarking : internal benchmarking focuses on the fact thatorganizations should look within their boundaries to improve the processes rather thanlooking at other organizations. This helps to reduce the amount of time required forbenchmarking. In addition, it is often much easier for employees to accept a practice whenit is being used within their company.

Internal benchmarking not only helps to identify best practices, it also encourages aculture of learning and innovation spurred on by internal competition. lf there is competitionwithin the organization (between employees or between business entities), there will beinnovation at all levels of the organization it promotes idea sharing and increasedcommunication among departments and business units.

In most companies, internal best practices remain unidentified simply becausemethods for extracting and communicating them do not exist. For internal benchmarkingto be effective, a company needs to implement a process designed to promote idea sharing.This can be done in four simple steps:

identify the processes to be benchmarked

Organize the benchmarking effort

Prioritize the ideas the team finds and turn them into projects with timelines foradopting the best practices

Implement and begin to realize the benefits

Competitive Benchmarking : Competitive benchmarking is a process ofcomparing a firm’s processes, or strategies, or performance measures, with another firm.Competitive benchmarking helps the organization to know its position as compared to itscompetitors and helps identify the areas for improvement. This can be in all areas, i.e.,finance, products and services, organization, technology, research and development,personnel policies, etc., or in specified areas.

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Functional Benchmarking : Functional benchmarking looks at similar practicesand processes in organizations in other industries. This type of benchmarking is anopportunity for breakthrough improvements by analyzing high performance processesacross a variety of industries and organizations.

Generic Benchmarking : Generic Benchmarking as a form of externalbenchmarking is a performance improvement process that looks at best practicesimplemented by well established firms. The core area of generic benchmarking is identifyingand adapting the best practice to improve productivity by improved performance measures.Generic benchmarking investigates activities that are, or can be used. in most businesses.This type of benchmarking makes the broadest use of data collection. One difficulty is inunderstanding how processes translate across industries. Yet. Generic benchmarking canoften result in organizations drastic altering ideas about its performance capability; and inthe reengineering of business processes.

6.5 BPR Implementation Methodology

An exercise in business process reengineering requires a fundamental redesign in

the way we work. This is a process of exploration and discovery of clearly defined

methodologies and procedures. In this lesson, we look at methodologies for accomplishment

of BPR initiatives.

Fundamental Management Process

According to this view, the steps to be followed in a BPR initiative are as follows.

1. Define : This step involves defining functional objectives, determining functional

management strategy to be followed in streamlining and standardizing processes and

establishing process, data and information systems baselines from which to begin process

improvement. A framework is established by defining these baselines, objectives and

strategies for the function.

2. Analyze : This involves analysing business processes to eliminate Net Value Added

(NVA) activities, simplifying and streamlining limited value added processes and examining

all processes to identify more effective and efficient alternatives to process data and system

baselines.

3. Evaluate : This means evaluating alterative to baseline processes through a

preliminary functional economic analysis to select a preferred course of action.

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4. Plan : This step involves planning implementation of the preferred course of actionby developing detailed statements of requirements, baseline impacts costs, benefits andschedule.

5. Approve : This involves extracting from the planning data the information neededto finalize functional economic analysis. This is used by senior management to approveproceeding with the proposed process improvements and any associated data or systemchanges.

6. Execute : This means executing approved process and data changes and providingfunctional management overview of any associated information system changes.

6.5 Business Process Improvement

Improving business processes is of paramount significance for businesses to staycompetitive in today’s marketplace. Over the last 10 to 15 years, companies have beencompelled to improve their business processes since customers are demandingprogressively better products and services. Many companies began business processimprovement with a continuous improvement model. This model attempts to understandand to measure current processes, and make performance improvements accordingly.The basic steps. You can begin by documenting what you do today, establish some way tomeasure the process based on what your customers want, carry out the process, measurethe results, and then identify improvement opportunities based on the data collected.Subsequently, you implement process improvements and measure the performance ofthe new process. This loop repeats over and over again, and is called continuous processimprovement.

This method for improving business processes is effective for obtaining gradual,incremental improvement. However, over the last 10 years, several factors have acceleratedthe need to improve business processes. The most obvious is technology. New technologies(like that of the Internet) are rapidly introducing new capabilities to businesses, therebyraising the competitive bar and the need to improve business processes drastically.

Another apparent trend is the opening of world markets and increase in free trade.Such changes bring more businesses into the marketplace, and competing becomesprogressively harder. In today’s marketplace, major changes are required to just stay even.It has become a matter of survival for most businesses.

As a result of this, companies are seeking methods for faster business processimprovement. Besides, companies want breakthrough performance changes, not merely

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incremental changes, and they want them sooner than later. Because the rate of changehas increased for every business, few businesses can afford a slow change process.Business process reengineering is one of the approaches for rapid change and dramaticimprovement that have emerged recently

6.8 Business Process Redesign

An increasing number of firms are marching to the drumbeat of business processredesign (BPR), alternatively called reengineering. The term reengineering may be new,but the idea of process redesign is familiar to most engineers involved in logistics andproduction control. Just-in-time (JIT), Total Quality Management (TQM), FlexibleManufacturing Systems (FMS), Computer Integrated Manufacturing (CIM) and ComputerIntegrated Logistics (CIL) are some of the buzz words used to signify process redesigntrends in logistics and manufacturing control. However, business process redesign is notrestricted to logistics and manufacturing, it also applies to administrative, commercial andmanagerial processes. Nevertheless, we think that many of the techniques, tools andmethods developed for logistics and production control can be used in the context ofbusiness process redesign. Business process redesign focuses on the fundamentalrethinking of business processes, ignoring organizational boundaries. However, beforeimplementing new business processes, we want to compare the existing situation with thenew (redesigned) situation. Therefore, we need a tool to quickly capture and model existingprocesses but also new processes. This tool should support rigorous changes and catalyzecreative thinking.

Moreover, we would like to use this tool to analyse and compare alternative businessprocesses.

Definition of Business Process Redesign

Reengineering business processes means tossing aside existing processes andstarting over. In Hammer and Champy [13] business process redesign (reengineering) isdefined as “the fundamental rethinking and radical redesign of business processes toachieve dramatic improvements in critical contemporary measures of performance suchas costs, quality and speed”. This definition contains four key words:

1. Fundamental

Revaluate the primary goals of the company, ignoring rules and assumptionsformulated in the past.

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2. Radical

Do not try to improve the existing situation, invent completely new ways ofaccomplishing work

3. Dramatic

Do not use business process redesign to obtain marginal improvements, aim atorder-of-magnitude improvements.

4. Process

Focus on the business processes instead of organisational structures. So, in anutshell, business process redesign (BPR) is an ambitious and rule-breaking approachfocusing on business processes instead of organizational boundaries.

6.8 Managing Change

Change management is a set of processes that are incorporated to ensure thatsignificant changes are implemented in a systematic and controlled way to effectorganizational change. The main goal of change management is to reduce the riskassociated with the implementation of change in the business environment. lts otherfundamental goal is rapid recovery of change related problems when changes areimplemented. Effective.- change management achieves these goals without compromisingthe values of business.

The main factors for change management are the processes/methods in whichchanges are to be implemented and the tools through which changes are incorporated.Most organizations want change to be implemented with least obstruction to businessentities and minimum risk to business. For this, change must be applied with a structuredand systematic approach.

In general, Change management helps an organization to reduce risk whileimplementing the change, which is acceptable by the top management. Structured andsystematic approach towards change management strategies can benefit not only financialaspects of the organization, but also information security, Operations and risk managementfunctions.

Importance of Change Management

Change management plays an important role in an organization. Identification ofchanges in the organization or a project may together be initiated internally or externally, inwhat is more important is how the organization responds to these changes.

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It is not easy to make immediate changes to an established process. When more

than one process is running in parallel or series fashion, changes made in one process will

reflect in another. The change process should be thought of as a process which stops the

current process and makes necessary changes to the current process. The new process

is then implemented. The procedure should have minimal effect on the process and the

business organization.

The change process may also be considered a problem solving situation. The

implementation of identified changes may be viewed as solution to the problem identified in

the current process or method.

A broad skill set (political, analytical, business, etc.) is required for managing changes

in the organization. ‘The top management should evaluate the financial and political impacts

of the changes. The workflow should be changed in such a manner as to reflect the financial

changes taking place. Operations and systems should be so reconfigured that the

organization gets the desired financial impact.

Therefore, we can conclude that change management considers all aspects of the

organization before implementing the change. Hence, it plays a vital role in the success of

any business.

Action Plan for Change Management

There is increasing emphasis on the need to tailor change management strategies

to the business entities of the organization and its environment. and to address all aspects

of the organization during implementation of change. Effective change management requires

not only skilled management but also effective leadership and broad employee engagement

and participation.

Processes and values : That are key factors of‘ any business, can become restrictive

factors while implementing the changes. Time and resources play an important role in

changing the process. As a process has direct impact on the organization success, it is

difficult to implement changes in it. Values influence judgments about the type of business

the organization can conduct. Hence Values are also difficult to change.

Processes are not nearly as flexible or adaptable as resources, and values are even

less so. So, when an organization needs new processes and values, it must create a new

organizational space where those capabilities can be developed in several ways. This may

be done by

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• Creating new organizational structures within the corporate boundaries where newprocesses can be developed

• Spinning out an independent organization from the existing one

• Acquiring a different organization whose processes and values closely match therequirements of the new task

Top management participation is critical to the success of change initiatives. Leadersare needed to provide vision and inspiration, demonstrate integrity, provide meaning, generatetrust and communicate values. A key aspect of leaders’ effectiveness during change istheir ability to apply different styles of leadership to different circumstances, even withinshort time periods. This is because different leadership styles (coercive, authoritative,democratic, pacesetting, coaching) have different effects on various aspects oforganizational climate (flexibility. responsibility. standards. rewards, clarity, commitment)that affect the success of planned change in different circumstances.

For addressing issues related to change management, Prosci makes use of ADKAR(Awareness, Desire, Knowledge, Ability, Reinforcement) model that allows organizationsto focus their activities on specific business results. For more information, readers mayvisit Prosci’s website, www.prosci.com.

BPR and Organizational Change : BPR is an important change management tool.Most BPR organizations are making significant and wide reaching changes to theirorganization in response to strategic business needs.

McKinsey’s 7 S Model : The model is based on the theory that, for organizations toperform well, seven elements-structures, systems, style, staff, skill, strategy and sharevalues·—need to be aligned and mutually reinforced. The model is used for identifying thechanges that need to be implemented to improve the performance of the organization.McKinsey model is used as a basis for assessing the extent to which organizationsundertaking BPR are changing them.

6.9 Summary

Business process management (BPM), as a managerial approach, considers theprocesses or methods that need to be understood and managed properly to deliver qualityproducts and value added services to the customers in general. BPM integrates changesenabled by Technology and humans. Due to this, BPM is always discussed from two differentviews Points—people and technology.

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Benchmarking is an effective way to ensure continuous improvement or progresstowards strategic goals and organizational priorities. A real benefit of benchmarking comesfrom the understanding of processes and practices that permit transfer of best practicesor per- furnaces into the organization. Benchmarking stresses processes, quality andoutput.

6.10 Review Questions

1. What are the categories of benchmarking?

2. What are the benefits of change management?

3. Explain the steps in BPR implementation.

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Lesson – 7

BUSINESS PROCESS OUTSOURCINGLearning Objectives

After reading this lesson, you will be able to

define the concept of Outsourcing

explain the benefits of outsourcing

analysing the critical success factors for outsourcing

Structure

7.1 Introduction

7.2 Business Process Outsourcing

7.3 Strategic Benefits of Outsourcing

7.4 Evolution of Business Process Outsourcing

7.5 Evaluation and Develop Firm’s Internal readiness for Outsourcing

7.6 Critical Success Factors

7.7 Assessing and Managing Risk of BPO

7.8 Summary

7.9 Review Questions

7.1 Introduction

Outsourcing is a process that a firm or an organization entering into a contract with

another firm or an organization to operate and manage one or more of its business

processes.

Global competition is the most important issue facing top decision makers in some

of the world’s largest companies today. To meet this challenge, leading companies

worldwide are focusing their resources on their core competencies as a business strategy

to compete profitably in a global market. Outsourcing is paving the way for leading companies

to compete globally and increase profitability into the new millennium. The practice is gaining

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widespread acceptance throughout the United States, Europe, South America, and Asia

Pacific as an important new management tool to improve performance and profitability,

gain competitive advantage in the global marketplace, and ultimately build shareholder

value.

“More and more companies are looking at outsourcing not just as a tactical, reactive,

but as a strategic and proactive move,” states Frank J. Casale, Chairman of The Outsourcing

Institute.

7.2 Business Process Outsourcing

In a deflationary economic environment, every manager is focused on reducing

expenditures. A cost cutting economy, increasing globalization, the Internet infrastructure,

and e-business applications are rapidly converging to facilitate a new business mega-

trend: Business Process Outsourcing (BPO).

The philosophy behind BPO is simple, stick to what you do best (core competencies)

and leaves everything else to low cost third party providers (or business process

outsourcers). The business rationale behind BPO is save money and focus scarce

management resources on a few core competencies. The list of functions being outsourced

is growing to include IT outsourcing, call centres, order entry, billing, human resources

administration, internal audit, and payroll.

BPO strategies enabled by technology are gaining momentum. In fact, some clever

companies are taking advantage of the structural changes in the economy to distance

them from competition. This lesson will introduce, explain, and explore business process

outsourcing services, an innovative business strategy that involves outsourcing various

processes to reduce costs and increase customer satisfaction.

Business Process Outsourcing is the long term contracting of a company’s business

processes to an outside service provider to help increase shareholder value, produce

increased efficiencies permitting greater focus on core competencies. BPO started as a

move to take cost out of the business by farming out non core business processes now

becoming strategic outsourcing to reshape company. Reinvigorating old processes to give

competitive advantage. BPO covers front office, mid office and back office functions but

also logistics, facilities management etc. Specialist range of suppliers with domain skills

quite often joint venture arrangements. Most deals one to one but future will be developing

one too many solutions utility computing.

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7.3 Strategic Benefits of Outsourcing

The Benefits of Outsourcing

Financial restructuring:

Improving the business’s financial position while reducing or at least containing costs

Core competence:

Redirecting the business and IT into core competences.

Technology Catalyst:

Strengthening resources and flexibility in technology and service to underpin thebusiness strategic direction.

Business transition:

Facilitating and supporting major organization change.

Business Innovation:

Improving and innovating in processes, skills and technology, while mediating financialrisk through the vendor, in order to achieve competitive advantage.

New market:

Direct profit generation through joint ventures and vendor partner.

7.4 Evolution of Business Process outsourcing

Over the recent decades it has become apparent that globalization is an inevitableevent that will continue to change the business atmosphere. “Globalization is the advanceof human cooperation across national boundaries,” In reality globalization and outsourcingare two in the same. Outsourcing can be defined as an act of moving some of a firm’sinternal activities and decision responsibilities to outside providers. Through trade, foreigndirect investment (the measure of foreign owned productive assets in a country), capitalflows, migration, and the spread of technology, individual economies will eventually meshinto a one global international economy. The world as we know it is becoming aninterdependent market system that is more flexible than ever before. In order to sustaineconomic growth within a nation, the people investing must feel a sense of security andconfidence. There has to be the guarantee that the assets invested in a developing countryare not going to be stripped by the governing officials or other political and societal forces.

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The more trust present between two parties, the more wealth that can be accumulated.Once a country develops a sound legal policy and infrastructure, outsourcing can takeplace. In essence, the very idea of paying an employee less money to do the same job isthe underlying theme associated to outsourcing.

Over the past half century, several countries have emerged as leaders in the world ofoutsourcing. Better known as BRIC; Brazil, Russia, India and China have all been able todevelop their nation through the process of outsourcing. Mexico can also be placed in thiscategory since their economic growth has skyrocketed after the North American Free TradeAgreement was put in place. The reason why these countries look so appetizing for foreigndirect investment is because their currency has not inflated to the level of developed nations.Since the United States and Europe have been developed nations for quite some timeinflation over the years has created higher labor costs that are incomparable to developingcountries. Besides cheap labor, companies may specialize in a certain type of productionto develop their competitive advantage. Depending on where the company is located, thereare various ways for local and foreign companies to develop their niche in the market. Thefacts present outsourcing to be worth the consideration, but the process is not as clear cutas it seems. Only 54% of companies are satisfied with their outsourcing, which is downfrom more than 80% a decade ago. This fact is even more troubling considering theadvancements in telecommunications. The environment to do business has becomeincreasingly smaller due to the innovations in technology and will continue to do so foryears to come.

7.5 Evaluation and Develop Firm’s Internal readiness foroutsourcing

Outsourcing is an irreversible mega trend that will continue to grow. In fact, researchfirm Gartner, Inc. (Stamford, CT) has predicted that more than 40 percent of Fortune 500U.S. firms will be outsourcing IT services through a global delivery model by the end of2004. Analysts at research firm Meta Group, Inc. (Stamford, CT) have predicted that asmuch as 40 percent of production support may be managed offshore in the next severalyears. Clearly, all signs continue to point to outsourcing as the new reality for Americanbusiness. What is driving this trend? You might think that the allure of quality work for lowercosts is what makes global outsourcing attractive. However, new research from Meta Groupshows that 80 percent of businesses have spent more time and money on outsourcedapplication development than what was originally specified, with problems ranging fromtime and cost overruns, to non-adherence to specifications and requirements.

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With so many faltering or failed outsourcing projects and an increasingly stringentregulatory environment-the Sarbanes-Oxley Act, for example-is global outsourcing safe foryour company? This article outlines the issues executives must consider and the stepscompanies should take to safely implement an outsourcing solution.

Ready or Not?

The first step is to determine whether your company is ready to outsource. Conducta readiness assessment that specifically evaluates programmatic risks and opportunitiesassociated with outsourcing as they relate to your specific company needs. Risks to beevaluated include:

· Functionality risk-Risk that the system may not fully meet the ultimate users’demands due to the relative complexity of user requirements and interfaces.

· Internal political risk-Risk that the project would compromise because ofantagonism within the organization, related to changes in the existing power balance orstatus quo.

· Project management risk-Risk that the company would not be familiar with theprocesses for managing expectations and deliverables in a distributed developmentenvironment.

· Financial risk-Risk that cost would exceed budget, or that the result would notdeliver anticipated benefits.

· Technical risk-Risk that the scope of the project would be beyond the technicalcapabilities of the hardware, software, or available personnel.

Security and compliance risk-Risk that company data or business continuity may becompromised.

· Geopolitical risk-Risk of political instability in a developing country where businesscritical applications or data reside.

The assessment should also evaluate issues such as the total cost of ownership,project complexity, maturity of internal and partner infrastructure, the criticality of the projector process to be outsourced, and the project’s dependence on key personnel. The outcomeof this assessment should be a comprehensive picture of the outsourcing possibilities forthe business processes and applications used by the company. Which projects are fairlylow risks that promise reasonably high returns, and vice versa? The evaluation shouldinclude a ranking of the risks and rewards possible from implementing an outsourcing

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plan. With this information in hand, it should be possible to determine what kind of functionsor projects can be outsourced safely. Companies are outsourcing business processesevery day that may not have even been thought possible in the past. From call centres,document management, information technology development, accounts receivable,accounts payable and general ledger, to tax processing, legal research, medical diagnostics,medical transcriptions and animation-outsourcing can touch almost any business function.

Selecting a Candidate

When evaluating whether a project is a good candidate for outsourcing, the projectsor processes with the least outsourcing risk generally involve business functions with lowcriticality and low strategic value, where significant costs savings can be achieved. Thereare compelling reasons, however, to consider outsourcing in areas that do contain somedegree of risk. For example, when a company implements a new approach or switches anapplication platform but does not have in-house support capabilities, it often makes themost sense to find a partner who can manage the process from start to finish. Themanagement and consolidation of legacy applications is a fertile area for outsourcing.Maintaining old, but necessary, systems is usually not the best strategic use of a company’sinternal IT resources.

Software testing also stands out as a solid outsourcing candidate. Testing needs tobe independent, can be done anywhere in the world where there is expertise, and is adiscrete project with a defined start and finish. The company gets something tangible in itshands when the project is complete. It also avoids the costly ramp-up and ramp-downdictated by cyclical development schedules, as well as the capital investment in testingsoftware and annual license fees. In all these examples, there are degrees of risk associatedwith obtaining a rewarding outcome. It is necessary to be aware of the risks and be preparedto manage the various risk elements as they are mapped in the initial assessment. Projectsthat are risky candidates for offshore outsourcing generally require high levels of humaninteraction with business managers or process owners, or involve understanding thebusiness rules to be designed as a large part of the project. For example, the actualconfiguration of an enterprise application with complex organizational interfaces is mosteffectively and efficiently done face-to-face with business owners.

Caution is also justified in considering offshore outsourcing of systems involved inregulatory compliance programs. Public companies have spent a great deal of money oninternal working processes to ensure compliance with Sarbanes-Oxley and other regulatorymandates. Make certain that an outsourcing partner will create the necessary

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documentation and audit trails so that the outsourced facility becomes an extension of thesolution that has already been implemented.

Develop a Plan

Once a company’s internal readiness has been assessed and a project or businessprocess to outsource identified, the next step is to develop a solid plan that clearly identifiesand manages the impact of outsourcing on the organization. For the manager chargedwith overseeing an outsourcing project, it is helpful to ask a few basic questions:

How will outsourcing impact our continuity plan?

What effect will the project have on employee retention and morale?

How do we overcome the cultural differences between our employees and our partner?

The single most important thing to do to ensure business continuity and to significantly

decrease risks is to communicate the plan to employees. Often, the biggest reason for

outsourcing failure is not that the company didn’t pick the right partner, or failed to go to the

right country, or chose the wrong project. It’s employee sabotage. A company needs to

develop a holistic outsourcing plan and make it known to employees, including plans to

retool employee responsibilities, as well as amicable pathways, such as attrition, for those

who will no longer be needed. The danger is that an exodus of employees, some with the

knowledge base that is crucial to business continuity, can result from an uncertain

environment. Or employees may purposely, perhaps subtly, sabotage the outsourced

projects to ensure that they fail. Companies that require their soon-to-be- displaced

employees to train their own replacements are creating an environment for certain failure.

Implementing an effective employee communications program can help to avoid these

problems. External team building is also essential to a project’s success. Some of the

steps or items that you may wish to consider to help manage the transition and build

external teams include:

Setting expectations clearly and upfront, acknowledging job transition or reassignment.

Clearly stating the reasons why work is being outsourced (A large number of

organizations evaluate function and performance first, not the potential cost savings).

Recognizing each other’s cultures through the celebration of birthdays and holidays

and the sharing of cultural days and traditions.

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Creating reward/recognition systems that are on par for employees and contractors.

For example, some companies provide the same rewards and bonuses.

A piecemeal approach or “creeping outsourcing” is another sure recipe for disaster.

Your outsourcing plan should map out the key projects or processes to define the scope of

the relationship and ensure efficient delivery of services. You will also want to work with a

partner that provides multiple global outsourcing options to meet your ongoing operational

needs. This is especially true if outsourcing is new to your company. Also, don’t forget to

update your disaster recovery plan when undertaking an outsourcing project. Managers

often omit this important step, putting the business at risk. The plan needs to address

critical systems and functions, so reviewing and testing the plan including the outsourced

components will provide valuable information as to its effectiveness.

Pick a Partner

An outsourcing plan should also map out the optimal path to outsourcing projects or

processes. It is a good idea to work with a partner that provides multiple global outsourcing

options to meet ongoing operational needs, especially if outsourcing is new to an organization.

Keep in mind that outsourcing does not necessarily mean going offshore. By keeping

business critical projects on or near your site, and moving to an offshore or near shore

facility, the less critical projects can be supported from remote locations. Some projects

may require both an onshore and offshore presence to optimize project delivery. A partner

with global delivery options will be able to access and manage the best options.

This approach will allow decisions to be made about managing an outsourced project

based on a company’s specific technical requirements, domain knowledge, security and

compliance needs, project schedule and cost goals. Another key advantage to working

with a partner with multiple global delivery options is that the due diligence required to

safely outsource work to offsite facilities has already been completed. The outsourcing

partner has already implemented the processes and conducted the due diligence to ensure

that the country to which your projects are sent is politically stable, with regulations to

protect your intellectual property. In addition, security for the outsourced facility will be in

order, although planning is required to ensure that data are protected, buildings secured,

personnel screened and insurance for theft in place. Finally, your partner will likely have a

good telecommunications infrastructure and will be easily accessible should travel be

necessary.

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In today’s world, software developers change jobs and move between companies at

a rapid pace. Competition for talent is also heating up in the offshore environment. A world-

class outsourcing partner will have already addressed the issue of employee retention at

its outsourcing facilities to mitigate business continuity risks that result from high employee

turnover. Make sure a partner’s staff turnover is less than 10 percent per year. An outsourcing

partner should also have experience managing cultural differences that might impede a

healthy client relationship. For example, the employees of a facility located in a predominantly

patriarchal society need to understand a company’s expectations about working with female

managers based in the United States.

Keep in mind that outsourcing will not enable you to reduce your project management

responsibilities. By contrast you will probably have increased internal project management

responsibilities. Managing a distributed team, incorporating new business processes and

methodologies and navigating cultural differences are just a few of the items you may be

faced with. However, following these measures will help you to build the knowledge base

with your offshore partner so that the relationship matures and the return on investment

continues to grow. You may think your company is too small to consider outsourcing. The

reality, however, is the global marketplace is accessible to anyone. No one competing in

today’s economy builds a company with a permanent employee at every desk. Companies

of all sizes are shopping globally to find the best resources at the right price. With careful

planning, companies can reap the benefits of the global marketplace, while at the same

time ensuring their risks are managed and their business continuity is preserved. It’s not

only about outsourcing anymore: it’s about smart business.

7.6 Critical Success Factors

Critical success factor (CSF) is the term for an element that is necessary for an

organization or project to achieve its mission. It is a critical factor or activity required for

ensuring the success of a company or an organization. The term was initially used in the

world of data analysis, and business analysis. For example, a CSF for a successful

Information Technology (IT) project is user involvement.

“Critical success factors are those few things that must go well to ensure success

for a manager or an organization, and, therefore, they represent those managerial or

enterprise area, that must be given special and continual attention to bring about high

performance. CSFs include issues vital to an organization’s current operating activities

and to its future success.”

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Critical success factors should not be confused with success criteria; those areoutcomes of a project or achievements of an organization that are needed to consider theproject a success or to esteem the organization successful. Success criteria are definedwith the objectives and may be quantified by Key performance indicators.

7.7 Assessing and Managing Risk of BPO

Outsourcing services can reduce costs, provide higher quality processes and allowmanagement to focus on core business. But it also introduces substantial risk managementchallenges, which when combined with increasing regulatory scrutiny and negative publicsentiment about moving jobs overseas; make risk assessment and mitigation imperative.

The risks of flawed location selection, provider selection, and poor management areconsiderable, attracting substantial management time and investment. However there aresome other risks which are not so obvious but impact the business and its interests.Respondents to the survey state that as clients become more knowledgeable aboutoutsourcing, greater emphasis is laid on assessing risk areas where there may besignificant impact on people, processes, technologies, on existing facilities, and on regulatoryand legal requirements both in the home and offshore environments. A noticeable trend, asper the survey, indicates the steady shift in the focus of clients from external to internalrisks.

Internal risks1. Transition risks2. Data Security risks3. Loss of control4. Brand damage5. Weak governance6. Hidden costs

1. Transition Risks

As a part of internal risks, transition risks have been cited to be the most severe.These risks include errors in estimating overall time for migration, intensity of efforts involvedand costs that shall accrue. To mitigate these risks, clients are adopting sophisticatedapproaches for identifying the critical path for successful transition and understanding thelevel of risk associated with realizing each key benefit area. Sensitivity analyses are alsoconducted to assess the probability and impact of any delay and reduction of benefit levelsdue to uncertainties or inter-dependencies with other projects, operations or functions duringplanned transition.

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2. Data Security Risks

Global customers consider network security, physical security, and customer privacyand information protection to be critical. A few respondents state that the criticality of datasecurity is more concentrated in the areas of voice-based outsourcing, with employeesoften gaining access to customer id’s, pin codes and other confidential data. In addition,the importance is magnified in specific strategic processes such as financial reporting, taxand legal support and in the verticals of healthcare and insurance. Service providers areaware of the privacy and IP related concerns of their clients and in a large number ofcases, as per the survey, are compliant with global standards such as BS 7799, ISO17799, COBIT and ITSM, now considered ‘must-haves’ for the larger players. Further,most respondents have taken steps in the areas of physical security, technological initiatives,policies, ethical guidelines on their own initiative, to ensure that data confidentiality ismaintained. Regular training on issues of security awareness, nondisclosure agreements,screening of employees and periodic compliance audits are some of the best practicesthat had been observed in the survey.

3. Loss of Control Risks

Loss of control on offshore operations is an area that clients have traditionally beenconcerned of in light of the cultural, administrative and geographic distance between theclient and the service-provider. The anxiety accrues due to two prime factors respondentscite – perceived inability to influence the quality of the service and the inability to determinewhat is going wrong due to inadequate or inaccurate information. The implication of theperceived loss of control has been on high expectations from service providers and thedetailed drafting of Service level agreements with respect to quality controls andcommunication flows.

4. Brand Risks

Brand risk is another area of concern for clients, stemming from poor service byservice providers resulting in end-customer dissatisfaction or service-provider practicesnot being in line with stated practices (ethical or otherwise) of the regulated entity. Themagnitude of reputational risk is amplified with the political overtones of off shoring forwhich clients have begun to develop proactive external Communication plans.

5. Weak Governance

An emerging area of concern for clients is the risk related to arrested evolution. Theserisks relate to the inability of an outsourcing solution, defined from a short-term perspective,

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to respond to changing business requirements. Due diligence in this respect is being carriedout, with focus on issues of scalability and robustness of proposed technology platforms tounderpin transition of existing operations, support ongoing business and enable any futureexpansion of offshore strategy such as significant Increases or spikes in transactionprocessing requirements.

6. Risk of Hidden Costs

In the financial domain, risks that clients are becoming wary of include hidden costs– not foreseen in initial stages of projects. Respondents cite examples of the costs ofevaluating vendors, managing major contracts, travelling to offshore sites, enhancingsecurity, and paying severance for laid-off workers as instances of hidden costs. Exit costsare another hidden risk, as ending an arrangement prematurely exposes both buyer andprovider to litigation. Clients are resorting to careful cost modelling and scenario planningwhich include benchmarked information and sound understanding of current activity-basedperformance and costing. While most companies are focused on risk issues at the offshoring decision point (e.g., contract signature/change of control/ physical move), it hasbeen observed that the focus fades with time. It is critical to keep the ongoing commitmentto risk management; risk profiles and exposures change over time, and while some riskscan be eliminated or mitigated, others must be actively managed.

7.8 Summary

Business process outsourcing is the movement of functions from inside theorganization to an outside service provider. It has been widely praised as a strategy foreliminating business processes that are not part of an organization’s core competence,including back-office functions such as payroll and benefits administration, customer service,call center, and technical support. Despite its demonstrable bottom-line benefits, however,BPO has come under attack for eliminating jobs, often by moving them offshore to lower-cost, higher-value locations.

7.9 Review Questions

1. Explain about the Business Process outsourcing.

2. What are the critical factors of Business process outsourcing?

3. Explain the process of managing risk.

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Lesson - 8

IDENTIFY AND MANAGE COST OF BPOMANAGING BPO TRANSITION

Learning Objectives

After reading this lesson, you will be able to

explain the various costs related to BPO

Structure

8.1 Introduction

8.2 Financial Costs

8.3 Strategic Costs

8.4 Summary

8.5 Review Questions

8.1 Introduction

Make or buy is the fundamental decision that faces all organizations consideringtheir alternatives for managing a business process. The decision involves many factors,not the least of which is the cost associated with developing internal capabilities (making)or outsourcing them to an external provider (buying). Cost is one of the three primaryelements of the BPO decision, along with productivity and mission criticality. Each mustbe weighed when analyzing BPO opportunities. In a perfect world, where all other thingsare equal, the decision to undertake a BPO initiative would be based purely on cost-of-labor arbitrage- firms would simply source business processes to the lowest-cost labor,wherever it may be. But this is not a perfect world, and the various costs associated with aBPO initiative are not always easy to identify or forecast. The savings that are most oftenassociated with BPO stem from the elimination of overhead, including jobs, capital assets,and real estate. However, the true costs involve far more than head count and capitalinvestments. Identifying and assessing the costs related to a BPO initiative are essential tothe outsourcing decision and can help organizations budget appropriately. There are twoprimary areas of concern:

1. Financial costs. Hard costs associated with activities that must be undertaken toassess, launch, and maintain a BPO project.

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2. Strategic costs. Soft costs that are difficult to quantify but can profoundly affect

the firm’s ability to compete.

While financial costs are often self-evident, strategic costs may not be so clear. For

example, one strategic cost of outsourcing that is often cited is loss of organizational learning

in the outsourced activity. This can lead to strategic blunders if the outsourced activity is

important to the organization’s core competence and the organization is not working closely

enough with its vendor in a mutual exchange of knowledge. Strategic benefits can arise

from a deep partnership arrangement between BPO buyer and vendor. Such a relationship

focuses not just on cost-effective performance on the outsourced activity, but also on

knowledge sharing, innovation, and reciprocal exchange across business processes,

including the outsourcer’s core competence

8.2 Financial Costs

The financial costs associated with BPO are ongoing, as long as the project is active.Each project phase has predictable costs that can be forecast, budgeted, monitored, andmitigated. Additionally, each BPO initiative has a variety of less obvious yet insidious hiddencosts. BPO project managers should include these in their analyses because manyinitiatives accumulate unanticipated costs that can threaten projects—and careers.

Analysis Phase Costs

The first direct cost to consider in the BPO analysis phase is associated with theinternal staff that will be enlisted to conduct the assessment. Organizations should use ateam approach to identify and select BPO opportunities. Organizing a BAT (BPO AnalysisTeam) means employees from diverse units will take time away from their normal duties toserve on the team. The time spent away from these duties is a direct cost. Costs associatedwith removing individuals from their regular jobs can be calculated in several ways. One isto count the hours spent on the BPO analysis for each BAT member (and anyone elsebrought in on a transitory basis) and multiply this figure by the hourly wage for that individual.The result of this calculation is then attributed to the BPO project. This approach is oftenreferred to as transfer pricing. Project managers also commonly use what is called a task-based costing estimate to forecast personnel costs associated with a project.

Cost of Third-Party Support

Another direct cost associated with the BPO analysis phase involves third-partyprofessional support that may be required to assist the team.BPO consultants, market

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research specialists, and change-management consultants are just some of the outsideprofessionals the BAT may want to consider utilizing. This cost can be estimated at thebeginning of the project using several indicators, including:

Prior BPO knowledge among BAT members and the organization as a whole

Organizational history with BPO, reengineering, or other transformational changeprograms

Top management support for BPO in the organization

BAT member knowledge of BPO is a factor because lack of such background willusually require investment in outside support. It is simply unrealistic to expect individualswith no BPO knowledge or experience to be effective BAT members. Thus, training andpreparation costs should be estimated. A good rule-of-thumb estimate is to assume oneweek of person-time for each BAT member to read, review, and discuss what BPO is andhow it can be utilized by the organization. Organizational history with major change programscan also reduce BPO analysis costs. Firms that have such a history, whether withreengineering, Total Quality Management (TQM), or something else, will likely be bettersuited for the self-examination process that is required for effective BAT performance. Ahistory with transformational change, especially if the experience was positive, can easethe burden of the analysis process. Individuals throughout the firm will be more willing tocooperate and work hard to analyze BPO opportunities if they believe the process willresult in positive changes. Estimating the costs associated with a lack of history intransformational change will be subjective. In general, the analysis-phase cost estimatesshould include an extra week of BAT member time if the organization has no history withtransformational change. Top management support is critical to the success of anyorganizational transformation. BAT members must perceive that they are empowered todedicate their time to the analysis process. If top managers badger them about time spentaway from their central duties, team members will feel conflicted and the BPO analysisprocess will likely take longer and be less effective. Top managers must clear the spacenecessary for BAT members to do their analysis, while maintaining reasonable expectationsabout performance in their regular duties.

Cost Benefits of Internal and External Implementations

The costs of implementing a BPO project can be mitigated using a variety of tactics,depending in part on whether the implementation is handled internally or externally. Internalimplementation will provide the value-adding benefits of increased levels of organizationallearning and capability. The internal outsourcing manager or management team will be

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involved in drafting and distributing the request for propetal RFP, responding to vendorinquiries, selecting a vendor, and initiating the BPO transition. Developing internal knowledgeof these aspects of an implementation means the organization has acquired the capacityfor additional BPO initiatives in the future. The greatest value-added benefit is likely to bethe reduced time necessary for future BPO implementations, as well as a more effectiveimplementation phase overall. Cost mitigation benefits associated with hiring a consultantto conduct the BPO implementation include a faster process and, quite likely, a moreeffective vendor relationship. Professional service firms skilled in matching client needswith vendor capacities are likely to be able to provide significant value to the BPO buyer.The BPO buyer can derive even greater benefits if the consultant is compensated in partbased on vendor performance. This is just one example of contracting mechanisms andinnovations that can be used during the implementation phase to reduce risks and increasebenefits.

Transition-Phase Costs

The transition phase is one in which the business process that formerly had beenhandled in house is wholly or in part shifted to the outsourcing vendor. The costs associatedwith this phase are driven by primary characteristics of the BPO buyer—vendor relationship

Asset Ownership and Location

The asset ownership and location driver concerns which firm will be better able toleverage people, technology, and other assets for competitive advantage, and where thoseassets should be located. In some situations, a BPO buyer may want to retain all or part ofits existing assets to continue to develop internal competence in a process. For example,a firm may elect to outsource part of its call centre function to a vendor as a means offreeing internal call centre staff time to improve the in-house operation. The decision abouthow asset ownership will be allocated between buyer and vendor has cost implications.For example, by outsourcing asset ownership, an organization can turn capital into expense:Assets that had previously required maintenance and continuing investment of time, money,equipment, and people are converted into a variable or fixed cost on the income statement,depending on the type of BPO contract The decision about where assets will be locatedalso has cost implications. Retaining a process on the buying organization’s premisesusually means that the transition can be completed more quickly than by moving assetsoff-site, but not necessarily. There are many advantages to keeping assets on-site, includingthe fact that it is far easier to retain existing personnel, many of whom would be unwilling torelocate to the vendor (especially if the vendor is overseas). Employees involved in a processthat has been outsourced can become productive members of the vendor organization,

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but the transition must be handled with care. It is not unusual for the BPO buyer to experienceattrition, staff cuts, and reassignments during the transition phase. The vendor will oftenreengineer the outsourced process, reducing inefficiencies and enhancing individualproductivity levels. This means that staffs that remain may harbour lingering fears for theirown job security—fears that may slow the transition and affect productivity. Propermanagement of the in-house transition to vendor management and process ownership willreduce these potential costs.

Operational-Phase Costs

The operational phase of the BPO project refers to the period when the contract isbeing fully implemented and performance expectations drive the relationship. Among theendpoints that should be monitored as part of an ongoing BPO initiative are both financialand productivity ratios. Financial ratios that should be monitored range from standard returnon investment (ROI) to margin enhancement. Depending on the intentions of the BPOproject, the financial ratios to be monitored will vary slightly. As mentioned, some BPOprojects are undertaken primarily for cost reduction purposes and others primarily forstrategic advantage purposes. Cost-reduction BPO projects are intended to enhancemargins through reduced overhead, which can often be achieved within 6 to 12monthsafter commencement of the contract. In contrast, strategic BPO attempts to leverage theworld-leading capabilities of the outsourcing partner and focuses more on new revenueover margin enhancement. Organizations must establish financial metrics appropriate tothe intentions of their BPO project.

8.3 Strategic Costs

The strategic costs associated with BPO centre on the potential loss of organizationallearning that results from placing a process under the control of an external service provider.Outsourcing so-called noncore processes must be undertaken with careful forethoughtbecause it is never clear how future competitive conditions will unfold and what types ofcompetencies will be required. Firms must distinguish noncore activities as critical, key, orsupport. Those activities that are tightly coupled to the core and are fault intolerant (i.e.,mission-critical processes) should usually be retained in-house. At the very least, theyshould be outsourced only when the inter organizational relationship is clearly focused ondeveloping and deriving strategic advantages. Knowledge management should betransparent from one firm to the other, and reciprocal exchange of insights should beconsidered routine. Furthermore, a quest for innovation in the interlinking of the critical andcore processes must be a paramount concern for both sides of the outsourcing relationship.In fact, the major strategic component of a BPO initiative is the relationship between buyer

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and vendor. Relationship costs are those that are involved in courting, establishing, andmaintaining a relationship with a BPO vendor. This complex undertaking can be as far-reaching and comprehensive as a merger or joint venture.

Such transactions are distinguished by the need to mesh information systems,governance structures, and organizational cultures into a unified whole. The complexity ofthe challenges of merging two formerly distinct enterprises is often too overwhelming forthe executives who engineered the deal. One or more top executives are often either askedor forced to leave as they become increasingly disoriented amid the chaos of the combinedentity. For example, the merger of Hewlett-Packard and Compaq in 2002 led to a quickdeparture of Compaq’s then-CEO Michael Capellas. Departures related to that mergercontinued well into 2003.A thoroughgoing BPO relationship can share many of thecomplexities of a major merger or joint venture. Firms that determine to outsource back-office processes are entering into a relationship with a vendor that will have importantcompetitive implications. The risk posed by this loss of functional independence requirescareful prior analysis of the capabilities and integrity of the vendor. In the case of a BPOrelationship, it is simply unacceptable for any breakdowns in performance or integrity tooccur.

8.4 Summary

The costs of a BPO project go far beyond mere labor-cost arbitrage. They occur atall four levels of the process—analysis, implementation, transition, and maintenance—and can be categorized as either financial or strategic costs. There are a number of criticalfactors in the cost equation, including decisions about whether to handle BPO internally orexternally, development of RFPs and review of responses, and how well initiatingorganizations create and sustain positive relationships with vendors. At the same time, anorganization must consider impacts on internal (employee) as well as external stakeholdersto help maximize competitive benefits of the BPO project

8.5 Review Questions

1. Discuss the managing cost of Business Process outsourcing.

2. Explain the importance of strategic costs.

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Lesson – 9

TYPES OF BUSINESS RISKSLearning Objectives

After reading this lesson, you will be able to

explain the types of business risks involved in BPO industry

Structure

9.1 Introduction

9.2 Human Capital Risks

9.3 Labor-Related Risk

9.4 Project Risks

9.5 Intellectual Property Risks

9.6 Legal Risks

9.7 Vendor Organizational Risks

9.8 Value Risks

9.9 Force Majeure Risks

9.10 Managing Risks

9.11 Summary

9.12 Review Questions

9.1 Introduction

This lesson explores the most common BPO risk factors and discusses effective

management techniques for mitigating those risks. These factors will be examined from

the perspective of SMEs that seek to gain their fair share of the advantages offered by

BPO. Lacking the capital and other resources to absorb the impact of major strategic

decision errors, SME executives and managers must be vigilant about risk avoidance and

mitigation. The discussion focuses on seven primary areas, each of which should be

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addressed in a thorough risk-management strategy developed by the Project Management

Team (PMT):. The types of business risks are lested below.

1. Human capital risks

2. Project risks

3. Intellectural Property risks

4. Legal risks

5. Vendor organizational risks

6. Value risks

7. Force majeure risks

9.2 Human Capital Risks

The challenges associated with managing the organizational changes that go hand

in hand with a BPO project. Change management is an HR issue, involving a well-understood

pattern of overcoming resistance, instituting changes, and re-establishing standard operating

procedures (SOPs). Some change management consultants have expressed this as

unfreezing–moving–refreezing the organization. This section does not address the risks

related to change management; rather, it focuses on the technical risks involved with the

thorny issues of equal employment opportunity, immigration, and foreign trade regulations.

Each of these topics touches the BPO project on the margins and must be understood

and managed. Onshore outsourcing usually has minimal human capital risks because it is

strongly in the domestic BPO vendor’s interest to understand and comply with all U.S.

employment laws and regulations. Furthermore, the vendor is highly motivated to assist

clients with any labor issues they may face as a result of engaging vendors in an outsourcing

relationship. The human capital issues most likely to arise in an onshore outsourcing project

are those associated with equal employment opportunity regulations. For example, BPO

buyers must be especially careful when outsourcing results in reductions in force (RIFs).

Such reductions must be handled in a manner that is transparently related to business

interests and has not selectively targeted a protected class of individuals.

9.3 Labor-Related Risks

Other human capital risks associated with onshore outsourcing concern those that

stem from collective bargaining and labor relations laws and regulations. For example, the

U.S. Supreme Court has established basic guidelines governing whether and when

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subcontracting should be deemed a mandatory subject of bargaining under the National

Labor Relations Act (NLRA). Beginning in the early 1980s, the National Labor Relations

Board (NLRB) issued several decisions that created additional uncertainty when evaluating

the bargaining status of outsourcing or subcontracting decisions. The NLRB’s lack of clarity

on the obligations of employers in collective bargaining is unlikely to be resolved anytime

soon. To reduce risk, companies should consult with labor attorneys as part of the BPO

opportunity analysis to determine the likely disposition of their preferred strategy and its

implications for possible liability exposure

9.4 Project Risks

Project risks are defined as those that have the potential to prevent the BPO initiative

from not providing the cost savings, strategic advantages, or productivity improvements

anticipated. The reasons for these risks are too numerous to list. Unexpected

incompatibilities between software

Infrastructures could prove intractable and lead to delays, cost overruns, and lost

business. The cultures of the two companies may pose unwieldy- in challenges that become

more trouble than they are worth. Changes in U.S. or foreign labor laws could depend the

cost equations that had been the primary reason for the offshore outsourcing

9.5 Intellectual Property Risks

Most businesses have a significant amount of sensitive information, including trade

secrets, business plans, and proprietary business knowledge. Safeguarding critical business

information is a concern, even in the United States. Threats to information security, including

theft by company insiders, former employees, and computer hackers, abound. Offshore

outsourcing presents different—and in some cases, more potent—threats than the

domestic variety. Legal standards and business practices governing whether and how

sensitive information should be guarded vary around the world

9.6 Legal Risks

Many law firms and consultancies specialize in assisting BPO buyers in developing

contract terms that are favourable and enforceable. Of course, each contract must foster

and promote the BPO relationship. In an offshore BPO project, the BPO buyer may have

to concede some governing jurisdiction to the vendor’s home country. That is, it may not

be possible to draft contracts with offshore vendors that demand all legal conflicts be

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decided in the buyer’s preferred jurisdiction. Some give and take may be required on different

contract elements, with some potential areas of conflict to be decided in a domestic forum,

some in a forum preferred by the vendor, and others in an international forum such as the

International Arbitration Association. BPO buyers should mix and match forums to ensure

that matters of potentially greatest impact to competitive ability are decided in their preferred

forum. This can be achieved if there is a willingness to concede that matters of less

importance can be decided elsewhere. One technique that has been effective for avoiding

legal disputes is to split outsourcing contracts depending on different deliverables and

service-level agreements (SLAs). For example, many firms outsource software development

as well as IT management to third-party vendors. A BPO buyer would be wise to split the

software development contract from the IT services contract. IT management services

are generally governed by SLAs that require regular fee payments. Firms should also be

careful to separate continuous service or transaction-related terms from those that concern

development of some type of output, such as software or knowledge that is the property of

the BPO buyer. The transaction-related services are usually covered in the SLAs and are

paid on a regular basis. Development contracts should be treated separately. It is reasonable

for the BPO buyer to withhold a substantial portion of the development contract fees until

the final product has been delivered and tested.

9.7 Vendor Organizational Risks

The risks associated with the BPO vendor’s organization are perhaps the most difficult

to accept because they are not easy to control. This risk is also enhanced when the vendor

is offshore. The risks associated with the vendor organization can range from business

practices to authenticity of Certification and reference claims.

Vendor business practices can vary greatly around the world. Practices that are

clearly prohibited or considered highly questionable in the United States can be routine in

the vendor’s home country. The problems of bribes, kickbacks, or money exchanged under

the table have affected U.S. businesses abroad in a wide range of industries. The U.S.Foreign

Corrupt Practices Act of 1977 is designed to discourage domestic companies from

participating in practices abroad that are proscribed at home. Most BPO vendor companies

were founded after the 1977 act was passed and are generally managed by individuals

who are sensitive to the need to conform to its strictures. Market-based governance

mechanisms also compel vendors to conform to U.S. standards. Another risk concerns

the potential for vendors to overstate their competencies and to exaggerate the business

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and technical certifications they possess and the clients they serve. This risk can be mitigated

through comprehensive due diligence that insists on objective proof of certifications and

permission to talk to representatives from the vendor’s client list. Vendors that refuse to

share certification evidence or balk at client referrals should be treated with caution. Vendor

organizational risk also includes its HR practices. Many manufacturers that chose to

outsource to foreign companies turned a blind eye to labor practices long banned in the

United States. Child labor, excessively long hours, and outright sexual and other forms of

harassment or discrimination are not uncommon in some foreign labor markets. Firms

choosing to outsource business processes should consider the labor practices of the

vendor and determine whether the risk of participating in domestically reviled practices

abroad can damage domestic reputation and goodwill.

9.8 Value Risks

Whether the rationale is cost savings or business transformation, an outsourcing

project is undertaken to create value for the BPO buyer. With the myriad uncertainties

inherent in any complex BPO deal, extracting anticipated value can be a challenge. This

risk can be mitigated through several techniques, most of which center on managing the

projected outcomes. For example, if the outsourcing deal is expected to save the BPO

buyer $1 million in the first year, the PMT should manage to that figure. Adding extra people

or hiring consulting firms may be a temptation as project difficulties mount. But this

temptation can be resisted if the PMT is committed to hitting the cost-savings targets

established for the project. Another technique for mitigating project value risks is to empower

the PMT to constantly seek opportunities to leverage the competencies that develop between

the buyer and vendor firms. This tactic often referred to as pressing the value model, will

expand the reach of vendor competencies as well as those jointly developed through the

BPO relationship.

For example, firms that outsource payroll may find that additional advantages can be

gained by turning over other back-office functions to the same vendor. When the PMT

presses the value model, it seeks to identify other noncore processes that may be suitable

for outsourcing under an existing buyer–vendor relationship umbrella. Value risks are inherent

in any project as people strive to work together to achieve future organizational states.

Working with international vendors presents higher-value risks than does working with

domestic vendors in that the extent of potential value is often overstated by the foreign

vendor and can take longer than expected to achieve. Mitigation of these risks centers on

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the effectiveness of SLA negotiation, implementation, and management. Some international

vendors have adopted extreme value-risk mitigation tactics to ensure that project deliverables

meet expectations. The following case study describes how a lead generation service

mitigates this risk.

9.9 Force Majeure Risks

Force majeure risks are the most difficult to quantify and specify. What is the likelihood

of a war? A hurricane? An earthquake? No one really knows. Yet these risks can be estimated

with some measure of objectivity, and an appropriate mitigation strategy can be developed

and enacted.

9.10 Managing Risks Early

Outsourcing does not mean eliminating business risk; it simply means that some

risk is transferred to the BPO vendor.BPO buyers should consider whether they could go

back to their old systems if all else failed. To be effective, an outsourcing deal requires that

each partner has considerable benefits to be gained, and that means sharing both risks

and rewards. To make that work, the BPO deal must fund the necessary investment and

motivate each partner’s commitment by aligning goals. Although the financial structure of

conventional outsourcing arrangements typically includes bonuses and penalties based

on the achievement of minimum service levels by the vendor, the focus of business

transformation outsourcing deals is on upside targets. They align incentives around

enterprise-level outcomes such as market share and return on equity. When thinking about

using outsourcing, the buyer must also consider the risks it brings to a potential BPO

relationship. The BPO provider’s readiness to undertake a BPO project is a major

determinant of risks to project success. A good starting point to a risk management strategy

is for the potential buyer to develop a risk profile of it. Issues to consider in a risk profile

include outsourcing maturity, financial stability, operational capabilities, market goodwill,

and access to credit. Managing risks associated with outsourcing is not unlike managing

the risks associated with any other business project. Firms must establish their goals

before undertaking the project and then manage to those goals. They must also be aware

of the internal and vendor-related HR and change management issues that will arise as a

result of launching a BPO project. Each of the various risk factors discussed in this chapter

can be managed, but constant attention is required to ensure that problems are addressed

before they become unmanageable and that project value is constantly pressed to extract

maximal benefit for buyer and vendor alike.

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9.11 Summary

The risks facing managers and executives in organizations seeking to outsource

business processes often go beyond the easily predictable. Defined as those events or

conditions that may prevent the BPO organization from achieving its projected benefits,

these risks occur in both onshore and offshore environments and can be placed in seven

categories: human capital risks, project risks, intellectual property risks, legal risks, vendor

organizational risks, value risks, and force majeure risks. It is vital that each of these risks

be assessed—at both internal and external levels, as appropriate—and that effective

strategies be put in place to anticipate, mitigate, and respond to them as circumstances

require. Failure to do so can significantly cripple the potential upside of any BPO initiative.

9.11 Review Questions

1. Explain the types of Business risk in BPO.

2. Discuss the strategies of managing risks.

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Lesson - 10

VENDORS SELECTION AND CONTRACTINGLearning Objectives

After reading this lesson you will be able to

discuss the steps on vendor selection

explain BPO contract and service level agreement

Structure

10.1 Introduction

10.2 Vendor Selection Process

10.3 BPO Contract

10.4 Summary

10.5 Review Questions

10.1 Introduction

Finding the right BPO vendor and developing an appropriate contract are essential toan organization’s outsourcing initiative. Regarding the former, the promise of BPO is alwaystempered by the perceived risks associated with handing responsibility for an internalbusiness process- no matter how noncore or mundane it may be—to another firm. Sogetting the right partner is crucial. As to the latter, careful consideration of the elements inan effective outsourcing contract can help avoid many of the risks that contribute to BPOfailure. The fact is, managing these functions in a way that reflects the strategic nature ofthe buyer–vendor relationship—that is, with an eye toward mutual satisfaction, trust, andprecision can go a long way toward maximizing the potential for BPO success.

10.2 Vendor Selection Process

The vendor identification and selection process can be broken into eight steps:

1. Appoint a vendor selection team (VST).

2. Establish qualifications.

3. Develop a long list.

4. Distribute the request for information (RFI).

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5. Distribute the request for proposals (RFP).

6. Evaluate proposals.

7. Select a short list.

8. Select a vendor.

Step 1: Appoint a Vendor Selection Team

There is far more to choosing an outsourcing vendor than there is to choosing a new

supplier. Unlike the buyer–supplier relationship, the BPO buyer–vendor relationship involves

a customized service, detailed agreement on service levels, and a strategically oriented

long-term contract. The buyer and vendor must have shared interests in key objectives

and values. The relationship will be more intimate. In general, BPO buyer– vendor

relationships are characterized by regular senior management meetings and sharing of

otherwise confidential information. Therefore, harmony among each firm’s predominant

management styles is vital. After the BPO Analysis Team (BAT) identifies the BPO

opportunity, estimated costs, and built the business case for an outsourcing project, a new

team—or at least new team charter—should be developed for the vendor selection process.

This is the vendor selection team (VST), which will work in relationship with other BPO

project teams. Organizations may elect to keep the BAT intact for the vendor selection

process or elect to develop a new team. Many firms decide to empower and charter a new

team to manage partnership identification, selection, and development to introduce fresh

ideas and provide a clear endpoint to the BAT’s efforts. But regardless of whether a new

team is established, the organization should consciously select and develop one or more

individuals to serve as BPO champions, at least one of which should come from the BAT.

These champions will be in charge of developing and deepening the outsourcing relationship

over the long term. Experience has shown that it is better to have the BPO champion

emerge from the vendor identification and selection team than to bring one in later to manage

the ongoing relationship.

Step 2: Establish Qualifications

It is imperative for the BPO buyer to establish minimum vendor qualifications. These

may include standard items such as experience, price, and location, as well as strategic

items such as the vendor’s organizational culture, decision-making style, and reputation.

According to extensive research into what outsourcing buyers need, the qualifications most

often sought in a vendor are

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• Quality

• Performance history

• Warranties and claims policies

• Facilities and capacity

• Geographic location

• Technical capability

In addition to these, other factors come into play as well:

• Customer service : BPO buyers must maintain a customer mindset to derive asmuch value as possible from the vendor and avoid making concessions on provisions ithas established as necessary for the project. A partner mindset in the BPO buyer shouldemerge only after the vendor has been selected and the contracting process has begun. Inthe partnership development stage of a BPO relationship, mutual compromise andcooperation is expected.

• Process expertise : This becomes less important the further from the core theoutsourced process is. Processes that are close to the outsourcing organization’s corecompetence should never be outsourced to an inexperienced vendor.

• Data sharing : Given that data sharing between the various commercial databasescan be difficult, the technology platform of the vendor should be a qualification. If vendorsdo not have a system that is easily compatible with the buyer’s existing system, theyshould be responsible for demonstrating how that hurdle can be overcome.

• Vendor’s business : Understanding the emphasis of a vendor’s business, or whatdrives its revenue, is critical. For example, large vendors usually look for large contracts.Smaller contracts negotiated with large vendors are unlikely to receive the same quality oftreatment as larger contracts.

• Industry specialization : Any vendor, other than the major consultancies, that claimsto specialize in several outsourcing service areas should be treated with caution. Having alarge base of multifunctional outsourcing expertise is rare, not to mention expensive tomaintain. Many vendors will say that the skills from outsourcing a function in one industrytransfer to another, and that may well be the case. But, in general, if the vendor is not anexpert in the field, it will not know about the hidden challenges associated with providingservices in that industry.

• Specificity : Firms interested in specific types of BPO providers can stipulate thatas a qualification. Some buyers may not want to use an offshore provider, for example.

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Others may specifically prefer the so-called pure play vendor, who specializes in a single

business process. Still others may desire a shared-services provider, who serves multiple

clients from a centralized location and usually bases its fees on a “pay by the pound” basis.

Step 3: Develop a Long List

The Vendor Selection Team objective is to build a list of 15 to 20 qualified potential

vendors .By searching for and evaluating multiple vendors, BPO buyers will better

understand what the marketplace has to offer, will be more likely to find vendors best suited

for their project, and will distribute risk over multiple partners. There are several good places

to start the BPO vendor search, including- believe it or not—the Internet. The VST can

make headway in vendor identification by using the standard Internet search engines and

keyword combinations. Another approach is to search among current suppliers to see if

any are qualified and willing to bid on the BPO project. This type of relationship is referred

to as sole sourcing or single sourcing and can be effective based on a shared experience

of working together. However, sole sourcing may lead to retaining a vendor that is not

completely qualified to manage the business process under consideration. It also increases

risk. If the vendor faces problems, more of the BPO buyer’s processes will be affected.

Many outsourcing magazines and online portals offer unbiased directories to assist in

locating potential vendors. These include Outsourcing-Central.com, Outsourcing Center,

the Outsourcing Institute, and Firm Builder. BPO buyers may want to consider third-party

consultants, some of whom offer free searches and have built a list of vendors from which

to choose. Additionally, buyers can also find vital information-case studies, lists of partners,

customers, services, and so on—on the respective Web sites of potential long-list vendor

candidates.

Step 4: Request for Information

After gathering the necessary data to identify 15 to 20 potential BPO vendors, it is

time to begin culling the list. This involves directly gathering information from the candidates.

A common technique to accomplish this is to send a scope of work (SOW) outline

specification and request for information (RFI) to each vendor on the long list. The SOW

should contain the broad intention of the outsourcing proposal and the time frame for

responding. The RFI is a questionnaire-type survey intended to establish the level of vendor

competence and interest. One method for contacting long-list vendors is via a phone call

to the sales department. This will involve only a high-level discussion about the BPO project

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and is designed to assess the vendor’s interest before moving forward with the RFI. If

there is interest, specific information should be gathered about where and to whom the RFI

should be sent. The vendor should also be informed as to whether the buyer would allow a

dialog before the RFI process.

Step 5: Request for Proposals

The objective of developing an request for proposal is to create a document that

details the services, activities, and performance targets required for the BPO project. But

the RFP is also a sales document designed to interest vendors who can add value to the

BPO buyer organization. Although RFPs vary in format, at minimum they should clearly

communicate project requirements to ensure that initial responses provide a full and

unambiguous picture of the vendor’s abilities, sophistication, and experience.

Step 6: Evaluate the Proposals

Initial screening of the proposals may reveal interesting facts about the vendor. For

example, the VST should scan each one to determine if it addresses the organization’s

unique needs. Often, a BPO vendor will use a generic template or cut and paste material

from another proposal and simply insert it in the current one. This often indicates the vendor

has not focused specifically on what the buyer needs. A good BPO vendor must be customer

oriented, and the proposal should be directly written for the buyer’s project.

Second Telephone Interview

Remaining vendors should be scheduled for telephone interviews of about one hour

in length. During this teleconference, the vendor should explain its proposal in detail, including

addressing issues such as:

• Approach

• Company background

• Experience in the process area

• Strengths

• Availability

• Certifications

• Suggested solution

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Step 7: Select a Short List

The VST should now have enough information to select the three to five most qualified

vendors, who should be contacted and invited in for face to-face formal presentations.

Vendor Presentation

The VST should meet with one vendor per day. The vendor visits should be limited to

four hours and be scheduled as close together as possible so the VST can compare notes

on each vendor while impressions are still fresh. The VST should set the meeting agenda

and share it with each vendor In advance. At the beginning of the formal presentation, the

VST chairperson should:

• Inform the vendor that it has made the short list.

• Explain that the vendor has four hours for its presentation.

• Express interest regarding the vendor’s pricing model.

• Reiterate what the organization is looking for in a BPO vendor.

• Let the vendor know there will be a final telephone conference to clarify the bid

submitted.

• Ask the vendor to submit its best bid no later than the deadline you have established.

• Let the vendor know when the decision will be made.

Step 8: Select the Vendor

Final vendor selection should be completed shortly after the second round of face-to-face presentations. By this time, it is usually clear which vendor’s proposal best meetsthe long- and short-term needs of the buyer. However, the VST may decide that none of thevendors is suitable. If that occurs, it is in the interest of the organization to abandon theBPO project. For many executives and managers, this may be difficult given the investmentof personal time and other resources. But sound business decision making sometimesrequires firms to cut their losses and move on rather than gerrymandering the specificationsor allowing the vendor to alter its bid to try to force a fit.

10.3 BPO Contract

First-time outsourcing projects fail to meet their objectives for reasons that are asvaried and complex as outsourcing relationships themselves. And while failures are generallynot strictly legal in nature, a poorly drafted contract is one of the most significant reasons

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cited for unsuccessful relationships. The careful negotiation and drafting of a goodoutsourcing contract can not only preserve the potential of an outsourcing project, but alsominimize the risk of failure and eliminate most other points of dissatisfaction.

Negotiating BPO Contracts

Although this discussion is intentionally brief and not designed to supplement themany excellent books written on the art of negotiation, it is important to examine the natureof negotiating BPO contracts. The complexity and evolving nature of the outsourcing processdemands a different mindset than is required in traditional commercial contract negotiation.It is not a zero-sum game, in which each party is motivated to extract as much value aspossible from the limited available resources, even to the detriment of the other party. Inthese types of negotiations, the outcome is winning–lose in that one party or the other getsits way. Although there may be clear advantages for the winner, the relationship is likely tobecome adversarial rather than collaborative. This probably will not promote the kind oflong-term collaboration critical to successful BPO initiatives.

However, developing an effective BPO contract requires a positivism approachwhereby the parties are interested in creating more value than currently exists. It aims forthe proverbial “win–win” outcome and seeks long-term, flexible contract terms. This requirescompromise by both parties. At the same time, risks associated with compromise can bemitigated through creative incentive clauses and remedies in the event of non-performance.

Terms of the Contract

Although BPO contract negotiations should be conducted in a positive sum spirit, it

would be naive to assume that trust is a sufficient governing mechanism. In fact, drafting

precise contract terms, including avenues for remedy in case performance falls short of

expectations, can help preserve a relationship during difficult stretches. The discussion

that follows outlines terms that should be considered and included in the formal BPO

contract. Although not an exhaustive set, the terms discussed are part of nearly every BPO

contract and constitute the core of the working relationship. They include:

• Scope of work (SOW)

• Service-level agreements (SLAs)

• Pricing

• Term of the contract

• Governance

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• Intellectual property

• Industry-specific concerns

• Termination of the contract

• Transition

• Force majeure

• Dispute resolution

Service-Level Agreements

In an SLA, a vendor agrees to achieve defined levels of performance. If the vendorfails to meet these objectives, the SLA provides the buyer with various rights and remedies.A carefully crafted set of SLAs aligns the interests of the vendor and buyer. Poorly draftedSLAs almost ensure a failed relationship. Unfortunately, SLAs are among the most difficultof outsourcing contract provisions. A solid SLA requires an intimate understanding ofbusiness processes by the attorneys drafting the agreement (SLAs should not be draftedby nonlawyers).The parties must document in great detail the requirements of eachoutsourced process and agree on how to measure service levels and consequences forthe failure to meet them

Defining What to Measure

The foundation of the SLA is defining which service levels and key performanceindicators (KPIs) to measure. An SLA may be tied to anything that can be objectivelyquantified but is usually a measure of such indicators as quality, speed, availability, reliability,capacity, timeliness, or customer satisfaction. With a call center, for example, servicelevels might include the average time to answer a call, the duration of the call, the percentageof issues satisfactorily resolved in the first call, and customer satisfaction. .

Transition

If a BPO relationship falls apart and one or both parties decide to terminate theagreement, it may be necessary for the buyer to reabsorb the outsourced process or findanother vendor. In either case, the transition of the outsourced process should be considered

in the original contract. The reasons for this are clear. Consider all of the planning and

implementation entailed in outsourcing a process from a buyer to a vendor. Now imagine

how much more difficult that process might be when the original buyer is no longer in

control of the process and its assets and personnel. To add to the challenge, consider the

fact that the transition may well be from an unhappy or incompetent vendor. Thus, the

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transition from one vendor to another, or the reintegration of the outsourced process back

to the buyer, is exponentially more difficult than the original outsourcing process. As a

result, careful consideration should be given as to how the transition may be effected, and

detailed transition provisions included in the contract. A transition plan should have a

commitment by the vendor to provide transition-planning assistance. This should include

inventories of hard and soft assets, copies of relevant data, detailed descriptions of

procedures, and other information relevant to the outsourced process. The buyer should

have the right to use this data and disclose it to other potential vendors, to purchase the

assets and hire key personnel related to the outsourced process, and to assume key

contracts.

Furthermore, the plan should address the need for parallel processing for some period

of time while the process migrates to a new vendor or back to the buyer. There may also be

a need for continued use of shared assets, such as computer networks. And just as aligning

vendor– buyer interests is vital to a successful contract, aligning those interests during the

transition is equally significant. Usually, this takes the form of monetary incentives for a

successfully implemented transition.

Force Majeure

Outsourcing contracts typically include force majeure clauses, which excuse the

vendor from performance in the case of natural disasters such as fire and weather-related

catastrophes. In light of the geopolitical postures of many of the countries where BPO

vendors are located, war and terrorism are also likely triggers of force majeure clauses.

However, because of the significant function that outsourced processes often play in the

buyer’s business, a well-crafted contract should contemplate more than just excusing the

vendor from performance during the force majeure event. It should also link the triggering

of a force majeure event with disaster recovery plans and business continuation plans. To

the extent that a buyer cannot significantly minimize its risk in that regard, insurance should

be addressed.

Dispute Resolution

The outsourcing contract is a living document that must have change managementprocesses integrated within it. Change, however, inevitably invites disagreement, and thecontract should anticipate this. The dispute resolution process begins where corporategovernance ends. When all

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Elements of the governance process have been engaged and the parties have stillfailed to resolve their dispute, legal processes must be pursued. These processes canhave escalation procedures built in, just like the governance process. Dispute resolutionmay be initiated through inform-mal, nonbinding procedures such as mediation. Beyondthese procedures, however, the dispute resolution process will progress to either bindingarbitration or litigation. If the parties decide to use arbitration, they must agree on the rules.In international transactions, parties often use the rules and procedures promulgated bythe International Chamber of Commerce’s International Court of Arbitration; in domestictransactions, they often specify that arbitration will be conducted pursuant to the CommercialArbitration Rules of the American Arbitration Association. In either case, questions of venueand choice of law must be addressed. Venue is the place where the dispute is to be resolved.The parties should consider questions of efficiency in terms of proximity to the personsand facilities proximate to the dispute as well as questions of neutrality. Choice-of-lawprovisions determine what laws will govern the interpretation of the contract and rules ofthe dispute, and they are usually determined by the golden rule—he who has the goldrules.

10.4 Summary

Identifying, selecting, and contracting with the right BPO vendor is essential to thesuccess of any initiative. The selection process should be thorough and rigorous and takeon a life cycle of its own that includes appointing a vendor selection team; establishingqualifications; developing an initial long list of potential vendors; distributing a request forinformation, followed by the RFP; evaluating the proposals; culling the list of prospectivevendors; and making a final decision. In the event that no vendor satisfies the specificrequirements of the RFP, the buyer should consider abandoning the BPO project ratherthan altering the specifications or forcing a fit.

10.5 Review Questions

1. Explain the selection of vendor’s procedures.

2. Write a note on BPO Contracts.

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Lesson - 11

INFRASTRUCTURE CONSIDERATION ANDCHALLENGES

Learning Objectives

After reading this lesson, you will be able to

types of instructure such as hardware and software

Structure

11.1 Introduction

11.2 Types of infrastructures

11.3 Making Buyer and Vendor Connection

11.4 Human Resource Issue

11.5 Status of Indian BPO

11.6 Summary

11.7 Review Questions

11.1 Introduction

Working with an outsourcing vendor involves the integration of a variety of formerlydistinct systems, both technical and social. The social aspects of project and relationshipmanagement, including the difficulties associated with intermingling organizational culturesand managing organizational change. This lesson focuses primarily on technicalinfrastructure issues that arise after the BPO project has been launched and operationshave begun. These issues include hardware, software, knowledge, security, and trainingand support. The focus here is not on the cost elements of the infrastructure considerations,but on the management issues that will arise and questions that need to be asked andanswered during the transition and operating phases of the BPO Life Cycle. Companiesundertaking a BPO initiative may want to revisit their cost estimates as a result of the moredetailed discussion of the technical issues contained in this lesson. Fundamentally, thegoal of infrastructure integration is to embed and reinforce the collaborative nature of therelationship between buyer and vendor. Before the interlinking of their respective systems,the two companies have interacted only on a surface level. There have been no processchanges on either side and no threats to business continuity. The integration of buyer and

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vendor infrastructures represents a true turning point in the BPO relationship—the partnersare now becoming familiar with one another. The transition phase is characterized bysharing systems, data, and knowledge. Each party now has additional risk exposure. Thebuyer is concerned about data and systems integrity. The vendor is concerned with meetingthe contract terms established by the sales team. Cross-enterprise collaboration to improveperformance must be the overriding objective for each organization.

11.2 Types of Infrastructure

There are a variety of infrastructures that must be managed during the transition andoperating phases of the BPO Life Cycle. Though exceedingly interdependent, they can bedivided into four sections:

1. Hardware infrastructure

2. Software infrastructure

3. Knowledge infrastructure

4. Training and support infrastructure

A truly effective BPO project will elevate itself beyond the service level agreements(SLAs) established in the contract. The project management plan highlights the basicoperating rules, and procedures for modifying them, that are freely agreed to by each side.Establishing a collaborative mindset that seeks to leverage economies of scale and eachparty’s core business strengths can lead to amazing and unexpected results. However, ifthe BPO relationship is governed solely by the Service Level Agreements, the relationshipwill be more traditional, focusing on service delivery, monitoring, and meting out rewardsand penalties. To achieve breakthrough results from the BPO project, the infrastructureneeds to support that potential. This lesson addresses infrastructure issues from theperspective of creating the potential for breakthrough performance through cross-enterprisecollaboration

Hardware Infrastructure

The first issue to consider with respect to the hardware infrastructure underlying theBPO project is whose systems to use. Because providing high levels of service in thespecific business process is the vendor’s core competence, their hardware capabilitiesusually outstrip those of the buyer. Despite this common circumstance, the decision touse the vendor’s hardware system should not be based on technology maturity alone.Buyer and vendor must also consider other factors when determining whether to shiftprocesses to the vendor’s hardware.

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Software Infrastructure

Software compatibility is often a difficult issue within an organization. Compatibilityissues are amplified in a BPO relationship when attempting to bring buyer and vendorapplications into alignment. Database issues will confront nearly every BPO relationship,as data sharing is the backbone of most BPO projects. While this discussion stops shortof recommending how to get disparate databases to talk to one another, BPO projectmanagers should be alert to the difficulties often encountered when two systems attemptto connect at the database level. Organizations that use BPO to improve their servicelevels—as opposed to seeking mere cost savings—are those most likely to encounterdifficulties because their internal systems may well lag behind the latest technologyupgrades. The BPO vendor, however, has chosen to focus on the specific business processas its core business competence and is likely to be current in its software infrastructure,including its database systems. The greater the gap between buyer and vendor softwarematurity, the greater the challenges in database integration and data sharing. It is reasonable,if not expected, that the burden will be on the vendor to manage database integration. Thecost, however, is likely to be borne, at least in part, by the buyer.

Knowledge Infrastructure

Clearly, the data and information infrastructure is a vital part of any BPO relationship.Competitive businesses are data driven, and in many cases a large part of their overallvalue is derived from the industry and market data they have collected, stored, and analyzed.However, a company’s knowledge infrastructure is even more important, because knowledgerefers to the practical application of the analyzed data and information. The knowledgeinfrastructure of the BPO buyer involves several components, some of which are directlyaffected by the BPO relationship. Knowledge is defined as “analyzed and applied informationthat helps the organization compete and grow.” Data and information are generated by rawtransactions; knowledge is generated by analysis and reflection on aggregated transactions.

Training and Support Infrastructure

Most of the problems employees will experience during a project will be unrelated tothe hardware or software infrastructure associated with BPO.They will be more likely relatedto failures in understanding new workflows, work procedures, and work responsibilities.From the apocryphal User who cannot find the “Any” key (“Press any key to continue”) tothe individual struggling to find data that, without warning, now appears under a new fieldname, there are always problems with human adaptation to new systems. When the buyerand vendor system architectures come together in a BPO project, there will be workflow

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and responsibility changes. To avoid some of the problems that arise from process-relatedchanges, and to ensure a smooth transition to the new system, training should be providedto everyone—even those who are adamant that they do not need to be trained.

One hurdle that faces many BPO project managers with respect to training employeesand getting them to be more self-sufficient is obtaining support from midlevel managers.This is primarily because the middle manager is trying to learn the new processes whilemaintaining the unit’s productivity. This juggling act can be challenging in the throes of amajor BPO-based business transformation.

11.3 Making the Buyer–Vendor Connection

In addition to the details of software and database compatibility, the BPO buyer mustbe concerned about the method that will be used to connect its systems with those of thevendor. Multiple alternatives exist:

• Servers : Buyers can use a single or multiple servers to connect with the vendor’ssystem via a wide area network (WAN) or send the necessary information via electronicflat file.

• Active server pages (ASPs) : Using ASPs on an application server allows theBPO partners to see and use familiar screens to conduct their jobs. The application serverstypically use ODBC drivers to map into the back-office databases, enabling both companiesto interact with real-time data.

• Virtual private network (VPN) : In some cases, the BPO vendor’s services maybe so tightly integrated into the buyer’s back office that the vendor requires full access todata systems. If that is the case, a common technique to facilitate full access is a globalVPN.VPNs has become popular over the past several years and third-party companiesoffer support service at reasonable prices.

• File transfers : These have the greatest utility when the vendor is providing servicesthat do not require access to the buyer’s computer system. The file transfer method canbe as simple as the vendor sending a weekly e-mail outlining all activity, sending a flat file,or setting up a basic electronic data interchange (EDI) translator.

11.4 Human Resource Issue

Virtually every business enterprise has considered, or will consider, outsourcinginternal business or IT functions to an outside service provider. A company’s decision tooutsource has highly significant HR issues associated with it, in part because the decisionto outsource is often part of a broader strategy to reduce employee-related costs.

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Global sourcing is a trillion dollar industry that continues to expand. First-generationsourcing usually involved administrative functions such as payroll and benefits managementthat, while important, were not directly related to the company’s products and services.Then companies began moving IT, help desk and customer support functions to outsideproviders, propelling the sourcing industry into the realm of critical, as opposed to backoffice, business functions.

During recent years, sourcing has extended its reach into the strategic core of manybusinesses, as companies now engage third parties to help develop strategies to transformtheir business, to research and develop new products and services, and to help positionthe companies more competitively within their industries. The explosive growth in outsourcinghas been fuelled by the globalization of business relationships and supply chains.

Companies often allow the compelling economic and strategic reasons driving theirdecision to outsource to overshadow the significant impact the decision has on thecompanies’ employees. When a business outsources a function, the employees who hadperformed the function in-house prior to its outsourcing find themselves in one of threecategories. Some employees are given the opportunity to move into other areas within thecompany. A number of employees will become employees of the service provider (this iscalled “re-badging”) if there are post-outsourcing functions that still need to be performedon-site at the company. The remainder of the employees, and this is often a majority, willbe terminated, often within the rubric of a “reduction in force.” The termination of employeesof the company that is outsourcing is often the most controversial part of the outsourcingdecision, particularly if the outsourced function is subsequently performed offshore byemployees of the service provider.

A detailed discussion of all of the employee-related issues associated with anoutsourcing transaction is beyond the scope of these brief issues. The company that isoutsourcing, however, must conduct a systematic and thorough analysis of the impactthat the proposed sourcing would have on the company’s employees. That kind of analysisvery well may impact the parameters and scope of the sourcing. The following are amongthe more important issues that should be addressed in any HR outsourcing strategy:

Identify affected employees : The company first needs to identify all employeeswhose job functions will be affected by the outsourcing.

Retained employees : The company should determine which employees it wishesto retain, either to continue working in the same functional area or to be redeployed toanother area within the company.

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Re-badged employees : The company should then identify which of the affectedemployees are likely candidates for re-badging (i.e. transferring their employment over tothe service provider). This will usually include employees who have a substantial amountof knowledge of the outsourced function and who would be critical to the success of theoutsourcing. This part of the analysis should be made jointly by the company and theservice provider. For a number of reasons, it is preferable to have the service providermake the final decision as to which employees will be re-badged. A number of importantissues must be addressed in connection with re-badged employees.

Careful consideration should be given to the employees who will lose their jobs andwill not have an opportunity for redeployment elsewhere in the company and who will notbe re-badged. Most U.S. states allow employers to terminate employees “at will” but thecompany should ascertain whether a given employee has a written employment agreementand, if so, whether that agreement contains a guaranteed term of employment. The companyshould address whether severance benefits are payable to the employees who are to beterminated under either an employment agreement or the benefit plans of the company. Ifthe company’s workforce is unionized, collective bargaining and other labor contracts shouldbe reviewed closely for provisions that may be implicated by outsourcing. Employers shouldrecognize that employees terminated in conjunction with an outsourcing might allege thattheir termination violates applicable anti-discrimination laws. The analysis recommendedin this paragraph should be conducted for re-badged employees as well, since, as atechnical matter, a re-badged employee is first terminated by the company, and then re-hired by the service provider.

Internal Communication of the Sourcing Decision : Once a company has madea decision to move forward with sourcing a function to an outside service provider, thecompany should communicate this decision to its employees. Ideally, the communicationshould come from a senior member of management and the company’s HR director.Employees should have the opportunity to raise questions with a designated member ofmanagement or the company’s HR staff. As soon as decisions have been made withregard to how the outsourcing will affect individual employees, those decisions should becommunicated directly and privately to each affected employee. Good timing is crucial toavoid severe disruption and stress among the company’s employees.

External Communication of the Sourcing Decision : How a company handlesthe HR aspects of a sourcing decision will have HR implications well beyond the company’sown current employee base. A badly timed, mishandled communication strategy or adisorganized process of implementing the outsourcing can tarnish a company’s public

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reputation and make it more difficult for the company to attract quality employees. Clearly,when a business enterprise outsources, it should tie its HR communications strategy intoa well-managed, broader public relations strategy because a sourcing decision is likely tohave a significant impact on all of the company’s constituencies, including customers,clients, vendors and other service providers.

11.5 Status of Indian BPO

The Indian outsourcing industry can be broadly categorized into two segments asper Nasscom—in-house or captive centers and third party providers.

In the case of in-house or captive centers, outsourcing is done by an arm of theparent organisation. Business processes are located at low-cost and high skill offshorelocations (like India). In this approach, the central unit itself will take care of and enforce allthe regulatory issues that the offshore centre is subject to, as this is just an extension ofthe business that happens to be located outside the country.

However, in the case of third-party outsourcing centers, the scenario is different.These organisations have to keep themselves compliant with the latest quality andtechnological regulations in order to stay competitive in the global marketplace.

A time for regulation

Data privacy and integrity concerns that relate to outsourcing are the biggest concernsfor Indian BPO’s clientele. This is especially true in the case of businesses that have IPRs(Intellectual Property Rights) to protect or banks and others that must maintain theconfidentiality of their customer records. “Clients insist that regulations are adhered to asthis can result in business being attracted or lost. If BPOs fail to implement the requiredlevel of information security, they lose out on business.

Implementing ethical practices for client confidentiality etc. are almost mandatory.“Consumer banking uses data about account holders. In this case, if data is processedoutside the country, there is a chance that the BPO Company fails to follow the relevantprivacy laws. Fraud is an ever-present problem. “Strong security policies have to be therein an ITES-BPO organisation. The issue of client confidentiality—addresses, phonenumbers, and credit card information etc.-must is addressed.

This trend is assuming increased prominence as higher service quality levels becomethe norm. In such an environment certification and regulatory compliance can help a BPOcompany stand out. In terms of global certifications and standards, Indian BPOs are at par

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with the rest of world. Most Indian BPO companies are BS 7799 and ISO 17799 certified.

According to the Ernst & Young (E&Y) and The Indo-American Chamber of Commerce

(IACC) Offshore Outsourcing Survey, BS 7799 and ISO 17799 security certifications are in

place at 43 percent of surveyed BPO companies. An increasing number of BPO firms are

getting themselves certified.

On the service management front, ITIL (IT Infrastructure Library) is used as a

foundation by most BPO companies. This is helping Indian BPO outfits leap frog over

other industry segments that haven’t caught up on this front. The effective use of ITIL

means that BPOs have a comparatively easier time in catching up with upcoming standards

such as BS 15000 and the COBIT (Control Objectives for Information and related

Technology) framework. On the quality accreditation front, an E&Y-IACC survey found that

ISO 9000 is the most popular quality standard followed by COPC and Six Sigma. The

graph Global quality accreditations and best practices highlight these trends.

What regulator wants : Even after they get certified, Indian BPO companies still

have to catch up on the regulations front. The principal regulations that affect Indian BPOs

are the Sarbanes-Oxley Act, HIPAA (Healthcare Insurance Portability and Accountability

Act), GLBA (Gramm Leach Bliley Act), UK Data Protection Act, FDCPA (Fair Debt Collection

Practices Act) and the US-EU Safe Harbour Agreement. Most of these relate to Indian

BPO’s biggest clients, i.e. The U.S. and the U.K. Although the percentages of Indian BPO

companies that are comply with these regulations is minuscule, the majority of them are

partially compliant on the technology front. “Around 25 to 30 percent of Indian BPOs are

complying with regulations. However, on the partial compliance front, most companies are

more or less there.

The home front

Indian regulatory authorities haven’t really got around to framing regulations for the

BPO industry. The main law or regulation that affects BPO companies in India is the Indian

IT Act 2000. Other legal regulations that affect this sector are the Indian Penal Code Act,

Consumer Protection Act 1986, Indian Contract Act 1972, Specific Relief Act 1963, Indian

Copyright Act 2000 and the Product Patent act 2005. The required technology compliance

for BPO companies is limited to copyrights, patents and data security. These are easily

fulfilled as most of these companies comply with BS 7799 and ISO 17799 that have the

required mechanisms built in. The technological readiness of the Indian BPO industry is at

a higher level than what Indian regulations mandate.

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This is poor consolation as this industry is concerned about competing globally. Thelikes of Nasscom are working with the Indian government to bring regulations like the IndianIT Act 2000 to par with regulations such as the EU Data Protection Directive.

Each regulation requires a different strategy to handle it due to the differing levels ofcomplexity and coverage areas. There is no single all encompassing strategy. However,the basic strategies followed by these companies are similar. The first strategy is to haveclearly documented policies and procedures. This helps satisfy the client and the certifyingor regulatory authority. It also helps the organization approach new business opportunitieswith a greater degree of confidence and comfort.

Educating users through regular training programs comes next. The knowledge ofcompliance policies has to percolate right down from the top management to the operationalmanagement. Organisations can achieve this through regular training and other meanslike online training over the intranet, poster campaigns, awareness quizzes, etc.

BPO companies emphasize data security and integrity. Extensive security policiesand proper configuration right from access level control for data to configuring firewallsand IDS systems is essential here. These are complemented by regular audit and reviewmechanisms. Audits are done at regular intervals by the internal IT team as well as by thirdparty auditors. Reviews and modifications of the policies are also done if required. Thissystematic approach has made their life easier when it comes to conforming to regulations.Other measures include proper incidence management, and clearly documented and testedescalation plans. When we go into the specifics, the compliance initiatives of most BPOsbasically include the following : -

Assessing internal controls

Managing and optimizing financial reporting processes

Consolidating information for managing business performance

Improving business intelligence

Providing financial models for high-risk operations and programs to manage risk

Improve records management and audit trail

Ensuring fraud detection and prevention

11.6 Summary

The process of integrating BPO buyer and vendor infrastructures is the beginning ofthe operating phase of the BPO project. The goal of this integration is to embed and reinforcethe collaborative nature of the buyer–vendor relationship. While there is an array of

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infrastructures that must be managed during the transition and operating phases of theBPO Life Cycle, they can generally be broken into four categories: (1) hardware, (2) software,(3) knowledge, and (4) training and support. As the process continues, key issues witharise. These include whether to use the vendor’s or the buyer’s system; how to managethe challenges of data exchange; assuring that analytic software systems are not corruptedor changed without intent; implementing effective system backup and security guidelines;and developing training programs that counter employee obstruction, are modular in design,and recognize the need for training vendor-side employees.

11.7 Review Questions

1. Explain the software infrastructure in outsourcing.

2. Discuss the Human resource issues in outsourcing.

3. Explain the status of BPO in India.

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Lesson - 12

INFORMATION PRIVACY AND SECURITY ISSUESLearning Objectives

After reading this lesson you will be able to

discuss the importance of privacy laws and regulations

explain the performance measurement system

Structure

12.1 Introduction

12.2 Privacy Laws and Regulations

12.3 Maintaining Security Standards

12.4 Performance Measurement System

12.5 Performance Measurement Audit

12.6 Summary

12.7 Review Questions

12.1 Introduction

For most companies, personal information databases have become a critical asset.

essential for record keeping, customer relations, product support. and other core functions.

Typically. these databases might include nonpublic personal information about employees.

clients, or prospects. such as home addresses, unlisted phone numbers, family status,

children‘s or dependents‘ names. race, ethnicity or national origin. employment history.

salary. tax withholdings, financial statements. medical information, hobbies, personal

interests, travels. or membership in community or business organizations. In some cases.

this information might be highly sensitive: for example. information about a person‘s political

opinion or sexual orientation.

Given the strategic and monetary value of these compilations, databases have been

copied. stolen, misused or even altered. Disputes and litigation have ensued. Numerous

federal and state laws were passed, and government and private actions have taken place.

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out of concern for the protection of individuals to combat identity theft and for other purposes.

In the United States. the Federal Trade Commission (FTC) and State Attorney General

offices have conducted investigations of companies‘ data management practices, which

have resulted in lines and other penalties when deficiencies were identified.

12.2 Privacy Laws and Regulations

While only a few statutes apply to the confidentiality of employee information, common

law invasion of privacy suits are also a risk. Employers should be concerned about protecting

the confidentiality of employee data, for the employer may ultimately be liable if the outsourcer

allows such data to be accessed by unauthorized personnel or to be inappropriately used.

In the United States, for example, consider the following federal laws: certain provisions of

the Americans with Disabilities Act of 1990 (protecting medical records); Health Insurance

Portability and Accountability Act of 1996 (protecting health and medical information); and

Financial Modernization Act of 1999 (protecting financial information)-as well as state law

requirements. In the European Union, the laws are more stringent.

Employers should focus on how the security and confidentiality of information will be

maintained during the term of the outsourcing relationship. To ensure the confidentiality of

employee data, the agreement should:

Identify confidential information and specify the types of security mechanisms the

employer expects of the provider.

List applicable privacy laws and regulations.

Require the provider to limit access to authorized personnel; keep security patches

current; install, maintain, and monitor computer systems that require passwords,

use encryption technology, and contain firewalls and similar intrusion detection

systems.

Specify that the provider shall be liable for complying with applicable laws and

regulations and the breach of its confidentiality or security obligations.

Provide employer access to and control over the information; impose restrictions on

how information may be used, transferred, or shared; and grant employer audit rights

over the provider’s security procedures.

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12.3 Maintaining Security Standards

Employers should determine whether the outsourcer has the proper security

mechanisms in place to comply with the relevant privacy laws and employer’s security

expectations, including: a secure technology infrastructure; data storage and handling

procedures; information sharing policies; and staff-training procedures. If additional steps

need to be taken to ensure compliance, the outsourcer should be responsible for the cost

of implementing such security mechanisms. Further, employers may wish to set forth

remedies for security breaches.

An established human resources outsourcer should be familiar with relevant laws

and regulations. Further, the outsourcer should be responsible for tracking new legal

developments common to its customers and updating security measures as necessary.

Outsourcers should indemnify employers from any acts or omissions by the outsourcer in

violation of the law, and for any third-party claims brought as a result of acts or omissions

of the outsourcer inconsistent with its obligations. This indemnity should be an exception

to any limitation-of-liability clause set out in the agreement.

12.4 Performance Measurement System

Performance measurement provides vital information for advancing social innovation:

the process of developing, testing, and honing new and potentially transformative approaches

to existing social issues. With the right performance metrics, data, and analysis in hand,

social innovators—nonprofit organizations, government agencies, and businesses that

offer innovative, results-driven solutions to social problems—can make well-informed

management decisions to drive continuous improvement and long-term social impact.

Integrating performance measurement into day-to-day operations does not have to be

complicated or prohibitively resource intensive—and the payoffs make it well worthwhile.

Using data to drive decision-making will help social innovators to carry out their missions

more effectively. It will also aid in building funder confidence and securing new and returning

investments.

A performance measurement system provides an efficient way for organizations

dedicated to social impact to collect and make use of data about their programs and

operations. If you consider your organization to be part of the growing field of social

innovation, a performance measurement system proves particularly important. It is a tool

that informs the process of developing, testing, and honing new and potentially

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transformative solutions to some of our most pressing social issues, including poverty,

unequal access to health care, and the achievement gap in education. Imagine having at

your fingertips a concise set of quantitative and qualitative data, which provides a clear

picture of your organization’s progress in achieving its mission and goals. Imagine a culture

of learning that engages your entire staff in data-driven decision-making, helps you identify

opportunities for improving your activities and operations, and ultimately accelerates your

organization’s progress toward enduring social impact. Imagine using data-based evidence

of your organization’s successes to aid in securing new and returning investments. If this

scenario is not yet a reality for your organization, you are not alone. Yet getting there is less

daunting than it might seem. Performance measurement fits within the vast field of evaluation,

which has spawned an equally extensive body of literature, tools, and methodologies on

the topic. Mastering this complex field is the work of entire careers. Nevertheless, making

use of performance measurement to run the best organization possible does not have to

be complicated.

In the outsourcing sector, performance measurement enables for-profit organizations

to collect data that help identify potential improvements to their business models. By acting

on the knowledge provided by this data, an organization can ultimately increase its financial

performance. As one business management article explains, a “business model is just a

model. It is based on a series of assump-tions that might not be valid.” Performance

measurement can help turn assumptions into well-understood facts and show the way to

improvements that lead to more effective business models.

Performance measurement serves a similar purpose when applied to advancing

social innovation to address social problems. It helps identify opportunities for improvement

in an organization’s approach to achieving social impact, and it can inform day-to-day and

longer-term decision making.

Mission and vision of success

The mission articulates an organization’s purpose, and a vision of success describes

how the world will be different if the organization succeeds in carrying out its mission. The

mission and vision of success work together to guide an organization’s activities and

operations.

Activities and operations: Activities are any programs, services, and initiatives run

by an organization. Operations are the organizational infrastructure that supports these

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activities, including human resources, technology, and financial management. Together,

activities and operations constitute everything an organization does to carry out its mission

and realize its vision of success.

The performance measurement cycle starts and ends with an organization’s activities

and operations, as it continually moves through the following phases:

Measure: Organizations operating performance measurement systems use

indicators, metrics that are tracked regularly, to assess their activities and supporting

operations.

Report: To compile performance measurement data into a format that is easy to

analyze, organizations can use two main types of reporting tools:

1. A dashboard includes a focused selection of indicators to provide periodic snapshots

of the organization’s overall progress in relation to past results and future goals. All

performance measurement systems should include a management dashboard, which

enables an organiza-tion’s leadership team to track overall organizational performance.

Many organizations also choose to create program-level dashboards to track individual

programs or internal areas, such as marketing or human resources, at a more detailed

level.

2. A report card contains highlights from an organization’s internal dashboards and

facilitates sharing data exter-nally with social impact investors and other stakeholders.

This external reporting tool helps to establish account-ability with social impact investors.

3. Learn: Using the reporting tools listed above, an organization’s leadership and

other key staff members review and interpret perfor-mance data in order to make well-

informed decisions and identify opportunities for improvement and necessary course

corrections.

4. Improve: The organization implements its decisions to improve its activities and

operations. From there, the performance measure-ment cycle begins again

Performance Measurement Working Group

To get started, form a performance measurement working group that includes your

organization’s leader and key program staff. Designate one person to direct the group.

Measurement working groups typically include one to five people, depending on the size of

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the organization. Be sure to include anyone who will be critical to get-ting the performance

measurement system up and running once it is in place.

12.5 Performance Measurement Audit

A performance measurement audit will help you build on any existing measurement

practices that your organization may already have in place.

To conduct the measurement audit, answer the questions below.

1. What indicators are you currently tracking? Compile a list of all the indicators that

your organization currently tracks, both quantitative and qualitative.

2. How and when are you tracking these indicators? In most organizations, multiple

staff members involved in activities and operations engage in data collection using a variety

of tools to capture data at different times. For all of your current measurement practices,

list who is measuring, when, and how.

3. Where and how are you storing your data? Make sure you know where all of the

data currently collected by your organization end up. Take stock of all file collections,

spreadsheets, databases, accounting systems, and other tools. Create a master list of

data storage locations, if you do not already have one.

4. How are you reporting your data? Methods of reporting your data can include

dashboards, report cards, annual reports, stakeholder newsletters, and internal program

reports. For each report, assess which indicators and other content are reported, to whom,

and how often. Also document that develops the reports.

5. How are you reviewing and using your data? Assess how your organization makes

use of collected data. Who reviews your performance reports and when? Do you hold

regular performance review meetings? How do you analyze and interpret data? How do

you incorporate con-clusions drawn from your data into decision making?

Understanding the Performance Indicators

1.Organizational health indicators provide critical insight into your organization’s

capacity to carry out its mission, including your progress toward what we call financial

sustainability: capturing a reliable and varied stream of revenue sources to ensure that

your organization will be able to exist for years to come. Such indicators include total

revenue and expenses; the percentage of the expense budget covered by committed

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revenue; the percentage of your income sources that you consider renewable and reliable;

and the distribution of your income between foundation funding, individual donors, earned

income, and other sources.

2. Program performance indicators focus primarily on your organization’s activities

and the outputs, or the short-term results, produced by those activities. Depending on the

nature of the organization’s work, program performance indicators could include the number

of individuals enrolled in a given program, members in an association, partner organizations,

individuals engaged through advocacy efforts, or individuals reached through a

communications campaign. Many organizations also find it valuable to gather demographic

information on their beneficiaries or other key stakeholders.

In addition, program performance indicators cover program quality, such as

satisfaction level of beneficiaries, program efficiency, and program costs.

3. Social and economic impact indicators allow you to assess your organization’s

outcomes, its longer-term progress in meeting its mission and realizing its vision of success.

For example, an organization aimed at getting high school students into college would

want to know what percent of the program’s graduates go on to enroll in a college or

university. Depending on its mission and vision, the organization might also decide to track

how many of those students complete their degrees or even the types of careers those

graduates pursue and their average salaries. Social and economic impact indicators may

also measure the costs of achieving an organization’s outcomes.

Additionally, this category includes indicators that assess the larger, systemic impact

of your work. For instance, you might choose to measure how your approach has impacted

the work of other organizations in your field or new stakeholders that you have helped to

bring into the effort to address your target social problem. This type of impact often proves

difficult to predict, and you may need to document new systemic outcomes qualitatively as

they come up.

For most companies, personal information databases have become a critical asset.

essential for record keeping, customer relations, product support. and other core functions.

These databases might include nonpublic personal information about employees. clients,

or prospects. such as home addresses. Unlisted phone numbers, family status, children‘s

or dependents‘ names. race, ethnicity or national origin. employment history. salary. tax

withholdings, financial statements. medical information. hobbies. personal interests, travels.

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or membership in community or business organizations. ln some cases. this information

might be highly sensitive.

12.6 Summary

Privacy is a growing concern for many Indian outsourcing organisations. When

business services are outsourced, outsourcing companies are given access to a variety

of confidential company information and employee data. Outsourcing employers should

protect employee confidential information by taking steps to maintain the confidentiality

and security of employee data when retaining and transferring such data to outsourcing

services. Given the sensitive nature of employee-related data, privacy concerns are

particularly significant for companies outsourcing human resources functions. The

performance is measurement system is also explained.

12.7 Review Questions

1. Discuss the information privacy methods in outsourcing

2. Explain the performance management system.

3. Discuss the security issues in outsourcing

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Lesson - 13

VENDOR MANAGEMENT AND RELATIONSHIPLearning Objectives

After Comleting this lessonï you must be able to discuss

the vendor management in BPO industry

the relationship between Vendor and BPO business

Structure

13.1 Introduction

13.2 Meaning of Vendor Management

13.3 Vendor Management and Relationship

13.4 World Class Vendor Relationship Management

13.5 Managing Vendor Relationship

13.6 Technology Support and BPO Operation

13.7 Types of Services Provided by the BPO Industry

13.8 Summary

13.9 Review Questions

13.1 Introduction

Over the past three decades almost all companies, ranging from all sizes, have

realized savings by applying strategic sourcing practices. These sourcing efforts frequently

yielded remarkable reductions in cost; often in the range of 5 to 25% as spend was

consolidated and resources were streamlined. These efforts demonstrated substantial

returns on investment making many Chief Information Officers (ClOs) heroes in the

boardroom. The question at top of mind today is: “What is the next wave of strategies for

sustaining cost reductions and driving efficiencies in an intensifying and competitive business

environment?” The answer is in how companies are pushing the boundaries of outsourcing

in a quest for further cost reduction by creating incentives that leverage the capabilities of

their current provider partners.

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Even as they seek new opportunities in sourcing, leading companies are findingthemselves dependent on an increasingly complex multi-sourcing provider base, with theneed to drive further cost and performance improvements, manage provider risk, andstreamline costs of vendor management. These companies are developing a new set ofVendor Relationship Management (VRM) capabilities — including processes, governancemechanisms and systems to manage vendors on a day-to-day basis over the fullrelationship lifecycle. Early adopters of VRM are realizing savings in existing relationships,remediating relationships that are not working, working with vendors to build joint capabilitiesand improve joint processes, effectively managing vendor risk, and reducing internal costsof vendor management.

13.2 Meaning of Vendor Management

The vendor‘s managers are an important part of the management process. Thesuccess of an outsourcing relationship is often dependent on the vendor‘s global and siteproject managers. It is helpful to both parties if the customer approves the vendor’smanagers prior to contract signing so that the managers can be part of the negotiationsand become familiar with the transaction. The panics will need to negotiate qualificationrequirements and reassignment provisions pertaining to vendor project managers andother key personnel. ln addition. a common solution in international transactions where theselected vendor does not have required expertise or resources in a certain location is forthe vendor to subcontract pan or all of its service obligations. Vendors typically resistcustomer approval of subcontracting relationships on the grounds that the customer shouldbe concerned about the quality of services received, not how the services are delivered.Customers, however often wish to have the vendor identity the names of any proposedsubcontractors and the services that each subcontractor will be responsible for.

13.3 Vendor Management and Relationship

Vendor Relationship Management (VRM) is a set of principles, processes, templates,and tools to maximize relationship value and minimize risk and management overheadover the entire vendor relationship lifecycle. VRM enables organizations to effectively:

• Stratify vendors based on importance and define relationship expectations

• Establish the governance structure and process for internal and vendor interactionsacross the lifecycle of the vendor relationship

• Define formal processes for management involvement in the relationship

• Clarify internal roles and responsibilities to achieve operational alignment

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• Secure required vendor management tools and skills

• Put in place processes to effectively manage vendor performance and develop vendorcapabilities to continuously drive innovation and improve value

13.4 World Class Vendor Relationship Management

1. Vendor Tiering

Effective VRM requires a clear company-wide understanding of which vendors arethe most strategic to the organization and which are less important. However, in the absenceof balanced, formal criteria for vendor tiering, vendors on which the organization spendsthe most are inevitably viewed as the most important and tend to capture the greatestrelationship focus and effort. Factors such as business criticality, operational / technicalintegration, alignment with business strategy, conformance to quality and long-term culturalfit with the organization are often ignored, reducing the organization’s vendor managementeffectiveness.

In addition, effective vendor tiering requires a set of common definitions of howvendors in strategic and non-strategic tiers should be managed.

This common set of definitions enables companies to:

• Optimize resource allocation across a broad multi-vendor base

• Establish and manage relationship expectations by vendor tier, providing a commonreference point for what it means for a vendor to be strategic

• Define for vendors what financial and non-financial benefits can be realized frommoving up the vendor tiering ladder

• Provide functional and business groups with consistent partnering strategies withintheir multi-vendor bases

• Provide functional and business groups with a fresh view of their vendor portfoliosbased on relationship value, enabling improved decisions on further vendorconsolidation and leading to further strategic sourcing opportunities

• Create incentives to motivate vendors to strive for advancement across vendor tiers

2. Vendor Management and Governance Organization

Once the importance of a strategic vendor to the organization is established viaVendor Tiering, the next step is for the organization to define the team structure that will be

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required to manage the vendors on a day-to-day basis and how to establish a VendorManagement Organization with the right roles, activities, skills and knowledge needed foreffective multi-vendor management. Formalizing these definitions across the organizationcan reduce duplication of effort confusion within the company and among vendors andinefficiency. In addition, a VMO structure eliminates many of the dropped hand-offs andhelps operationally align among business functions and among vendors to make vendormanagement more proactive.

3. Vendor Training and Development

Due to increasing multi-vendor sourcing, a company’s overall performance andefficiency is more and more dependent on the capabilities of its vendors. An organizationbenefits greatly when key vendors dramatically reduce costs, introduce innovation andnew services designed to address the organization’s needs, expand their footprint to provideseamless coverage in multiple regions, and work with the organization to operationallyalign and streamline joint processes.

• Provide functional and business groups with a fresh view of their vendor portfoliosbased on relationship value, enabling improved decisions on further vendorconsolidation and leading to further strategic sourcing opportunities

• Create incentives to motivate vendors to strive for advancement across vendor tiers

13.5 Managing Vendor Relationship

The role of managing vendor and contractor relationships is focused on oversightand support the project manager should focus on control of vendor and contractorparticipation. The PMO should grow its capability to identify vendor and contractor valueand capability to support the various types of project efforts performed within the relevantorganization. lt can then develop guidelines and recommendations for establishing vendorand contractor relationships. When establishing its capability to manage vendor andcontractor relationships within the project management environment, the PMO can considerthe three activities described in the following subsections.

Identify Vendor and Contractor needs the PMO should collaborate with projectmanagers to determine the nature of vendor and contractor support required within theproject management environment. This entails discussion and deliberation about the typeof vendors and contractors needed. the frequency of those needs, and the preferredbusiness relationship for each type of vendor and contractor.

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Vendor affiliations This is a formal business relationship that is established tofacilitate the mutual pursuit and achievement of common business objectives. Thepartnership relationship is used for vendors and contractors having frequent and closebusiness alignment with the relevant organization. The vendor or contractor is often anactive and visible participant on the project team and has a vested interest in achievingoverall project objectives. it is usually characterized by a written agreement put in effect fora period of time and reconfirmed at intervals that enables vendor or contractor participationon many or all projects within the relevant organization. Partnerships can lm established tocreate a more

Vendor Project affiliation in collaboration with relevant project managers shoulddetermine the approach to vendor and contractor management on projects, relative toeach type of vendor engaged. In particular, it would be good to specify whether the vendoror contractor will be performing its assigned role and tasks as a member of the projectteam or will be working independent of the project team.

Vendor project management responsibility. Should establish common activities

and expectations for vendor and contractor participation in project management activities

and performance of their own project management efforts, per each vendor and contractor

type. This deliberation also results in establishing the project manager’s role in overseeing

vendor and contractor project participation and performance from a project management

perspective. The vendor or contractor can contribute and participate in a variety of activities

aligned with phases of the project management life cycle, as warranted by their established

role.

13.6 Technology Support and BPO Operation

Companies need to invest, upgrade and provide end-to-end support services keeping

pace with the ever-changing technology without having a negative impact on the quality of

service. There is a need to focus on customer service and post-sale technical support as

critical service differentiators that help organizations stay ahead in a highly competitive

business environment. Outsourcing technical helpdesk is no longer looked upon as a short-

term cost-cutting tool with the focus now shifting to long-term competitive gain. In order to

provide customers with end-to-end support services,firms must deliver a superlative

customer experience and also find ways to reduce the cost of operations while driving for

new revenues.

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The technical helpdesk infrastructure capabilities of the offshore partner are a

significant factor in ensuring seamless transitioning of helpdesk functions. Offshore technical

support centers and helpdesks in India are thus investing in cutting-edge technologies and

state-of-the art technical helpdesk.

BPO is a leading and respected player in the Technical Support Services segment

and aims to relentlessly deliver value in addressing each Client’s specific business goals.

Helpdesk models are thus tailored to meet the nseeds of individual customers for successful

outsourcing outcome, as the one-size-fits-all option no longer exists. Acknowledging the

concerns of the market through commitment and customer feedback, the company has

developed solutions for the entire Support Life Cycle Management.

13.7 Types of Services Provided by the BPO Industry

The various types of services provided by the BPO Industry include Customer Support

Service; Marketing and Sales (inbound/ outbound); Technical support; Help desk; HR

Administration services; Finance and Accounting services; Content development; Medical

transcription services; Knowledge processes related services like, Analytics, Modeling,

Forecasting and Legal support.

1. Call Centers

A contact center is a facility for multipurpose, multi-channel interaction that serves

the needs of the various constituents of an organization — customers, prospects, supply

chain, distribution channel and employees. Call centers are contact centers that handle

only voice interactions. The outsourcing model has gained quick acceptability in contact

centers, subject to strict adherence to nondisclosure contracts and service level agreements.

The opportunity in India was stimulated by advancements in communications technology.

U.S. and European companies such as GE and American Express pioneered this activity

in India by starting their own offshore and shared service centers.

2. Insurance Claims Processing

The insurance industry in the U.S. is highly complex. Healthcare practitioners and

hospitals in the United States find it very cumbersome to manage the documentation and

to follow up with insurance companies for their fees. Many find it easier and more cost-

effective to outsource the documentation and follow-up activity to Enterprise Service

Providers (ESP’s). Medical billing and claims processing services offered by Indian vendors

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include data entry, patient enrolment, accounts receivable, denials/rejections analysis,

rebilling, insurance follow-up, and collection agency reporting.

3. Transcription Services

Transcription services involve conversion of information from voice format into textformat. Transcription services take two main forms: medical transcription and legal &business transcription. Medical, legal, and business transcription is a big businessopportunity for Indian vendors by virtue of the English-speaking talent available at significantlylower costs than the United States. The level of confidentiality involved in the informationshared by the client is higher and the Service Level Agreements (SLA’s) and Non DisclosureAgreements (NDA’s) are bound to be more complex. To benefit most from this opportunity,vendors have to ensure good quality of output, and a high degree of assurance towardstheir ability to successfully manage the security and confidentiality of customer data.

4. Human Resources Services and Accounting

Managing human resources (HR) involves a number of routine, time-intensive tasksthat distract HR managers from more important functions. Once again, external serviceproviders offer a viable alternative. Services offered by ESP’s in India include payrollprocessing, pension management, and resume management. Indian service offerings inaccounting typically include remote data entry, general accounting, accounts receivable,accounts payable, customer invoicing, credit application, and collection processing andcollection calling Only a few companies in India offer these services, but each one processesmillions of transactions annually. Setting up to provide these services demands a significantinvestment in IT infrastructure and staff with relatively higher qualifications.

5. Forms Processing

Forms processing services promote speed, accuracy, and low cost. Manual keyentry can be integrated with high-end tools for forms capture. Data from paper, optical andmagnetic media may be converted, inputted to a database and validated. Customized datacapture can span orders, invoices, warranties, survey forms, check information, customerenrollments, government statistical information, and intelligent abstraction of data fromfinancial reports. Only a few companies in India, such as Datamatics, have been providingsuch services from their data-processing centers.

6. Legal Databases

Timely access to relevant laws, amendments and precedents has driven theemergence of a legal database industry in the U.S. BPO service providers train lawyers to

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work closely with their clients to create and maintain an extensive database of their recordsand conduct supporting research. Salaries and qualifications are higher than those foremployees engaged in other BPO activities, but so are the margins, and the cost of alawyer in India continues to remain a fraction of the cost of his/her counterpart in the UnitedStates. Indian legal service providers are in an advantageous position over other AsianBPO providers for reasons other than cost: Indian lawyers operate in a large scaledemocratic environment (India is the world’s largest democracy) similar to that of the UnitedStates, and can readily understand the approach and requirements of their U.S. counterparts.

7. Data Centers

Clients typically sign up for data center services to take care of their incrementalstorage requirements at lower costs. Data centers are also seen as a solution for databackup as part of disaster-recovery and business-continuity policies. A data center serviceprovider should be able to offer multiple platforms, easy scalability, reliable connectivity,and data security.

8. Digital Media

The service portfolio for digital media and animation content development includesdata collection, collation, sorting into meaningful categories, data presentation and developinganimated movies and cartoons for films, television, advertisements and educational media.India has a huge talent pool trained in media and animation development that is alreadybeing utilized by US filmmakers. Educational CDs (for Distance Learning) represent anothersignificant opportunity for the Indian ITES industry.

9. Data Digitization

Data digitization services include converting data in various forms into a digital formatthat can be easily accessed, analyzed, and manipulated on a computer. The range ofservices provided by Indian ITES companies includes data capture, data conversion,software intelligence (SI) and consulting. This service differs from most other BPO servicesin that it is more IT-intensive and requires people with higher levels of IT and spatial skillsthan in other services, which also means margins are higher.

10. Research & Development

Indian BPO vendors are well-positioned to provide outsourced web search, archiving,and analysis services. Teams of people dedicated to specific research areas and/orgeographies can continuously monitor, archive, and catalog information, and respond toqueries from global clients. Beyond general online research, such companies can provide

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more valuable services in customized research, business intelligence (BI), operationsresearch and business valuation. The Indian IT company Wipro has around 9,000 engineersdesigning products for about 100 companies making it the world’s largest third-party R&Doutsourcer.

11. Engineering Design and Biometrics

This is a niche IT services activity in India. Indian universities produce a large numberof engineers across various science and technology disciplines. This resource pool canbe applied to R&D and engineering design services. A few companies in India provide suchservices. Bio-informatics, and specifically genomics research, represents another BPOopportunity for Indian providers because of the tremendous amount of information acrosstens of thousands of genes that must be simultaneously accessed, organized and searchedfor novel relationships. Although this is a new area for Indian BPO vendors, some Indiancompanies have already ventured into offering services through tie-ups with US companiesinvolved in R&D on genomics and with companies that aggregate published informationfocused on medical research.

13.8 Summary

The first step in structuring any outsourcing transaction is to understand and definethe scope of services to be provided to each of the in-scope sites. This task is in manycases more difficult than it seems, particularly if the customer does not have a centralizedbusiness department or the customer is moving to a new environment and therefore it isdifficult to clearly define what the scope of services will be at each site. The types of servicesprovided by BPO industry are also explained.

13.9 Review Questions

1. Explain the vendor relationship management.

2. Discuss the various service provided by the outsourcing industry.

3. Discuss the world class relationship with vendor.

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Lesson - 14

BUSINESS OPPORTUNITYLearning Objectives

After reading this lesson, you will be able to

discuss the steps in BOP opportunity analysis

list out the trends in offshore outsourcing

Structure

14.1 Introduction

14.2 Steps in BPO Opportunity Analysis

14.3 Risk Involved in Outsouring

14.4 Trends in Offshore Outsourcing

14.5 Analytical Mechanisms to Measure Off Shoring Success

14.6 Summary

14.7 Review Questions

14.1 Introduction

BPO was pioneered primarily by large companies that were eager to reduce theircosts and bloated payrolls. Today, many small to medium sized enterprises (SMEs) havediscovered BPO advantages that enable them to compete with the larger firms that havebeen using outsourcing for years. In 2001, for example, 75 percent of BPO users werefirms with greater than $500 million in revenue. By 2002, that number had dropped to 64percent. What is indisputable is that any business that has grown to more than about $25million in sales has begun to encounter growth related challenges in back-office processesthat may be suitable for handing over to an outsourcing partner.

With these potential advantages, it is not difficult for organizations to justify a decisionto at least investigate BPO opportunities. At the same time, inquiring into BPO has potentialshort-term organizational consequences that must be considered and addressed. Themost effective way to analyze and select a BPO opportunity is through a six-step processthat is deliberate, systematic, and minimizes risk. This process has been designed tointegrate and align the decision-making process with long term organizational strategic

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objectives and near-term organizational needs. If handled systematically, the BPO analysis

and selection process can be an effective way for an organization to examine itself. Whether

a decision to undertake a BPO initiative is made or not, this process will shine a light on

organizational processes and activities.

14.2. Steps in BPO Opportunity Analysis

The six steps are:

1. Establish a BPO Analysis Team (BAT).

2. Conduct a current-state analysis.

3. Identify core and noncore activities.

4. Identify BPO opportunities.

5. Model the BPO project.

6. Develop and present the business case.

Although these steps seem transparent, many organizations overlook opportunities

or misunderstand the true value versus risk proposition by skipping steps in the analysis.

An organization can also find itself managing confusion if a non-systematic approach is

used. This six-step process is not the only known approach to analyzing the BPO opportunity.

However, it is a proven way to maximize the likelihood of success and minimize the risks

associated with a BPO initiative.

Step 1: Establish a BPO Analysis Team

BPO is a socio technical business innovation that requires a variety of skills and

expertise to be managed effectively. The multidisciplinary nature of a BPO initiative requires

a multidisciplinary team to adequately assess the opportunity for the organization—the

BPO Analysis Team (BAT).

The BAT should be chartered by the organization’s top executive team, which will

also serve as the Steering Team for the BPO project. It should consist of four to seven

individuals who represent a range of organizational functions, including:

• IT

• Finance

• Human resources (HR)

• Strategy

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Step 2: Conduct a Current-State Analysis

The first performance task for the BAT to conduct is a current-state analysis, whichrefers to the exercise of examining, mapping, and categorizing internal businessprocesses.Typically, this involves rolling up the sleeves and mapping business processesstep by step on a white board or other erasable medium. The goal is to develop anunderstanding of how work flows within the organization. This can be difficult, requiringhard thinking and involving individuals from outside the BAT. But done correctly, a current-state analysis can unveil hidden bottlenecks and expose sloppy procedures that havebecome entrenched within the organization.

Step 3: Identify Core and Noncore Activities

Some consultants and business scholars have made identifying an organization’score business seem complicated. They offer example after example of organizations thathave experienced decline in market share because they did not focus on their corecompetencies. Often, the prescription for returning to a healthy core competence is toengage in a series of high-level meetings that may involve scenario planning or other effortsto forecast the future and focus the organization on seizing competitive advantage. In reality,such meetings can be useful in setting strategy but are not helpful in identifying corecompetence.

Step 4: Identify BPO Opportunities

As business processes are identified and classified, the BAT begins to develop a feelfor which processes may be candidates for BPO. This step requires that the BAT decidehow the organization can use BPO to support the core competence in the current andprojected competitive environment. In a highly competitive environment, where fast actionis required, it may be necessary to consider outsourcing key and support functionsimmediately to a best-in-class provider in a winner-take-all strategy. However, in a lesscompetitive environment, it may be prudent to take a more cautious approach to BPO,beginning only with support activities in measures designed to focus more on marginenhancement than on competitive positioning.

Step 5: Model The BPO Project

BPO is similar to any other strategic business initiative in that it is imperative toestablish performance metrics before implementation. In the case of BPO, some of themetrics will be quantitative (hard) and others will be qualitative (soft). Hard data includesuch things as project costs, time involved, and opportunity costs. Soft data include

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employee displacement, effects on morale, and impact on community goodwill. To establishappropriate performance metrics for a BPO initiative, it is critical to first establish projectobjectives. The BAT’s charter charges it with defining the objectives of the initiative.Objectives should be identified both for the BPO initiative and for the transition process. Atminimum, project objectives should include:

• Timing

• Costs

• Risk mitigation

• Deliverables

Step 6: Develop and Present the Business Case

Once the BPO initiative has been modeled for timing, costs, risk mitigation, anddeliverables, the BAT next must build a business case for those processes that couldbenefit from outsourcing. This will include direct recommendations on which, if any, businessprocesses within the organization are suitable for outsourcing. A business case is a writtendocument that presents the methodology and findings of the BAT. The methodology sectionof the business case should include a review of the process the BAT used to reach itsconclusions, including:

• The people who were consulted during the analysis phase

• The research documents reviewed, books read, conferences attended, and so on

• An overview of analytic tools applied to identify and select opportunities

• Copies of any research instruments (surveys, etc.) used to gather original data

• Minutes of the BAT team meeting

14.3 Risk Involved in Outsourcing

When services are outsourced to offshore providers, a customer faces increasedcosts and risks compared to solutions involving on-shore resources.Offshore outsourcing, though potentially more cost-effective, may involve hidden costsincluding: a more expensive and lengthy step of vendor selection, a longer (3-12 month)timeframe to complete work handover to the offshore partner, severance and costs relatedto layoffs of local employees who will not be relocated internationally, turnover cost, andcosts associated with addressing language and other communications or culturaldifferences. Lastly, managing the actual offshore relationship is also a major additional andsometimes unforeseen cost. Overall, a company may end up paying up to 50% more in frontend costs than initially expected and only achieve a cost savings of up to 15%-25% in the

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first year; well below the expected 35%-40% in savings, which will only be achieved in thethird year of the agreement.

An increase in front-end costs may cause the outsourcing organization to agree tolengthen the initial term of the agreement in order to generate the required financial benefits,which ultimately involves making a larger commitment and therefore increases risk. Asidefrom costs, other risks which must be considered when outsourcing to offshore companiesinclude:

Data/Security Protection

While most IT organizations find offshore vendor security practices impressive (often

exceeding internal practices), the risk of security breaches or compromised intellectual

property (IP) rights is inherently raised when working internationally. On the IP front, some

Indian courts have recently demonstrated a meaningful response to the problem of respect

for and enforcement of IP rights in their respective countries by awarding punitive and

exemplary damages in infringement cases.

Process discipline

The Capability Maturity Model (CMM) becomes an important measure of a company’s

readiness to adopt an offshore model. META Group observes that approximately 70% of

client IT organizations are at CMM Level 1, whereas offshore vendors require a CMM Level

5 standardized and repeatable model. This disparity creates a gap that is usually

compensated for by additional vendor resources on-site. Companies lacking internal process

model maturity will therefore find it challenging to realize upon the cost savings which

should arise from the retention of an offshore service provider.

Loss of business knowledge

Companies must carefully assess business knowledge and determine if moving it to

an offshore location will compromise the company’s ongoing ability to perform at the required

levels.

Vendor failure to deliver

A common oversight for IT organizations lies in not implementing a contingency plan

to deal with the risk that a vendor, for whatever reason, fails to deliver as expected.

High risk or exposure might force the organization to unexpectedly alter its

outsourcing strategy (i.e. from a single offshore vendor to multiple vendors).

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Compliance with Government Oversight/Regulation

Utilities, financial services institutions, and healthcare organizations - among others

- face various degrees of government oversight. The negotiating team advising this type of

regulated entity must ensure that the selected offshore vendor is aware of and will be

compliant with industry-specific requirements and that the vendor’s compliance will be

demonstrable to, among others, all necessary auditors.

Culture

Cultural differences include religion, mode of dress, social activities and even theway a question is asked or answered. Although most leading vendors have cultural educationprograms, the challenges and costs associated with cultural alignment may not beinsignificant or trivial.

Turnover of key personnel

Rapid growth among outsourcing vendors has created a dynamic labour market.Common turnover rate levels, especially in India, are in the 15-20% range. A high turnoverrate has an indirect impact on the client organization because it forces it to increase timespent on knowledge transfer and training new individuals. To address this concern, clientshave recently tended to demand that contracts place a “liability” on the vendor for anypersonnel that must be replaced.

Productivity fluctuations

Most IT organizations experience a 20% decline in productivity during the first yearof an agreement, largely due to time spent transferring both technical and businessknowledge to the vendor. Furthermore, the cost savings achieved from an offshorearrangement often come at the expense of personnel layoffs by the client organization.Layoffs can cause significant morale problems among the “in house” survivors, whichmay sometimes lead to dissatisfaction and work slowdowns.

Competitive Procurement

Potential Pitfall: A customer may enter into an agreement with a service provider thatdoes not generate the expected benefits and/or undermines the bargaining position thecustomer will have during any renewal negotiations.

It is critical that the customer develop an accurate “baseline” of the process(es) orfunction(s) to be outsourced prior to entering into negotiations with the service provider.

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The baseline will establish important negotiation input data, such as the number and typeof internal resources currently required to perform the function/process and the servicelevels then being experienced by the internal service recipients. Once acquired, these datawill assist the parties in negotiating the appropriate deal parameters including pricing, servicelevels and the length of the initial term.

It is now the norm that outsourcing services providers are selected after robust“request for proposal” (RFP) processes have been followed, that RFP process havingpossibly been preceded by initial “request for information” (RFI) or “request for quotation”

(RFQ) phases. For significant outsourcing transactions, it is now quite usual for the

customer to enter into substantial negotiations with the top two bidders and to only make

the final selection once further discussions have taken place and details uncovered via

those negotiations.

Changes

Potential Pitfall: A service provider may become opportunistic in its pricing in the event

that material changes to the relationship need to be introduced “mid-stream” during the

initial term or any renewal term of the agreement (a likely occurrence given the usual

lengthy duration of outsourcing arrangements). This risk is particularly present when, as

a result of an over-reliance upon the competitive procurement process just discussed, the

customer has aggressively negotiated down the profit margin accruing to the service provider

pursuant to the agreement as initially negotiated.

One way for the customer to manage the risk of change-related costs subsequently

undercutting the economic viability of the outsourcing arrangement, is to obtain the service

provider’s promise to use commercially reasonable efforts to quote a fixed price for

implementing any proposed change. In the event a fixed price cannot be quoted, the service

provider shall quote the customer a charge for the proposed change which is equal to the

service provider’s incremental direct cost of providing the change, plus a profit margin

equal to a defined amount less than its annual operating margin as reported in its most

recent annual report.

Benchmarking

Potential Pitfall: A service provider may not pass on the appropriate portion(s) of the

cost reductions generated during the term of an agreement, such that the customer is

subsequently placed at a relative competitive disadvantage.

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In order to have a viable means for testing whether any promises made by the service

provider have been adhered to and that the expected cost reductions have materialized

and have been appropriately shared during the term of the agreement, the customer will

often propose that benchmarking provisions also be included in the agreement.

Benchmarking provisions allow a customer to have a knowledgeable third party

compare the service provider’s pricing with the pricing being offered to other customers

operating under similar arrangements. The negotiation of benchmarking provisions can be

challenging, as the service provider can be expected to resist the imposition of terms

which are perceived by its negotiating team as materially enhancing the risk of an unfair

clawback on the profitability of the arrangement, particularly since customer concerns

about minimizing upfront transition costs generally result in outsourcing contracts that

are “back-end loaded” (i.e. the service provider’s profits often only arise during the latter

portion of the initial term and, of course, during any renewal terms). On the other hand, a

customer would be leery to agree to provisions where the output of a time consuming and

expensive benchmarking process is merely an opportunity to meet with service provider

representatives to discuss the possibilities for reducing costs, and therefore pricing, under

the agreement.

Service Levels

Potential Pitfall: A failure to adequately define the nature of the service expectations

via the service level agreement (SLA) portion of the overall outsourcing agreement, and

the initial monetary consequences in the event of failure(s) on the part of the service provider

to meet those expectations, will increase the likelihood of disputes between the parties and

leave the customer with inadequate means of incenting the service provider to meet its

contractual commitments.

It is difficult to overstate the importance of negotiating a comprehensive and realistic

SLA and, generally speaking, this portion of the negotiations tends to be both challenging

and time consuming. The SLA negotiations should serve to shed light on many of the

existing “grey areas” in the relationship and so it will likely also be time well spent during

the formative period of the relationship. As the service provider can be expected to resist

the imposition of SLA fee clawback regimes which allow customers to impose a

“penalty” in the event of a breach of an SLA metric, in seeking to negotiate the SLA provisions

the customer should be guided by the principle that it will pay 100% of the agreed to rate(s)

for full service and a reasonable amount less for less than full service up to the defined

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point(s) where a customer termination right will arise. It is critical that the SLA also define

the point at which poor service will give rise to a customer option to terminate the agreement

“for cause” (i.e. without an obligation to pay termination fees) and it include a provision

stating that termination rights not be subject to an additional cure period. This approach

addresses the reality that termination tends not to be an attractive remedy for the

customer in the event of poor service and thus should only be considered after less

draconian options have been exhausted.

Disputes

Potential Pitfall: Not having an appropriate dispute resolution process. As is the casewith other sophisticated commercial contracts, outsourcing contracts usually includedispute resolution provisions. Such provisions can provide for an initial phase during whicha dispute will be escalated up through a series of suitably constituted committees staffedby representatives of the parties. This is followed by a second more formal phase duringwhich any dispute which remains unresolved at the conclusion of the initial phase becomesthe subject of: (1) litigation; (2) mediation (a voluntary, non-adjudicative process in whichthe mediator assists the parties in negotiating a settlement); or (3) arbitration (arbitrationcan be considered as providing the function of a private judge and accordingly is anadjudicative option conducted before either a panel of one or three arbitrators). Anotherdispute resolution mechanism sometimes used is “last offer arbitration,” colloquially knownas “baseball arbitration.” In this scenario, each party submits their last best offer to thearbitrator in advance of the hearing. This process is intended to promote the submissionof reasonable offer proposals by the parties as the arbitrator is limited to awarding one ofthe offers submitted.

Transition Out

Potential Pitfall: The customer will be in a weak position at the timethe outsourcing relationship is being terminated or is expiring to negotiate transition outterms and runs the risk of being exposed to large unexpected costs.

A failure on the part of the customer to be comprehensive in its approach to definingthe transition out process will leave it vulnerable at a time when the service provider’sbehaviour may not be moderated by the prospect of future revenues. Typically, this portionof an outsourcing agreement will set out the maximum duration of a “termination period”during which the service provider is required to provide defined “termination services” tothe customer and/or its new third party provider under a termination services plan. Theobligation to provide such termination services should be made contingent upon the payment

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to the service provider of all prior undisputed service fees and the execution of an appropriateconfidentiality agreement by any such third party provider. The service provider will generallybe entitled to additional compensation (at defined rates) if, in providing the terminationservices, it is required to use additional resources or additional resource hours. Transitioningout provisions also usually address: the return of data and records relating to the services,each in a specified format; the return of ownership to the customer of assets previouslysold by a customer to a service provider; the reassignment of contracts (including licenses)to the customer that were originally assigned by the customer to the service provider; theprovision by the service provider of the necessary staff, services and assistance to effectan orderly transition and migration, which obligations will frequently encompass the hiringof staff, software training, access to personnel, provision of copies of procedures manuals,use of software, sale to the customer or the third party provider of dedicated equipment,and the disclosure of service provider proprietary information. Lastly, it is a good idea toinclude at least a soft “cap” on transition out fees.

US financial crisis that started in 2008 changed several industries permanently;offshore outsourcing is not immune to the changes. Top outsource vendors successfullymanaged the global recession by adopting different global delivery models and byunderstanding customer’s business started providing direct business value in the projects.Customers from their part started managing their outsource vendors more efficiently andwith better performance metrics they started getting maximum benefits in minimum cost.

14.4 Trends in Offshore Outsourcing

Following are some of trends that are happening in offshore outsourcing.

1. Outsource vendor delivery model

Outsource vendors started with “Staff Augmentation” as the primary deliverymodel slowly changing to “Managed delivery model”. In staff augmentation, client sendsRFP to offshore vendors asking for specific technical skills like Java, C++, Oracle DBA,etc. Outsource vendors respond to the RFP by sending their employee’s resume with anhourly rate. Generally outsource vendor with lowest hourly rate (cost arbitrage) wins theRFP. In this model customers did not have a way to find the business value provided by thecontractors. “Yes” the customers saved money in their projects, but they do not have away to specifically point out the business value added by those contractors. Also customer’smeasurement did not include the time spent (and productivity lost) by their own employeesin managing and training the contractors.

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2. From cost arbitrage to managed delivery

The cost arbitrage model gave little or no incentives for the outsource vendors in

providing other business values like quality, process efficiency, time to market, etc. In the

managed delivery model outsource suppliers agree to deliver specific functionality for a

given price. For example, customers outsource their call center operations with specific

service level requirements like call wait time less than one minute per customer, number of

calls processed in a given time etc. In the managed delivery model both client and the

outsource supplier work closely from the beginning of the project, often client considers

the outsource provider as a partner and gave full control in managing their own employees.

Customers benefit from getting the desired services without managing the variable

requirements of the contract resources needed for the projects.

The new managed delivery model is getting wider acceptance in both onshore and

offshore outsources projects. Compared to cost arbitrage model, in managed delivery

model clients must spend significant up-front cost in working with the outsource vendor’s

team in making them understand their business processes, IT infrastructure, project

management, etc. So they may not see the ROI for a long time, but still customers are

moving towards managed delivery model due to the benefits offered by the new model.

3. Different pricing models

In the managed delivery model customers started negotiating different pricing models

like fixed price, transaction based, performance based, etc. For customers these new

pricing models are helping to reduce their capital (capex) and operational expenses (opex).

For offshore vendors it is helping to use their resources efficiently to achieve the SLA set in

the outsource contract and to meet their profit margins.

4. Outsource vendor domain maturity

In the managed delivery model offshore vendors moved from lower to higher value

chain, working closely with the customers, started offering business solutions that are

strategic in nature. This is helping the customers to identify long-term need for the offshore

vendor services and managing the project more efficiently. The offshore vendors are

benefiting repeat business from their customers and it also helping them to sell their domain

expertise to other customers in similar business verticals.

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5. Outsource project metrics and accountability

Traditionally offshore outsourcing performance metrics was performed with the main

focus on cost savings. But now in the managed outsource model, customers started

measuring business value provided by the offshore teams. Typically both the client and the

offshore vendor identify minimum number of measurable goals in the beginning of the

project, add those goals in the SLA, and manage it throughout the duration of the project.

This gives the client and the offshore vendor proper project governance in resolving issues

that arises during the course of the project. The transparency provided by the new model

is helping the offshore vendors to correct their mistakes and offer better service to their

customers.

14.6 Analytical Mechanism to Measure Offshoring Success

In today's sourcing business, many companies are offshoring IT services and projectsto India, some as a Captive Center (employment of own Indian staff), others choose externalservice providers for delivery.

While a few years ago such offshore decisions have primarily been made to savecosts, today these decisions are more often included into a global multi-sourcing strategy,where overall sourcing goals determine the right sourcing method. And, offshore outsourcing(e.g. to India), is still a good solution for specific situations.

A challenge for decision makers is to profit from lessons learned other companieshave experienced, since companies are typically not willing to openly admit and share theirfailures. Thus, information on key success factors are mostly collected by consultingcompanies or in-house, while even in-house knowledge is often not shared.

The underlying article comprises a series of key success factors that can be observedin almost any mid-size to large-size offshoring project focusing on India. The question is:how is success measurable?

The answer to this is very simple: from the very beginning, Key Performance Indicatorsshould be defined to measure the success of the project. In addition, it is advisable toinstitutionalize regular satisfaction surveys that measure the perception of the engagementacross several stakeholder levels.

The success of an offshore outsourcing engagement should be pro-activelyaddressed. The following list is a key collection of criteria to ensure a successful offshoreengagement:

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1. Cultural awareness:

In most cases, there is tremendous time pressure to offshore services or projects.The tight time schedule of a project plan forces the management to save costs quickly.The consequence is that often knowledge on already existing offshore experience is notsufficiently shared, not even within the company, and therefore, with respect to culturalawareness, this is very important. A misunderstanding of the Indian culture will result inhigher costs later and can at times result in cost deficit disasters. Indian staff working withWestern staff (on each level) and Western staff working with Indian staff must be trainedon cultural differences. Very helpful for effective working relationships are mutual visits inthe other country. This has shown drastic improvement on each other’s understandingand quality of work. Furthermore, it is beneficial to have a specific percentage of Indiancolleagues work onsite (e.g. 20% onshore - 80% offshore). The assumed higher costsmostly compensate for costs that arise otherwise (see below).

2. Strong Management & Sponsorship:

For offshore outsourcing projects, a strong management team (onshore and offshore)and a fully dedicated sponsorship are crucial to enable fast decisions and clear directions.The continuous drive and proactive attitude must come from the service recipient. Forlarge-size projects, it is inevitable to have a Program Management Office (PMO) in placethat ensures all communication is bundled, interpreted and available. The PMO ensuresthat respective rigor is given throughout the overall engagement, that the right communicationis done in time and that problems are de-escalated appropriately.

3. Governance Framework:

Watching the market, it has proven that most offshore outsourcing initiatives fail withtheir goals unsatisfied because of the fact that a clear governance framework has notbeen defined. The governance framework ensures that all managerial rules, regulationsand processes are explicitly stated and will be followed by all stakeholders. It is consideredas the backbone for an engagement. Typically, it is aligned to internationally accepted qualitymodels and adjusted to the project needs.

4. Off shoring Readiness:

Several questions need to be addressed in order to evaluate offshoring readiness. Isthe internal staff ready for offshoring? Extensive knowledge and training are required priorto transfers and need to be consistently supported; strong resistance might adverselyaffect a company s success. Are processes mature enough to be offshored? Have the

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processes been scanned and evaluated carefully, considering maturity and risks to ensure

they are suitable? What is the documentation level of the processes? In most cases, this

question will be answered with “90% documentation had done” while the reality shows that

instead “30% documentation is done”. Documentation is a time intense activity and mostly

underestimated.

5. Experience:

The bigger the offshore outsourcing initiative the more important it is to have the right

experience available. Identification of risks and foresights are crucial to ensure a successful

engagement offshore. Wrong decisions and wrong expectations can easily result in a

back transfer of the services to onshore.

6. Quality Adherence:

Services are typically offshored to save costs. Although most experienced consultancy

companies today discourage this perspective, nevertheless, many offshore businesses

are motivated primarily by cost advantages. It is often realized late in the process that

quality is one of the top two to three driving factors for a successful offshore engagement.

Lacking qualities have an impact on performance and reputation of the engagement. Poor

qualities can cause considerable follow-up costs, which in turn have a negative impact on

the business case.

A close adherence to Industry Standards, such as ISO9000, Six Sigma, CMM, etc. is

highly recommended, as well as regular quality audits and continuous quality improvements.

Quality initiatives should be a standard asset for successful delivery.

7. Expectation Management:

Outsourcing engagements have a supplier (also in-house) and a recipient, which

causes different expectations. The fact that a service is delivered from India, complicates

the expectations. Expectations are often becoming unrealistic and sooner or later, these

wrong expectations become problematic. It is important to close expectation gaps which

lead to dissatisfaction.

One typical example for expectation gaps is when service owners are in doubt about

the service provider s capability and hesitant to give services offshore, while the service

provider (also in-house) might feel unchallenged by dealing only with standard, unchallenging

topics.

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A good expectation management will ease communication and sets expectationsright. This can be accompanied by innovative approaches - initiations by qualitymanagement, for example.

8. Contract:

In case the services are handed out to an external service provider, a respectivecontract management is needed. If there is no in-house legal department available, externallegal advice is inevitable to ensure that the business is built on a stable base.

Over the past several years it has proven that “built for change” contracts are mostsuitable. More and more companies are starting to negotiate penalties for lacking servicequality or specific situations.

9. Onshore-Offshore Ratio:

A 100% offshore model (all resources working from offshore) is very challenging forboth the service provider and service recipient. Interactions and exchange opportunitiesare missing which often leads to functional, technical, and cultural misunderstandings.Frequent exchanges or a ratio of 20:80 or 10:90 can be recommended and assumed to becovered in the business case.

Offshore outsourcing is seen now as one out of several sourcing options. It can beselected in alignment with the overall company Multi-Sourcing strategy. India, as one of thechoices for offshoring, is constantly becoming more and more expensive. While it is notclear when stagnation can be expected, India has a few advantages to offer. Today, the keyplayers in India can offer very good experience, skilled management staff, a goodinfrastructure and a decent understanding of the Western IT market and needs.

14.6 Summary

The six-step approach to analyzing the BPO opportunity provides a systematicframework for decision making. The importance of developing and managing a cross-functional BPO Analysis Team (BAT) cannot be overstated. An effective and committedBAT will be the focal point for BPO-based organizational change, including internal challengesto the BPO analysis process. Team members must be carefully chosen for theircommitment to organizational strategy, their ability to deal with and manage change, andtheir capability to communicate and work with persons from a range of disciplinarybackgrounds. Implementing the decision-making process and developing a business caseshould be done deliberately, with attention to deadlines and resource constraints. Althoughthe proposed systematic process is not foolproof, it is likely to help the organization identify

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inefficient or unproductive business processes, some of which can be outsourced andothers of which can simply be fixed.

14.7 Review Questions

1. Discuss the six step process of Business Opportunities.

2. What are the risk involved in outsourcing?

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MODEL QUESTION PAPERMASTER OF BUSINESS ADMINISTRATION

SECOND YEARELECTIVE - OPERATIONS MANAGEMENT

PAPER - XIX

BUSINESS PROCESS MANAGEMENT ANDOUTSOURCING

Time : Three hours Maximum : 100 Marks

Part-A (5 x 6 = 30 Marks)Answer any Five Questions

All Questions Carry Equal Marks

1. What is Business process Management?

2. What is Business Process Outsourcing?

3. What is Strategic Risk?

4. What is vendor management?

5. What is benchmarking?

6. What is change management?

7. What are the costs involved in BPO?

8. What is performance measurement system?

Part-B (5 x 10 = 50 Marks)Answer any Five Questions

All Questions Carry Equal Marks

9. Explain the pro's and con's of outsourcing?

10. Discuss the steps in vendor selection.

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11. Explain the types of business risk.

12. Discuss the importance of process refinement.

13. Explain the types of benchmarking.

14. Discuss the information privacy and secure by issues related to outsourcing.

15. How will you manage the change in BPO?

16. Describe the trends in outsourcing?

Part-C (1 x 20 = 20 Marks)Compulsory Questions

Case Study

17. Recently the U.S. President Mr. Barack Obama had stated that there was no moreoutsourcing for Indicate.

Questions :

Is it a business opportunity or threat to India? Give explanations of your answer.

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MASTER OFBUSINESS ADMINISTRATION

SECOND YEARSECOND YEARSECOND YEARSECOND YEARSECOND YEAR

INSTITUTE OF DISTANCE EDUCATIONUNIVERSITY OF MADRASCHEPAUK, CHENNAI - 600 005

TAMILNADU, INDIA

ELECTIVE - OPERATIONSMANAGEMENT

PAPER - XIX

BUSINESS PROCESS MANAGEMENTAND OUTSOURCING

PBA209E

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M.B.A. ELECTIVE - OPERATIONS MANAGEMENTSECOND YEAR BUSINESS PROCESS MANAGEMENT AND OUTSOURCING

WELCOME

Dear Student,

We welcome you as a student of the Second Year Postgraduate Degree Course.The package contains learning materials pertaining to M.B.A. BUSINESS PROCESSMANAGEMENT AND OUTSOURCING

The complete set of learning materials has been prepared in the self-learning format.You will receive self-learning materials for all the papers. This is a significant step taken bythe University of Madras towards realising the mission to “develop citizens with knowledge,skill and character leading to societal transformation and national development.”

We invite you to make the fullest possible use of these learning materials. They aredesigned so that the teacher-in-print of the materials is of constant help to you in yourprogress as a learner. So, stay with teacher-in-print and carry out the tasks, exercises etc.with care and diligence. In addition to these materials we also conduct Personal ContactProgrammes for your benefit.

Learning through the distance education mode involves self-learning and self-assessment and in this regard you are expected to put in disciplined and dedicated effort.

On our part, we assure you of our help in guiding you throughout the course.

Wish you all the success.

DIRECTOR

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© UNIVERSITY OF MADRAS, CHENNAI 600 005.

Mr. D. VENKATESANAssistant Professor in Commerce

T.S. Narayanasamy College of Arts & ScienceNavalur, Chennai

COURSE WRITER

Dr. B. DEVAMAINDHANAssistant Professor in Management Studies

Institute of Distance EducationUniversity of MadrasChennai - 600 005.

EDITING

M.B.A. ELECTIVE - OPERATIONS MANAGEMENTSECOND YEAR BUSINESS PROCESS MANAGEMENT AND OUTSOURCING

159MASTER OF BUSINESS ADMINISTRATIONSECOND YEAR

ELECTIVE - OPERATIONS MANAGEMENTPAPER - XIX

BUSINESS PROCESS MANAGEMENT ANDOUTSOURCING

SYLLABUS

UNIT I

Principles of BPM : Business Process and business process management -

Functional Management BPM functional management - Identifying core and non-core

processes to assess properties of outstanding processes - Relating process management

with core competency and competitive advantage - Management of Business process -

Process refinement. Build quality in refind process. Evaluating return on process analysis -

Applying a return on value metric to evaluate process refinement - Dissecting operational

details of root cause analysis for process refinement.

UNIT II

Proceff Refinement and BPR : Conceptual Foundation of Business Process

reengineering - Role of information technology in BPR : Processimprovement and process

redesign - BPR experience in Indian Industry : PRocess identification and mapping : Role /

Activity Diagrams : Process Visioning and Benchmarking - BPR Implementation

Methodology, Business process improvement - Business Process Redesign - Man

Management Managing Change.

UNIT III

Business Process Outsourcing : Managing Business through Outsourcing - Under

Standing Evaluation of Business Process out sourcing - Evaluation and develop firm's internal

readiness for out sourcing - Critical success factors - Assessing and managing risk of

BPO - Identify and manage cost of BPO managing BPO transition - Business risk and

migration strategy.

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160UNIT IV

Outsourcing and Transition : Identify, select vendors - Contracting and legal aspects

- Infrastructure consideration and challenges - Human resource issue - Government

regulations - Information privacy and security issues - Performance measurement system.

UNIT V

Offshoring Business Process : Vendor management and relationship - Technology

support and BPO operation - Off shoring BPO as Business opportunity - Risk involved in

outsourcing - Trends in off shoring - Analystical Mechanism to measure offshoring success

- New partiers of out sourcing - BPO Operation in India (Seminar Class)

REFERENCE BOOKS

1. Sethi V and W T King, "Organizational Transformation through Business Process

Reengineering", New Jersy - Prentice Hall.

2. Sarikakulakarani, "Business Process Sourcing" Jaico Publishing, New Delhi.

3. John K Halvey and John, "Business Process Out Sourcing". Wiley Publishing 2nd

Edition.

4. Thomas N Ducning, "Business Process Out Sourcing the Competitive Advantage",

John Wiley.

5. Anupindi, Chopra and Deshpande "Managing Business Process Flow", Prentice Hall.

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MASTER OF BUSINESS ADMINISTRATIONSECOND YEAR

PAPER - XIX

BUSINESS PROCESS MANAGEMENT ANDOUTSOURCING

SCHEME OF LESSONS

No. TITLE Page

1. Business Process Management 1

2. Meaning of Process Management 30

3 Process Refinement 40

4 Business Process Reengineering 47

5 Process Improvement and Process Redesign 56

6 Process Visioning and Benchmarking 66

7 Business Process Outsourcing 76

8 Identify and Manage Cost of BPO Managing BPO Transition 88

9 Business Risk and Migration Strategy 94

10 Vendors Selection and Contracting 101

11 Infrastructure Consideration and Challenges 111

12 Information Privacy and Security Issues 121

13 Vendor Management and Relationship 129

14 Business Opportunity 138