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Lesson - 1

BUSINESS PROCESS MANAGEMENT


Learning 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 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Introduction Business Process Management Business Process Management Life Cycle BPM Suites Principles of Business Process Management Functional Management Vs Business Process Summary 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

2 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 holistic management approach to aligning an organizations business processes with the wants and needs of clients. It promotes business effectiveness and efficiency while striving for innovation, flexibility, and integration with technology. BPM attempts to improve processes continuously. It can therefore be described as a process optimization process. It is argued that BPM enables organizations to be more efficient, more effective and more capable of change than a functionally focused, traditional hierarchical management approach. These processes are critical to any organization, as they can generate revenue and often represent a significant proportion of costs. As a managerial approach, BPM sees processes as strategic assets of an organization that must be understood, managed, and improved to deliver value-added products and services to clients. This foundation closely resembles other Total Quality Management or Continuous Improvement Process methodologies or approaches. BPM goes a step further by stating that this approach can be supported, or enabled, through technology to ensure the viability of the managerial approach in times of stress and change. In fact, BPM offers an approach to integrate an organizational change capability that is both human and technological. As such, many BPM articles and pundits often discuss BPM from one of two viewpoints: people and/or technology. BPM or Business Process Management is often referred to as Management by Business Processes. The term business can be confusing as it is often linked with a hierarchical 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 BPM Assessment,BPM can therefore is defined as company performance management through processes. And its this resolutely performance-oriented definition which is chosen
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here. Dominique Thiault, in Managing Performance through Business Processes defines

BPM as a management-through-processes method which helps to improve the companys performance in a more and more complex and ever-changing environment. Management through processes is a management method based on two logical levels: process governance and process management:
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Process governance is all of the companys governance activities which, by way of allocating on the processes, work towards reaching its objectives, which are both operational and progress-related.

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Process management is all the management activities of a given process which work towards reaching the objectives allocated for this process. Roughly speaking, the idea of business process is as traditional as concepts of

tasks, department, production, and outputs. The management and improvement approach as of 2010, with formal definitions and technical modelling, has been around since the early 1990s (see business process modelling). Note that the IT community often uses the term business process as synonymous with the management of middleware processes; or as synonymous with integrating application software tasks. This viewpoint may be overly restrictive - a limitation to keep in mind when reading software engineering papers that refer to business processes or to business process modelling. Although BPM initially focused on the automation of business processes with the use of information technology, it has since been extended to integrate human-driven processes in which human interaction takes place in series or parallel with the use of technology. For example (in workflow systems), when individual steps in the business process require deploying human intuition or judgment, these steps are assigned to appropriate members within the organization. More advanced forms such as human interaction management are in the complex interaction between human workers in performing a workgroup task. In this case, many people and systems interact in structured, ad-hoc, and sometimes completely dynamic ways to complete one too many transactions. BPM can be used to understand organizations through expanded views that would not otherwise be available to organize and present, such as relationships between processes. When included in a process model, these relationships provide for advanced reporting and analysis. BPM is regarded by some as the backbone of enterprise content management. Because BPM allows organizations to abstract business process from technology infrastructure, it goes far beyond automating business processes (software) or solving business 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:
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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 monitor the improvement in real time and feed the performance information back into the simulation 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 processes

based on real-life data (not just on assumed knowledge). Also, the coupling of BPM to industry methodologies allows users to continually streamline and optimize the process to ensure that it is tuned to its market need. As of 2012 research on BPM has paid increasing attention to the compliance of business processes. Although a key aspect of business processes is flexibility, as business processes continuously need to adapt to changes in the environment, compliance with business strategy, policies and government regulations should also be ensured. The compliance aspect in BPM is highly important for governmental organizations. As of 2010 BPM approaches in a governmental context largely focus on operational processes and knowledge representation. Although there have been many technical studies on operational business processes both in the public and in the private sector, researchers have rarely taken legal compliance activities into account, for instance the legal implementation processes 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.

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 organization is responsible for certain sets of processes made up of tasks which are to be executed and reported as planned. Multiple processes are aggregated to function accomplishments and multiple functions are aggregated to achieve organizational goals.

1.3.2 Design
Process Design encompasses both the identification of existing processes and the design of to-be processes. Areas of focus include representation of the process flow, the factors 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 a correct and efficient theoretical design is prepared. The proposed improvement could be in human-to-human, human-to-system, and system-to-system workflows, and might target regulatory, market, or competitive challenges faced by the businesses. The existing process and the design of new process for various applications will have to synchronise as such will not affect the business in major outage. The business as usual is the standard to be attained when design of process for multiple systems is considered.

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 under different circumstances).

1.3.4 Execution
One of the ways to automate processes is to develop or purchase an application that executes the required steps of the process; however, in practice, these applications rarely execute all the steps of the process accurately or completely. Another approach is to use a combination of software and human intervention; however this approach is more complex, making the documentation process difficult.

6 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 adhoc. 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.

1.3.6 Optimization
Process optimization includes retrieving process performance information from modelling or monitoring phase; identifying the potential or actual bottlenecks and the potential opportunities for cost savings or other improvements; and then, applying those enhancements 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 desired output, it is recommended to re-engineer the entire process cycle. BPR has become an integral part of organizations to achieve efficiency and productivity at work.

1.4 BPM Suites


Forrester Research, Inc recognizes the BPM suite space through three different lenses:
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human-centric BPM integration-centric BPM (Enterprise Service Bus) document-centric BPM (Dynamic Case Management)

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

Practice
Example of Business Process Management (BPM) Service Pattern: This pattern shows how business process management (BPM) tools can be used to implement business processes through the orchestration of activities between people and systems. While the steps can be viewed as a cycle, economic or time constraints are likely to limit the process to only a few iterations. This is often the case when an organization uses the 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.

8 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.

9 There are four critical components of a BPM Suite:


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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:
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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 must be honoured in order to deliver business results to customers and to satisfy the needs of the organizations other stakeholders. These principles underlie the methods of business operation and change. Understanding and living according to these principles will get managers and practitioners alike through some tough debates about managing processes.

10 Without the principles, teams can easily get lost and distracted from the intent of the journey. The 10 principles are 1. 2. 3. 4. Business change must be performance driven. Business change must be stakeholder based. Business change decisions must be traceable to the stakeholder criteria. The business must be segmented along business process lines to synchronize change. 5. 6. 7. 8. 9. 10. Business processes must be managed holistically. Process renewal initiatives must inspire shared insight. Process renewal initiatives must be conducted from the outside in. Process renewal initiatives must be conducted in an iterative, time-boxed approach. Business change is all about people. 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 we do, we should do for a reason, and measurement allows us to know if we are acting consistently with the reason. This principle in no way says what the right measurement indicators should be. Every industry is different, and every company has its own strategy for which a variety of indicators are possible. Nonetheless, its vital that each organization choose 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 automobile companies; customer satisfaction and retention for services firms; share price and staff loyalty for dot-coms. Government will have different drivers than the private sector, and monopolies will have different drivers than free-market firms. All, however, must know their aim in life and set a scorecard to evaluate how theyre doing. Traditionally, competitive organizations have used physical asset-based measures or investor-based measures, which I have likened to hearing last nights final score without seeing the football game. Although we know that all teams go out to win and, in the long

11 term, a team must win or its management and coaches will be fired, just having the final score after the fact does little to help our understanding of the whole game. We dont know if it was a good game for our team or not. We dont know if it was exciting and if our fans were happy, or perhaps not because we should have done better. We dont know if our strategy worked, or if it was abandoned part way through. We dont know what the team should probably do differently in the next game. We only know the result. Similarly, in business, most of us need other feedback to know whats working. A high stock price or good return on assets is nice, but how can we contribute to it with what we do every day? Earlier, I talked about evaluating human resources and intellectual capital as measured by return on management. However, this too can disconnect us from what we must do as far as many of our staff is concerned. As in sports, we need predictive measures, not just after-the-fact reports, to see the total picture. Constructing a connected measurement system is critical for us to break down overall targets into what people do every day. A popular response to this has been the balanced scorecard approach, which tries to put in place a set of measures that arent oriented just to the financial bottom line. Measures of all major components of success are required, including customer satisfaction and loyalty, innovation, knowledge and people, customers, suppliers, processes, as well as the financial side of the organization. From this perspective, the measurement-oriented approach doesnt 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 set of performance metrics from which all decisions regarding processes can be derived and linked to each other. This concept is normally referred to as traceability. Traceability simply means that everything we do, and every decision we make under ideal circumstances, relates through a set of linked performance measures to the organizations scorecard. After performance measurement factors are determined, the organization sets some performance 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 its done. Management must

12 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 focusits stakeholders. A stakeholder is anyone or any group thats affected by, has a vested interest in, or can influence the organizations performance in some way. Clearly some stakeholders are more important than others when it comes to the organizations success, and this will change over time. This principle recognizes that the organization doesnt exist only for its own purposesit must serve a larger community than itself. Stakeholders provide context for the businessits 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
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Customers and consumers Owners Staff Suppliers Community The enterprise itself

These categories will vary wildly for different companies and significantly from industry to industry. Often, significant overlaps in classification result in confusion. For example, many organizations have customers or suppliers who are also their competitors. How should the competitor be classified? Also, whats good for the customer might be not so good for the

13 staff or might violate legal and regulatory community rules? Again, a balance must be struck. In most organizations, one level of stakeholder type is insufficient, especially when we look at what certain parts of the organization do and whom they deal with. Customer segmentation is a well-developed function in many sales-oriented companies. Its the basis for marketing campaigns, sales organization design, and incentive schemes. Segmentation is used less, however, as a driver and organizer of business change initiatives and process management, an area where it holds great potential. Likewise, we can segment or structure the other stakeholder types, such as staff or suppliers, into hierarchical categories, from general types to more specific sub-types. Types should be segmented according to their different requirements and the difference in the way that they are to be treated. For example, telecommunications companies treat residential customers differently from multinational business customers. If theres no difference in treatment required, further segmentation might not be required. To analyze a stakeholder segment, we should know the current state of our relationship with that segment and what would we want it to be in the future. The gap between these two states will drive our needs for change. The future state view will provide a set of evaluation criteria for change from the current reality. From the current state, we should determine where we are with each type and subtype that warrants distinction. This evaluation includes knowing the following about each stakeholder type:
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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
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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 organizations 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 organizations philosophy toward its prime mission. This is especially a key factor in todays drive toward e-businesses. Many organizations have come and gonesome 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 doesnt require a lot of explanation. However, that doesnt mean its common practice. As a matter of fact, its often ignored or abused. Personal and political agendas more often form the basis for proposals, recommendations,

15 and approvals of courses of actions than criteria derived from outcomes of value to our stakeholders. The key question is, Whats the reason or justification for a particular decision? Is it business or personal? The challenge is to obtain accepted criteria before we enter into choosing among business options, even small ones, and to use those criteria instead of the personal drivers of powerful players. Conflicting personal, political drivers among decision makers can devastate a sound decision-making process. When those drivers are also misaligned to the organizations mission, vision, and values and to its stakeholders expectations, we cannot expect to optimize results, and disaster is always possible. Change initiatives that waste millions of dollars can be found in almost all organizations of size. The root cause is almost always poor decision making, or, some would say, poor management due to the factors described here. Again, insist on agreement to the future state stakeholder criteria that will determine your course of action; then and only then, select that course. This simple philosophy of tracing business change decisions to stakeholder criteria is consistent with many popular strategies for personal and professional success. Stephen Coveys 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 must have is a clear picture of what success is. Visualization of that end state drives the behavior to get there. If you dont know or care about where you are going, any behavior will suffice. To actually put this principle into practice, management must consciously and visibly agree on the criteria first and then publish them. Management must also empower those working on change to work creatively within those parameters. An example is the up-front agreement necessary in the process-renewal projects I have handled for various businesses. I always fight hard to get the commitment that we will use the stakeholder criteria to reach a solution. We all agree not to discuss or even try to think about any organizational structure already in place. This is hard to manage, but, if I dont get this commitment, it usually means that managers are thinking more about the drivers of direct relevance to them personally and currently. These current personal drivers seldom align within the team or with the best interests of external stakeholders. Principle 3 should be practiced in numerous situations. In deciding on design options for every aspect of the process management hexagon we should use the stakeholder criteria. In making scoping decisions, in selecting among alternatives in business cases, in

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

Principle 4: Business must be segmented along business process lines to synchronize change
Based on the earlier discussion in this chapter, its natural to view process as the prime segmentation strategy internal to organizations andmore and more frequently among organizations. As business cycles of products and services shrink time wise, management structures with overly rigid organizational boundaries and planning mechanisms are too slow to respond. They dont anticipate changes well enough to lead the market. Also, a customer or supplier clicks on a mouse while on a Web site, with the expectation of quick, efficient, and effective results. In both scenarios, seamless cross-functional integration is mandatory. Restructuring functional units alone wont do it. Focusing on people skills and empowerment also wont do it by itself; such approaches are aimless. A technological basis for organizing the delivery of results is likewise misdirected because technology will automate only what we want it to. Despite wider-focusing technologies, such as enterprise resource planning and customer relationship 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 doesnt end 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 in place solely to serve the event-to-outcome process and therefore to deliver added value to stakeholders. This strategy implies that in deciding how to invest in change, prioritizing along process lines is requisite. In this way, processes organize strategy and become a key link in the traceability chain between business/stakeholder criteria and the day-to-day actions of all the 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. Other events 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 isnt complete until satisfactory delivery has occurred,

17 and payment has been received. Other events along the way can include receipt of an inquiry regarding status of shipment, invoicing, receipt of payment, and so on. Other types of events to consider include
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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. Process analysis doesnt rest until all actions are complete. In event/outcome analysis, the organization is treated as a black box, and we dont look inside. Looking internally in the process will only confuse uswell get to that later. In order for you to manage processes, they must be defined as independent activities. However, in their performance, its clear that they are interdependent. In identifying processes that need to be renewed to resolve a problem, start with those event/outcome pairings that involve the customers and consumers affected by the problem. 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 stakeholder has with the organization and precedes to the last interaction in that relationship. This would span everything from marketing through to, in worst case, losing the customer, or, in best case, delivery of the completed product or service. From the core processes, we can derive the processes that deliver guidance to them (guiding processes) and those that deliver reusable enablers to them (enabling processes). These processes should themselves be defined, taking into account events and outcomes but from the perspective of other stakeholders. Especially important is the need to see the core processes as customers of the guiding and enabling processes. In this way, value creation can be traced from the processes traditionally seen as overhead. Processes such as hiring staff, developing systems and guidelines, and so forth exist only to support the business objectives that are the target of the core processes. They should be measured primarily by the impact they have on the core processes, such as their impact on operational capacity. Their internal measures of efficiency, such as headcount and expense, are irrelevant in this situation. By segmenting the business along process-value added lines, we have a clear framework for organizing and prioritizing change and for measuring the impact of our efforts in 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 and sustain benefits. In process-oriented change, the problem can be exacerbated if the proponents of change cant find appropriate champions. These sponsors must take a fullprocess perspectivethat is, one that delivers on behalf of external stakeholders, and not just for internal functional managers. Typically, anyone in a position to act is also typically responsible for only a portion of the day-to-day process and might not have the interest, knowledge, or motivation to take the whole process into account. This person seldom has the authority to act on behalf of the full process. Consequently, its becoming more and more prevalent to appoint a full process owner, sometimes referred to as a process steward, for each process of the organization. The process owner acts as advocate on behalf of the process, taking responsibility for the processs performance for stakeholders. The process owner works not only to deliver improvements in process projects but also to remain in the role subsequent to completion of these projects. This means staying on top of process and stakeholder performance 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 and evaluating the risk of not adapting. He ensures that feedback mechanisms exist to gather lessons learned and that knowledge from the latest experience and practices is distributed. Primarily, the process owner makes certain that the process continues to perform to requirements for its stakeholders, and he takes corrective or anticipatory action as needed to either continuously improve or to introduce radical change. The objective is similar to that of total quality management, although the process owners focus is wider and spans organizational control boundaries. Process owners must be effective even though they might have no direct control over the resources involved in the execution and management of 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.

19 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 contacts job to be fully aligned with the activities in the process; the individuals 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 dayto-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 crossfunctional 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 whats 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. Its 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. Its also true that working closely with knowers rapidly accelerates the learning curve. In small areas of an organization, this type of learning is manageable because everyone can identify the areas knowers 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 whats known as well as to realize the identities and trustworthiness of its knowers. Its 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. Theres 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 knowledge interact with one another in a never-ending learning process. Todays challenge is no different, with the exception of the speed with which the learning must occur.

21 The TTEE knowledge discovery model deals with all types of knowledge conversion tacit to tacit, tacit to explicit, explicit to explicit, and explicit to tacitin a series of iterations or learning cycles. This model has a distinct R&D flavor and is being adopted by companies that want quality products and services to enter the market quickly in a competitive environment. This approach manages a creative and collaborative process of deeply embodied knowledge discovery resulting in the deepest form of knowledge embedding that is, knowledge is embedded into our process definitions. In their analysis of successful Japanese companies, Ikujiro Nonaka and Hirotaka Takeuchi support the iterative creativity of the TTEE model. The knowledge discovery model

Examples of this business solution can be found in many internal company processes that create artifacts for other parts of the organization to use, including process design. In doing this work, its important to be cautious about too much emphasis on the models themselves. They are only one aspect of the deliverable. The other is arrival at a common understanding of the situation and its potential for improvement.

Note
Models and documentation are only abstractions of the real world and not comprehensive in their reach. Not everything can be explicitly modelled or documented in pictures 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 to assure common learning and validation, which are necessary conditions for any change to proceed. If we just focus on models, we will never bring to the surface what we are unaware of.

22 Recognition of the value of sharing insight, not just documents, is reflected in the methods discussed later in this book. A number of activities will uncover what we know, so that it can be shared across a group in workshops. These workshops will create artifacts or records of the agreements and ideas, but more importantly they will embody a deeper tacit understanding of whats important to allow better decision making and common commitment. In many cases, a discussion of strengths and weaknesses will be more valuable than the charts created. Especially regarding strategy and architecture, there are no right answers, only a better sense of how to judge. Not everything can be objective. Dont leave out activities that embody trust, commitment, and understanding in the participants.

Principle 7: Process renewal initiatives must be conducted from the outside in


In any change initiative, its easy to become overwhelmed with the daunting task to be accomplished. There are myriad concepts to master, all of which are in play concurrently and all of which interact with one another. If we try to deal with too much at once, we will never finish the job; instead, we will fall prey to analysis paralysis. Each step of the way will require a strong ability to focus on the work at hand with the confidence that we will get to the other aspects later when the time is right. Managing multiple levels of detail or going to an overly complex level is the biggest risk. It wont be possible to understand and communicate that understanding when looking too soon at 500 flow boxes with decision points throughout. Everything we do should be understood and validated at its own level, starting at the top box and then working down. At each level, the objects we are analyzing must be looked at only with regard to their own context 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 stakeholders before we analyze the processes of that organization. We will then identify each process for that organization and select the priority ones to examine further. Well examine each chosen process in turn to see how it works with regard to its external stakeholders and other related, internal processes. We will break down each process into its next level of activities, and each of those will be examined. In this way, well keep analysis and design at an appropriate level of detail. We wont spend unnecessary time analyzing work that wont even exist later. We will focus on the key aspects, not all aspects. We will understand the drivers and have the insight needed before moving on. The context will provide meaning at

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

Principle 8: Process renewal initiatives must be conducted in an iterative, timeboxed 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 8 extends 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 dont know everything in advance and that they must create an environment wherein they can figure things out and articulate them incrementally. This iterative approach can be found in knowledge creation processes, in prototyping of technology, and in research-oriented activities. It assumes that you will get it wrong before you get it right and that you will know the result of a change only when you try it. It also assumes that we need to attempt changes first at a fairly high level of abstraction before we get too detailed. This concept isnt new, but, more recently, those applying the concept have proven the benefit of doing only a time-fixed amount of work before reviews occur. This is often referred to as time boxing. Time boxing dictates that the activity schedule is preset and the amount of work performed varies according to what can be done within the timeframe. For example, a schedule might say, Each Tuesday afternoon from 1:00 to 5:00, we will review what we have learned in the past week with the key participants in the process in order to validate our findings. Such a statement ensures that the team will not get too deep too soon, too far off track without correction, and will be able to gain gradual commitment toward the deliverables from the participants. It also solves one of the biggest problems in processoriented and other change situationsthat is, scheduling the participants, especially management, for key reviews. In this approach, everyone schedules weeks and months of reviews 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. Whats important should be determined by the impact of that activity on the desired outcomes of the overall process, by the frequency

24 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 Number Outstanding Knowledge Gained 1 2 3 4 50% 50% 50% 50% Incremental Knowledge Gained 50% 25% 12.5% 6.25% Cumulative Knowledge Gained 50% 75% 87.5% 93.75%

It appears that theres 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, its important that the right knowledge be pursuedthat 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 its 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 didnt get right, what we missed, and what priority we should look at next. Weve found that a simple ABC ranking is sufficient, wherein we can be confident that we will get to the As by next time but the Cs wont be addressed now. (They might become As in later iterations.)

25 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 dont consider the human element. Change initiatives are often used simply as ways of creating a documenta specification for a system, for example. Instead, you must see them as a vehicle of more

26 encompassing transformation. You arent 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 cant 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 mid1990s 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:
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We dont 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 wont 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.

27 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 arent 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, its 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 isnt 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

28 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 processoriented 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 doesnt 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.

29 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. 2. 3. Explain about the Business Process Life cycle. What are the principles of Business Process Management? Explain the Functional management.

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Lesson - 2

PROCESS MANAGEMENT
Learning 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 2.2 2.3 2.4 2.5 2.6 Introduction Meaning of Process Management Identify the Core Noncore Processes Measurement of Competitive Advantage Summary 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 midcentury. The next great addition to process management was created by the combination of Taylors 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 ve 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 denition 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 denition and can include sequences as mechanical as reading a le and transforming the le to a desired output format; to taking a customer order, lling that order, and issuing the customer invoice. From a business perspective, a process is a coordinated and standardized ow 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 denition of process is more familiar to business readers, and we will use this denition when referring to processes. Every management theorist has a slightly different denition of process management. One denition that generically describes process management is from Professor Mary J. Benner of University of Pennsylvania and Professor Michael L. Tushman of Harvard

32 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 denition of process management is succinct but encompassing. It also resonates with the process enterprise concept that Michael Hammer described. Whereas traditional organizations are composed of departments and functional silos, this denition views organizations as networks or systems of processes. To manage a process, the rst task is to dene it. This involves dening the steps (tasks) in the process and mapping the tasks to the roles involved in the process. Once the process is mapped and implemented, performance measures can be established. Establishing measurements creates a basis to improve the process. The last piece of the process management denition describes the organizational setup that enables the standardization of and adherence to the process throughout the organization. Assigning enterprise process owners and aligning employees performance reviews and compensation to the value creation of the processes could accomplish this. The current theories of process management have their origins in the quality movement and business process reengineering movement of the past two decades. However, the genesis of process management and management in general, can be traced to the birth of the modern corporation. Adam Smith claimed that mass production required a new organizational form and new methods of work. In his seminal work, The Wealth of Nations (1776), Smith recognized that the division of labor was essential for increasing the productivity of workers. While observing workers at a pin factory in France, he noticed that workers performing single steps in pin manufacturing could produce far more pins than workers engaged in manufacturing whole pins. The productivity increase was orders of magnitude higher, 48,000 pins by 10 person teams compared to at most 20 per person working independently. Smith determined that the productivity Increases were due to the dexterity each worker obtained by performing the assigned tasks and the time saved by not having to switch from one task to another. Smiths idea of specialization of labor established the foundation for the functional organizations in which corporations align themselves today. Adam Smith introduced the idea of labor specialization. This necessitated dening roles and tasks performed by different individuals. This is the basis of business processes

33 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 Smiths labor specialization with the introduction of the scientic method and measurements to the manufacturing processes. In his book, The Principles of Scientic Management (1911), Taylor stressed that corporations needed to remove production in efficiencies and improve the division of labour. He proposed to accomplish these with scientic management techniques. These techniques include the following:
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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 decits from war-induced ination, the United States

34 Withdrew from the gold standard, ending the Bretton Woods world monetary system. Under the Bretton Woods system, the dollar was xed at $35 per ounce of gold. Other currencies had xed exchange rates against the United States dollar. The various central banks were obligated to buy/sell their currency to limit uctuation to within 1 percent of the xed 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 satised 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 customerdriven 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.

35 In this context we can divide all business processes into three categories:
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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 noncore 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. Todays 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 authors 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.

38 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. 2. 3. Explain about the process management generations. Explain the Core and non-core competency of process. Discuss the competitive advantage of process management.

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Lesson - 3

PROCESS REFINEMENT
Learning 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 3.2 3.3 3.4 3.5 3.6 3.7 Introduction Meaning of Business Process Refinement Importance of Process Refinement Oil Refinery in India Case study Evaluating Return on Process analysis Summary 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 some choice and at that time you have to choose between glows and grow. This single decision can alter your career. Here, grow means you are prepared to face new challenges and some important responsibilities. Here you have to move from your present position and then put a step forward to a higher stage. On the other hand, glowing means that you need to choose and remain behind for future polish and with the help of this you can also allow your organization to shine along with improvements in business processes so that it can become best organization in the market. With the help of Business Process Refinement you can easily determine the inefficiency and efficiencies of the business. Of you are able to actively identify these factors then you can easily adjust the procedures according to that, and with the help of this you can easily have various useful flows of process One among the major factors is that, the Business Process Refinement gives attention to align your business progress with your goals. Suppose if your company have some desired goals and if you are not on the correct path of achieving these goals then, Business Process Refinement can help you a lot and can easily bring your company on the accurate track. With the help of this you can also stop unwanted actions and can also save lots of time, efforts and money. Need of customers is also the main point of Business Process Refinement. This evolving 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 the customers must be appreciated and honoured. The services of company can be improved by gathering lots of useful information.

3.3 Importance Process Refinement


Processes are important types of models in software development, they are generalized representations of control How, data etc. The results of a development are usually produced and utilized through a process. Therefore the modeling of processes is crucial for the planning and organization of development. In MDSD, processes are usually designed step by step on different levels of abstraction. This creates a refinement chain of the process Models. An ontological solution for validating BPMN process refinement is presented. 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. Precondition: 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. Postcondition: 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 the processes responsible for its build up. Hence the process selected for improvement was Procurement. Selecting the Improvement Techniques Considering in was a chronic problem; minor improvements would not have delivered the results expected by the management. In order to achieve breakthrough results. The management selected Process Reengineering technique. The methodology applied was Westinghouse Technology for improvement of process. In the five day workshop, the participants
N N N N

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 is neither too long nor too short. lf it is too long, it may remains shallow while mapping and analysis and some critical issues may be left unaddressed On the other hand, if it is too short, improvement attempted may not impact the business considerably. In the present case, 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 to ensure that the participants were knowledgeable about the current process. This required that a supplier and a customer (internal) were pan of the team. Some of the members were from a totally different function to bring in objectivity. Team members needed to be creative, bold and willing to take risks, and question the fundamentals.

44 Usually. a team consists of 6-10 members from middle management and team leader from senior management, with executive director as the sponsor. Sponsors Expectations To set stretch targets. sponsors expectations were defined and documented. These were:
N N N N N N N

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:
N N N

Process cycle time Process cost Value delivered to customers

Key Issues are problems that hinder effective performance of processes. The team members posted issues under each task and then, using Dot Voting technique, selected key issues. Some of the key issues affecting process cycle time, cost and value delivered were:
N N N N N N N N N N

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 determine the value delivered by the process, value analysis for few internal customers were done. Paradigms are the boundaries of beliefs of team members within which, according to them, the organization operates. As a result of these paradigms, improved working methods appear to be impossible. For breakthrough improvements, it is critical to identify and shift existing paradigms. Some of the existing paradigms identified were: Too many signatures would ensure control Be safeinvolve all Servants of system Rules (rules cannot be changed) Lowest bid is the best and safest inventory management is material management departments responsibility

Designing the New Process


Stretch Targets in order to achieve a quantum improvement in the needed process in line with sponsors expectations, certain targets with respect to quality. Cost and delivery were 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 of the workshop, good ideas generated by the team were parked. These we evaluated and used for designing the reengineered process. Some of the radical good ideas generated by the team were:
N N N N N N

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

46 Reengineered Process Based on the outputs available from analysis of the current process, good ideas, key issues, etc., the team designed and mapped the reengineered process. 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 multiple logically related (less abstract) actions describing in more detail how the latter abstract action is performed. For example. The action judge application form can be refined into logically related actions such as check if form is complete, End customer file in information system, check customer characteristics. Etc. Moreover. The attributes can be refined as well. When refining an action. Two basic rules must be obliged: the attributes of the refinement 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. 2. Explain the importance of process refinement. Discuss the Oil refinery industry in process management.

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Lesson - 4

BUSINESS PROCESS REENGINEERING


Learning 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 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Introduction Meaning of Business Process Reengineering Example of BPR Applications Objectives of BPR Role of Information Technology in BPR Role of IT in BPR with Practical Examples BPR Tools and Techniques Summary Review Questions

4.1 Introduction
Business Process Reengineering involves changes in structures and in processes within the business environment. The entire technological, human, and organizational dimensions may be changed in BPR. Information Technology plays a major role in Business Process Reengineering as it provides office automation; it allows the business to be conducted in different locations, provides flexibility in manufacturing, permits quicker delivery to customers and supports rapid and paperless transactions. In general it allows an efficient and effective change in the manner in which work is performed.

4.2 Meaning of Business Process Re-engineering


The 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 wasnt 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

51 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 customers 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 todays process, and focus on a new process. The BPR characteristics - outcomes include the following: 1. 2. 3. Several jobs are combined into one. Decision-making becomes part of the job of employees (employee empowerment). 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. 6. 7. Work is performed where it makes the most sense. Controls and checks and other non-value-added work are minimized. 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

54 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 (email) 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.

55 Process and customer focus: The primary aim of BPR, according to some authors, is to redesign processes with regard to improving performance from the customers 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 impactis 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. 2. 3. Explain the role of Information technology in BPR. Explain the concept of Business process reengineering. Discuss the Objectives of BPR.

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Lesson 5

PROCESS IMPROVEMENT AND PROCESS 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 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 Introduction Meaning of Process Improvement Levels of Process Improvement Meaning of Process Redesign BPR Experience in Indian industry Process Identification Process Mapping SIPOC MAP Summary Review Questions

5.1 Introduction
Process can be defined as a sequence of interdependent and linked procedures that, 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 then serve 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, the fact is that the process comes before the product. and for a product to be of good quality the process should be good. Poor process or no process ultimately harms the product.

57 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 todays 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

58 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 of mission or strategic plan or business plan. It would be required when a previously outsourced function is brought in-house. There is no baseline from which to work on new process design. However, bench marking can be critical for the success of the effort. Continuous Process improvement : Continuous process improvements refer to those improvements that can be undertaken and supported by an organization with minimum impact 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 optimization of available resources with respect to process and activity output requirement, to mention a 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

59 across organizational boundaries on external suppliers and customers. Hence, it is required that the process reengineering team must be cross functional and include members from all impacted organizations. A corporate mission or statement or strategic plan helps an organization to identify business process. The next step is to identify customers and suppliers. Customers determine products and services from which business processes profit. Suppliers provide the raw materials which the business processes will use in building products or services. There has to be an analysis of all activities that take place in the process. Which are in the value chain between what it got from suppliers and what it delivers to its customers? Activities that add value to products and services should be strengthened and optimized and the activities that do not add value need to be reduced or eliminated.

5.5 BPR Experience in Indian Industry


Mahindra & Mahindra
The concept of BPR was popularized in the early 1990s by Michael Hammer and James Champy in their best-selling book, Reengineering the Corporation. The authors said that radical redesign and reorganization of an enterprise was necessary to lower costs and increase the quality of service. According to them, IT was the key enabler for that radical change. Hammer and Champy felt that the design of the workflow in most large corporations was based on assumptions about technology, people and organizational goals that were no longer valid. They recommended seven principles of reengineering for streamlining work processes and, consequently, achieving significant levels of improvement in quality, time management and cost. In the mid-1990s, Indias largest multi utility vehicle (MUV) and tractor manufacturer M&M was facing serious problems at its Igatpuri and Kandivili plants in Maharashtra. The plants were suffering from manufacturing inefficiencies, poor productivity, long production cycle, and sub optimal output. The reason: highly under-productive, militantly unionized, and bloated workforces. The company had over the years been rather lenient towards running the plants and had frequently crumbled under the pressure of union demands. The work culture was also reportedly very unhealthy and corruption was widespread in various departments. Alarmed at the plants dismal condition, Chairman Keshub Mahindra tried to address the problem by sacking people who allegedly indulged in corrupt practices. M&M also tried to implement various voluntary retirement schemes (VRS), but the unions refused to cooperate and the company was unable to reduce the labor force.

60 During this period, M&M was in the process of considering the implementation of a Business Process Reengineering (BPR) program throughout the organization including the manufacturing units. Because of the problems at the Igatpuri and Kandivili plants, M&M decided 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 implementing BPR and its effect on the unions. M&Ms management was not surprised to learn that the unions expressed extreme displeasure at the decision to implement BPR and soon went on a strike. However, this time around, the management made it clear that it would not succumb to union demands. Soon, the workers were surprised to see the companys senior staff come down to the plant and work in their place. With both the parties refusing to work out an agreement, observers began casting doubts on the future of the companys grand plans of reaping the benefits 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 companys history dates back to 1945, when two brothers, J.C.Mahindra and K.C.Mahindra, decided to start a business of generalpurpose utility vehicles. The brothers formed a company, Mahindra & Mohammed Ltd., in association with their friend Ghulam Mohammed. In October 1947, the first batch of 75 jeeps 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 areas as 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 players in many of the segments it operated in, it realized that some of its businesses were not closely related to its core business. This realization marked the beginning of the biggest change exercise since the companys inception. In 1994, a major restructuring exercise was initiated as part of a BPR program. M&M introduced a new organizational model, in which various divisions and companies were regrouped into six distinct clusters of related businesses, each headed by a president. M&Ms core activities, automotive and tractors were made autonomous business units. The other activities of the group were organized into infrastructure, trade and financial

61 services, telecommunication and automotive components. According to company sources, the whole exercise was intended to develop a conceptual map to provide direction for the future growth of various business lines. It was decided that, in future, the group would confine its expansion to the identified thrust sectors. The two main operating divisions of the company were the automotive division, which manufactured UVs and LCVs, and the farm equipment division, which made tractors and farm implements. The company employed over 17,000 people and had six state-of-the-art manufacturing facilities spread over 500,000 square meters. The plants were situated at Kandivili (MUVs and Tractors), Nasik (MUVs), Zaheerabad (LCVs, Voyager, and threewheelers), 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 leading organizations implementing it. However, when M&M undertook the exercise, it was still a new concept in India. M&Ms workforce, as mentioned earlier, resisted this attempt to reengineer the organization. Soon after the senior staff began working on the shop floors, the first signs of the benefits of BPR became evident. Around a 100 officers produced 35 engines a day as compared 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 a 30% wage hike. As the situation returned to normalcy, BPR implementation gained momentum. M&M realized that it would have to focus on two issues when implementing the 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 their processes manufacturing, sales, accounting, building services. But it is just this silo mentality that causes processes to lose their customer-centric approach. Instead of defining processes based on the companys understanding, they must be defined by the customers understanding. Walking through customer experiences helps the reviewer identify those trigger points that can make or break success. These then form the basis for process identification. 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 the intricacies of a process. Primary among these is identifying who the true process owners

62 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 stickynote 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

63 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

64 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 are listed. 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 specific goal. Business process focuses on meeting the needs of customer by delivering value driven products. It often makes use of process mapping techniques and SIPOC map to achieve high productivity in its products. The steps of a business process vary from one corporate structure to another. However, there are some elements or sub processes that can be found in almost .To some degree, these sub processes occur in an order that leads to successful completion of manufacturing process.

5.10 Review Questions


1. 2. 3. Explain the importance of process improvement. Discuss about the BPR experiences in Indian industry. Discuss about the Process Mapping.

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Lesson 6

PROCESS VISIONING AND BENCHMARKING


Learning 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 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 Introdution Process visioning Meaning of Benchmarking Benchmarking Categories BPR Implementation Methodology Business Process Improvement Business Process Redesign Managing Change Summary 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 enterprises mound the world. It is evolving to include everything that existed about management in the industrial age and recasting it into an information age framework. This involves shared information, 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-theshelf 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 that


organizations should look within their boundaries to improve the processes rather than looking at other organizations. This helps to reduce the amount of time required for benchmarking. In addition, it is often much easier for employees to accept a practice when it is being used within their company. Internal benchmarking not only helps to identify best practices, it also encourages a culture of learning and innovation spurred on by internal competition. lf there is competition within the organization (between employees or between business entities), there will be innovation at all levels of the organization it promotes idea sharing and increased communication among departments and business units. In most companies, internal best practices remain unidentified simply because methods for extracting and communicating them do not exist. For internal benchmarking to be effective, a company needs to implement a process designed to promote idea sharing. This can be done in four simple steps:
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identify the processes to be benchmarked Organize the benchmarking effort Prioritize the ideas the team finds and turn them into projects with timelines for adopting the best practices

Implement and begin to realize the benefits

Competitive Benchmarking : Competitive benchmarking is a process of


comparing a firms processes, or strategies, or performance measures, with another firm. Competitive benchmarking helps the organization to know its position as compared to its competitors 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 practices


and processes in organizations in other industries. This type of benchmarking is an opportunity for breakthrough improvements by analyzing high performance processes across a variety of industries and organizations.

Generic Benchmarking : Generic Benchmarking as a form of external


benchmarking is a performance improvement process that looks at best practices implemented by well established firms. The core area of generic benchmarking is identifying and 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 in understanding how processes translate across industries. Yet. Generic benchmarking can often result in organizations drastic altering ideas about its performance capability; and in the 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.

70 4. Plan : This step involves planning implementation of the preferred course of action by developing detailed statements of requirements, baseline impacts costs, benefits and schedule. 5. Approve : This involves extracting from the planning data the information needed to finalize functional economic analysis. This is used by senior management to approve proceeding with the proposed process improvements and any associated data or system changes. 6. Execute : This means executing approved process and data changes and providing functional management overview of any associated information system changes.

6.5 Business Process Improvement


Improving business processes is of paramount significance for businesses to stay competitive in todays marketplace. Over the last 10 to 15 years, companies have been compelled to improve their business processes since customers are demanding progressively better products and services. Many companies began business process improvement with a continuous improvement model. This model attempts to understand and to measure current processes, and make performance improvements accordingly. The basic steps. You can begin by documenting what you do today, establish some way to measure the process based on what your customers want, carry out the process, measure the results, and then identify improvement opportunities based on the data collected. Subsequently, you implement process improvements and measure the performance of the new process. This loop repeats over and over again, and is called continuous process improvement. This method for improving business processes is effective for obtaining gradual, incremental improvement. However, over the last 10 years, several factors have accelerated the need to improve business processes. The most obvious is technology. New technologies (like that of the Internet) are rapidly introducing new capabilities to businesses, thereby raising 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 becomes progressively harder. In todays 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 process improvement. Besides, companies want breakthrough performance changes, not merely

71 incremental changes, and they want them sooner than later. Because the rate of change has increased for every business, few businesses can afford a slow change process. Business process reengineering is one of the approaches for rapid change and dramatic improvement that have emerged recently

6.8 Business Process Redesign


An increasing number of firms are marching to the drumbeat of business process redesign (BPR), alternatively called reengineering. The term reengineering may be new, but the idea of process redesign is familiar to most engineers involved in logistics and production control. Just-in-time (JIT), Total Quality Management (TQM), Flexible Manufacturing Systems (FMS), Computer Integrated Manufacturing (CIM) and Computer Integrated Logistics (CIL) are some of the buzz words used to signify process redesign trends in logistics and manufacturing control. However, business process redesign is not restricted to logistics and manufacturing, it also applies to administrative, commercial and managerial processes. Nevertheless, we think that many of the techniques, tools and methods developed for logistics and production control can be used in the context of business process redesign. Business process redesign focuses on the fundamental rethinking of business processes, ignoring organizational boundaries. However, before implementing new business processes, we want to compare the existing situation with the new (redesigned) situation. Therefore, we need a tool to quickly capture and model existing processes but also new processes. This tool should support rigorous changes and catalyze creative thinking. Moreover, we would like to use this tool to analyse and compare alternative business processes.

Definition of Business Process Redesign


Reengineering business processes means tossing aside existing processes and starting over. In Hammer and Champy [13] business process redesign (reengineering) is defined as the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as costs, quality and speed. This definition contains four key words: 1. Fundamental Revaluate the primary goals of the company, ignoring rules and assumptions formulated in the past.

72 2. Radical Do not try to improve the existing situation, invent completely new ways of accomplishing work 3. Dramatic Do not use business process redesign to obtain marginal improvements, aim at order-of-magnitude improvements. 4. Process Focus on the business processes instead of organisational structures. So, in a nutshell, business process redesign (BPR) is an ambitious and rule-breaking approach focusing on business processes instead of organizational boundaries.

6.8 Managing Change


Change management is a set of processes that are incorporated to ensure that significant changes are implemented in a systematic and controlled way to effect organizational change. The main goal of change management is to reduce the risk associated with the implementation of change in the business environment. lts other fundamental goal is rapid recovery of change related problems when changes are implemented. Effective.- change management achieves these goals without compromising the values of business. The main factors for change management are the processes/methods in which changes are to be implemented and the tools through which changes are incorporated. Most organizations want change to be implemented with least obstruction to business entities and minimum risk to business. For this, change must be applied with a structured and systematic approach. In general, Change management helps an organization to reduce risk while implementing the change, which is acceptable by the top management. Structured and systematic approach towards change management strategies can benefit not only financial aspects of the organization, but also information security, Operations and risk management functions.

Importance of Change Management


Change management plays an important role in an organization. Identification of changes in the organization or a project may together be initiated internally or externally, in what is more important is how the organization responds to these changes.

73 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

74 Creating new organizational structures within the corporate boundaries where new processes can be developed Spinning out an independent organization from the existing one Acquiring a different organization whose processes and values closely match the requirements of the new task Top management participation is critical to the success of change initiatives. Leaders are needed to provide vision and inspiration, demonstrate integrity, provide meaning, generate trust and communicate values. A key aspect of leaders effectiveness during change is their ability to apply different styles of leadership to different circumstances, even within short time periods. This is because different leadership styles (coercive, authoritative, democratic, pacesetting, coaching) have different effects on various aspects of organizational 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 organizations to focus their activities on specific business results. For more information, readers may visit Proscis 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 their organization in response to strategic business needs. McKinseys 7 S Model : The model is based on the theory that, for organizations to perform well, seven elements-structures, systems, style, staff, skill, strategy and share valuesneed to be aligned and mutually reinforced. The model is used for identifying the changes 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 organizations undertaking BPR are changing them.

6.9 Summary
Business process management (BPM), as a managerial approach, considers the processes or methods that need to be understood and managed properly to deliver quality products and value added services to the customers in general. BPM integrates changes enabled by Technology and humans. Due to this, BPM is always discussed from two different views Pointspeople and technology.

75 Benchmarking is an effective way to ensure continuous improvement or progress towards strategic goals and organizational priorities. A real benefit of benchmarking comes from the understanding of processes and practices that permit transfer of best practices or per- furnaces into the organization. Benchmarking stresses processes, quality and output.

6.10 Review Questions


1. 2. 3. What are the categories of benchmarking? What are the benefits of change management? Explain the steps in BPR implementation.

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Lesson 7

BUSINESS PROCESS OUTSOURCING


Learning 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 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Introduction Business Process Outsourcing Strategic Benefits of Outsourcing Evolution of Business Process Outsourcing Evaluation and Develop Firms Internal readiness for Outsourcing Critical Success Factors Assessing and Managing Risk of BPO Summary 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 worlds 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

77 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 megatrend: 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 companys 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 businesss 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 the business strategic direction.

Business transition:
Facilitating and supporting major organization change.

Business Innovation:
Improving and innovating in processes, skills and technology, while mediating financial risk 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 inevitable event that will continue to change the business atmosphere. Globalization is the advance of human cooperation across national boundaries, In reality globalization and outsourcing are two in the same. Outsourcing can be defined as an act of moving some of a firms internal activities and decision responsibilities to outside providers. Through trade, foreign direct investment (the measure of foreign owned productive assets in a country), capital flows, migration, and the spread of technology, individual economies will eventually mesh into a one global international economy. The world as we know it is becoming an interdependent market system that is more flexible than ever before. In order to sustain economic growth within a nation, the people investing must feel a sense of security and confidence. There has to be the guarantee that the assets invested in a developing country are not going to be stripped by the governing officials or other political and societal forces.

79 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 take place. In essence, the very idea of paying an employee less money to do the same job is the underlying theme associated to outsourcing. Over the past half century, several countries have emerged as leaders in the world of outsourcing. Better known as BRIC; Brazil, Russia, India and China have all been able to develop their nation through the process of outsourcing. Mexico can also be placed in this category since their economic growth has skyrocketed after the North American Free Trade Agreement was put in place. The reason why these countries look so appetizing for foreign direct 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 time inflation over the years has created higher labor costs that are incomparable to developing countries. Besides cheap labor, companies may specialize in a certain type of production to develop their competitive advantage. Depending on where the company is located, there are various ways for local and foreign companies to develop their niche in the market. The facts present outsourcing to be worth the consideration, but the process is not as clear cut as it seems. Only 54% of companies are satisfied with their outsourcing, which is down from more than 80% a decade ago. This fact is even more troubling considering the advancements in telecommunications. The environment to do business has become increasingly smaller due to the innovations in technology and will continue to do so for years to come.

7.5 Evaluation and Develop Firms Internal readiness for outsourcing


Outsourcing is an irreversible mega trend that will continue to grow. In fact, research firm Gartner, Inc. (Stamford, CT) has predicted that more than 40 percent of Fortune 500 U.S. firms will be outsourcing IT services through a global delivery model by the end of 2004. Analysts at research firm Meta Group, Inc. (Stamford, CT) have predicted that as much as 40 percent of production support may be managed offshore in the next several years. Clearly, all signs continue to point to outsourcing as the new reality for American business. What is driving this trend? You might think that the allure of quality work for lower costs is what makes global outsourcing attractive. However, new research from Meta Group shows that 80 percent of businesses have spent more time and money on outsourced application development than what was originally specified, with problems ranging from time and cost overruns, to non-adherence to specifications and requirements.

80 With so many faltering or failed outsourcing projects and an increasingly stringent regulatory environment-the Sarbanes-Oxley Act, for example-is global outsourcing safe for your company? This article outlines the issues executives must consider and the steps companies should take to safely implement an outsourcing solution. Ready or Not? The first step is to determine whether your company is ready to outsource. Conduct a readiness assessment that specifically evaluates programmatic risks and opportunities associated with outsourcing as they relate to your specific company needs. Risks to be evaluated 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 of antagonism within the organization, related to changes in the existing power balance or status quo. Project management risk-Risk that the company would not be familiar with the processes for managing expectations and deliverables in a distributed development environment. Financial risk-Risk that cost would exceed budget, or that the result would not deliver anticipated benefits. Technical risk-Risk that the scope of the project would be beyond the technical capabilities of the hardware, software, or available personnel. Security and compliance risk-Risk that company data or business continuity may be compromised. Geopolitical risk-Risk of political instability in a developing country where business critical 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 project or process to be outsourced, and the projects dependence on key personnel. The outcome of this assessment should be a comprehensive picture of the outsourcing possibilities for the business processes and applications used by the company. Which projects are fairly low risks that promise reasonably high returns, and vice versa? The evaluation should include a ranking of the risks and rewards possible from implementing an outsourcing

81 plan. With this information in hand, it should be possible to determine what kind of functions or projects can be outsourced safely. Companies are outsourcing business processes every 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 projects or processes with the least outsourcing risk generally involve business functions with low criticality and low strategic value, where significant costs savings can be achieved. There are compelling reasons, however, to consider outsourcing in areas that do contain some degree of risk. For example, when a company implements a new approach or switches an application platform but does not have in-house support capabilities, it often makes the most sense to find a partner who can manage the process from start to finish. The management 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 companys internal IT resources. Software testing also stands out as a solid outsourcing candidate. Testing needs to be independent, can be done anywhere in the world where there is expertise, and is a discrete project with a defined start and finish. The company gets something tangible in its hands when the project is complete. It also avoids the costly ramp-up and ramp-down dictated by cyclical development schedules, as well as the capital investment in testing software and annual license fees. In all these examples, there are degrees of risk associated with obtaining a rewarding outcome. It is necessary to be aware of the risks and be prepared to manage the various risk elements as they are mapped in the initial assessment. Projects that are risky candidates for offshore outsourcing generally require high levels of human interaction with business managers or process owners, or involve understanding the business rules to be designed as a large part of the project. For example, the actual configuration of an enterprise application with complex organizational interfaces is most effectively and efficiently done face-to-face with business owners. Caution is also justified in considering offshore outsourcing of systems involved in regulatory compliance programs. Public companies have spent a great deal of money on internal working processes to ensure compliance with Sarbanes-Oxley and other regulatory mandates. Make certain that an outsourcing partner will create the necessary

82 documentation and audit trails so that the outsourced facility becomes an extension of the solution that has already been implemented. Develop a Plan Once a companys internal readiness has been assessed and a project or business process to outsource identified, the next step is to develop a solid plan that clearly identifies and manages the impact of outsourcing on the organization. For the manager charged with overseeing an outsourcing project, it is helpful to ask a few basic questions:
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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 didnt pick the right partner, or failed to go to the right country, or chose the wrong project. Its 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 projects success. Some of the steps or items that you may wish to consider to help manage the transition and build external teams include:
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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 others 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, dont 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 companys 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.

84 In todays 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 worldclass 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 partners 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 companys 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 todays 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. Its not only about outsourcing anymore: its 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 organizations current operating activities and to its future success.

85 Critical success factors should not be confused with success criteria; those are outcomes of a project or achievements of an organization that are needed to consider the project a success or to esteem the organization successful. Success criteria are defined with 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 allow management to focus on core business. But it also introduces substantial risk management challenges, which when combined with increasing regulatory scrutiny and negative public sentiment about moving jobs overseas; make risk assessment and mitigation imperative. The risks of flawed location selection, provider selection, and poor management are considerable, attracting substantial management time and investment. However there are some 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 about outsourcing, greater emphasis is laid on assessing risk areas where there may be significant impact on people, processes, technologies, on existing facilities, and on regulatory and legal requirements both in the home and offshore environments. A noticeable trend, as per the survey, indicates the steady shift in the focus of clients from external to internal risks.

Internal risks
1. 2. 3. 4. 5. 6. Transition risks Data Security risks Loss of control Brand damage Weak governance 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 involved and costs that shall accrue. To mitigate these risks, clients are adopting sophisticated approaches for identifying the critical path for successful transition and understanding the level of risk associated with realizing each key benefit area. Sensitivity analyses are also conducted to assess the probability and impact of any delay and reduction of benefit levels due to uncertainties or inter-dependencies with other projects, operations or functions during planned transition.

86 2. Data Security Risks Global customers consider network security, physical security, and customer privacy and information protection to be critical. A few respondents state that the criticality of data security is more concentrated in the areas of voice-based outsourcing, with employees often gaining access to customer ids, pin codes and other confidential data. In addition, the importance is magnified in specific strategic processes such as financial reporting, tax and legal support and in the verticals of healthcare and insurance. Service providers are aware of the privacy and IP related concerns of their clients and in a large number of cases, as per the survey, are compliant with global standards such as BS 7799, ISO 17799, 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 is maintained. Regular training on issues of security awareness, nondisclosure agreements, screening of employees and periodic compliance audits are some of the best practices that had been observed in the survey. 3. Loss of Control Risks Loss of control on offshore operations is an area that clients have traditionally been concerned of in light of the cultural, administrative and geographic distance between the client and the service-provider. The anxiety accrues due to two prime factors respondents cite perceived inability to influence the quality of the service and the inability to determine what is going wrong due to inadequate or inaccurate information. The implication of the perceived loss of control has been on high expectations from service providers and the detailed drafting of Service level agreements with respect to quality controls and communication flows. 4. Brand Risks Brand risk is another area of concern for clients, stemming from poor service by service providers resulting in end-customer dissatisfaction or service-provider practices not being in line with stated practices (ethical or otherwise) of the regulated entity. The magnitude of reputational risk is amplified with the political overtones of off shoring for which 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. These risks relate to the inability of an outsourcing solution, defined from a short-term perspective,

87 to respond to changing business requirements. Due diligence in this respect is being carried out, with focus on issues of scalability and robustness of proposed technology platforms to underpin transition of existing operations, support ongoing business and enable any future expansion of offshore strategy such as significant Increases or spikes in transaction processing 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 of evaluating vendors, managing major contracts, travelling to offshore sites, enhancing security, and paying severance for laid-off workers as instances of hidden costs. Exit costs are another hidden risk, as ending an arrangement prematurely exposes both buyer and provider to litigation. Clients are resorting to careful cost modelling and scenario planning which include benchmarked information and sound understanding of current activity-based performance and costing. While most companies are focused on risk issues at the off shoring decision point (e.g., contract signature/change of control/ physical move), it has been observed that the focus fades with time. It is critical to keep the ongoing commitment to risk management; risk profiles and exposures change over time, and while some risks can be eliminated or mitigated, others must be actively managed.

7.8 Summary
Business process outsourcing is the movement of functions from inside the organization to an outside service provider. It has been widely praised as a strategy for eliminating business processes that are not part of an organizations 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 lowercost, higher-value locations.

7.9 Review Questions


1. 2. 3. Explain about the Business Process outsourcing. What are the critical factors of Business process outsourcing? Explain the process of managing risk.

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Lesson - 8

IDENTIFY AND MANAGE COST OF BPO MANAGING BPO TRANSITION


Learning Objectives
After reading this lesson, you will be able to explain the various costs related to BPO

Structure
8.1 8.2 8.3 8.4 8.5 Introduction Financial Costs Strategic Costs Summary Review Questions

8.1 Introduction
Make or buy is the fundamental decision that faces all organizations considering their 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 primary elements of the BPO decision, along with productivity and mission criticality. Each must be weighed when analyzing BPO opportunities. In a perfect world, where all other things are equal, the decision to undertake a BPO initiative would be based purely on cost-oflabor 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 a BPO initiative are not always easy to identify or forecast. The savings that are most often associated 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 capital investments. Identifying and assessing the costs related to a BPO initiative are essential to the outsourcing decision and can help organizations budget appropriately. There are two primary areas of concern: 1. Financial costs. Hard costs associated with activities that must be undertaken to assess, launch, and maintain a BPO project.

89 2. Strategic costs. Soft costs that are difficult to quantify but can profoundly affect the firms 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 organizations 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 outsourcers 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, and mitigated. Additionally, each BPO initiative has a variety of less obvious yet insidious hidden costs. BPO project managers should include these in their analyses because many initiatives accumulate unanticipated costs that can threaten projectsand careers.

Analysis Phase Costs


The first direct cost to consider in the BPO analysis phase is associated with the internal staff that will be enlisted to conduct the assessment. Organizations should use a team approach to identify and select BPO opportunities. Organizing a BAT (BPO Analysis Team) means employees from diverse units will take time away from their normal duties to serve on the team. The time spent away from these duties is a direct cost. Costs associated with removing individuals from their regular jobs can be calculated in several ways. One is to count the hours spent on the BPO analysis for each BAT member (and anyone else brought 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 often referred to as transfer pricing. Project managers also commonly use what is called a taskbased 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-party professional support that may be required to assist the team.BPO consultants, market

90 research specialists, and change-management consultants are just some of the outside professionals the BAT may want to consider utilizing. This cost can be estimated at the beginning of the project using several indicators, including:
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Prior BPO knowledge among BAT members and the organization as a whole Organizational history with BPO, reengineering, or other transformational change programs

Top management support for BPO in the organization BAT member knowledge of BPO is a factor because lack of such background will

usually require investment in outside support. It is simply unrealistic to expect individuals with no BPO knowledge or experience to be effective BAT members. Thus, training and preparation costs should be estimated. A good rule-of-thumb estimate is to assume one week of person-time for each BAT member to read, review, and discuss what BPO is and how it can be utilized by the organization. Organizational history with major change programs can also reduce BPO analysis costs. Firms that have such a history, whether with reengineering, Total Quality Management (TQM), or something else, will likely be better suited for the self-examination process that is required for effective BAT performance. A history with transformational change, especially if the experience was positive, can ease the burden of the analysis process. Individuals throughout the firm will be more willing to cooperate and work hard to analyze BPO opportunities if they believe the process will result in positive changes. Estimating the costs associated with a lack of history in transformational change will be subjective. In general, the analysis-phase cost estimates should include an extra week of BAT member time if the organization has no history with transformational change. Top management support is critical to the success of any organizational transformation. BAT members must perceive that they are empowered to dedicate their time to the analysis process. If top managers badger them about time spent away from their central duties, team members will feel conflicted and the BPO analysis process will likely take longer and be less effective. Top managers must clear the space necessary for BAT members to do their analysis, while maintaining reasonable expectations about 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. Internal implementation will provide the value-adding benefits of increased levels of organizational learning and capability. The internal outsourcing manager or management team will be

91 involved in drafting and distributing the request for propetal RFP, responding to vendor inquiries, selecting a vendor, and initiating the BPO transition. Developing internal knowledge of these aspects of an implementation means the organization has acquired the capacity for additional BPO initiatives in the future. The greatest value-added benefit is likely to be the reduced time necessary for future BPO implementations, as well as a more effective implementation phase overall. Cost mitigation benefits associated with hiring a consultant to conduct the BPO implementation include a faster process and, quite likely, a more effective vendor relationship. Professional service firms skilled in matching client needs with 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 part based on vendor performance. This is just one example of contracting mechanisms and innovations that can be used during the implementation phase to reduce risks and increase benefits.

Transition-Phase Costs
The transition phase is one in which the business process that formerly had been handled in house is wholly or in part shifted to the outsourcing vendor. The costs associated with this phase are driven by primary characteristics of the BPO buyervendor relationship

Asset Ownership and Location


The asset ownership and location driver concerns which firm will be better able to leverage people, technology, and other assets for competitive advantage, and where those assets should be located. In some situations, a BPO buyer may want to retain all or part of its 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 of freeing internal call centre staff time to improve the in-house operation. The decision about how 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 located also has cost implications. Retaining a process on the buying organizations premises usually means that the transition can be completed more quickly than by moving assets off-site, but not necessarily. There are many advantages to keeping assets on-site, including the fact that it is far easier to retain existing personnel, many of whom would be unwilling to relocate to the vendor (especially if the vendor is overseas). Employees involved in a process that has been outsourced can become productive members of the vendor organization,

92 but the transition must be handled with care. It is not unusual for the BPO buyer to experience attrition, staff cuts, and reassignments during the transition phase. The vendor will often reengineer the outsourced process, reducing inefficiencies and enhancing individual productivity levels. This means that staffs that remain may harbour lingering fears for their own job securityfears that may slow the transition and affect productivity. Proper management of the in-house transition to vendor management and process ownership will reduce these potential costs.

Operational-Phase Costs
The operational phase of the BPO project refers to the period when the contract is being fully implemented and performance expectations drive the relationship. Among the endpoints that should be monitored as part of an ongoing BPO initiative are both financial and productivity ratios. Financial ratios that should be monitored range from standard return on investment (ROI) to margin enhancement. Depending on the intentions of the BPO project, the financial ratios to be monitored will vary slightly. As mentioned, some BPO projects are undertaken primarily for cost reduction purposes and others primarily for strategic advantage purposes. Cost-reduction BPO projects are intended to enhance margins through reduced overhead, which can often be achieved within 6 to 12months after commencement of the contract. In contrast, strategic BPO attempts to leverage the world-leading capabilities of the outsourcing partner and focuses more on new revenue over margin enhancement. Organizations must establish financial metrics appropriate to the intentions of their BPO project.

8.3 Strategic Costs


The strategic costs associated with BPO centre on the potential loss of organizational learning that results from placing a process under the control of an external service provider. Outsourcing so-called noncore processes must be undertaken with careful forethought because it is never clear how future competitive conditions will unfold and what types of competencies will be required. Firms must distinguish noncore activities as critical, key, or support. 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, they should be outsourced only when the inter organizational relationship is clearly focused on developing and deriving strategic advantages. Knowledge management should be transparent from one firm to the other, and reciprocal exchange of insights should be considered routine. Furthermore, a quest for innovation in the interlinking of the critical and core 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

93 and vendor. Relationship costs are those that are involved in courting, establishing, and maintaining a relationship with a BPO vendor. This complex undertaking can be as farreaching 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 of the challenges of merging two formerly distinct enterprises is often too overwhelming for the executives who engineered the deal. One or more top executives are often either asked or forced to leave as they become increasingly disoriented amid the chaos of the combined entity. For example, the merger of Hewlett-Packard and Compaq in 2002 led to a quick departure of Compaqs then-CEO Michael Capellas. Departures related to that merger continued well into 2003.A thoroughgoing BPO relationship can share many of the complexities of a major merger or joint venture. Firms that determine to outsource backoffice processes are entering into a relationship with a vendor that will have important competitive implications. The risk posed by this loss of functional independence requires careful prior analysis of the capabilities and integrity of the vendor. In the case of a BPO relationship, it is simply unacceptable for any breakdowns in performance or integrity to occur.

8.4 Summary
The costs of a BPO project go far beyond mere labor-cost arbitrage. They occur at all four levels of the processanalysis, implementation, transition, and maintenance and can be categorized as either financial or strategic costs. There are a number of critical factors in the cost equation, including decisions about whether to handle BPO internally or externally, development of RFPs and review of responses, and how well initiating organizations create and sustain positive relationships with vendors. At the same time, an organization must consider impacts on internal (employee) as well as external stakeholders to help maximize competitive benefits of the BPO project

8.5 Review Questions


1. 2. Discuss the managing cost of Business Process outsourcing. Explain the importance of strategic costs.

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Lesson 9

TYPES OF BUSINESS RISKS


Learning Objectives
After reading this lesson, you will be able to explain the types of business risks involved in BPO industry

Structure
9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 Introduction Human Capital Risks Labor-Related Risk Project Risks Intellectual Property Risks Legal Risks Vendor Organizational Risks Value Risks Force Majeure Risks Managing Risks Summary 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

95 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 unfreezingmovingrefreezing 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 vendors 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

96 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 NLRBs 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 differentand in some cases, more potentthreats 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 vendors home country. That is, it may not be possible to draft contracts with offshore vendors that demand all legal conflicts be

97 decided in the buyers 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 vendors 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 vendors 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

98 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 vendors 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 buyervendor 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

99 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 partners 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 providers 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 assessedat both internal and external levels, as appropriateand 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. 2. Explain the types of Business risk in BPO. Discuss the strategies of managing risks.

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Lesson - 10

VENDORS SELECTION AND CONTRACTING


Learning 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 10.2 10.3 10.4 10.5 Introduction Vendor Selection Process BPO Contract Summary Review Questions

10.1 Introduction
Finding the right BPO vendor and developing an appropriate contract are essential to an organizations outsourcing initiative. Regarding the former, the promise of BPO is always tempered by the perceived risks associated with handing responsibility for an internal business process- no matter how noncore or mundane it may beto another firm. So getting the right partner is crucial. As to the latter, careful consideration of the elements in an effective outsourcing contract can help avoid many of the risks that contribute to BPO failure. The fact is, managing these functions in a way that reflects the strategic nature of the buyervendor relationshipthat is, with an eye toward mutual satisfaction, trust, and precision 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).

102 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 buyersupplier relationship, the BPO buyervendor 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 firms 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 teamor at least new team chartershould 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 BATs 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 vendors 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

103 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 as much value as possible from the vendor and avoid making concessions on provisions it has established as necessary for the project. A partner mindset in the BPO buyer should emerge only after the vendor has been selected and the contracting process has begun. In the partnership development stage of a BPO relationship, mutual compromise and cooperation is expected. Process expertise : This becomes less important the further from the core the outsourced process is. Processes that are close to the outsourcing organizations core competence should never be outsourced to an inexperienced vendor. Data sharing : Given that data sharing between the various commercial databases can be difficult, the technology platform of the vendor should be a qualification. If vendors do not have a system that is easily compatible with the buyers existing system, they should be responsible for demonstrating how that hurdle can be overcome. Vendors business : Understanding the emphasis of a vendors business, or what drives 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 of treatment as larger contracts. Industry specialization : Any vendor, other than the major consultancies, that claims to specialize in several outsourcing service areas should be treated with caution. Having a large base of multifunctional outsourcing expertise is rare, not to mention expensive to maintain. Many vendors will say that the skills from outsourcing a function in one industry transfer to another, and that may well be the case. But, in general, if the vendor is not an expert in the field, it will not know about the hidden challenges associated with providing services in that industry. Specificity : Firms interested in specific types of BPO providers can stipulate that as a qualification. Some buyers may not want to use an offshore provider, for example.

104 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 notthe 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 buyers 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 onon 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

105 and is designed to assess the vendors 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 vendors 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 organizations 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 buyers 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 vendors 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 faceto-face presentations. By this time, it is usually clear which vendors proposal best meets the long- and short-term needs of the buyer. However, the VST may decide that none of the vendors is suitable. If that occurs, it is in the interest of the organization to abandon the BPO project. For many executives and managers, this may be difficult given the investment of personal time and other resources. But sound business decision making sometimes requires firms to cut their losses and move on rather than gerrymandering the specifications or 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 as varied and complex as outsourcing relationships themselves. And while failures are generally not strictly legal in nature, a poorly drafted contract is one of the most significant reasons

107 cited for unsuccessful relationships. The careful negotiation and drafting of a good outsourcing contract can not only preserve the potential of an outsourcing project, but also minimize 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 the many excellent books written on the art of negotiation, it is important to examine the nature of negotiating BPO contracts. The complexity and evolving nature of the outsourcing process demands 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 as possible from the limited available resources, even to the detriment of the other party. In these types of negotiations, the outcome is winninglose in that one party or the other gets its way. Although there may be clear advantages for the winner, the relationship is likely to become adversarial rather than collaborative. This probably will not promote the kind of long-term collaboration critical to successful BPO initiatives. However, developing an effective BPO contract requires a positivism approach whereby the parties are interested in creating more value than currently exists. It aims for the proverbial winwin outcome and seeks long-term, flexible contract terms. This requires compromise by both parties. At the same time, risks associated with compromise can be mitigated 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

108 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 vendor fails 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 drafted SLAs almost ensure a failed relationship. Unfortunately, SLAs are among the most difficult of outsourcing contract provisions. A solid SLA requires an intimate understanding of business processes by the attorneys drafting the agreement (SLAs should not be drafted by nonlawyers).The parties must document in great detail the requirements of each outsourced process and agree on how to measure service levels and consequences for the failure to meet them Defining What to Measure The foundation of the SLA is defining which service levels and key performance indicators (KPIs) to measure. An SLA may be tied to anything that can be objectively quantified but is usually a measure of such indicators as quality, speed, availability, reliability, capacity, timeliness, or customer satisfaction. With a call center, for example, service levels might include the average time to answer a call, the duration of the call, the percentage of 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 the agreement, it may be necessary for the buyer to reabsorb the outsourced process or find another 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

109 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 buyers 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 management processes integrated within it. Change, however, inevitably invites disagreement, and the contract should anticipate this. The dispute resolution process begins where corporate governance ends. When all

110 Elements of the governance process have been engaged and the parties have still failed to resolve their dispute, legal processes must be pursued. These processes can have escalation procedures built in, just like the governance process. Dispute resolution may be initiated through inform-mal, nonbinding procedures such as mediation. Beyond these procedures, however, the dispute resolution process will progress to either binding arbitration 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 by the International Chamber of Commerces International Court of Arbitration; in domestic transactions, they often specify that arbitration will be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association. In either case, questions of venue and 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 persons and facilities proximate to the dispute as well as questions of neutrality. Choice-of-law provisions determine what laws will govern the interpretation of the contract and rules of the dispute, and they are usually determined by the golden rulehe who has the gold rules.

10.4 Summary
Identifying, selecting, and contracting with the right BPO vendor is essential to the success of any initiative. The selection process should be thorough and rigorous and take on a life cycle of its own that includes appointing a vendor selection team; establishing qualifications; developing an initial long list of potential vendors; distributing a request for information, followed by the RFP; evaluating the proposals; culling the list of prospective vendors; and making a final decision. In the event that no vendor satisfies the specific requirements of the RFP, the buyer should consider abandoning the BPO project rather than altering the specifications or forcing a fit.

10.5 Review Questions


1. 2. Explain the selection of vendors procedures. Write a note on BPO Contracts.

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Lesson - 11

INFRASTRUCTURE CONSIDERATION AND CHALLENGES


Learning Objectives
After reading this lesson, you will be able to types of instructure such as hardware and software

Structure
11.1 11.2 11.3 11.4 11.5 11.6 11.7 Introduction Types of infrastructures Making Buyer and Vendor Connection Human Resource Issue Status of Indian BPO Summary Review Questions

11.1 Introduction
Working with an outsourcing vendor involves the integration of a variety of formerly distinct systems, both technical and social. The social aspects of project and relationship management, including the difficulties associated with intermingling organizational cultures and managing organizational change. This lesson focuses primarily on technical infrastructure issues that arise after the BPO project has been launched and operations have begun. These issues include hardware, software, knowledge, security, and training and 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 and answered during the transition and operating phases of the BPO Life Cycle. Companies undertaking a BPO initiative may want to revisit their cost estimates as a result of the more detailed discussion of the technical issues contained in this lesson. Fundamentally, the goal of infrastructure integration is to embed and reinforce the collaborative nature of the relationship 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 process changes on either side and no threats to business continuity. The integration of buyer and

112 vendor infrastructures represents a true turning point in the BPO relationshipthe partners are now becoming familiar with one another. The transition phase is characterized by sharing systems, data, and knowledge. Each party now has additional risk exposure. The buyer is concerned about data and systems integrity. The vendor is concerned with meeting the contract terms established by the sales team. Cross-enterprise collaboration to improve performance 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 and operating phases of the BPO Life Cycle. Though exceedingly interdependent, they can be divided 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 basic operating 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 each partys core business strengths can lead to amazing and unexpected results. However, if the BPO relationship is governed solely by the Service Level Agreements, the relationship will be more traditional, focusing on service delivery, monitoring, and meting out rewards and penalties. To achieve breakthrough results from the BPO project, the infrastructure needs to support that potential. This lesson addresses infrastructure issues from the perspective of creating the potential for breakthrough performance through cross-enterprise collaboration

Hardware Infrastructure
The first issue to consider with respect to the hardware infrastructure underlying the BPO project is whose systems to use. Because providing high levels of service in the specific business process is the vendors core competence, their hardware capabilities usually outstrip those of the buyer. Despite this common circumstance, the decision to use the vendors hardware system should not be based on technology maturity alone. Buyer and vendor must also consider other factors when determining whether to shift processes to the vendors hardware.

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Software Infrastructure
Software compatibility is often a difficult issue within an organization. Compatibility issues are amplified in a BPO relationship when attempting to bring buyer and vendor applications into alignment. Database issues will confront nearly every BPO relationship, as data sharing is the backbone of most BPO projects. While this discussion stops short of recommending how to get disparate databases to talk to one another, BPO project managers should be alert to the difficulties often encountered when two systems attempt to connect at the database level. Organizations that use BPO to improve their service levelsas opposed to seeking mere cost savingsare those most likely to encounter difficulties because their internal systems may well lag behind the latest technology upgrades. The BPO vendor, however, has chosen to focus on the specific business process as 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 software maturity, 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. The cost, 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 overall value is derived from the industry and market data they have collected, stored, and analyzed. However, a companys knowledge infrastructure is even more important, because knowledge refers to the practical application of the analyzed data and information. The knowledge infrastructure of the BPO buyer involves several components, some of which are directly affected by the BPO relationship. Knowledge is defined as analyzed and applied information that helps the organization compete and grow. Data and information are generated by raw transactions; 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 to the hardware or software infrastructure associated with BPO.They will be more likely related to 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) to the individual struggling to find data that, without warning, now appears under a new field name, there are always problems with human adaptation to new systems. When the buyer and vendor system architectures come together in a BPO project, there will be workflow

114 and responsibility changes. To avoid some of the problems that arise from process-related changes, and to ensure a smooth transition to the new system, training should be provided to everyoneeven those who are adamant that they do not need to be trained. One hurdle that faces many BPO project managers with respect to training employees and 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 while maintaining the units productivity. This juggling act can be challenging in the throes of a major BPO-based business transformation.

11.3 Making the BuyerVendor Connection


In addition to the details of software and database compatibility, the BPO buyer must be concerned about the method that will be used to connect its systems with those of the vendor. Multiple alternatives exist: Servers : Buyers can use a single or multiple servers to connect with the vendors system via a wide area network (WAN) or send the necessary information via electronic flat file. Active server pages (ASPs) : Using ASPs on an application server allows the BPO partners to see and use familiar screens to conduct their jobs. The application servers typically use ODBC drivers to map into the back-office databases, enabling both companies to interact with real-time data. Virtual private network (VPN) : In some cases, the BPO vendors services may be so tightly integrated into the buyers back office that the vendor requires full access to data systems. If that is the case, a common technique to facilitate full access is a global VPN.VPNs has become popular over the past several years and third-party companies offer support service at reasonable prices. File transfers : These have the greatest utility when the vendor is providing services that do not require access to the buyers computer system. The file transfer method can be 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, outsourcing internal business or IT functions to an outside service provider. A companys decision to outsource has highly significant HR issues associated with it, in part because the decision to outsource is often part of a broader strategy to reduce employee-related costs.

115 Global sourcing is a trillion dollar industry that continues to expand. First-generation sourcing usually involved administrative functions such as payroll and benefits management that, while important, were not directly related to the companys products and services. Then companies began moving IT, help desk and customer support functions to outside providers, propelling the sourcing industry into the realm of critical, as opposed to back office, business functions. During recent years, sourcing has extended its reach into the strategic core of many businesses, as companies now engage third parties to help develop strategies to transform their business, to research and develop new products and services, and to help position the companies more competitively within their industries. The explosive growth in outsourcing has been fuelled by the globalization of business relationships and supply chains. Companies often allow the compelling economic and strategic reasons driving their decision to outsource to overshadow the significant impact the decision has on the companies employees. When a business outsources a function, the employees who had performed the function in-house prior to its outsourcing find themselves in one of three categories. Some employees are given the opportunity to move into other areas within the company. A number of employees will become employees of the service provider (this is called re-badging) if there are post-outsourcing functions that still need to be performed on-site at the company. The remainder of the employees, and this is often a majority, will be terminated, often within the rubric of a reduction in force. The termination of employees of the company that is outsourcing is often the most controversial part of the outsourcing decision, particularly if the outsourced function is subsequently performed offshore by employees of the service provider. A detailed discussion of all of the employee-related issues associated with an outsourcing transaction is beyond the scope of these brief issues. The company that is outsourcing, however, must conduct a systematic and thorough analysis of the impact that the proposed sourcing would have on the companys employees. That kind of analysis very well may impact the parameters and scope of the sourcing. The following are among the more important issues that should be addressed in any HR outsourcing strategy:
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Identify affected employees : The company first needs to identify all employees

whose job functions will be affected by the outsourcing.


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Retained employees : The company should determine which employees it wishes

to retain, either to continue working in the same functional area or to be redeployed to another area within the company.

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Re-badged employees : The company should then identify which of the affected

employees are likely candidates for re-badging (i.e. transferring their employment over to the service provider). This will usually include employees who have a substantial amount of knowledge of the outsourced function and who would be critical to the success of the outsourcing. This part of the analysis should be made jointly by the company and the service provider. For a number of reasons, it is preferable to have the service provider make the final decision as to which employees will be re-badged. A number of important issues must be addressed in connection with re-badged employees. Careful consideration should be given to the employees who will lose their jobs and will not have an opportunity for redeployment elsewhere in the company and who will not be re-badged. Most U.S. states allow employers to terminate employees at will but the company should ascertain whether a given employee has a written employment agreement and, if so, whether that agreement contains a guaranteed term of employment. The company should address whether severance benefits are payable to the employees who are to be terminated under either an employment agreement or the benefit plans of the company. If the companys workforce is unionized, collective bargaining and other labor contracts should be reviewed closely for provisions that may be implicated by outsourcing. Employers should recognize that employees terminated in conjunction with an outsourcing might allege that their termination violates applicable anti-discrimination laws. The analysis recommended in this paragraph should be conducted for re-badged employees as well, since, as a technical matter, a re-badged employee is first terminated by the company, and then rehired by the service provider.
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Internal Communication of the Sourcing Decision : Once a company has made

a decision to move forward with sourcing a function to an outside service provider, the company should communicate this decision to its employees. Ideally, the communication should come from a senior member of management and the companys HR director. Employees should have the opportunity to raise questions with a designated member of management or the companys HR staff. As soon as decisions have been made with regard to how the outsourcing will affect individual employees, those decisions should be communicated directly and privately to each affected employee. Good timing is crucial to avoid severe disruption and stress among the companys employees.
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External Communication of the Sourcing Decision : How a company handles

the HR aspects of a sourcing decision will have HR implications well beyond the companys own current employee base. A badly timed, mishandled communication strategy or a disorganized process of implementing the outsourcing can tarnish a companys public

117 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 into a well-managed, broader public relations strategy because a sourcing decision is likely to have a significant impact on all of the companys 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 as per Nasscomin-house or captive centers and third party providers. In the case of in-house or captive centers, outsourcing is done by an arm of the parent organisation. Business processes are located at low-cost and high skill offshore locations (like India). In this approach, the central unit itself will take care of and enforce all the regulatory issues that the offshore centre is subject to, as this is just an extension of the 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 and technological 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 concerns for Indian BPOs 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 the confidentiality of their customer records. Clients insist that regulations are adhered to as this can result in business being attracted or lost. If BPOs fail to implement the required level 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 processed outside the country, there is a chance that the BPO Company fails to follow the relevant privacy laws. Fraud is an ever-present problem. Strong security policies have to be there in an ITES-BPO organisation. The issue of client confidentialityaddresses, phone numbers, and credit card information etc.-must is addressed. This trend is assuming increased prominence as higher service quality levels become the norm. In such an environment certification and regulatory compliance can help a BPO company stand out. In terms of global certifications and standards, Indian BPOs are at par

118 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 havent 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 BPOs 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 havent 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.

119 This is poor consolation as this industry is concerned about competing globally. The likes of Nasscom are working with the Indian government to bring regulations like the Indian IT 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 of complexity 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 have clearly documented policies and procedures. This helps satisfy the client and the certifying or regulatory authority. It also helps the organization approach new business opportunities with a greater degree of confidence and comfort. Educating users through regular training programs comes next. The knowledge of compliance policies has to percolate right down from the top management to the operational management. Organisations can achieve this through regular training and other means like online training over the intranet, poster campaigns, awareness quizzes, etc. BPO companies emphasize data security and integrity. Extensive security policies and proper configuration right from access level control for data to configuring firewalls and IDS systems is essential here. These are complemented by regular audit and review mechanisms. Audits are done at regular intervals by the internal IT team as well as by third party auditors. Reviews and modifications of the policies are also done if required. This systematic approach has made their life easier when it comes to conforming to regulations. Other measures include proper incidence management, and clearly documented and tested escalation plans. When we go into the specifics, the compliance initiatives of most BPOs basically include the following : N N N N N N N

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 of the operating phase of the BPO project. The goal of this integration is to embed and reinforce the collaborative nature of the buyervendor relationship. While there is an array of

120 infrastructures that must be managed during the transition and operating phases of the BPO 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 with arise. These include whether to use the vendors or the buyers system; how to manage the challenges of data exchange; assuring that analytic software systems are not corrupted or 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. 2. 3. Explain the software infrastructure in outsourcing. Discuss the Human resource issues in outsourcing. Explain the status of BPO in India.

121

Lesson - 12

INFORMATION PRIVACY AND SECURITY ISSUES


Learning 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 12.2 12.3 12.4 12.5 12.6 12.7 Introduction Privacy Laws and Regulations Maintaining Security Standards Performance Measurement System Performance Measurement Audit Summary 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, childrens 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 persons 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.

122 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:
N

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 providers security procedures.

123

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 employers 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 innovatorsnonprofit organizations, government agencies, and businesses that offer innovative, results-driven solutions to social problemscan 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 intensiveand 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

124 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 organizations 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 organizations progress toward enduring social impact. Imagine using data-based evidence of your organizations 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 organizations 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 organizations 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 organizations 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

125 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 organizations 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 organizations overall progress in relation to past results and future goals. All performance measurement systems should include a management dashboard, which enables an organiza-tions 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 organizations 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 organizations leadership and other key staff members review and interpret perfor-mance data in order to make wellinformed 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 organizations 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

126 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 organizations 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

127 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 organizations activities and the outputs, or the short-term results, produced by those activities. Depending on the nature of the organizations 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 organizations 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 programs 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 organizations 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, childrens or dependents names. race, ethnicity or national origin. employment history. salary. tax withholdings, financial statements. medical information. hobbies. personal interests, travels.

128 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. 2. 3. Discuss the information privacy methods in outsourcing Explain the performance management system. Discuss the security issues in outsourcing

129

Lesson - 13

VENDOR MANAGEMENT AND RELATIONSHIP


Learning Objectives
After Comleting this lesson you must be able to discuss the vendor management in BPO industry the relationship between Vendor and BPO business

Structure
13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 Introduction Meaning of Vendor Management Vendor Management and Relationship World Class Vendor Relationship Management Managing Vendor Relationship Technology Support and BPO Operation Types of Services Provided by the BPO Industry Summary 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.

130 Even as they seek new opportunities in sourcing, leading companies are finding themselves dependent on an increasingly complex multi-sourcing provider base, with the need to drive further cost and performance improvements, manage provider risk, and streamline costs of vendor management. These companies are developing a new set of Vendor Relationship Management (VRM) capabilities including processes, governance mechanisms and systems to manage vendors on a day-to-day basis over the full relationship lifecycle. Early adopters of VRM are realizing savings in existing relationships, remediating relationships that are not working, working with vendors to build joint capabilities and improve joint processes, effectively managing vendor risk, and reducing internal costs of vendor management.

13.2 Meaning of Vendor Management


The vendors managers are an important part of the management process. The success of an outsourcing relationship is often dependent on the vendors global and site project managers. It is helpful to both parties if the customer approves the vendors managers prior to contract signing so that the managers can be part of the negotiations and become familiar with the transaction. The panics will need to negotiate qualification requirements and reassignment provisions pertaining to vendor project managers and other key personnel. ln addition. a common solution in international transactions where the selected vendor does not have required expertise or resources in a certain location is for the vendor to subcontract pan or all of its service obligations. Vendors typically resist customer approval of subcontracting relationships on the grounds that the customer should be 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 proposed subcontractors 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 overhead over 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 interactions across the lifecycle of the vendor relationship Define formal processes for management involvement in the relationship Clarify internal roles and responsibilities to achieve operational alignment

131 Secure required vendor management tools and skills Put in place processes to effectively manage vendor performance and develop vendor capabilities 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 are the most strategic to the organization and which are less important. However, in the absence of balanced, formal criteria for vendor tiering, vendors on which the organization spends the most are inevitably viewed as the most important and tend to capture the greatest relationship focus and effort. Factors such as business criticality, operational / technical integration, alignment with business strategy, conformance to quality and long-term cultural fit with the organization are often ignored, reducing the organizations vendor management effectiveness. In addition, effective vendor tiering requires a set of common definitions of how vendors 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 common reference point for what it means for a vendor to be strategic Define for vendors what financial and non-financial benefits can be realized from moving up the vendor tiering ladder Provide functional and business groups with consistent partnering strategies within their multi-vendor bases Provide functional and business groups with a fresh view of their vendor portfolios based on relationship value, enabling improved decisions on further vendor consolidation 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 via Vendor Tiering, the next step is for the organization to define the team structure that will be

132 required to manage the vendors on a day-to-day basis and how to establish a Vendor Management Organization with the right roles, activities, skills and knowledge needed for effective multi-vendor management. Formalizing these definitions across the organization can reduce duplication of effort confusion within the company and among vendors and inefficiency. In addition, a VMO structure eliminates many of the dropped hand-offs and helps operationally align among business functions and among vendors to make vendor management more proactive.

3. Vendor Training and Development


Due to increasing multi-vendor sourcing, a companys overall performance and efficiency is more and more dependent on the capabilities of its vendors. An organization benefits greatly when key vendors dramatically reduce costs, introduce innovation and new services designed to address the organizations needs, expand their footprint to provide seamless coverage in multiple regions, and work with the organization to operationally align and streamline joint processes. Provide functional and business groups with a fresh view of their vendor portfolios based on relationship value, enabling improved decisions on further vendor consolidation 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 oversight and support the project manager should focus on control of vendor and contractor participation. The PMO should grow its capability to identify vendor and contractor value and capability to support the various types of project efforts performed within the relevant organization. lt can then develop guidelines and recommendations for establishing vendor and contractor relationships. When establishing its capability to manage vendor and contractor relationships within the project management environment, the PMO can consider the three activities described in the following subsections. Identify Vendor and Contractor needs the PMO should collaborate with project managers to determine the nature of vendor and contractor support required within the project management environment. This entails discussion and deliberation about the type of vendors and contractors needed. the frequency of those needs, and the preferred business relationship for each type of vendor and contractor.

133 Vendor affiliations This is a formal business relationship that is established to facilitate the mutual pursuit and achievement of common business objectives. The partnership relationship is used for vendors and contractors having frequent and close business alignment with the relevant organization. The vendor or contractor is often an active and visible participant on the project team and has a vested interest in achieving overall project objectives. it is usually characterized by a written agreement put in effect for a period of time and reconfirmed at intervals that enables vendor or contractor participation on many or all projects within the relevant organization. Partnerships can lm established to create a more Vendor Project affiliation in collaboration with relevant project managers should determine the approach to vendor and contractor management on projects, relative to each type of vendor engaged. In particular, it would be good to specify whether the vendor or contractor will be performing its assigned role and tasks as a member of the project team 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 managers 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 shortterm 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.

134 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 Clients 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 costeffective to outsource the documentation and follow-up activity to Enterprise Service Providers (ESPs). Medical billing and claims processing services offered by Indian vendors

135 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 text format. Transcription services take two main forms: medical transcription and legal & business transcription. Medical, legal, and business transcription is a big business opportunity for Indian vendors by virtue of the English-speaking talent available at significantly lower costs than the United States. The level of confidentiality involved in the information shared by the client is higher and the Service Level Agreements (SLAs) and Non Disclosure Agreements (NDAs) 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 towards their 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 tasks that distract HR managers from more important functions. Once again, external service providers offer a viable alternative. Services offered by ESPs in India include payroll processing, pension management, and resume management. Indian service offerings in accounting typically include remote data entry, general accounting, accounts receivable, accounts payable, customer invoicing, credit application, and collection processing and collection calling Only a few companies in India offer these services, but each one processes millions of transactions annually. Setting up to provide these services demands a significant investment in IT infrastructure and staff with relatively higher qualifications.

5. Forms Processing
Forms processing services promote speed, accuracy, and low cost. Manual key entry can be integrated with high-end tools for forms capture. Data from paper, optical and magnetic media may be converted, inputted to a database and validated. Customized data capture can span orders, invoices, warranties, survey forms, check information, customer enrollments, government statistical information, and intelligent abstraction of data from financial reports. Only a few companies in India, such as Datamatics, have been providing such services from their data-processing centers.

6. Legal Databases
Timely access to relevant laws, amendments and precedents has driven the emergence of a legal database industry in the U.S. BPO service providers train lawyers to

136 work closely with their clients to create and maintain an extensive database of their records and conduct supporting research. Salaries and qualifications are higher than those for employees engaged in other BPO activities, but so are the margins, and the cost of a lawyer in India continues to remain a fraction of the cost of his/her counterpart in the United States. Indian legal service providers are in an advantageous position over other Asian BPO providers for reasons other than cost: Indian lawyers operate in a large scale democratic environment (India is the worlds largest democracy) similar to that of the United States, 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 incremental storage requirements at lower costs. Data centers are also seen as a solution for data backup as part of disaster-recovery and business-continuity policies. A data center service provider 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 includes data collection, collation, sorting into meaningful categories, data presentation and developing animated movies and cartoons for films, television, advertisements and educational media. India has a huge talent pool trained in media and animation development that is already being utilized by US filmmakers. Educational CDs (for Distance Learning) represent another significant opportunity for the Indian ITES industry.

9. Data Digitization
Data digitization services include converting data in various forms into a digital format that can be easily accessed, analyzed, and manipulated on a computer. The range of services provided by Indian ITES companies includes data capture, data conversion, software intelligence (SI) and consulting. This service differs from most other BPO services in that it is more IT-intensive and requires people with higher levels of IT and spatial skills than 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/or geographies can continuously monitor, archive, and catalog information, and respond to queries from global clients. Beyond general online research, such companies can provide

137 more valuable services in customized research, business intelligence (BI), operations research and business valuation. The Indian IT company Wipro has around 9,000 engineers designing products for about 100 companies making it the worlds largest third-party R&D outsourcer.

11. Engineering Design and Biometrics


This is a niche IT services activity in India. Indian universities produce a large number of engineers across various science and technology disciplines. This resource pool can be applied to R&D and engineering design services. A few companies in India provide such services. Bio-informatics, and specifically genomics research, represents another BPO opportunity for Indian providers because of the tremendous amount of information across tens of thousands of genes that must be simultaneously accessed, organized and searched for novel relationships. Although this is a new area for Indian BPO vendors, some Indian companies have already ventured into offering services through tie-ups with US companies involved in R&D on genomics and with companies that aggregate published information focused on medical research.

13.8 Summary
The first step in structuring any outsourcing transaction is to understand and define the scope of services to be provided to each of the in-scope sites. This task is in many cases more difficult than it seems, particularly if the customer does not have a centralized business department or the customer is moving to a new environment and therefore it is difficult to clearly define what the scope of services will be at each site. The types of services provided by BPO industry are also explained.

13.9 Review Questions


1. 2. 3. Explain the vendor relationship management. Discuss the various service provided by the outsourcing industry. Discuss the world class relationship with vendor.

138

Lesson - 14

BUSINESS OPPORTUNITY
Learning 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 14.2 14.3 14.4 14.5 Introduction Steps in BPO Opportunity Analysis Risk Involved in Outsouring Trends in Offshore Outsourcing 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 their costs and bloated payrolls. Today, many small to medium sized enterprises (SMEs) have discovered BPO advantages that enable them to compete with the larger firms that have been using outsourcing for years. In 2001, for example, 75 percent of BPO users were firms with greater than $500 million in revenue. By 2002, that number had dropped to 64 percent. What is indisputable is that any business that has grown to more than about $25 million in sales has begun to encounter growth related challenges in back-office processes that may be suitable for handing over to an outsourcing partner. With these potential advantages, it is not difficult for organizations to justify a decision to at least investigate BPO opportunities. At the same time, inquiring into BPO has potential short-term organizational consequences that must be considered and addressed. The most effective way to analyze and select a BPO opportunity is through a six-step process that is deliberate, systematic, and minimizes risk. This process has been designed to integrate and align the decision-making process with long term organizational strategic

139 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 organizationthe BPO Analysis Team (BAT). The BAT should be chartered by the organizations 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, which refers to the exercise of examining, mapping, and categorizing internal business processes.Typically, this involves rolling up the sleeves and mapping business processes step by step on a white board or other erasable medium. The goal is to develop an understanding of how work flows within the organization. This can be difficult, requiring hard thinking and involving individuals from outside the BAT. But done correctly, a currentstate analysis can unveil hidden bottlenecks and expose sloppy procedures that have become entrenched within the organization.

Step 3: Identify Core and Noncore Activities


Some consultants and business scholars have made identifying an organizations core business seem complicated. They offer example after example of organizations that have experienced decline in market share because they did not focus on their core competencies. Often, the prescription for returning to a healthy core competence is to engage in a series of high-level meetings that may involve scenario planning or other efforts to 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 core competence.

Step 4: Identify BPO Opportunities


As business processes are identified and classified, the BAT begins to develop a feel for which processes may be candidates for BPO. This step requires that the BAT decide how the organization can use BPO to support the core competence in the current and projected competitive environment. In a highly competitive environment, where fast action is required, it may be necessary to consider outsourcing key and support functions immediately to a best-in-class provider in a winner-take-all strategy. However, in a less competitive 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 margin enhancement than on competitive positioning.

Step 5: Model The BPO Project


BPO is similar to any other strategic business initiative in that it is imperative to establish performance metrics before implementation. In the case of BPO, some of the metrics will be quantitative (hard) and others will be qualitative (soft). Hard data include such things as project costs, time involved, and opportunity costs. Soft data include

141 employee displacement, effects on morale, and impact on community goodwill. To establish appropriate performance metrics for a BPO initiative, it is critical to first establish project objectives. The BATs charter charges it with defining the objectives of the initiative. Objectives should be identified both for the BPO initiative and for the transition process. At minimum, 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, and deliverables, the BAT next must build a business case for those processes that could benefit from outsourcing. This will include direct recommendations on which, if any, business processes within the organization are suitable for outsourcing. A business case is a written document that presents the methodology and findings of the BAT. The methodology section of the business case should include a review of the process the BAT used to reach its conclusions, 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 increased costs and risks compared to solutions involving on-shore resources. Offshore outsourcing, though potentially more cost-effective, may involve hidden costs including: 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 related to layoffs of local employees who will not be relocated internationally, turnover cost, and costs associated with addressing language and other communications or cultural differences. Lastly, managing the actual offshore relationship is also a major additional and sometimes unforeseen cost. Overall, a company may end up paying up to 50% more in front end costs than initially expected and only achieve a cost savings of up to 15%-25% in the

142 first year; well below the expected 35%-40% in savings, which will only be achieved in the third year of the agreement. An increase in front-end costs may cause the outsourcing organization to agree to lengthen 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. Aside from costs, other risks which must be considered when outsourcing to offshore companies include:

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 companys 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 companys 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 vendors compliance will be demonstrable to, among others, all necessary auditors.

Culture
Cultural differences include religion, mode of dress, social activities and even the way a question is asked or answered. Although most leading vendors have cultural education programs, the challenges and costs associated with cultural alignment may not be insignificant 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 turnover rate has an indirect impact on the client organization because it forces it to increase time spent on knowledge transfer and training new individuals. To address this concern, clients have recently tended to demand that contracts place a liability on the vendor for any personnel that must be replaced.

Productivity fluctuations
Most IT organizations experience a 20% decline in productivity during the first year of an agreement, largely due to time spent transferring both technical and business knowledge to the vendor. Furthermore, the cost savings achieved from an offshore arrangement often come at the expense of personnel layoffs by the client organization. Layoffs can cause significant morale problems among the in house survivors, which may sometimes lead to dissatisfaction and work slowdowns.

Competitive Procurement
Potential Pitfall: A customer may enter into an agreement with a service provider that does not generate the expected benefits and/or undermines the bargaining position the customer will have during any renewal negotiations. It is critical that the customer develop an accurate baseline of the process(es) or function(s) to be outsourced prior to entering into negotiations with the service provider.

144 The baseline will establish important negotiation input data, such as the number and type of internal resources currently required to perform the function/process and the service levels then being experienced by the internal service recipients. Once acquired, these data will assist the parties in negotiating the appropriate deal parameters including pricing, service levels 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 having possibly 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 providers 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 providers 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.

145 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 providers 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 providers 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

146 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 case with other sophisticated commercial contracts, outsourcing contracts usually include dispute resolution provisions. Such provisions can provide for an initial phase during which a dispute will be escalated up through a series of suitably constituted committees staffed by representatives of the parties. This is followed by a second more formal phase during which any dispute which remains unresolved at the conclusion of the initial phase becomes the subject of: (1) litigation; (2) mediation (a voluntary, non-adjudicative process in which the mediator assists the parties in negotiating a settlement); or (3) arbitration (arbitration can be considered as providing the function of a private judge and accordingly is an adjudicative option conducted before either a panel of one or three arbitrators). Another dispute resolution mechanism sometimes used is last offer arbitration, colloquially known as baseball arbitration. In this scenario, each party submits their last best offer to the arbitrator in advance of the hearing. This process is intended to promote the submission of reasonable offer proposals by the parties as the arbitrator is limited to awarding one of the offers submitted.

Transition Out
Potential Pitfall: The customer will be in a weak position at the time the outsourcing relationship is being terminated or is expiring to negotiate transition out terms 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 defining the transition out process will leave it vulnerable at a time when the service providers behaviour may not be moderated by the prospect of future revenues. Typically, this portion of 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 to the customer and/or its new third party provider under a termination services plan. The obligation to provide such termination services should be made contingent upon the payment

147 to the service provider of all prior undisputed service fees and the execution of an appropriate confidentiality agreement by any such third party provider. The service provider will generally be entitled to additional compensation (at defined rates) if, in providing the termination services, it is required to use additional resources or additional resource hours. Transitioning out 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 previously sold 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; the provision by the service provider of the necessary staff, services and assistance to effect an orderly transition and migration, which obligations will frequently encompass the hiring of 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 to include 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 successfully managed the global recession by adopting different global delivery models and by understanding customers business started providing direct business value in the projects. Customers from their part started managing their outsource vendors more efficiently and with 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 delivery model slowly changing to Managed delivery model. In staff augmentation, client sends RFP to offshore vendors asking for specific technical skills like Java, C++, Oracle DBA, etc. Outsource vendors respond to the RFP by sending their employees resume with an hourly rate. Generally outsource vendor with lowest hourly rate (cost arbitrage) wins the RFP. In this model customers did not have a way to find the business value provided by the contractors. Yes the customers saved money in their projects, but they do not have a way to specifically point out the business value added by those contractors. Also customers measurement did not include the time spent (and productivity lost) by their own employees in 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 vendors 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 projects to India, some as a Captive Center (employment of own Indian staff), others choose external service providers for delivery. While a few years ago such offshore decisions have primarily been made to save costs, 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 companies have experienced, since companies are typically not willing to openly admit and share their failures. Thus, information on key success factors are mostly collected by consulting companies 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 observed in 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 Indicators should be defined to measure the success of the project. In addition, it is advisable to institutionalize regular satisfaction surveys that measure the perception of the engagement across several stakeholder levels. The success of an offshore outsourcing engagement should be pro-actively addressed. The following list is a key collection of criteria to ensure a successful offshore engagement:

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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 not sufficiently shared, not even within the company, and therefore, with respect to cultural awareness, this is very important. A misunderstanding of the Indian culture will result in higher costs later and can at times result in cost deficit disasters. Indian staff working with Western staff (on each level) and Western staff working with Indian staff must be trained on cultural differences. Very helpful for effective working relationships are mutual visits in the other country. This has shown drastic improvement on each others understanding and quality of work. Furthermore, it is beneficial to have a specific percentage of Indian colleagues work onsite (e.g. 20% onshore - 80% offshore). The assumed higher costs mostly 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. For large-size projects, it is inevitable to have a Program Management Office (PMO) in place that ensures all communication is bundled, interpreted and available. The PMO ensures that respective rigor is given throughout the overall engagement, that the right communication is 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 with their goals unsatisfied because of the fact that a clear governance framework has not been defined. The governance framework ensures that all managerial rules, regulations and processes are explicitly stated and will be followed by all stakeholders. It is considered as the backbone for an engagement. Typically, it is aligned to internationally accepted quality models and adjusted to the project needs.

4. Off shoring Readiness:


Several questions need to be addressed in order to evaluate offshoring readiness. Is the internal staff ready for offshoring? Extensive knowledge and training are required prior to transfers and need to be consistently supported; strong resistance might adversely affect a company s success. Are processes mature enough to be offshored? Have the

151 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.

152 A good expectation management will ease communication and sets expectations right. This can be accompanied by innovative approaches - initiations by quality management, for example.

8. Contract:
In case the services are handed out to an external service provider, a respective contract management is needed. If there is no in-house legal department available, external legal 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 most suitable. More and more companies are starting to negotiate penalties for lacking service quality or specific situations.

9. Onshore-Offshore Ratio:
A 100% offshore model (all resources working from offshore) is very challenging for both the service provider and service recipient. Interactions and exchange opportunities are 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 be covered in the business case. Offshore outsourcing is seen now as one out of several sourcing options. It can be selected in alignment with the overall company Multi-Sourcing strategy. India, as one of the choices for offshoring, is constantly becoming more and more expensive. While it is not clear when stagnation can be expected, India has a few advantages to offer. Today, the key players in India can offer very good experience, skilled management staff, a good infrastructure 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 systematic framework for decision making. The importance of developing and managing a crossfunctional BPO Analysis Team (BAT) cannot be overstated. An effective and committed BAT will be the focal point for BPO-based organizational change, including internal challenges to the BPO analysis process. Team members must be carefully chosen for their commitment to organizational strategy, their ability to deal with and manage change, and their capability to communicate and work with persons from a range of disciplinary backgrounds. Implementing the decision-making process and developing a business case should be done deliberately, with attention to deadlines and resource constraints. Although the proposed systematic process is not foolproof, it is likely to help the organization identify

153 inefficient or unproductive business processes, some of which can be outsourced and others of which can simply be fixed.

14.7 Review Questions


1. 2. Discuss the six step process of Business Opportunities. What are the risk involved in outsourcing?

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MODEL QUESTION PAPER MASTER OF BUSINESS ADMINISTRATION


SECOND YEAR ELECTIVE - OPERATIONS MANAGEMENT PAPER - XIX

BUSINESS PROCESS MANAGEMENT AND OUTSOURCING


Time : Three hours Maximum : 100 Marks

Part-A
Answer any Five Questions All Questions Carry Equal Marks 1. 2. 3. 4. 5. 6. 7. 8. What is Business process Management? What is Business Process Outsourcing? What is Strategic Risk? What is vendor management? What is benchmarking? What is change management? What are the costs involved in BPO? What is performance measurement system?

(5 x 6 = 30 Marks)

Part-B
Answer any Five Questions All Questions Carry Equal Marks 9. 10. Explain the pro's and con's of outsourcing? Discuss the steps in vendor selection.

(5 x 10 = 50 Marks)

155 11. 12. 13. 14. 15. 16. Explain the types of business risk. Discuss the importance of process refinement. Explain the types of benchmarking. Discuss the information privacy and secure by issues related to outsourcing. How will you manage the change in BPO? Describe the trends in outsourcing?

Part-C
Compulsory Questions Case Study 17.

(1 x 20 = 20 Marks)

Recently the U.S. President Mr. Barack Obama had stated that there was no more outsourcing for Indicate. Questions : Is it a business opportunity or threat to India? Give explanations of your answer.

156

PBA209E

MASTER OF BUSINESS ADMINISTRATION


SECOND YEAR

ELECTIVE - OPERATIONS MANAGEMENT PAPER - XIX

BUSINESS PROCESS MANAGEMENT AND OUTSOURCING

INSTITUTE OF DISTANCE EDUCATION


UNIVERSITY OF MADRAS
CHEPAUK, CHENNAI - 600 005 TAMILNADU, INDIA

M.B.A. SECOND YEAR

157 ELECTIVE - OPERATIONS MANAGEMENT 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 PROCESS MANAGEMENT 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 by the 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 are designed so that the teacher-in-print of the materials is of constant help to you in your progress 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 Contact Programmes for your benefit. Learning through the distance education mode involves self-learning and selfassessment 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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158 M.B.A. SECOND YEAR

ELECTIVE - OPERATIONS MANAGEMENT BUSINESS PROCESS MANAGEMENT AND OUTSOURCING

COURSE WRITER
Mr. D. VENKATESAN
Assistant Professor in Commerce T.S. Narayanasamy College of Arts & Science Navalur, Chennai

EDITING

Dr. B. DEVAMAINDHAN
Assistant Professor in Management Studies Institute of Distance Education University of Madras Chennai - 600 005.

UNIVERSITY OF MADRAS, CHENNAI 600 005.

(ii)

MASTER OF BUSINESS ADMINISTRATION


SECOND YEAR ELECTIVE - OPERATIONS MANAGEMENT PAPER - XIX

159

BUSINESS PROCESS MANAGEMENT AND OUTSOURCING


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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160 UNIT 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. 3. Sarikakulakarani, "Business Process Sourcing" Jaico Publishing, New Delhi. 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 ADMINISTRATION


SECOND YEAR PAPER - XIX

161

BUSINESS PROCESS MANAGEMENT AND OUTSOURCING


SCHEME OF LESSONS
No. 1. 2. 3 4 5 6 7 8 9 10 11 12 13 14 TITLE Business Process Management Meaning of Process Management Process Refinement Business Process Reengineering Process Improvement and Process Redesign Process Visioning and Benchmarking Business Process Outsourcing Identify and Manage Cost of BPO Managing BPO Transition Business Risk and Migration Strategy Vendors Selection and Contracting Infrastructure Consideration and Challenges Information Privacy and Security Issues Vendor Management and Relationship Business Opportunity Page 1 30 40 47 56 66 76 88 94 101 111 121 129 138

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