outsourcing best practices annual issue 2006

Don Ganguly, Chief Executive Ofcer
Arin Brahma, EVP-Corporate Business Solutions
K V Subramanian, Chief Financial Ofcer
Chiranjib Pal, Vice President, Client Services
Umesh Gupta, Chief Information Ofcer
Sumit Sapra, Transitions Leader
Deepratna Srivastav, Operations Leader
Ashima Varanasi, HR and Training Leader
equInox SaleS teaM
Tim Harmon, Director Sales
Joe Beck, Manager Sales joe.beck@equinoxco.com
Manu Tandon, Executive Editor, Sr. Manager Marketing
Jyoti Makhija, Executive Editor
Bandana Borah, Puneet Arora, Piyali Ghosh, Saurabh Juneja
Corporate HeadquarterS (uSa)
10 Corporate Park
Suite 10
Irvine , CA 92606
T : 949-250-1445 (ext-278)
F : 949-250-7481
Equinox Global Services Private Limited
DLF Infnity Tower A , rd Floor
DLF Cyber City, Phase 2
Gurgaon – 122002
Haryana , India

offSHorIng BeSt praCtICeS onlIne
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online version of this magazine
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Send letters to manu.tandon@equinoxco.com or to any
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To educate banking professionals on BPO trends and
strategies and to bring experts and institutions to these
professionals through our magazine.
rewardS and reCognItIon
Equinox has been quoted in the Global Outsourcing
Top 100 in the leaders category by The International
Association of Outsourcing Professionals (IAOP)
published in FORTUNE® Magazine in May.
Equinox has been ranked 18th between Top 50 Best
Managed Global Outsourcing Vendors in The Black
Book of Outsourcing.
ContrIButorS: i-fex Solutions | Mortgage Bankers Association of America | NASSCOM | TowerGroup | MarketWise Advisors | NelsonHall | Everest
Group | Equaterra | Leadertoleader.com | Sourcingmag.com | MetaGyre Inc | Aubrey Daniels International | Celent | Tholons | NeoIT | Global Equations
Mortgage BPO Services
Complexity of Industry Challenges
Will Drive Accelerating Adoption of
Mortgage BPO Services pg38
Collaborative Workfow
Leveraging Technology to Improve the
Customer Experience and Corporate
Proftability pg12
Senior Analyst with Celent’s
Banking Group talks about emerging
trends of BPO in banking
Kiran Karnik
President, NASSCOM,
talks about the trends
and developments in
the KPO industry
Douglas G
Senior Vice President and
Chief Economist, Research and Business
Development, Mortgage Bankers
Association of America, talks about
Mortgage Banking trends and future
Atul Vashistha
CEO of neoIT, talks about
seven secrets of successful
outsourcing strategy
Legislating For Success
How to Create a Sourcing Contract and
Operating Environment that will Ensure
Sourcing Success pg20
The New Route to
New Wealth
Over time, every business model and
every strategy goes stale pg14
The Laws of Behavior
A Global Leaders’ Secret Weapon
The View from a Cubicle
An Interview with Scott Adams
Why Leaders...
...Should Reconsider Their Measurement Systems
Governance of Ofshore Program: Does One Model Fit All?
Mortgage Ofshoring to India Goes Mainstream
Putting the Value of Outsourcing Consultants in Perspective
Finding Lost Value in ofshore outsourcing
Outsourcing: Inside Out and Outside In
Andy EfstAthiou, dirEctor,
JordAn Brown, cEo, MArkEtwisE
Advisors, llc
GAry hAMEl, MAnAGEMEnt Guru
MArc stArk, EquAtErrA
AuBrEy c. dAniEls
lEAdinG Authority on BEhAviorAl sciEncE
scott AdAMs
crEAtEr of BilBErt
MichAEl hAMMEr
MAnAGEMEnt Guru And Author
AvinAsh vAshisthA, dr. P. k. MukhErJi, vinu kArthA
crAiG focArdi, dirEctor, towErGrouP
PEtEr BEndor-sAMuEl, foundEr & cEo, EvErEst GrouP
PAul thoMPson, sEnior Advisor, MEtAGyrE inc.
AnuPAM Govil, cEo & foundEr, GloBAl EquAtions
outsourcing best practices annual issue 2006
Ceo/edItor’S note
Dear Friends,
In our constant endeavor to provide you with the most comprehensive information on global outsourcing
in the mortgage industry, we have come up with our annual issue of Ofshoring Best Practices.
Equinox Corporation is a global leader in providing cost-efective, high quality, Knowledge Process
Outsourcing (KPO) services to the Banking, Consumer Finance, Securities & Capital Markets and Insurance
sectors. Equinox is an i-fex company; i-fex Solutions, a multi billion dollar market capital company, is a
Global Leader in Providing IT and Outsourcing Solutions to fnancial institutions worldwide. i-fex services
over 625 customers across more than 120 countries.
Our Six Sigma driven integrated delivery methodology is based on a well-orchestrated blend of of-shore
and on-shore best practices model, and has signifcantly reduced the costs of business processes outsourced
while improving the quality and the productivity. Currently, we are handling over 35 diferent mortgage
processes, as well as, providing a complete end to end solution that utilizes a high-tech platform that contains,
an LOS, and a workfow design for distributing and monitoring the entire loan processing cycle. Some of
our value propositions:
l Transforming Costs Structures- your company can save upto 60% of the current cost depending upon
the location and process complexity
l Redefning the Value Chain -Continual Process Improvement through Six Sigma Quality practice
l Faster Operational Cycle - Speed to Market
l Efcient Management of Volume Changes
l Access to Leading Edge Technology
l Managing Growth Efectively & Proftably
Cost advantage upto 60%! Yes, this is a big number. If you would like to know how Leading Mortgage
Banks are benefting from a relationship with us, please write to me at dong@equinoxco.com or call me at
949-250-1445 Ext: 278. I shall be glad to brief you on our services through a webinar presentation.
Smart Companies Need Smart Solutions.
Yours Sincerely
Don Ganguly, CEO
Welcome to a
new mortgage
Te US mortgage industry is going through a technological transition. Mortgage has been on the low
priority in terms of automation and outsourcing in the whole banking chain. But with increasing interest
rates and competition, Mortgage banks are looking for ITO and BPO as long term strategic tools. India is
fast becoming a Mortgage manufacturing hub, with its strong competitive advantage over other economies
like China, Canada, and Philippines etc.
Some reports suggest that the ofshore “BPO market size for the US Mortgage is in the range of $6 -
$7.4 billion. It is estimated that the US mortgage banking BPO market in India will grow to approximately
$1 billion over the next 5 years.”
North American banking is going through a consolidation phase, it has thrown basket of opportunities
in space of BPO. Biggest challenge in any consolidation is the integration of processes and functions.
Success of consolidation also depends upon how fast organizations integrate. Tis is a very resource & cost
intensive process and banks may look for external experts to help them through their consolidation phase
by taking up outsourcable processes. Tus reducing the burden on internal resources, this also helps the
bank to concentrate on their core competencies.
Tough ofshoring and outsourcing seems to be strategic cost optimization tool, the cost beneft
depends upon how successfully the outsourcing project is executed. We have seen wide gaps between
expectations and the deliverables.
Ofshoring Best Practices, is an endeavor to connect the buyer community with the who’s who of
outsourcing and mortgage space. Some articles of this issue also address real challenges which some of you
might be facing and how you can gear up for successful outsourcing and ofshoring projects. I am sure it
will guide many of you in formulating your outsourcing strategies. Te favor for year 2007 will indeed be
distributed workfow based outsourcing solution which extends risk free end to end window for mortgage
Happy Reading!
Manu Tandon / Jyoti Makhija
Ofshoring Best
Practices, is an
endeavor to
connect you
with leaders in
and Mortgage

outsourcing best practices annual issue 2006
specifc test especially for voice has to be
created, and we are working with the
British Council on this.
Tis training is useful not only for
BPO executives, but to those work-
ing on the front-end as well. Tis en-
sures that people have access to a broad
range of job openings. However, voice
assessment cannot be performed with-
out face-to-face interaction. As we have
intended to go online with the generic
test, we need to get people to conduct a
face-to-face professional assessment.
Te other thing that I’m very keen
on is in training English teachers, so
that they can teach spoken English
along with accent and communication
skills. Tis is a long-term plan, and we
hope to produce not only efective writ-
ers, but efective verbal communicators
in the next fve or ten years.
Te Indian outsourcing industry is
reeling under a high attrition rate.
What are your thoughts on training
at the primary level? What would you
defne as basic BPO skills? How is
NASSCOM addressing this issue?
Tere are two parts to what we are
doing right now. Te frst one is very
generic; it’s for the entry-level at the
call center--domain knowledge with no
specialization. Te focus, here, is on re-
moving the barriers of bad communica-
tion skills, low analytical skills, and poor
voice and accent.
We identify several skill sets that the
industry’s HR personnel have defned.
Tese aspects are very generic, but they
do help the industry to cut down time
and costs of recruitment and training.
Tis is not the best solution when we are
looking for specialized skills; therefore,
we hope to try and develop specialized
courses, which add on to the general skill
sets. For advanced levels, people will spe-
cialize on specifc verticals. Nevertheless,
we are just looking at creating a frst level
flter that will create a wider base at the
entry level, and are not concentrating on
people for specialized areas.
Te Indian brand experience is either
great or lousy. Many operators are not
keeping quality at the margin, while
a few small operators who should
not be in business are actually in it.
Is there a certifcation, especially on
the voice side, for call center oriented
operators as the voice experience is
personal and goes a long way?
It’s a matter of concern that qual-
ity standards are sometimes not main-
tained. Tis has been happening for a
long time now. Tere are some people
who are satisfed and some who have
had a bad experience.
Along with the generic certifcation,
we need to look at communication and
accent, which happens to be a huge
problem area. We need to look at an
individual base certifcation for that. A
“Our Strength
LIeS In nOn-
In a discourse with Don Ganguly,
CEO, Equinox Corporation, Kiran
Karnik, President, NASSCOM
(National Association of Software
and Services Companies),
talks about the trends and
developments in the KPO industry.

outsourcing best practices annual issue 2006
How will NASSCOM address this is-
sue, especially in terms of creating a
guideline policy?
Tis is a tough question. Frankly,
there are no easy answers to this. At the
very basic level, we are trying to increase
supply at the input stage, to somewhat
reduce attrition. For specialized areas, a
company trains people to put them on
the job, but soon a new player comes
in and the frst thing they do in order
to stand apart from the others is to of-
fer higher incentives. We tried hard to
look at industry standards, ethics, and
created HR practices to curb this trend.
Companies turn a blind eye to recruit-
ing agencies who lure people away by
not only ofering high salaries, but by
also asking candidates to take up new
ofers in less than a week’s time, in order
to avoid using excuses like job satisfac-
tion in their existing jobs. Recruiting
agencies beneft largely from this as
they run the same candidate through
diferent companies and get easy proft
margins from the same database. We try
and reduce this with the usage of bet-
ter practices, along with fostering better
understanding between both recruit-
ers and the industry. Tis problem is
bound to persist for the next few years,
until the supply system catches up.
How about creating some kind of
a national database to gather data
about people who are abandoning
jobs, or are staying in jobs only for
brief stints? Tis will help companies
perform background checks and en-
quire about references.
We are in the process of putting in
place a database for the industry, but
there are issues like the data protection
security angle, employee concerns, and
unions amongst others. Tis system
should provide any employer with ac-
cess to a database on a “third-party
checked” basis.
Te problem is not the issue of attri-
tion, but the willingness of companies
to take a candidate who hasn’t served
the notice period in the previous com-
pany. Te scenario is now improving
as companies realize that they cannot
turn a blind eye towards these issues.
Background checks are performed, rea-
sons for resignation from the previous
company are demanded, and serving of
the stipulated notice period is insisted
upon. Hopefully, these small steps will
make a small diference to the high rates
of attrition.
However, even with all this in place,
the attrition rate will remain
high in specialized felds, as
there is a dearth of readily
available skills in the market.
Tis is particularly true in the
sophisticated fnancial serv-
ices section, as it requires a
deeper amount of training.
We will also try and im-
plement employee-friendly
measures while developing
the database so candidates
need not worry about back-
ground check as details like
date of birth and graduation
should be enough. Tese
kinds of checks stay with a
person for life and will also
serve as a complete check
for the employer, simultane-
ously saving an employer a
lot of money. It will be built
by an independent, respected
third-party and be accessible
only to an employer and not to a pro-
spective employer.
Te BPO industry has gone through
several levels of evolution. What level
of evolution are we at?
We are now beginning to see the de-
velopment of niche players. About two-
three years ago, we saw a set of small
companies doing better than those who
ramped up rapidly. Tis is happening
particularly in new areas like market re-
search and legal outsourcing. Specializa-
tion is taking place in traditional areas
like the fnancial services sector, and the
bigger players with their varied aspects
are adding to their portfolio and emerg-
ing as a new group of extremely special-
ized people. Tese are often organiza-
tions that have been providing some
kind of broader low-level fnancial serv-
ices on a mass scale on a factory kind of
model. However, these companies may
focus on an area and be unsure about
which model would work--hybrid or
BPO to KPO is a big story. Do you
see that this is going beyond labor ar-
bitrage, because even when
you talk of a specialized
domain, I’m still training
or looking for skilled labor
at the end of the day? Have
you seen a true solution
emerging beyond labor ar-
bitrage knowledge process
at the workplace?
I have seen a few, but la-
bor arbitrage continues to be
at the base. It’s not that peo-
ple would come if they had
a lead cost. Given a certain
increase in cost levels, there
are other factors that people
are taking into account. Te
drive in most of these ar-
eas has been mere numbers.
However, this is not sustain-
able, as other locations and
countries will soon begin to
ofer the same talent.
We need people with
doctorates. Te US, for example, doesn’t
have enough numbers. Companies
come to India looking for these skills
and are willing to pay more money for
it. Talent is the important driver here,
after money. Tough we have moved
from quality, to skills to data protection,
what lies at the bottom of the pyramid
is cost. Tings are fne as long as this is
under control, but if costs go haywire,
customers are going to look for alterna-
tives soon.
If you look at customers from the US,
typically, it’s not a labor-based play. You
have a system or a solution that embeds
labor or the solution--e.g. in the case of
loan processing in mortgages, you have
to have a platform or a system for cus-
tomers. So, when we are taking our proc-
Don GanGuly,
CEo, Equinox
StOry. DO

outsourcing best practices annual issue 2006
esses to India, we are standardizing our
platforms and are embedding that onto
a solution. In the US, all outsourcers
have a system for delivering services. In
India, we perform collaborative process-
ing, where we hang of
the customer system, then
work on a piece of a proc-
ess, and give it back to the
customer, and so on. From
a KPO perspective, you
create your own solutions
or infrastructure, but the
labor angle does not get
the same screening as from
a pricing standpoint.
As long as you are do-
ing a bit of the activity,
your costs will be critical.
Certainly, if you move to-
wards providing solutions
or using your intellectual
property in the process to
create a platform of some
kind, then you move away
from this and start look-
ing at the value and not
the cost. It’s happening in
few areas, but not across
the board. My assessment
is that it will take a few
years to get there. Tere is
certainly recognition and
an awareness to increase
capabilities and expertise
to be able to produce that
kind of a solution. Tis
would mean increased do-
main knowledge—much
more than what we have
at present.
In the light of the data security debate,
what are your thoughts on proactive
communication and lobbying against
First, we have worked with the gov-
ernment very closely to amend a few
laws, especially the Information Tech-
nology Act, in order to take care of some
possible loopholes and ambiguities. Tis
work has been completed and there will
be a law soon. Tere will be additional
amendments, too, to strengthen this
law itself.
Second, we are working on the en-
forcement side with law enforcement
agencies, amongst others, to create
awareness and train people
to track cyber criminals,
projecting evidence, and
understanding what needs
to be done. A cyber crime
laboratory will be set up
We have recognized that
there are a lot of problems
inside the industry apart
from database protection
and, therefore, have em-
barked on two other ini-
tiatives. One, fnding and
sharing best practices not
just within the Indian in-
dustry, but also worldwide.
We now have something
akin to an annual summit
where there are collabora-
tions and discussions with
customers, vendors, secu-
rity providers, and regula-
tory agencies in the US, in-
cluding homeland security
and fnancial security.
Two, the task is to
integrate some of these
initiatives into a self-regu-
latory organization, the
framework of which is be-
ing built now. Te organi-
zation will be completely
voluntary and companies
can join and abide by a
standard set of guidelines
on what they are expected to follow. We
can ensure tight data protection, infor-
mation security, and good practices on
the human resources front.
What is your opinion on economies
like China, the Philippines, and Ire-
land as a competitive threat to India’s
eforts in this feld? What needs to be
done to stay competitive?
Most Indian companies are increas-
ingly moving towards the global delivery
model. Tey may have diferent centers
in multiple countries for diferent rea-
sons, or one may be following a near-
shore strategy (working out of Japan,
Korea, etc.). Others may not be catering
to large call centers which are focused on
the US. Terefore, you are beginning to
get an increasing amount of Indian com-
panies, both in the BPO space and the
title space, getting to global delivery.
As a country, we are in competition
with China. Tere are many countries,
especially in the European Union, who
will be taking their work into China
in the next three-fve years, for reasons
of cultural afnity, but India scores in
terms of talent and comparative costs.
Also, we need to create something new,
which is diferent and unique to India.
Our strength lies in non-commoditized
higher-end work.
What do you think of English as a
spoken language? I have heard about
an initiative where hundred million
resources in China are being trained
to speak English, with the objective
of catering to demands in the next
few years.
Yes, I don’t doubt this, given the im-
mense determination of the Chinese.
Tey are importing English teachers,
including people with the right accent
so they can learn English in the cor-
rect manner. Te structure of their own
language and the fact that they are a
comparatively homogenous country
will ensure that English is not difcult
for them. In India, the reverse happens.
When two Indians from diferent com-
munities speak to each other in English,
there are accent and language issues.
Nevertheless, there is defnitely a com-
fort factor while speaking the language.
In China, the entire top management
not only knows English, but would have
also been educated in the US. Te prob-
lem area lies with the common folk. If
you try to speak in English to someone
who is actually doing the work, he is
able to understand the language, but
not able to speak it. In this scenario, In-
dia should maintain its leading position
for the next 15 years or so.
thE uS, fOr
fOr It.

outsourcing best practices annual issue 2006
I understand the long term rates are
very much dependant on the bond
Absolutely, mortgages are priced of
of the treasury yield curve. Te 10 year
treasury is the base price for fxed rate
mortgage products. Tis is because peo-
ple in US stay in a house on an average 7-
9 years. At present time the spread of the
mortgage rate over the10 year treasury is
150 basis point so a 4.75 percent treasury
plus 150 basis point spread makes a 6.25
percent 30 year fxed rate mortgage inter-
est rate. We believe the 10 year treasury
is not going to go far from what it is but
the spread is going to widen out little bit
at close to 170 basis points by the end of
the year, which will translate to 6.5%.
If Fed goes up by another quarter
add another 15 to 20 basis points. Our
mortgage applications survey which is a
very accurate predictor for new homes
put the expected 2 year decline at 20%.
For existing homes we expect a 12-14%
decline over the same period
What about the builders? We talk
Te U.S. economy has bounced back
so strongly from a slow period late last;
the IMF forecast the U.S. economy
would grow 3.4 percent this year but
infationary pressures guides for high-
er interest rates. So, how do you trans-
late these macro economic indicators
in perspective of Mortgage Industry?
Economy is very strong but clearly
slowing. Te frst quarter results were
stronger than expected but the second
quarter was signifcantly slower, which
will ease the pressure on federal reserve
to continue pushing the interest rates
up. Tere is a debate as to how much
further the rates will go, but our current
modeling does not show that the Fed
will make any further move. Our current
expectation is that rate will be stable for
some time. Teir next move will likely be
in early 2008. Lets suppose we are wrong
and there is a raise of another quarter, we
will adjust our forecast accordingly. But
it seems rates will be fat for the year. In
the present scenario, the fxed rate prod-
ucts will be around 6.25% to 6.5% by
the end of the year, which will have a
continued slowing impact on the hous-
ing market but the word which we are
using for this phenomenon is “Normal-
izing”. Te reason to use this word is
because there is so much hype about the
home prices. Tere will be some markets
where prices will fall, so you are going to
hear bunch of stories that the price bub-
ble blew up. However, we will witness
the normal state of US housing market
with prices falling in a few markets and
in most market the prices will rise. Te
last four & a half years were unusual
in that very few markets had declining
prices thus the average increase has been
high. Te number with declining prices
will increase. Tat’s why we use the word
I think the frst priority of the Fed-
eral Reserve will be to keep the long
term infation expectation low. Macro
environment has a lot of uncertainty in
regard to how far the Fed will go with
respect to interest rates. Nonetheless, we
are of the view that in worst case mort-
gage interest rates will be not pushed to
beyond 7.5%.
“Our current
expectatIOn IS that
rate wILL Be StaBLe
fOr SOme tIme”
Douglas G Duncan, Senior vice President
and Chief Economist, Mortgage Bankers
Association of America, shares his views on
the emerging trends in mortgate banking
with Arin Brahma, EvP Corporate Business
Solutions at Equinox.
outsourcing best practices annual issue 2006
to some builders and the trends we
see is that there is lot of activity in
the building space. Why is building
new homes is high against the stated
trends by you?
It’s true. When a builder starts a
property they tend to take it through
completion. We see the number of per-
mits obtained on which the property is
not started is at record levels, but the in-
ventory of completed properties for sale
is at record levels. Tat is very consist-
ent with the decline in new home sales
as demand has slowed. Secondly the
properties will are sold but not yet start-
ed is also at the record levels. So, this is
a bufer on the supply side of the larger
builders. If you look at the reports you
will see cancellations and concessions
are up in general for them. All of this to
us is an orderly slowing in the housing
market. On mortgage refnance side, re-
fs are stronger than would be implied
by the current level and structure of in-
terest rates. Interestingly, the sales mar-
ket is not as sensitive to the interest rates
as lot of people think. We will see a 30%
decline in the ref volumes this year.
In some market the home prices will
fall steeply. Markets with heavily con-
centrated condos will be efected as the
prices of condos will fall sharply in a few
markets. Supply of condos is at about 8
months compared to 4 months (twenty
months ago), so supply has risen very
rapidly. Interestingly the higher per-
centage of condo owner do not live in
them as their primary residence, so the
condos tend to be more price sensitive
to short term market movements and
prices are more variable, so we watch
condo markets as the leading indicator.
In terms of ref mortgage lenders, in
last few years many brokers counted
into banker and major growth has
come from ref boom that pool is fast
drying up. What will be its impact on
mortgage lenders?
Bread & butter of the mortgage
market in long run is home sales. If you
look at the fnance of home sales, it’s
very steady. Te option to repay from
the customer side increases the volatility
in the business. In 2003, there was $2.5
trillion of ref in addition to $1.4 trillion
of the home purchase loans (the total of
$3.9 trillion). In 2004 and 2005 the
loan origination volumes were in range
of $2.8 -$2.9 trillion, this year we think
the volume will further drop down to
$2.4 trillion. Te dollar value of mort-
gages to fnance homes sales will drop as
well since home sales will be down and
price will fatten. Tere is no question
that refs are coming down and all of
this is having signifcant impact on the
production margins of lenders. Tis has
translated to close to 80%
decline in margins.
One other structural
thing that’s taking place
is on securitization front.
A signifcant shift to the
private label securitiza-
tion market happened be-
cause of the development
of vertical columns from
consumer directly to in-
vestors through secondary
market execution. So you
have companies like Mer-
rill Lynch, Bear Stearns
and Lehman who are buy-
ing mortgage origination
operations and driving the
product through their own
securitization structure
into investor community.
Tis is fairly recent phe-
nomenon and if you take
in context with what Wa-
chovia did in its acquisition
of Golden West, Wachovia
has column within the
holding company. A year
ago they bought American
Network Mortgage which
is a broker operation, but they didn’t
integrate it with their mortgage portfo-
lio operation but rather have integrated
it with their capital market group. So
you have got some interesting structural
changes taking place. Te industry is
more about capital management and
capital market execution as opposed to
sales culture that was ten years ago.
So what you are saying is that there
has been 80% decline in the margins
and it will make lending operations
more sensitive to cost. I keep on get-
ting diverse numbers from various
lenders on the cost of loan per unit.
I have read MBAA 2004 cost study; I
would like to know what is included
in the unit cost and what is the unit
cost of originating a loan?
All the frms operate in one or more
channels i.e retail, broker, correspond-
ent or direct marketing. Direct market-
ing includes telephone
and internet. You have
to sort the cost vis-à-vis
channel and also have to
sort by cost to create serv-
icing, secondary market-
ing and investor relations.
Te large diversifed com-
panies certainly have all of
those. You have to look
at servicing cost per loan
and secondary market ex-
ecution including hedg-
ing cost and servicing rate
Two years back the cost
of production was not
an issue when compa-
nies were enjoying the
margins. But today it’s
becoming very critical
so how do you see mort-
gage bankers looking at
core vs non core, fxed
cost to variable cost regi-
men also how they are
looking at ofshoring?
Defnitely, I see a trend
there but from mortgage
market perspective it’s a unit labor cost
issue. If adjusted for productivity difer-
ences, wage rate advantages and efcient
execution exist, then they make a switch.
Most large companies are doing it but
for some of them tried and they were not
successful but part of it has to do with
the scale of the operation. Some points
ButtEr Of thE
yOu lOOK At
SAlES, It’S vEry
outsourcing best practices annual issue 2006
are critical- are they narrowly focused or
broad based, are they national, regional
or local. But its an industry where the
rule of pure competition applies. Tat
means cost minimization is proft maxi-
mization in long run. So, the trick is go-
ing to be the for successful to invest in
technology to survive and lot of them are
making signifcant investments.
Te increased compliance burden
like Sarbox, DoNotCall, Basel II,
HMDA, RESPA, TILA will surely
increase the cost of operations, with
excess industry capacity and loan vol-
umes declining by 20%. How do you
see the industry responding to these
external challenges to maintain their
Te underlying theme of all these is
transparency. Transparency means data
availability and purity. Tere is no ques-
tion that frms with larger databases will
have to make investments in technology
and tools to help them meet the compli-
ance requirement. It’s a challenge as in-
dustry is not accustomed to this deep of
consistent data reporting. Some smaller
frms will deploy the capital elsewhere or
go for readily available of the shelf com-
pliance tools which will immediately im-
port the efciency that come with those.
In mortgage life cycle from origina-
tion to servicing, how do you see
the role of IT outsourcing and BPO
strengthening their competitive ad-
vantage in a cutthroat market?
Te industry has been outsourcing
for years. Tings like tax and insurance
require narrow and highly specialized
capabilities, where there can be econo-
mies of scale. If you look at technol-
ogy solutions, anything that is narrowly
defned and replicatable will at least be
exposed to whether or not it can be con-
ducted efciently again on a unit labor
cost basis internally or externally. Today
in mortgage industry there is no compa-
ny which can say that they can do every
step in mortgage process by themselves.
Tere is a new breed of outsourcing
companies which are extending end
to end solution for loan processing.
What are your thoughts on that?
I have tracked the structural changes
in manufacturing like automobiles &
airlines. Mortgage industry
processes other than contact
with customers is essentially
a manufacturing process.
Tere are great efciencies
that can be imported into
processes but the main con-
cern is of quality control.
Te way I look at the end
game is electronic mortgag-
es. Tat is defned as a cus-
tomer sitting at a computer
and applying for a loan and
not meeting another person
throughout the entire appli-
cation, approval and grant-
ing process including the
sale and transfer of the loan
to the investor.
Te information that’s
externally entered passes
through the system sup-
plemented by information
that service providers sup-
ply upon the queries by and
from the production man-
ager. It is imported into the
same fle with quality control
run. Tis fle is automatical-
ly transferred to the investor
who has agreed to purchase
it in electronic format. Tough we are
long way from that it is the production
process and you have to see the pressure
points to fnd out the error rates and at-
tack those points and then look at each
entry point at the production process
and see whether or not it’s adding any
value. If it’s not, cut it of or fnd pos-
sibilities for re-engineering.
Ofshoring is in nascent & experimen-
tal stage in Mortgage eco-
system, there is a need to
educate banks with both
the risks and advantages.
What role MBAA can play
in facilitating the same?
Do you plan to create a
team which can develop
standards in ofshoring
(same as MISMO for in-
formation technology)?
Standardization is the
objective of MISMO.
MISMO is a two phase
process. Firstly it is data
defnition & structure and
that’s what has been fo-
cused on for last fve years
of its existence. MISMO is
a toll to enhance the inter-
face between lenders and
vendors. One thing that
MISMO has not done is
process re-engineering and
in the eMortgage context
there is lot more of that to
discuss. Te second phase
of MISMO activity will be
data purity. Data fow has
become very smooth, hard-
ware and software can talk
to each other because they are using the
same language. Tis doesn’t translate
that data is of good quality. Tere has to
be lot of eforts to standardize the data
purity which is what SOX and other
compliance rules are targeted at.
Douglas G Duncan is Senior Vice President and Chief Economist at the Mortgage
Bankers association (MBa). as leader of MBa’s Research and Business
Development Group, Duncan is responsible for providing economic and policy
analysis services in the areas of real estate fnance, legislative and regulatory
proposals, and industry trends for MBa and its members. He also oversees the
education products and services of the association as well as its Industry
technology committees and standards eforts. He has oversight responsibility for the Research
Institute for Housing america (RIHa), the Mortgage Industry Standards Maintenance
organization (MISMo), the Secure Identity Standards accreditation Corporation (SISaC), and
lender Technologies Corporation. Duncan received his doctorate from Texas a&M university,
BS and MS degrees from north Dakota State university and aa degree from Fergus Falls
Community College.
EVP, Corporate
Business Solutions at
But tODAy
outsourcing best practices annual issue 2006
Main Story
Jordan Brown
What is the next innovation that is going to change the
way that mortgage lenders work everyday?
To improve The
cusTomer experience and
corporaTe profiTabiLiTy
technology backbone. Te limits of ge-
ography, static processing, and depend-
ency on external vendors that create
bottlenecks in the process are eliminat-
ed. Technology is a core driver but the
true innovator is the mortgage lender
itself in its defnition of their business
practice, principles, and their ability to
defne the right strategic relationships
with technology-enabled partners.
Collaborative workfow incorpo-
rates both automated workfow in a
loan origination system with the con-
cept of fulfllment resources that may
be located across the city or the globe
to complete tasks necessary to drive the
business. It’s a relatively simple concept
with tangible results—cost reduction,
cycle time compression, parallel
task execution, touch-less
service ordering, and re-
source balancing. Tere
are three steps in
achieving collabora-
tive workfow.
Step One:
Establish a Solid
Loan Origination
Te frst step in estab-
lishing collaborative work-
fow is to deploy a solid loan
origination platform that has the
operational fexibility to incorporate
workfow, fle imaging, a product and
pricing engine, automated underwrit-
ing, and the ability to inter-connect
partners through web services. Te
combination of the fve core compo-
nents is essential to reach optimal op-
erational efectiveness.
l  Product and Pricing
A Product and Pricing Engine (PPE)
is often confused with a custom Au-
tomated Underwriting System (AUS).
Te function of the PPE is to provide
instant product eligibility decisioning
to the point of sale--a retail loan ofcer,
loan broker, consumer, correspondent,
or branch manager. Te eligibility of a
loan is tested and the individual loan
attributes are used to determine the
Collaborative workfow is the develop-
ment of the organizational process to
fexibly allocate and utilize both hu-
man and technology resources to ef-
fectively complete a task. In order to
accomplish this objective, mortgage
frms need to evaluate and build a solid
Collaborative WorkfloW:
CEo of MarkEtwisE advisors LLC
outsourcing best practices annual issue 2006
Main Story
true price or rate/point combinations
available to a consumer. Te beneft of
a PPE is that a lender can ensure that
eligible loans are entering the transac-
tion platform. Te PPE is a separate
component that may work interac-
tively with the AUS to deliver both an
underwritten result set and the pricing
options to the point of sale.
l  Automated Underwriting Systems
Access to investor or internal automat-
ed underwriting systems is an essential
function of the transaction platform to
provide decisions quickly to the con-
sumer. Te most efective frms use the
automated underwriting function as a
marketing tool to capture loan transac-
tions. Collaborative workfow is highly
dependent upon the integration and
investment in automated decisioning
l  Web Services Architecture
In order to connect to the wide array
of service partners and technology pro-
viders that are involved in the mort-
gage origination process, it’s important
that the loan origination system has
an open architecture to support web
services. Optimal efciency is achieved
when all internal and external partici-
pants in the mortgage lending process
are connected through the transaction
platform. Often, web services can be
deployed to transfer loan data electron-
ically eliminating duplicate data entry
and costly data quality issues.
l  Workfow and Image Management
Workfow is the heart of what makes
collaborative workfow achieve its
goals. Te workfow tool can poten-
tially sit on top of any loan origina-
tion system with an efective product
and pricing, automated underwriting,
and web-services architecture. Auto-
mated workfow must aim at creating
an electronic business process where
the number of human-touch points
for processors, underwriters, and clos-
ers is minimized. Document imaging
is an important element of the work-
fow in that it enables the manual fle
to become an interactive work fle that
contains the electronic images that can
be reviewed without human interac-
tion through a series of business rules
or across the globe by a processor that
is an expert in a particular work task.
Step Two: Organize the Process
to Leverage Technology and
Achieve Business Goals
Once the technology platform is in
place, the next step is to clearly establish
the business process steps to leverage
the investment. Te important prin-
ciple, however, is not only to develop/
deploy the right technology, but rather
view technology as an investment to
achieve a specifc business goal/metric
(cost per loan, channel proftability,
customer satisfaction level, etc.).
Te process should be mapped out
for each loan from point of sale through
loan closing. A keen eye will often re-
veal duplicative steps, signifcant wait
times, and bottlenecks. Careful atten-
tion should be directed in identifying
business processes that can be done in
parallel such as instantly ordering serv-
ices without human interaction (title,
food, credit, fraud detection, apprais-
al, etc.).
Te business process is modeled to
meet the objectives of an organization.
One clear objective may be to utilize
all resources in the most efective man-
ner. Tis may include a mix of staf
employees, ofshore, or outsourced
resources. Collaborative workfow pro-
vides the fexibility to allocate work to
resources anywhere and anytime, based
on resource availability, work-group
skill set, and level of task complexity.
Lenders should evaluate and de-
velop a business fow that establishes
work queues for resources to efectively
complete their assigned tasks. Some
loan processes can be fully automated
such as electronic fle image stipulation
clearing while other processes may still
require human intervention. Business
rules can be setup to handle virtually
all normal situations and exception
queues designed to provide an appro-
priate level of manual intervention.
A healthy balance needs to be struck
between exception management and
automation to ensure that corporate
proftability goals and customer service
levels are met.
True automation is possible when
resources work interactively within the
technology framework to fulfll a loan.
A review of process steps to organize
and leverage technology to achieve the
business goals of a mortgage lender is
as follows:
l Evaluate the current business
l Develop interactive work queues
l Parallel task execution (apprais-
al, credit, title, food, and stipulation
l Exception management (use
work queues and business rules to au-
l Integrate onshore, ofshore, and
in-house resources into work queues.
Step Three: Measure, Monitor,
and Focus on Key Performance
Collaborative workfow is the intersec-
tion of technology, people, and busi-
ness process to efectively deliver a
service. Every step in the business fow
needs to be managed, monitored, and
focused upon. Open partnerships that
embrace both interactive technology
and resources create the operational
environment to leverage collaborative
workfow and drive proftability, quali-
ty, and ultimately the customer experi-
ence. Once the technology and process
are in place, key performance metrics
can be put into place to dynamically
measure, monitor, and ensure proft-
ability goals and a positive customer
about the author
Jordan Brown is CEO of MarketWise Advisors, LLC (www.marketwiseadvisors.com) which
provides technology consulting and investment banking services to the mortgage industry.
outsourcing best practices annual issue 2006
Main Story
Over time, every business model and every strategy
goes stale.
The new rouTe
To new weaLTh
WHERE does new wealth come from?
Like a four-year-old’s curiosity about
how babies are born, it’s a deceptively
direct question that often disarms our
capacity to answer. To be sure, we’re
ready with pat responses peppered with
references to return on investment, re-
turn on net assets, and economic value
added, but these measures tell us more
about how revenues are rearranged than
about how they’re created anew. Af-
ter all, we’re not talking about market
share sliced loose from a competitor
or revenues boosted by an acquisitions
binge—but truly new wealth: revenues
from new customers buying products or
services that yesterday they didn’t know
they needed and today can’t live with-
Creating new wealth requires more
than simply responding to market de-
mand. Tink about some of the path-
breaking products of the past few
decades. No car buyers walked into
Chrysler dealerships in 1983 saying
that what they really wanted was a van
mounted on a car chassis with folding
seats—and don’t forget some cuphold-
ers. No customers told Sony the only
thing wrong with its tape players was
that you couldn’t strap one on your
head. Neither the BBC nor any of the
Big Tree U.S. TV networks saw a mar-
ket for 24-hour news; it took a renegade
Gary HaMEL
LEadEr to LEadEr, no. 19 wintEr 2001
rEprintEd witH pErMission of JoHn
wiLEy & sons, inC.
worLd rEnownEd autHor, spEakEr and BusinEss
tHouGHt LEadEr
outsourcing best practices annual issue 2006
Main Story
was able to establish a dominant posi-
tion in the online trading world.
Today, Schwab controls some 30
percent of all the stock trading that takes
place on the Web. Even more impres-
sive, Schwab’s market capitalization—
$3.5 billion in 1995, less than half that
of Merrill Lynch—has now pulled even
with Merrill’s, which instead of engag-
ing the Internet, pursued until recently
a policy of digital denial.
You’re Never Too Old to Innovate
SCHWAB is not an upstart. And inno-
vation isn’t the special preserve of Inter-
net upstarts or the denizens of the dot-
com motels of Silicon Valley. In fact,
innovation can happen at any company,
regardless of its line of business, age, or
Can a century-old company learn
to innovate like an industry ingenue?
Te answer is yes—provided the com-
pany is willing to examine its orthodox-
ies, abandon its strategy-by-habit ways,
and engage its employees broadly and
deeply in the efort to envision the new
markets and new opportunities that
promise new wealth.
Consider the experience of PECO
Energy Corporation—the old Phila-
delphia Electric Company. Founded in
1881, PECO had operated for its entire
existence within the public utility para-
digm, with a regulatory strategy that
brought it signifcant success. In June
1997, however, the company was look-
ing to transform its regulatory strategy
to ft the dawning deregulated environ-
Working to examine its hidden as-
sumptions, PECO uncovered a core
competency in operating large, mission-
critical infrastructure—a competency
honed in time of crisis a decade earlier
when PECO grappled with bringing its
own Peach Bottom nuclear plant into
federal compliance. PECO emerged
from the Peach Bottom process with a
proven ability to bring “problem plants”
to high-capacity performance with low
operating costs.
As a result, where other companies
named Turner operating out of Atlanta
to wed three developments—the shoul-
der-held minicam, more afordable ac-
cess to satellite transmission, and the
fact people no longer make it home in
time for the six o’clock news—into the
concept of a continuous news format.
Innovations like the minivan, the Walk-
man, and CNN succeeded not because
they responded to market need but be-
cause they created a need consumers
had yet to sense themselves.
All of which attests to the fact that in
the New Economy, the greatest rewards
go to companies that create new business
models—ideas that spark new sources of
revenue based on changing technology,
demographics, and consumer habits. By
defnition, new business models destroy
old ones, which is why creating new
wealth is a threat to every traditional,
unimaginative business. Never before
have strategy life cycles been shorter
and market leadership counted for less.
Call it the First Law of the Innovation
Economy: Companies that are not con-
stantly pursuing innovation will soon be
overwhelmed by it. Strategy innovation
is the only way to deal with discontinu-
ous—and disruptive—change.
The Innovation Imperative
SOME companies seem to understand
the innovation imperative instinctive-
ly. Consider Charles Schwab’s daring
plunge into the online unknown: When
the bricks-and-mortar broker took the
view that online trading was inevitable,
it faced a choice between leading the
brokerage industry to the future or be-
ing a victim of some dot-com start-up
that got there frst. Tus, on the fateful
day in 1995 when a technology team
within Schwab presented a demo of
what the Web could do, senior man-
agers almost instantly recognized how
the Internet could make life better for
Schwab customers. Schwab invested in
the Web even before it realized it would
face aggressive price-based competition
from other Web brokers. By committing
to the goal—and pursuing it through a
series of low-risk experiments—Schwab
saw liabilities, PECO saw opportunity.
PECO would follow its competency
into places other companies feared to
tread—taking on responsibility for
running environmentally risky nuclear
plants in a safe, efcient manner. PECO
has now bought three U.S. nuclear
plants that had been for sale for years—
including a reactor at Pennsylvania’s
notorious Tree Mile Island, obtained
for $23 million—a substantial discount
from its $640 million book value.
Te problem-plant strategy proved
just one element of a broader inno-
vation agenda. PECO teams looked
beyond their traditional market to to-
morrow’s opportunities. A prime exam-
ple: PECO conceived of the wire that
delivers electricity into each home as
a pipeline permitting a far wider car-
rying capacity. Te company built on
its core competency in power delivery
networks to launch a new communica-
tions platform. Exelon, a subsidiary of
PECO Energy, has strung 27,000 miles
of high-speed telecommunications line
atop electrical transmission poles—and
signed up over 100,000 phone custom-
ers in its frst year in operation. PECO
now looks to combine the installation
of electric, gas, telephone, and cable to
provide a single-source installation serv-
ice for its customers.
Three Signs
WHAT’S standing in the way of com-
panies that fail to innovate? In many
cases, it is the tried-and-true recipe that
brought them past success.
It’s understandable. Businesses with
a winning formula are
logically reluctant to
change horses in mid-
stream. Over time,
however, every busi-
ness model and every
strategy goes stale—
and in our fast-for-
ward economy, strate-
gies reach their “sell-by” date faster than
ever. Indeed, the life cycle of successful
business strategies has been rapidly de-
clining in a period of high competition
Over time,
and every
goes stale.
Over time,
and every
goes stale.
outsourcing best practices annual issue 2006
Main Story
and innovation. In the Industrial Age, a
successful business strategy for steel
manufacture or durable goods might
power a company for a generation or
more; today, Moore’s Law (which states
that computing power and speed dou-
ble every 18 months) is setting the terms
for strategy life cycles that are measured
in months, not years.
How can a company tell if its present
profts come from spending down past
success? Here are three new realities to
l Te  inevitability  of  commodi-
tization.  Every new product or service
will become a commodity in time. Not
many years ago, cell phones cost upwards
of $100; today, companies will give you
one to sell you their service. Likewise,
phone service itself is now a commod-
ity: Traditional telecoms—local as well
as long-distance—are engaged in a race
to the bottom to see who can sell access
to a dial tone for how little. Meanwhile,
Internet upstarts are considering giving
away long-distance calls to lure people
to their site, while deriving their revenue
from advertising and other sources.
l Te impossibility of forecasting
future trends. Most forecasts are worth-
less exercises in spread-
sheet manipulation—
and not just because
small adjustments in
key variables create
wildly diferent pro-
jections over time. Te
larger problem is that traditional fore-
casting projects past assumptions for-
ward, providing a sense of false comfort
to established companies wedded to ex-
isting business models. It’s like auto in-
dustry forecasters painting a reassuring
picture of steadily rising minivan and
family sedan sales—the year before Ford
rolled out something it called the Sports
Utility Vehicle. Whatever industry
you’re in, you can’t drive change looking
in the rear view mirror.
l Te futility of waiting for inspira-
tion. If it’s a given that great companies
are built on a brilliant idea, the next
question is where the next great idea
will come from. Don’t be fooled by
the rosy glow of growth: Companies
living of a single great insight are the
corporate equivalent of dead stars-in
spite of their sparkle, they’re cold at the
core. Like grandma’s favorite “Five and
Dime” store in the age of category-kill-
ers and cyber-shopping info-bots: Stand
pat with your original business model,
and burnout is only a matter of time.
Creating an Innovation Engine
IF companies can’t depend on the
lightning bolt of sudden inspiration
or serendipitous discovery, then what?
An innovative environment can be
consciously created—if a company is
willing to abandon old rules, shed old
habits, and upend cherished conven-
tions. Te key is recognizing that past
achievement militates against future
adaptability by creating well-worn ways
of doing things that cause a company
to undervalue or ignore rule-breaking
insights. Yesterday’s laserlike focus be-
comes today’s set of blinders, narrowing
an enterprise’s feld of vision from what
is truly new to what it already knows.
Glimmers of great ideas are evident in
most organizations; the problem is that
in direct proportion to the degree those
great ideas are diferent, the “immune
system” of most organizations attacks
those ideas as foreign organisms, threat-
ening the host.
Part of the challenge is demystifying
innovation by breaking it down to its
constituent parts. Here are three ways
to begin the process of awakening in-
novation in your company:
l Recognize that innovation doesn’t
follow a schedule. Most companies are
so bounded by existing orthodoxies and
obsolete business models that they think
they can schedule strategic insight the
way you record a reminder in your day-
planner. But the truly innovative bursts
of insight that trigger new ideas don’t
obey the corporate planning calendar.
Consider that the idea for Nokia’s
wildly successful rainbow-hued cell
phones emerged not from a daylong
strategy session in the corner ofce but
from an afternoon at California’s Ven-
ice Beach, as company execs watched
sun-drenched skaters slash down the
boardwalk, sporting color-coordinated
shades, Rollerblades, and bathing suits.
Te realization: Mobile phones are as
much fashion accessory as communica-
tions tool, an inspiration that’s pushed
Nokia to the cutting edge of cells.
l Shatter the “strategy monopoly.”
In any company, a hierarchy of organi-
zation dominates a hierarchy of ideas.
Te antidote: To encourage innovation,
unlock ideas from across the company.
Bring together a cross-section of em-
ployees at all levels to share the new
perspectives that may just contain the
kernel of a bold new idea. Realize that
every company promotes success as de-
fned by today’s reigning strategy; the
question is how to promote new ideas
that may have nothing to do with that
strategy—or may even cut against it.
Tat’s how Virgin Enterprises oper-
ates under the lead of Richard Branson.
Every employee has Branson’s phone
number, and can pitch new project ideas
directly to the top. Tat’s how a Virgin
Airlines fight attendant turned her dif-
fculties in planning her own wedding
into a new venture: the wedding plan-
ning boutique Virgin Bride.
Institutionalize innovation by build-
ing a safe place for people to think new
thoughts. In some companies, new ideas
are in short supply—stifed by a corpo-
rate climate that cuts of intellectual ox-
ygen, discourages change, and demands
conformity. At other companies, ideas
abound—and the challenge takes a dif-
ferent shape: Creating the conceptual
conveyor belt that moves from ideas to
From Ideas to Action
CAN a company really institutionalize
innovation? Witness the efort of Royal
Dutch/Shell, the Anglo-Dutch oil giant.
With $138 billion in revenues, 102,000
employees, and nearly a century-old tra-
dition, Shell is the epitome of a lumber-
ing industrial behemoth—the last place
you’d expect to fnd entrepreneurial
outsourcing best practices annual issue 2006
Main Story
zeal. Within Shell’s Balkanized organi-
zation—which one employee com-
pared to a maze of 100-foot-high brick
walls—access to capital is tightly con-
trolled, investment hurdles are daunt-
ing, and radical ideas move slowly, if at
all. Shell’s globe-trotting managers are
famously disciplined, diligent, and me-
thodical. In cataloguing their character
and capabilities, “wild-eyed dreamers” is
not a term that comes to mind.
Enter Shell’s GameChanger initia-
tive, begun in 1996. As an incentive to
innovate, a group of Shell employees
were given the authority to allocate $20
million to rule-breaking, game-changing
ideas submitted by their peers. Proposals
would be accepted from anywhere with-
in the company—no need to squeeze
radical new ideas through the keyhole of
existing programs and priorities.
Shell’s GameChanger team embarked
on an Action Lab: An intensive fve-day
experience designed to dramatically ac-
celerate the translation of “gamechang-
ing” ideas into practical venture plans
for the launch of new businesses—plans
of the kind that would pass muster with
venture capitalists in Silicon Valley. Te
goal was for each team to present its
story to a “venture board”—a panel of
senior Shell executives and representa-
tives from Shell Technology Ventures
Inc., a unit whose job is to fund late-
stage technology commercialization.
Te venture board was empowered by
GameChanger to “sponsor” winning
concepts and fund the next round of
business development. In the end, four
teams out of the original twelve received
six-month funding to put them on a
path toward full-fedged business plans.
For Shell, GameChanger was the be-
ginning of an attempt to institutionalize
innovation. Today, any employee with a
promising idea is invited to give a 10-
minute pitch to the panel, followed by a
15-minute Q&A session. Ideas that get
a green light often receive funding—on
average, $100,000, but sometimes as
much as $600,000—within eight or ten
days. Ideas that don’t pass muster enter
a database accessible to anyone within
Shell, a kind of innovation stockpot
that helps entrepreneurial employees
shape their own ideas or bring new in-
sight to existing ones. To date, several
of GameChanger’s ventures have found
homes in a Shell operating unit or in
one of the company’s various growth
initiatives. Still others have been carried
forward as R&D projects, while the re-
mainder have been wound down and
written of as interesting but unproduc-
tive experiments.
GameChanger is producing measur-
able results: Of Shell’s fve largest growth
initiatives for 1999, four had their gen-
esis in the GameChanger—including
one exploring an entirely new business
focused on renewable geothermal en-
ergy sources. Fully 30 percent of Shell’s
exploration and production R&D
budget is now devoted to ventures that
are GameChanger graduates.
As the Shell case suggests, it is possi-
ble to create an internal constituency for
change—inspiring a new breed of “in-
novation activist” to fnd an ear and an
outlet for creative new concepts within
a company. Compared to innovation-
unfriendly organizations that leave their
iconoclasts no option but to take their
bright ideas elsewhere, Shell’s experience
proves that established companies can
create a hospitable climate for change.
Hammer Time
WHAT can innovation-minded execu-
tives do to create such a culture in their
company? Here are three ways to kick-
start the innovation process:
l Start new conversations. New
ideas don’t obey an organizational
chart. Companies that want to get seri-
ous about innovation need to break the
“strategy monopoly” that closes of the
executive suite from new ideas perco-
lating in other corners of the company.
Innovation-minded companies spark
new conversations by bringing together
executives with employees of all ranks
to question corporate orthodoxies and
search for new ways to do business.
l Seek new perspectives. If you want
your company to do a better job of en-
visioning the future, ask the people who
will get to the future frst: Your young-
est employees. If you want to know how
consumers act, don’t observe them in
focus-group captivity—join the Nokia
execs for a day at the beach. Want a new
vision? Try a new vantage point—and
watch a world of opportunity open up.
l Spark new passions. Innovation
comes from the heart
as well as the head.
Companies that aren’t
afraid to innovate en-
gage employee ener-
gies in a new and pro-
foundly diferent way.
When people are part
of a cause and not just a cog in the
wheel, their IQ—innovation quo-
And above all, recognize that in to-
day’s economy, capital is plentiful; good
ideas are scarce. Companies that look
to incremental change to generate ad-
ditional revenue will tend toward sub-
sistence at best—eclipsed by companies
that create an environment of innova-
tion, spawning the new ideas that gen-
erate new wealth. Tat’s why an ambi-
tious enterprise must replicate within
itself the basic DNA of innovation: A
culture of continuous experimentation
embedded broadly and deeply through-
out a company.
All of which brings us to the fnal
characteristic of the true innovator: cour-
age—the guts to realize it’s time to take
a hammer to your own business model,
before someone else does it for you.
from the
heart as
well as the
from the
heart as
well as the
about the author
Gary Hamel is founder and chairman of Strategos, a consulting frm focused on strategy
innovation, and also a visiting professor of strategic and international management at the
London Business School. A frequent contributor to Harvard Business Review, Fortune, and
the Wall Street Journal, Hamel is coauthor of the best-selling Competing for the Future and
author of Leading the Revolution.
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outsourcing best practices annual issue 2006
Main Story
How to Create a Sourcing Contract and Operating
Environment that will Ensure Sourcing Success.
for success
outsourcing best practices annual issue 2006
Main Story
MarC stark, EquatErra
THIS  EquaTerra briefng paper looks
at some of the pitfalls to avoid when
negotiating a contract, and highlights
three main areas companies need to
provide for when legislating for success:
creating contract fexibility, putting in
place good governance structures and
implementing proper change controls.
Although the sourcing market is
maturing rapidly, many companies still
remain naive as to the contractual ele-
ments that can make or break a sourc-
ing relationship. Often the general
environment during the contracting
phase of a sourcing engagement is one
of opposition and confict. But there
are no winners in aggressive negotia-
tions as they lead to unworkable con-
tracts and set a negative tone for future
working relationships.
Companies must recognize the need
to negotiate a good deal, but not too
good. Contracts need to be ‘fair and
commercially reasonable’ meaning the
provider must be able to make money
while the buy-side company must be
able to save money. Although this
seems logical, the lawyers who negoti-
ate for the buy-side companies often
forget this.
Creating a Flexible Contract
Companies should think logically
about how they will run the deal in the
future. Rights must be protected but
the details must be workable. Flexibil-
ity needs to be built into the contract
to ensure companies can readjust price
points and re-examine methodologies.
Being too detailed in the wrong places
can cause breakdown in communica-
tion and make the contract unwork-
able. In one contract, for example, the
lawyers set tough provisions for hourly
wage rates, who could do which tasks
and when these could be adjusted. Te
provisions were so complicated they
were unworkable for the provider and,
ultimately, resulted in it breaching its
contract, which led to deterioration in
the relationship. Building in fexibility
means being able to look at the practi-
cal workings of the contract on a day-
to-day basis. Tere are four key points
a contract should address to make it
Set  clear  expectations:  Companies
need to be clear on their retained re-
sponsibility and unrealistic expecta-
Allow for minor change: Contracts
should be active and not set in stone.
Tey should enable the parties to re-
examine key points on a regular basis,
for example, promoting and modify-
ing service levels, or managing succes-
sion plans for key personnel. Inevitably
a successful service will result in indi-
vidual staf developing and moving
on to new challenges. Tis is clearly a
success that should be encouraged in
order to attract quality new recruits.
Often clauses concentrate upon key
staf retention and locking staf in,
rather than the development of suc-
cession plans, skills planning, and the
maintenance of a robust service team
through opportunity.
Focus  on  milestones:  Companies
should focus on milestones that en-
sure the appropriate level of manage-
ment scrutiny, and that are supported
in the contract by detailed acceptance
criteria. Failure to provide such crite-
ria prevents the parties from achieving
agreed outcomes, which in turn puts
pressure on the relationship. Assum-
ing the acceptance criteria are in place,
then milestone payments can be made
contingent upon defned successful
Opportunities also exist to place a
successful twist on failure-oriented leg-
islation. Although Service Level Agree-
ments (SLAs) focus on failure, they can
also be used to drive success. A vari-
ety of earn-back provisions on service
credits may be employed, agreements
can be drafted that allow performance
thresholds to be raised or lowered, and
facilities that allow the introduction of
new service levels can be incorporated.
Benchmark  for  market/business 
change:  As business cases change, or
markets change, contracts need to be
fexible enough to allow for changes to
services, service levels and price points.
Efective benchmarking should allow
for changes to be made to the contract.
For example, if a market moves dra-
matically by 10 or 15 percent against
agreed benchmarks, then the con-
outsourcing best practices annual issue 2006
Main Story
tract should allow for both parties to
come to the table to discuss changes in
price points. Te key is to remember
both sides need to win and to have an
open discussion about how this can be
Promote  innovation:  Success-
based legislation constitutes more
than just continuous process improve-
ment or a gain-share mechanism. In-
novation provisions, where possible,
should be mandated into a contract.
Te contract should embody clauses
that cause the parties to actively man-
age, reevaluate, and reinvent. Specifc
contract clauses that support innova-
tive behavior and continued activity
may include: client advocacy and sup-
port of sales initiatives in return for
strategy assessment of current service,
technology developments, and new
BPO initiatives inside and around the
scope of the services. Tese types of
clauses are already in use but they are
vague; to correctly incentivise both
parties, they need to be linked and
regularly reassessed.
While creating a fexible contract
is key to legislating for success, com-
panies need to beware of creating too
much fexibility or providers will run
roughshod over their organizations and
potentially impact the organization’s
business case for the transaction. Tere
is a fne balance to be struck, which is
where it is useful to talk to those com-
panies who have done it before, or use
advisors to give a good perspective on
what is acceptable and the best practice
in the marketplace.
Specify Good Governance
A good contract will make provisions
for governance structures and the role
and responsibilities that team has for
ensuring a successful and innovative
relationship is maintained. A layered
governance structure will detail how
the communications should be run
between both parties and enable any
issues or problems to be resolved early.
For example, a governance structure
should include a steering committee
of top executives who meet twice a
year, an operations governance team
that meets monthly to review per-
formance, and an account relationship
governance team that meets weekly, as
well as a transformation or innovation
Not only does the governance team
need to understand the contract and
how it should be practically imple-
mented, they must also communicate
regularly with the other side to ensure
both parties know how contract provi-
sions are being met. It is often advis-
able to have individuals who were in-
volved in the creation and structuring
of the transaction to have an ongoing
role in the governance organization so
as to provide continuity and consisten-
cy with original tenets and underpin-
nings of the transaction.
Provide for Change Control
Te failure of sourcing relationships
and contracts is often placed at the
feet of the provider. But the buy-side
organization has a critical role to play
in implementing the right change
controls within its organization to
help the new order succeed. Te com-
pany must have realistic expectations
about what can be achieved in years
one and two, as well as a realistic end
goal. By implementing proper change
controls, expectations can be set and
Set  clear  expectations:  Companies
need to be clear on their retained re-
sponsibility and unrealistic expecta-
tions – are they enforcing the contract
appropriately or not. Senior executives
need to recognize that they are respon-
sible for what gets done, not how it is
done. Tey are now buying into a set
of given services, at a particular price,
which should be delivered to a speci-
fed level rather than delivering the
services themselves. Tis may in turn
require that the organization needs to
acquire diferent retained skills. At the
same time, the retained organization
must be aware of unrealistic expecta-
tions and the appropriate time to dis-
cuss issues with suppliers.
Defne  lines  of  communication: 
Te company’s senior executives are
responsible for communicating to its
workforce how the new order will
work and what should be expected
from it. Often, outsourcing deals fail
on the misunderstanding of what
employees believe they should be re-
ceiving against what the deal is really
about. Ensuring proper internal trans-
formation and expectations through-
out the organization is key to success.
For example, employees need to know
how outsourcing will change the way
they do business or their job, what
to expect in the new order and how
they are locked in to certain elements
or not. As part of this, organizations
need to make sure they have a pro-
gram ofce for internal change and
that its activities are properly funded
to enable real change.
Te efect of legislating for suc-
cess and putting in place a fexible
contract, good governance structures
and proper change controls will help
organizations obtain the most return
from their sourcing investment. One
of the central axioms of sourcing is
to access world-class capabilities of a
provider to make certain that a desired
future state is achieved and continues
to evolve. With this in mind, the con-
tract must legislate for the provider
and the organization to focus on that
evolution by allowing for continuous
change and improvement.
about equaterra
EquaTerra sourcing advisors help clients achieve sustainable value in their business processes.
With an average of more than 20 years of industry experience in over 600 global transformation
and outsourcing projects, our advisors ofer unmatched industry expertise. EquaTerra has
deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critica
business processes with advisors throughout North America, Europe and Asia Pacifc.
www. n e wg e n s o f t . c o m
Newgen Software is a leader in Business Process and Document
Management Solutions using Workflow and Imaging. Newgen
Software has a successful track record of deploying mission
critical solutions in Banking, Insurance, Telecom, and
Government Organizations in more than 25 countries across the
globe. The company is known as the fastest implementer of large
enterprise solutions.
Newgen Software, over last 14 years, has built comprehensive
product range for Business Process Management, Workflow,
Document Management and Enterprise Content Management to
offer end-to-end solutions. Newgen Software is a Certified ISO
9001:2000 and SW-CMM Level 4 company, and employs more
than 650 persons world over.
Newgen Software Technologies Ltd.
A-6, Satsang Vihar Marg,
Qutab Institutional Area,
New Delhi 110 067
Tel: +91-11-26964733, 26963571, 26856871
Email: newgen@newgen.co.in
Newgen Software Inc.
1364 Beverly Rd., #300, McLean, VA 22101
Toll Free: 1-800-499-5074 Tel: +1-703-749-
2855 Tel: +1-510-794-6724
Fax: +1-703-7492858
Email: info@newgen.net
Retail Banking
Investment Banking
Treasury /
Cash Management
Trade Finance
Mortgage Banking
Risk Management &
Corporate Governance
Some of our prestigious customers: HSBC Bank, Deutsche Bank, Abu
Dhabi Commercial Bank, ABNAmro Bank, State Bank Of India, ICICI Bank, IDBI
Bank, HDFC Bank, ING Vysya Bank, Ceylon Insurance Company, BNP Paribas,
RAK Bank, Bank of Tanzania, Bahrain Monetary Agency, First Gulf Bank, I & M
Bank, Kuwait Finance House, Lippo Bank, Hua Nan Bank, Max New York Life,
Bajaj Allianz, Sahara Life, Royal Sundaram General Insurance and Equinox
(i-flex BPO)
Competitive Advantage through Process Management
BPM and DM Solutions
Efficiency and Customer Service
Optimization and Productivity
Monitoring and Continuous Improvement
Centralization and Strategy Alignment
Automation and Streamlined Operations
De-risking and Compliance
Newgen BPM Solutions for Banking and Financial Services
PreIntegrated Imaging
Capabilities through
OmniCapture & OmniExtract
PreIntegrated Document Management
Capabilities through
outsourcing best practcies annual issue 2006
Nari KaNNaN
Leveraging Lean
six sigma
in Business Process
80% and continues to fall with their
on-going Kaizen (continuous process
improvement) eforts. Tis business
transformation efort was so success-
ful that Fujitsu was awarded the con-
tract for handling BMI’s entire IT asset
infrastructure. Tis time around, the
contract was structured with the same
emphasis on cost cutting, but with the
addition of gaining continuous process
improvement and better quality.
Tis article outlines how lean Six
Sigma can help you move up the value
chain if you’re a service provider and
achieve true business transformation if
you’re the client. If you want to learn
the basics of lean Six Sigma, I provide a
list of resources under “Useful Links.”
The Typical Transition
Te fgure below shows the as-is state
of most processes under transition
from the client to the service provider
in the usual outsourcing initiative.
Typical steps in the BPO transition
process include:
l Process transition: Observing,
participating and training in the proc-
ess; documenting the process and key
Critical to Quality (CTQ) or Service
Level Agreement (SLA) measures;
forming a process team; training the
team; and running a pilot efort in
parallel to the regular operation of the
l Transfer to regular BPO opera-
tions group: Once the process team is
in place with the BPO service provider
and it has been executing the process
for a certain period of time, it is tran-
sitioned to their operations group for
ongoing operations.
l Measure and report SLAs and
metrics: BPO contracts may specify
SLA measures like average handle time
(for phone processes) or network avail-
ability (for network management proc-
esses). Service providers often measure
a number of additional metrics that
help them evaluate the performance of
their own employees and/or to make
sure that the business process is ex-
ecuted well.
We hear the slogan, “moving up the
value chain” often in the context of
business process outsourcing (BPO).
BPO service providers typically use
this to refer to the execution of other
knowledge processes such as fnancial
or legal research that gain them bet-
ter revenues and margins. We also
frequently hear the phrase, “business
transformation,” usually used as a syn-
onym for BPO that demonstrates cost
savings and little more.
What’s the key to gaining true value
and business transformation? One ap-
proach is to apply lean Six Sigma to
move processes from a point of stable
outsourcing to “leaning” to process
redesign and ultimately, to process in-
In Lean Solutions: How Com-
panies and Customers Can Create
Wealth Together authors James Wom-
ack and Daniel Jones describe how Fu-
jitsu Services did precisely this with its
contract with British Midland Interna-
tional. BMI outsourced its service help
desk function to Fujitsu. Pretty bland
stuf. Tis business process involved
handling calls from BMI agents at air-
ports regarding computers and print-
ers that were installed at airport ofces
and airline service counters.
Fujitsu’s goals for this business
process evolved from one of just pro-
viding the help desk services to try-
ing to eliminate the root causes of the
calls and thus the calls themselves! It
worked with the printer makers to
improve printer reliability to such an
extent that calls to the help desk fell
tips on quality management
outsourcing best practcies annual issue 2006
l Statistical process control check:
Optionally, many service providers
make sure that key performance in-
dicators are in statistical process con-
trol. If they’re in process control, only
minor adjustments are made to the
process, often necessitated by people
turnover or other more minor factors.
If KPIs aren’t in statistical process con-
trol, then root causes may be addressed
and adjustments to the process made
If you analyze the above as-is state
of BPO transitions and operations,
you might notice that there’s no fun-
damental innovation or reengineering
of the business process. Sure, there
may be minor adjustments or tweaks,
but nothing more. Tis hardly heralds
business transformation in the mak-
Movin’ On Up
Te fgure below shows the to-be state,
where the business process is improved
continuously using lean Six Sigma.
Let’s walk through the stages.
Te frst set of steps are the same as
in the as-is state -- process transition,
transfer to operations, measure and re-
port SLAs and statistical process con-
trol check. Here’s what’s added.
l Six Sigma eforts: Tese help
ensure that the process is in statistical
process control whether the process
runs as-is or when any fundamental
change to the process is implemented.
All KPIs need to be stable and in sta-
tistical process control! Defects need to
be identifed and minimized, moving
from lower sigma levels towards a Six
Sigma level.
l Process leaning: Tis involves a
number of tools and techniques that
provide continuous improvement
to all aspects of a business process --
turnaround time, accuracy, error rates,
currency-related efectiveness metrics,
customer satisfaction levels and so on.
Te tools you’ll fnd of value include
value stream analysis (making sure
that each process step is adding value
to the customer and non-value add-
ing steps are completely eliminated or
speeded up), failure mode and efect
analysis- FMEA (analyzing and mini-
mizing risks due to failure of process
steps), service blue printing (analyzing
customer touch points and minimizing
the chances for making mistakes) and
Poke Yoke methods (mistake proof-
ing). (If these terms are new to you, I
suggest you look them up at iSixSig-
ma.com to further your education on
these techniques. You’ll fnd the URL
in “useful Links.”)
l Process redesign/innovation:
Tese fow naturally after an extended
period of process leaning and use of Six
Sigma. Radical process redesign may
not work as well as process innovation
and redesign born out of an extended
period of deep analysis and under-
standing of existing processes.
How You, the Client, Will Beneft
When your BPO service provider
moves up the value chain with lean
Six Sigma, you beneft in a number of
First, you’ll see an evolution from
pure cost savings to process improve-
ment. Presumably, this metamorpho-
tips on quality management
Business Process
Transfer for Regular
BPO Operations
Measure and Report
Metrics & SLAs
Is Business Process
in Statisfical Process
Yes No
Minor Adjustments
as Needed
Address Root
Yes No
Transit on
Business Process
Transfer for Regular
BPO Operations
Measure and Report
Metrics & SLAs
Is Business Process
in Stastical Process
Address Root
Minor Adjustments
as Nedded
Leaning of Current Process
Process Redesign/Process Innovation
outsourcing best practcies annual issue 2006
sis results in better quality and greater
speed at less cost (as the application
of the Toyota Production System and
other lean Methods have proven in
manufacturing as well as services).
Process improvement adds to the cost
savings or at least mitigates costs as and
when they rise.
Second, you’ll be able to leverage
process understanding and documen-
tation. In many large organizations in
the US and Europe, business processes
have evolved over time. Te latest doc-
umentation for the business process
may not exist. BPO vendors may insist
on documenting the business process
along with workfows, KPIs and SLAs
for legal and contractual purposes.
Te very process of outsourcing makes
many of these processes explicit. Mov-
ing up the value chain with lean Six
Sigma depends upon proper documen-
tation of the business process.
Tird, you’ll see a movement from
informal to formal process measure-
ments. Before outsourcing, there may
not have been a compelling need to
formally identify SLAs and KPIs for
processes and measure them diligently.
However, now that they’re outsourced,
informality leads to formality due to le-
gal and contractual reasons. Process im-
provement can build on these measure-
ments and result in better quality while
identifying areas to reduce expense.
How Your Service Provider Will
Moving up the value chain in BPO
benefts your service provider in a
number of ways. Why should you care?
Te success of the outsourcing engage-
ment depends as much on the relation-
ship you form with your service pro-
vider as on the services performed by
that provider.
First, it gets the vendor out from
under the mode of competing on price.
When a service provider adds value
over and above simple costs savings
with continuous process improvement,
it removes that company from the fray
of competing on price for contract ex-
tensions or other business processes.
Tey become a partner that provides
true business transformation. Tey can
renegotiate contracts based on value
added with process improvement rath-
er than a simple time and materials or
full-time equivalents approach.
Second, the service provider be-
comes a true business partner. Moving
up the value chain provides a chance
for a longer term relationship with
your company. When a client out-
sources a technical help desk, the ideal
isn’t to handle those calls in the best
possible way; it’s to reduce those calls
altogether while still keeping customer
sat levels high. Tat kind of transfor-
mation, efected through lean Six Sig-
ma, can demand revenues an order of
magnitude higher than simple process
execution (because the client gains far
greater beneft).
Tird, the service provider gains
invaluable vertical skills development.
When a BPO service provider moves
up the healthcare claims processing val-
ue chain, they cease being just a service
provider. Over time, they slowly be-
come world-class experts in healthcare,
not just claims processing! Tey can
leverage this expertise for much more
valuable process design/redesign/in-
novation business, thereby continuing
the cycle of continuous improvement.
How To Start Down Your Road
to Business Transformation
One place to begin is by looking for
the addition of incentives for process
improvement to your contracts. Initial-
ly, Fujitsu was getting paid by BMI for
help desk processes on an FTE number
of agents basis. Te service provider had
no incentive to fx root causes of com-
monly reported problems in calls to
their help desk. However they renego-
tiated the contract. Tey based it on the
number of BMI employees that could
potentially call their help desk rather
than the number of agents needed to
take calls (FTE number). Tis meant
they would get paid the same if they
handle 100 calls a day or 1,000 calls a
day! Tis kind of structuring provided
an incentive for the service provider to
do real business transformation! It be-
came a win-win for both the buyer and
provider! For proper process improve-
ment eforts, incentives and contract
need to be designed in such a way that
they encourage appropriate efciency
and efectiveness.
Don’t expect immediate payback,
especially in the trust department.
Moving up the value chain in BPO
needs to be done one step at a time
over a long period. First, the provider
needs to execute the business process
that exists today properly and then
slowly improve it step by step. Once
the provider understands the process
in all its dimensions, it can earn client
trust by demonstrating small improve-
ments frst before attempting any proc-
ess redesign or innovation.
You need to take a long-term out-
look. Service providers -- especially
ofshore ones -- are vulnerable to price
competition from other countries. For
example, when the focus is on price,
many business processes in India could
be considered vulnerable to price com-
petition from lower-cost locations. Mov-
ing up the value chain requires a longer
term outlook on the vendor. Te beauty
of that is that it is difcult for a com-
petitor to duplicate in a short amount
of time. When service providers begin
their lean Six Sigma journey and bring
clients along for the transformation,
they can ensure protection of their cur-
rent business -- and even win additional
business once they demonstrate that
they’re long-term business partners.
BPO provides an outstanding op-
portunity for both clients and service
providers to look at both optimizing
cost savings and achieving continuous
process improvement! Lean Six Sigma
provides the tools and techniques for
making business transformation not
just a slogan, but a systematic, disci-
plined way of daily operation.
Copyright © 2006 CTQ Media LLC- all right
reserved Content reproduced with Permission
of Sourcingmag.com
tips on quality management

outsourcing best practices annual issue 2006
AvinAsh vAshisthA
Dr. P. K. MuKherji
vinu KArthA
Governance of Ofshore Programs:
Does One
Model Fit
reduce costs, organizations use glo-
balization as a powerful advantage.
Tis strategy is popularly called “Serv-
ices Globalization”, and it is becom-
ing the accepted business paradigm
and an integral part of all successful
business strategies. However, the ex-
perience of the past few years suggests
that not all globalization initiatives
have been successful. It is estimated
that 50% of all initiatives fail to de-
The services sector is progressively
becoming the major contributor to
the Gross Domestic Product (GDP)
of developed nations. Te GDP of
most developed nations have services
as the major contributor. In order to
drive efciency, improve quality, and
liver the anticipated benefts. An in-
ternal survey conducted within the
globalization industry reveals that the
absence or inefective use of Govern-
ance organizations is the leading cause
for failure.
A recent study by Diamond Clus-
ter revealed that more than 75% of
organizations rated “Management
Complexity” as the number one risk
factor in globalization.
A more recent survey that Tolons
conducted with our clients, found that
nearly a third (28%) reported that the
lack of a Governance organization was
a key reason for not achieving globali-
zation goals.
All of these studies point to one
important question – How critical is
a formal Governance organization to
the whole globalization story?
In this paper, we examine:
l What is Ofshore Program Gov-
l What is the impact of not having
a formal Governance Organization?
l What are the elements of a good
governance model?
l Does one size ft all?
Ofshore Program Governance
Governance of an Ofshore Program
for services can be defned as specify-
ing the decision rights and account-
ability framework to enable decisions
and actions that ensure achievement
of the objectives and goals of globali-
Te primary role of the a Gov-
ernance organization is to help the
stakeholders develop the globaliza-
tion strategy, aggregate demand, as-
sess risk, schedule and prioritize, pool
resources, source and manage the de-
livery of engagements, enforce quality
standards, and build relationship with
ofshore partners.
A formal management framework
and structure enables organizations
and their partners to mutually man-
age the relationship, expectations,
contractual dependencies, and serv-
ices. Organizations that have been

Source: DiamondCluster International
Buyer Viewpoint: Top Outsourcing Risk Factors
Financial Payback
Quality of Output
Control of Resources
Reduced Effectiveness
Proximity to Staff
Low Level of Concern High
bPO stOry
outsourcing best practices annual issue 2006
successful in their globalization initia-
tives have had a Governance organiza-
tion which:
l Proactively defnes globalization
strategies and keeps them aligned to
corporate goals.
l Closely monitors and measures
performance and value generated
from the initiative.
l Continuously gathers knowl-
edge from implementation and indus-
try best practices and shares it across
organization to afect operational im-
l Maintains an efective commu-
nication channel across geographies
and boundaries of partner organiza-
Impact of Not Having a Formal
Ofshore Program Governance
Te management of any large business
operation is loaded with risks and is
especially tricky if a strong leadership
is missing. Te magnitude of this risk
multiplies if the project is executed
fve or 10 thousand miles away in a
remote location and with unfamiliar
partners. However, this is exactly the
scenario found with most globaliza-
tion programs. Ever since ofshore
sourcing started as a means of leverag-
ing low-cost resources, this challenge
has existed. Most organizations are
poorly equipped to handle the associ-
ated risks.
Te following are the most critical
challenges that organizations face in
managing globalization programs:
l Ad-hoc Scheduling of Projects
Puts Pressure on Internal Resources:
Many organizations have no formal
process for identifying what to glo-
balize, how to globalize, and when
to globalize. Tis results in each busi-
ness unit making ad-hoc decisions
about what and when they want to
globalize. Often the priorities of the
various business units clash. Since
the budgets for the various IT or
shared services often come from the
individual business units, it makes it
difcult for the IT or procurement
organization to say no. As a result,
there is tremendous pressure placed
on the IT or shared service organiza-
tion, procurement, legal department,
and project management; all of which
leads to schedule slippages, processes
circumvention, budget overruns and
staf attrition.
l No Standardization of Proc-
esses for Demand Aggregation, Pro-
curement, Delivery or Monitoring: A
large Fortune 500 Financial Services
major in the US has 13 business lines
with more than 10,000 IT resources
distributed among them. Tis organi-
zation started a globalization initiative
in 2001 with a plan to scale up to 5000
resources within fve years. Initially,
everything went well; the frst set of
applications was migrated successfully
within the allotted time. However, as
soon as they settled in, problems start-
ed to arise. Each business line insisted
that its project be delivered frst. Ten
the business line decided to choose
the globalization partner it wanted to
give the work to. Tings became even
more complicated when each business
line bypassed the procurement and IT
departments in reporting the benefts
of the globalization initiative. While
one reported 50% savings, another re-
ported a net loss, and a third claimed
5% savings. Ultimately, the organi-
zation shifted the Chief Information
Ofcer, and the company never real-
ized their goal from globalization.
Ofshore sourcing is more compli-
cated than domestic sourcing because
many of the elements of a globaliza-
tion engagement cannot be taken
for granted. Even simple things like
24-hour electricity or telephone con-
nections are risk elements in some of-
shore locations. Without a governing
body that has visibility into globali-
zation initiatives across the organiza-
tion, there is no way to ensure that
standard processes are implemented.
Each business unit or IT department
will implement its own procurement,
measurement, and reporting process-
es. Tis makes it difcult to evaluate
the efectiveness of the vendors, meas-
ure returns, or simply even report on
status. Te lack of transparency of the
various initiatives across the organiza-
tion inhibits long term strategic plan-
ning. As a result, organizations end
up ofshoring only for the cost arbi-
trage and forego other benefts, such
as quality improvement, innovation
stimulation, resource scalability and
de-risking of business drivers.
l Alienation of the IT/Shared
Services Organization by the Busi-
ness Units: Often, IT and shared
services organizations complain about
the lack of authority and responsibil-
ity to execute IT projects due to inter-
5% 10% 15% 20% 25% 30%
Vendor staff
Poor vendor domain
Weak control on
Poor Internal
buy in
Lack of internal knowledge
about offshoring
Poorly managed
Lack of a governing body
to manage the offshore
Percent of Respondents
bPO stOry
Source: TholonS industry survey
outsourcing best practices annual issue 2006
ference from the business lines. Since
the business units control the budget,
they often dictate what applications
or processes to globalize, what model
to use, which vendors to choose, and
what performance measures to imple-
ment. Tis alienates the IT/shared
services department, since they are the
ones that have to make sure projects
are delivered on time, within budget
and with high quality. Any problems
that arise are therefore highlighted as
the inability of the IT/shared services
organization to plan properly, and of-
ten end in the CIO being fred.
l Duplication and Redundancy
Caused by Diferent Business Units
Sourcing Similar Applications/Proc-
esses: Without a central organization
that brings together the various busi-
ness units on a common platform for
globalization, there is a real danger of
duplication and wastage of valuable
resource time and efort. Each busi-
ness unit conducts its own procure-
ment or sourcing process and selects
its own vendors. Tey also typically
do not track and manage in the same
way as another business unit.
Since a large percentage of the IT
and shared services needs of the busi-
ness units are similar in nature, they
end up duplicating the efort and los-
ing out on economies of scale, while
also doubling the risks.
l Projects with Sub-optimal Re-
turns From Globalization are Often
Sourced: On the whole, few program
or project managers have extensive
experience with globalization. As a
result they end up ofshoring appli-
cations and processes that are poor
candidates for globalization. A study
of globalization initiatives that have
failed will most likely point out that
the wrong processes or applications
were ofshored in the frst place. Of-
shoring the wrong process or applica-
tion is equivalent to using the wrong
map to start a cross-country expedi-
tion. It can lead to fnancial loss, loss
of morale, setback to business plans
and eventual termination of the glo-
balization initiative.
Program Governance Goals
Tere are eight critical goals for pro-
gram governance, which if managed
properly will reduce the risks with
globalization and improve the ben-
l Requirements Aggregation & Pri-
n Tis is the process by which all
requirements for information tech-
nology and business process glo-
balization services are identifed,
aggregated and prioritized across
various divisions of an organiza-
tion. Tis ensures transparency,
avoids duplication and wastage
of resources and time, as well as
maximizing fnancial and business
n Key activities:
– Assessment of a portfolio’s suit-
ability for globalization
– Aggregation of demand to create
optimal size for globalization
– Prioritization of execution based
on internal business imperatives,
resource availability, budget and
risk profle
l Resource Allocation
n Tis is the process by which in-
ternal and external resources ca-
pable of managing and executing
the services required are identifed,
qualifed, selected and managed.
n Key activities:
– Identifcation of internal and ex-
ternal resources
l Internal resources include
project teams and managers,
technical and globalization
subject matter experts; support
resources such as infrastructure,
security, procurement, legal, f-
nance, etc.
l External resources include
third party service providers,
company owned captive cent-
ers, or consultants.
– Make or Buy analysis
– Sourcing of resources
l Risk Assessment and Management
n Risk assessment and manage-
ment involves identifying, quali-
fying and managing various risks
associated with globalization.
n Key elements:
– Knowledge Risk
– Process Risk
– Communication Risk
– Environment Risk
– External Risk
– Technical Risk
– People/Resource Risk
l Quality of Service
n Quality of service ensures that
the organizational goals of qual-
Innovation &
Aggregation and
Quality of
Service & SLA’s
Voice of the
bPO stOry
outsourcing best practices annual issue 2006
ity are identifed, measured and
n Key activities:
– Metrics defnition
– Metrics measurement
– Metrics reporting and
– Continuous improvement
l Financial Monitoring
n One critical goal of globaliza-
tion is the reduction of operational
cost, thereby releasing savings that
can be deployed in other essential
areas. Financial monitoring ensures
that the plan to actual expenses for
globalization are tracked and re-
n Key Activities:
– Base case
– Financial savings scenario mod-
l Voice of the Customer
n No service is successful without
putting the customer at the center
and ensuring their satisfaction.
Voice of the customer measures
expectations of the end customers
of the IT services through feedback
and continuous improvement.
n Key Activities:
– Customer satisfaction surveys
– Capturing lessons learned and
implementing continuous im-
l Vendor Management
n Vendor management covers all
aspects of monitoring delivery ex-
ecution, vendor resource deploy-
ment, performance measurement,
culture, relationship and commu-
nication exchange, contractual ob-
ligations, fnancial remuneration
and continuous improvement.
l Innovation and Continuous Im-
n Te goal of any globalization
initiative should be to leverage the
potential for stimulating innova-
tion to grow the business. Tis
is possible through a process of
continuous application of lessons
learned, and also by moving from
skill augmentation to leading by
Main Components of
Tere are six key responsibility areas
for efective governance which allow
an organization to successfully man-
age a globalization initiative:
l Relationship Management
l Performance Management
l Risk Management
l Change Management
l Knowledge Management
Governance for Diferent
Models of Globalization
Ofshoring of business processes and
technology support can be undertak-
en using alternate business models:
l Tird Party Ofshoring: In this
model a third party vendor/ partner
organization is identifed to assume
responsibility for the applications
or business processes and deliver the
service in a more efective fashion. Te
ofshoring can be to a single service
provider or multiple service provid-
ers based on risk mitigation strategies
adopted by the organization.
l Captive/Shared Services: Te
organization may choose to create a
separate sector under its own manage-
ment to service the outsourced busi-
ness processes. Te center is generally
located in a low cost country and serv-
ices core processes of the organization.
In this model the up-front investment
is high.
l Build-Operate–Transfer: Tis
model allows the organization to out-
Component Purpose Focus
Align the
operations of
outsourced setup
with company’s
strategic objectives
Journey towards strategic partnership
Clearly defne roles and responsibilities.
Understand rules of engagement and jointly manage
contractual commitments
Focus on business results expected out of globalization
Ensure that
performance levels
are met in an
engagement on
continuous basis
Performance defnition, confguration, assessment and
Escalation procedure and resolution for performance
Quality Metrics
Performance reporting, scorecards and dashboards
Efective resource deployment and utilization
Address the risks
in globalization
and provide
mechanism to
mitigate risks
Risk assessment and impact analysis
Risk mitigation; Risk sharing
Focus on security, Disaster Recovery/Business
Continuity Planning and compliance issues
Handle changes
brought about by
the globalization
and promote
transparency in an
Cultural alignment
Focus on business results
Communicate efects of globalization and catalyze
retooling /redeployment exercise
Communication Planning, transparency and
information distribution
Collect knowledge
about best
practices and
such knowledge
through timely
Catalyze right
choice of tools and
Monitor industry best practices and benchmarks.
Assimilate, institutionalize and disseminate best
practices knowledge
bPO stOry
outsourcing best practices annual issue 2006
source to a third party partner organi-
zation while retaining a higher degree
of control. Te organization also re-
tains the option of making the unit a
captive setup beyond a specifed pe-
Te globalization strategy adopted
by the organization spells out the most
appropriate business model for im-
plementing the initiative. Te choice
of business models is one of the key
dimensions for deciding the optimal
governance model.
Does Organization Strategy
Impact Governance Model?
When deciding on the appropriate
governance model it is important to
understand the strategy and value dis-
ciplines of the outsourcing organiza-
tion. Te three value disciplines are:
l Operational efciency: Here
the focus is on business efciency
and reliability. Organizations of this
nature lead the industry in price and
convenience. Tey excel in minimiz-
ing overhead costs and streamlining
supply chain.
l Customer Intimacy: Tese or-
ganizations focus on cultivation of re-
lationships, customer service, respon-
siveness and customization based on
deep customer knowledge.
l Product/Service Leadership:
Organizations that adopt this value
discipline focus on innovation, ex-
periment with new approaches and
solutions, and concentrate on rapid
Organizations that are market lead-
ers excel in at least one value discipline
while meeting minimum threshold
levels in the other two disciplines.
Dimensions that defne the
Optimal Governance Model
Te optimal governance model for a
globalization initiative is an outcome
of the interplay between the three di-
mensions; namely, the organization’s
strategy and value principles, the glo-
balization strategy adopted and choice
of business model and lastly the man-
agement intensity of the various com-
ponents of governance.
Tis framework and structure is
supported by a defned set of stand-
ards, documented processes and best
practices. Te degree of intensity of
each component can be mapped as
Principles of Right
Implementation of Governance
To have a successful globalization en-
gagement, it is necessary to have the
right governance model and ensure
that it is implemented properly. A
handful of important principles for
implementation guarantee success.
While governance requires manag-
ing complex relationships, strong
processes, skills and tools to succeed,
globalization excellence depends on a
governance operating model imple-
mented based on principles, rather
than rules. Te important principles
of implementation include:
l Balancing stakeholder needs:
Companies that successfully outsource
continuously “take the pulse” of all
stakeholder groups to balance their
needs over time. It may be impossible
to please all stakeholder groups at the
same time. However, the governance
group should strive to balance each
group’s needs over the term of the
agreement. When the stakeholders see
Strategy & Value
Business Model
Third Party BOT Captive
Operation Focus Rel Mgmt-High




Rel Mgmt-Low
Perf Mgmt-High Perf Mgmt-High
Risk Mgmt--Med Risk Mgmt--Low
Change Mgmt-Med Change Mgmt-High
Knowledge Mgmt-Low Knowledge Mgmt-Low
Customer Intimacy Rel Mgmt-High Rel Mgmt-Med
Perf Mgmt-Med Perf Mgmt-Med
Risk Mgmt--Med Risk Mgmt--Low
Change Mgmt-High Change Mgmt-High
Knowledge Mgmt-Low Knowledge Mgmt-Low
Product Leadership Rel Mgmt-High Rel Mgmt-Med
Perf Mgmt-Med Perf Mgmt-Med
Risk Mgmt--High Risk Mgmt--Low
Change Mgmt-Med Change Mgmt-Low
Knowledge Mgmt-High Knowledge Mgmt-High
bPO stOry
outsourcing best practices annual issue 2006
that the governance group does not
consistently place one group or set of
requirements above the others, their
participation and satisfaction will in-
l Pursuing stakeholder involve-
ment: Formal governance boards and
steering committees are essential, but
informal stakeholder involvement
is the way successful relationships
are built and maintained over time.
Stakeholder involvement results from
an efective combination of informa-
tion exchange and action.
l Seeking cultural synergy: One
criterion often used when selecting an
outsourcer is cultural synergy. Gov-
ernance groups achieve improved re-
sults by identifying and building on
strengths both cultures share.
l Driving out false agreement:
False agreement occurs when some-
one agrees to do something without
any intention of actually doing it.
Although not unique to outsourcing
relationships, this can be particu-
larly damaging to them. A govern-
ance group operates predominantly
through infuence rather than author-
ity. Terefore, its members must be
able to rely on commitments made by
others, whether internal employees or
service provider staf.
l experience matters: When gov-
ernance group members are drawn
exclusively from the client company,
they begin with a globalization experi-
ence defcit that puts them at a real dis-
advantage. It helps to include service
providers in the framework, but their
perspective may not be fully aligned
to the organizations perspective. Te
best approach is to have an independ-
ent third party with real hands-on
experience in client-side governance
participate in the implementation for
a defned period of time.
l Avoid the paradox of align-
ment: Alignment between the cli-
ent company’s goals and the service
provider’s actions has long been con-
sidered the Holy Grail of globaliza-
tion. Yet alignment remains elusive
-- client companies want to cut costs
and increase service quality, while
service providers want to increase
revenue and decrease service deliv-
ery costs. While these objectives are
not necessarily opposed, they tend
to prevent efective alignment unless
both parties actively seek out those
areas where both sets of objectives
can be met. Client companies that
expect the service provider to adopt
and align with their objectives at the
expense of their own will be disap-
bPO stOry
pointed. Continued disappointment
leads to distrust, which can seriously
damage the relationship. It is better
to seek true alignment around mutu-
ally benefcial outcomes than to gain
false agreement to one-sided goals.
l SLAs aren’t enough: Service-
level agreements are extremely im-
portant and should be continuously
refned and improved over the life of
the agreement. However, they must
be augmented by other methods to
ensure customer satisfaction. For
example, the principles of balanc-
ing stakeholder needs and pursuing
stakeholder involvement can be used
to monitor and improve customer
satisfaction and relationships among
stakeholders. Ultimately, customer
satisfaction depends on the relation-
ship between the governance group
and the service provider. When trust
is high and commitment to achieving
the agreement’s goals is shared, cus-
tomer satisfaction becomes a key suc-
cess ingredient that is jointly nurtured
by both sides.
l What Next? Te frst step for an
organization is to realize the impor-
tance of having a formal governance
organization. Having gained that, the
next step will be to seek ways to de-
velop a strategy and implement it.
Excellent ofshoring governance requires many components: leadership,
tools, processes, personnel, skills and principles. Operating from shared
principles can create the basis for the high-trust relationship required to de-
liver the complex results expected from today’s globalization initiatives.
outsourcing best practices annual issue 2006
CrAig FoCArDi
Te global sourcing of information
technology (IT) services and business
process outsourcing (BPO) has moved
from a leading edge to mainstream ac-
tivity for U.S. fnancial services institu-
tions (FSIs). Mortgage lending has be-
come a leading line of business within
FSIs for reducing labor costs through
The Problem: Too Much Manual
In 2005, approximately half of the es-
timated $44 billion (USD) direct cost
base of the US mortgage industry was
labor expense. Approximately 18.9 mil-
lion loans were originated at an estimat-
ed average total direct cost of $2,100
USD per loan, for a total cost base of
nearly $40 billion. In the same year, ap-
proximately 55 million frst mortgages
were serviced at an average total direct
cost of $67 per loan, for a total cost base
of $3.8 billion. Lenders are aggressively
looking to ofshore the labor intensive,
back-ofce activities performed by loan
processors and clerks who perform data
entry, document sorting, secondary
marketing, quality control and loan
shipping activities.
Based on the size of the US mort-
gage market and the share of that
market that is operational labor cost,
the opportunity for ofshore mortgage
BPO vendors is huge. TowerGroup
forecasts that through a combination
of business process reengineering,
document imaging, business process
management, and ofshoring, the labor
cost component will decline to reach
46.5% of total direct origination costs
by 2010.
How Big Is the Ofshore Market?
Not all mortgage processes and costs
are ofshorable. Te ofshorable cost
base are those direct loan origination
and loan servicing costs that lenders
can perform ofshore. TowerGroup es-
timates the ofshorable cost base for US
mortgage loan origination processes will
increase from 19% of total direct costs
in 2005 to 35% in 2010. Te ofshora-
ble cost base for mortgage loan servicing
processes will increase from 37% 2005
to 55% in 2010. TowerGroup estimates
that the ofshorable market for mort-
gage lending processes will grow from
$9.0 billion in 2005 to $13.1 billion in
2010, with over 80% of these costs oc-
curring in loan origination processes.
Should Lenders Ofshore?
Te US Mortgage Bankers Association
(MBA) estimates (as of August 2006)
that residential mortgage lending vol-
ume will drop roughly 19 percent in
2006 and another 7% in 2007. Tower-
Group analysis of historical MBA loan
origination cost and loan volume data
shows that lender cost metrics worsen
considerably when loan volumes de-
cline. Tis happens because too many
lenders forecast market-share increases
that don’t materialize, and then it takes
a lot of time to restructure people, proc-
esses and locations to ft the lower level
of demand.
Declining loan volume, productiv-
ity and proftability also means that IT
spending budgets grow more slowly or
decline. Yet demands on the IT depart-
ment don’t decline commensurately,
and innovative chief information ofc-
ers are increasingly looking ofshore as a
way to do more with the same budget.
Ofshore Opportunities for Small
Most lenders ofshoring today are top
20 banks operating captive operations
in India, the Philippines and elsewhere.
Some large lenders that are just begin-
ning to ofshore, and many small and
medium-sized lenders will increasingly
look to business process outsourcing
(BPO) vendors for ofshore loan process-
ing rather than build captive operations
abroad, due to the lack of processing
scale, IT, management breadth, and
capital required for a captive operation.
TowerGroup envisions two paths for
small lenders to participate in ofshor-
ing. Te frst is by outsourcing to US-
based mortgage lenders that own and
manage their own ofshore operations
and that have, or can develop, private-
label ofshore BPO operations. For the
second path, TowerGroup believes that
over time, some ofshore, India-based
mortgage BPO vendors, instead of per-
forming lending tasks on each lender
client’s IT platform, will license core
loan origination and servicing systems
to provide complete loan origination
(private-label lending) or loan servic-
ing (subservicing) to small lenders. Tis
model will also require BPO providers
to establish onshore processing facilities
to execute those processes that lenders
do not want performed ofshore.
Mortgage Offshoring to
India Goes Mainstream
COver stOry
reseArCh DireCtor, towergrouP
outsourcing best practices annual issue 2006
ofshored cost base will rise at a 21%
CAGR from 2005 to 2010, reaching
$1.2 billion in 2010. Te mortgage
BPO market size component of this
ofshored cost base was $120 million
in 2005. Ofshore mortgage settlement
services BPO brings the total mortgage
BPO market to approximately $240
million. Both of these fgures exclude
additional mortgage IT services work
that lenders and settlement service pro-
viders ofshore.
Te ofshoring of lending processes is
a permanent and growing share of the
US mortgage industry cost base. Of-
shoring is creating signifcant operating
cost advantage that leading lenders will
use to competitively diferentiate them-
selves in price, service, and proftability.
As interest rates fuctuate and lending
volume declines into 2007, large lend-
ers without an ofshoring strategy are
scrambling to catch up. Although most
large lenders establish captive opera-
tions, some of the large lenders playing
catch-up and medium-sized lenders will
look to BPO vendors for ofshore loan
As with any new venture, successes
and struggles abound. Confdential in-
formation provided to TowerGroup by
fnancial institutions indicates some un-
anticipated startup costs, training costs
and employee turnover. But within a
few months operational cost efciency
is strong as labor productivity increases.
Te ofshoring of selected US mortgage
processing will increase returns to share-
holders, improve service to customers,
and create a sustainable competitive ad-
vantage for those FSIs that expand and
refne their global sourcing strategy.
About the Author
Craig Focardi, CMB, is research area director for TowerGroup’s Consumer Lending,
Global Payments and Wholesale Banking research services, which covers a wide range of
business, process, strategic, and technical topics relating to origination, servicing,
securitization, and risk management. Craig has 20 years experience in a variety of fnance,
product development, and business development roles for mortgage technology vendors,
lenders and risk management frms.TowerGroup Research is available to subscribers on the
Internet at www.towergroup.com
When and How?
TowerGroup believes than any top-40
U.S. mortgage lender (originating more
than $7.5 billion in new loan volume)
needs a global sourcing strategy. While
the captive (owned) model is not scal-
able for many lenders, joint ventures
with a BPO provider and BPO itself are
viable options. Conversely, the largest
lenders should not limit ofshoring to
their own captive operations. Tey can
beneft from BPO vendor best practices
garnered from serving a diverse range
of customers. Some lenders already use
multiple BPO vendors to diversify ven-
dor risk, create a competitive market for
services and scale more quickly. Fur-
thermore, other lenders may determine
over time that ofshoring through a cap-
tive operation is not a core competency
and consumes excessive management
How Big Will The Ofshore
Market Actually Be?
Te ofshorable market defnes the gross
costs that lenders can ofshore. It doesn’t
defne net savings from ofshoring or the
revenue opportunity for BPO vendors.
NASSCOM defnes the addressable
market as the potential revenue mar-
ket for lenders and BPO vendors that
ofshore work. Te addressable market
is thus a percentage of the ofshorable
cost base.
TowerGroup estimates that the
COver stOry
Indicator of booming economy, a high-rise building accommodating Foutune companies.
outsourcing best practices annual issue 2006
Peter BenDor-sAMuel
With the importance of outsourcing on
the rise in fnancial services institutions
as a proven course of action for trans-
forming a business to be more com-
petitive and for increasing shareholder
value, mortgage bankers recognize the
growing need for expertise in structur-
ing their deals to be more successful in
capturing value. Tis translates to en-
gaging an outsourcing consulting frm.
For most organizations, the fun-
damental objective in using a consult-
ing frm is to help run the Request for
Proposal (RFP) process and get a better
deal by reducing the service provider’s
margin in the outsourcing arrangement.
Tis approach will often yield some fa-
vorable price points, but it is limited in
its ability to ensure an outsourcing ar-
rangement is built for success, especially
considering the complexities of business
process outsourcing (BPO) and global
sourcing models.
How can an outsourcing
consulting frm assist mortgage
Te mortgage banking business has a
lot of opportunity for creating value
through outsourcing, and it’s a strategic
tool that has been widely used by the in-
dustry for many years. It has consistent
processes that are somewhat controlled
by regulations and also have consistent
outcomes. Te IT and claims processing
functions throughout the industry look
alike; therefore, there are plenty of op-
portunities for building leverage points
such as economies of scale; process or
domain expertise; and technology, hu-
man, and capital resources.
In addition, a brand new ingredient,
or leverage point, has been introduced
to outsourcing: labor arbitrage. It has
a proven ability to reduce costs and in-
crease quality and productivity by mov-
ing work to low-cost locations such as In-
dia or the Philippines. Within mortgage
banking, labor arbitrage, or ofshoring,
provides an opportunity for economies
of scale built around applications and
the Value
of Outsourcing Consultants
in Perspective
bPO stOry
FounDer & Ceo, everest grouP
outsourcing best practices annual issue 2006
frm with deep expertise and a research
capacity can help a client better predict
the attractiveness of a location fve, sev-
en, or 10 years from today. Tis type of
consultancy can also help clients better
understand the maturity and fnancial
viability of the pool of service provid-
Moreover, consultants can help a cli-
ent better understand and manage the
risks associated with enforcing contrac-
tual commitments in
an ofshore location as
well as the increased
regulatory issues be-
cause the work is han-
dled in two countries.
Mortgage bank-
ing institutions can
beneft greatly from a
more robust and holis-
tic approach to weigh-
ing their needs against
diferent outsourcing
solutions. With higher-
value consulting services
combined with research
capabilities, a consultant
can merge benchmark
information around IT
infrastructure and ap-
plications with location
optimization informa-
tion, enabling a mortgage institution to
design a better solution and select a bet-
ter outsourcing partner. Te information
will also result in designing more realistic
incentives and a more manageable gov-
ernance vehicle.
Most important of all, such con-
sulting services will enable the client
to identify risks and appropriate miti-
gation strategies. Te need to do this
is implicit in any outsourcing arrange-
ment but particularly crucial to success
in an ofshore outsourcing relationship.
IT infrastructure, as well as the ability to
further reduce costs through the people
component of claims processing.
Ofshoring is a “game-changer” in
outsourcing in that the same amount of
capital will hire more resources, which
will result in greater productivity and
reduced turnaround time. Financial
services institutions were among the
early adopters of labor arbitrage, prima-
rily through building their own shared-
service centers (the “captive” model) in
low-cost locations. However, success
has proved to be difcult for the captive
models, and many organizations are now
reaching out to outsourcing service pro-
viders to help them drive down cost.
A good consulting frm, such as Ev-
erest Group, can help a mortgage bank-
ing institution identify opportunities
for capitalizing on leverage points such
as economies of scale and labor arbi-
trage and can the client design a better
outcome—whether it’s building a cap-
tive service center or moving toward a
third-party outsourcing relationship.
Client organizations also beneft
from a consultant’s expertise and expe-
rience in identifying risks, developing
risk-mitigation strategies, and develop-
ing appropriate governance structures.
Taking Consulting to the Next
However, there are information
gaps—the real costs of labor and in-
frastructure in low-cost locations, for
example—that hinder the efectiveness
of many consultancies. Tese informa-
tion gaps can be dramatic in their bot-
tom-line impact to clients.
A consulting frm that has a research
capacity, such as the Everest Research
Institute, can bring this additional in-
formation that is crucial in designing a
higher-value solution with lower price,
more fexibility, and higher-quality
Salary costs are not the only con-
sideration when evaluating an ofshore
location; in fact, they account for only
around 44%-57% of operating costs.
What about real estate, telecommu-
nications, and equipment costs? How
about training and management costs
and other overhead? And what about
currency exchange rates? One location
may be optimal for a particular business
process but not for others.
An example of the information that
higher-value consulting can ofer is the
Cost-Maturity Framework in Everest’s
Location Optimization product. It
combines benchmark information that
reveals all elements of
cost (even the impact on
costs from government
incentives and subsidies)
at a city, not country, lev-
el. In addition, the Cost-
Maturity Framework
provides an assessment
of a particular location’s
risks such as maturity in
outsourcing, the size and
quality of the labor pool
for a particular process,
infation, attrition rates,
infrastructure reliability,
maturity of language ca-
pabilities, and other risk
A provider’s matu-
rity, for instance, is an
important factor, as it
indicates the ease of so-
lution implementation or transition to
the provider’s environment and, thus,
the speed to value realization from the
outsourcing strategy. Attrition rates not
only indicate the risk of rising labor costs
but also potential impact to the cost of
managing the relationship. Infrastruc-
ture reliability and other sustainability
risk factors are in ensuring the client’s
future needs will be met.
In addition, the attractiveness of a
location and its savings sustainability
may change over time. A consulting
also beneft
from a
expertise and
experience in
identifying risks,
strategies, and
About the Author
Peter Bendor-Samuel is the Founder and Chief Executive Ofcer of Everest Group. Peter’s
thought leadership and expertise span more than two decades of developing signifcant,
large-scale outsourcing and partnering solutions in a broad range of industries and business
processes. He is the recipient of the 2001 Outsourcing World Achievement Award and the
author of “Turning Lead Into Gold: The Demystifcation of Outsourcing,”
bPO stOry
outsourcing best practices annual issue 2006
Main Story
Andy EfstAthiou
The challenges of making BPO engagements successful
are dwarfed by the challenges of internal delivery.
of industry
Will drive aCCelerating
adoption of mortgage Bpo
ity. Banks face the additional challenge
that years of cost competition and out-
sourcing have hollowed out their abil-
ity to internally develop, maintain, and
operate custom systems.
Banking BPO is mature as most
banks outsource select processes. In
fact, banking BPO represents prima-
rily an Up-sell opportunity, rather than
a Greenfeld opportunity. Many past
outsourcing deals haven’t delivered the
expected results. However, those per-
formance failures have often refected
that the bank transferred a platform or
workforce that was delivering sub-par
performance already. “Same mess for
less” is a failed business model. Intrac-
table problems do not become tracta-
ble just because they are outsourced.
For better or worse, in a world
where regulatory change necessitates
operational transformation, “lift and
shift” is not an option. Banks need to
form a point of view on what the new
operational bases of competition will
be and partner with service providers
to capitalize on the new landscape. Ul-
timately, in banking, it’s survival of the
most adaptable.
Mortgage BPO
In the banking segment, mortgage
processing is under great pressure to
transform. Deteriorating market con-
ditions for mortgages, brought on by
increasing interest rates, declining col-
lateral values, and deteriorating bor-
rower credit quality are forcing mort-
gage lenders adapt or exit the market.
Banks are looking for fve key benefts
from mortgage processors:
l Conversion of fxed cost to vari-
able cost: through transaction based
pricing and rapid scaling of services.
l Cost reduction: cost reductions
of 20%+, with continuing cost reduc-
tions over the next fve years.
l Increased speed of execution: as
lenders compete for a shrinking pool
of business in deteriorating conditions,
executing quickly is a key competitive
l Re-engineered processes: to en-
Much has been made during the past
year of the slowdown in new BPO (and
ITO) contract signings. Is the market
slowing down? Dying? Are customers
dissatisfed with service quality and
cost? What is an informed customer
to do?
NelsonHall’s research shows a very
diferent story. Customers are using a
disciplined approach to service acquisi-
tion, which isn’t surprising considering
that industries such as banking, which
has the highest propensity to outsource
of all industries, have been outsourc-
ing IT and select processes for close to
40 years. Banks have also been early to
ofshoring, as evidenced by Citibank’s
outsourcing to India in 1986 and set-
ting up its own captive in 1991. Te
slowdown in contract signings the past
year is the result of customers taking
a considered approach to solving very
complex business challenges using
BPO services. Let us discuss the direc-
tion of one key area of BPO—mort-
gage processing BPO for banks.
Banking BPO
Globally, the banking industry is facing
the greatest change in regulatory over-
sight since the 1930s. Basel 2, SEPA,
Check 21, and SAS 70--to name a few
of the key regulatory changes mandat-
ed, but not yet fully implemented--will
necessitate that each bank re-architect
its core systems and operational de-
livery capabilities. Tese regulations
change the underlying processes such
as payment processing, so that re-con-
fguring systems will not be possible,
system conversion will be necessary.
Tis is true, regardless of whether this
is done in-house or not.
Our conversations with banks show
that banks understand that this is not
a “best of breed” selection process, but
rather a set of decisions that “bet the
bank” on the future landscape of the in-
dustry. Execution cost take-outs matter
less than time to market and fexibil-
Main Story
REsEARch diREctoR At nElsonhAll
outsourcing best practices annual issue 2006
Main Story
hance straight-though-processing and
data access.
l Platform fexibility, compat-
ibility, and improvements: the ability
to integrate to legacy platforms, while
adding functionality over time.
To achieve these benefts, vendors
are breaking apart the entire mortgage
process lifecycle and re-architecting
processes to deliver relevant benefts
(see Exhibit 1).
Mortgage BPO has been segmented
by borrower type, with vendors special-
izing on one or a few borrower types.
Service is migrating to network enabled,
low-cost delivery. Key diferentiation is
moving away from borrower character-
istics to process service features.
To meet these market needs, ven-
dors must be able to provide six key
l Consistent execution of proc-
esses: strengthening consumer protec-
tion regulations (resulting in fnes and
negative publicity) necessitates consist-
ency of execution.
l Rapid adaptation to regulatory
changes: incorporation of regulatory
changes into operations as a tactical
weapon, rather than a response.
l Access to country-specifc op-
erational experience: to support new
market entry.
l Support for secondary market
activities: an increasingly important
segment of the marketplace.
l Portfolio quality enhancement
services: reduce portfolio defaults and
manage default activity.
l Access to data: customer selec-
tion and default management in a de-
teriorating credit environment require
superior information.
Tese enablers are driving a change
in the characteristics and nature of the
vendors themselves. Vendors have tra-
ditionally provided services to highly
localized geographies and specifc mort-
gage types. Today, vendors are reaching
out across country boundaries to buy
regional vendors and product type spe-
cialists to incorporate them into a glo-
bally delivered, “industrially hardened”,
set of service oferings to create the nec-
essary enablers and benefts.
Since the beginning of 2005, M&A
activity driven by third party mortgage
processors has spiked. At the same
time, divestitures of mortgage process-
ing operations by frms not committed
to this marketplace as strategic to their
business, has also spiked upward. Tese
activities will ensure both consolida-
tion and globalization for the industry
over the next fve years.
Finally, everyone is considering of-
shore delivery of services. Te ofshore
delivery market remains very small,
at under 1% of total global mortgage
service delivery. As cost pressure forc-
es consideration of alternatives that
promise aggressive cost reduction,
the ofshore market is poised for very
strong growth over the next fve years.
Conclusion: A complex chang-
ing business environment makes BPO
choices difcult, where process transfor-
mation is required. However, cost pres-
sure and access to talent have made it
imperative that customers increasingly
engage with BPO providers to deliver
those processes in a fexible manner.
Te BPO market will continue to grow
for the foreseeable future because, over-
all, there are no credible alternatives.
Mortgage BPO is a leading area
for process transformation due to the
confuence of several factors driving
consideration and adoption of new
service delivery methods. New vendors
are entering the marketplace to deliver
services adapted to the changing needs
of this rapidly evolving industry.
Main Story
Origination services
Customer acquisition
Underwriting services
Data entry
Account set-up
Compliance checking
Mortgage services
Maintenance and customer services
Payment services
Default management
Secondary market services
Sale of loan portfolios
Portfolio management
Portfolio servicing
Prime Residential Sub-prime Residential
Business acquisition focused services
Customer acquisition
Operational efficiency focused services
Scale efficiency
Transaction accuracy
Busines disposition focused services
Transaction accuracy
Commercial Mortgages
Key Mortgage Processes
Customer selection
Customer acquisition,
efficiency, and accuracy are
driving mortgage BPO
Exhibit 1
Source: NelsonHall 2006
Lenders are trying to maintain
volume through more effective
customer acquisition
(orgination) and/or portfolio
acquisition (secondary market)
Lenders are trying to reduce
cost through scale efficiencies
in the prime market increased
accuracy where risks are
higher or more concentrated
Scale efficiency Transaction accuracy
Scale efficiency Transaction accuracy
about the author
Andrew Efstathiou is the Director for
NelsonHall’s Banking Benchmarking
and Sourcing Program. Andy brings
to NelsonHall 25 years experience in
banking and fnancial services.
outsourcing best practices annual issue 2006
using a mix of third party, captive, dif-
ferent locations, project governance is
not enough. A company can’t always
get all the benefts if it’s not looking at
organizational lines.
Under operational governance, a
company needs to look at fve key ar-
l Performance. Tis is where serv-
ice levels are looked at.
l Relationship Management. Tis
is where a company looks at how good
the relationship is, how well are they
working together and how well are is-
sues resolved.
l Resource Management. Here,
the company needs to eye the core re-
sources and development of resources.
l Contract
l Financial.
We recommend when a company
looks at operational governance, it
should not just look at service levels. In
fact, it should look at all fve key areas
as described.
What, according to you, are the criti-
cal factors an organization should
How can optimum balance be
achieved keeping in mind the of-
shoring benefts (cost savings, risk,
control, and quality)?
Optimum balance can be achieved
by evaluating the kind of cost savings
the organization is looking for, the lev-
el of risk it’s willing to bear, the kind of
control it desires, and the kind of qual-
ity that’s acceptable. When it balances,
rather optimizes all those factors, the
optimum balance is achieved. Tis is
the reason why certain companies tend
to go to the Philippines for their BPO
operations many times as they look at
a captive situation and attempt to bal-
ance the risk and control over quality
and cost.
Do these factors also play a critical
role in vendor evaluation?
Companies look at vendors while
making decisions regarding the risk,
control and quality. If we compare the
IT industry with BPO industry, we see
that there is much greater control and
risk issue involved in BPO as the mar-
ket is not as developed as the IT mar-
ket for certain processes. Hence, in the
case of a company trying to optimize
balance for BPO operations, it tends
to put a lot more focus on the risk and
control than what is required in the
case of IT industry.
What ideally should be the gov-
ernance model to manage ofshore
projects in order to prevent failure?
Te mistake that most companies
make is that they limit their govern-
ance just to project governance, while
we recommend that companies should
look at governance at three levels.
l Organizational Level. Look across
the board: it’s almost like air trafc con-
trol, the best way to explain it.
l Functional Level. Here, the
company needs to look across func-
tions such as Financial, F&A, HR, IT,
and more of the cluster.
l Operational Level. It’s the day-
to-day governance and day-to-day
management of projects.
Governance becomes very efective
particularly by use of diferent out-
sourcing or globalization models. Only
‘It wIll be a bIg
faIlure If all the
companIes focus
just on cost
Atul Vashistha, CEO of neoIT, a
leading management consultancy
focused on ofshore and global
sourcing of services.
outsourcing best practices annual issue 2006
address while planning to outsource/
ofshore? (Cultural, political, and
other risks involved).
I would say that there are seven se-
crets/key factors to look at while of-
l Embrace Globalization. Com-
pany embracing globalization should
have sponsorship related to this--has
the CEO bought on to this, where is
the resistance in organization coming
from, does sponsorship exist for this?
l Welcome It as a Transformation
Lever. A company needs to evaluate
why it’s agreeing to make this move.
Te reasons need to be clearly looked
at and the company should try to fnd
out if there is an agreement across the
board and if the move is being looked
at as a transformation lever.
l Take a Lifecycle Approach. Li-
fecycle approach means ofshoring is
not just about supply selections but
also about understanding what should
be ofshored and then looking at the
sourcing side as to which suppliers and
what locations are right for you.
l Align Business and Globalization
Objectives. A company needs to clearly
align business and globalization objec-
tives and make sure the business objec-
tives that ofshoring is going to accom-
plish for them are clearly defned.
l Assign the Best People. Te
best people should be assigned to
the project. Te best that ft can be
trained, developed or selected, and as-
signed to launch and manage the pro-
gram. Strong participation from CEO
and C-level executives and attention
and recognition by senior manage-
ment is also required to lure the best
l Implement a Strong Governance
l Embrace a Continuous Im-
provement Mindset. Embracing a
continuous improvement mindset as
the process of outsourcing/ofshoring
is not easy and companies can make
mistakes. Te mindset that you need to
continuously improve things and keep
working on things is needed.
How would a continuous improve-
ment model be inculcated in an en-
vironment wherein the whole service
methodology is being based on the
premise of cost advantage?
It will be a big failure if all the com-
panies focus just on cost
advantage because cost
savings mean nothing if
quality isn’t accomplished.
Success just doesn’t come
with cost advantage. Even
if it’s cost advantage that
the company is looking
at, the market is mature
enough now that one can
get all the benefts. Te
supplier-buyer relation-
ship should be such that
you should together be
working on improving
quality consistently rather
than seeing what you are
paying for the service.
We have seen transition-
ing of a service-based
model to a product-
based model in today’s
BPO world. What are
your thoughts on this?
Vendors are focusing
on outcome rather than
just providing a service. I
don’t see this as a transition
but just as another level
of service available in the
market. I just see this as an option. For
certain processes, the client infrastruc-
ture is not being used. For most proc-
esses that are very integrated with the
companies, e.g. Finance and Account-
ing, companies continue to use their
own infrastructure. Companies have
become more comfortable with out-
sourcing particularly ofshoring--there
will be a rise in product-based model.
I just call it a much bigger outsourcing
platform than purely just a process.
What is the “Wave Strategy” defned
by you in outsourcing perspective?
Wave strategy is about time, i.e.
when to outsource. Any company that
takes on outsourcing or ofshoring
needs to recognize that it has to build
maturity over a period of time before it
can do more complex things. It’s about
sending work ofshore as you and your
supplier, or ofshore op-
eration reaches a certain
level of maturity. “Wave
1” is simple to outsource
and as you go up in
waves your complexity
and scale of things are
changing. It’s very much
about what you are of-
shoring and how it stays
over a period of time. It
also enables ofshore op-
erations to reach higher
levels of maturity and to
be successful and build
confdence over a period
of time.
Will this Wave Strat-
egy be a suitable strat-
egy/tool for companies
looking at outsourcing
or ofshoring?
Whenever companies
are looking to develop a
roadmap, lay out a three
or fve-year plan for how
they are going to out-
source or ofshore. It’s
pretty important to be
able to select what they
are going to ofshore and then being
able to put on a timeline to it. Tat’s
what a wave strategy is. It focuses very
much on not just what and when to do
but also how to structure relations and
value to mature in the perspective of
both onsite and ofsite. Tat’s why it’s
called wave strategy because the work
goes ofshore in waves.
by EVAluATIng
ThE kInd
sAVIngs ThE
Is lOOkIng
fOr And lEVEl
Of rIsk IT Is
wIllIng TO
Atul Vashistha is the CEO of neoIT, a
leading management consultancy
focused on ofshore and global sourcing
of services. He is a leading authority
on globalization and outsourcing and
was recently recognized by Consulting
Magazine as one of the “Top 6 IT Power
outsourcing best practices annual issue 2006
Paul ThomPson
A funny thing happened to me on the
way to my next high-tech consulting
engagement. It was no longer where
I left it, conveniently located down the
road from the last company I support-
ed. It seems that while I was focused
on one client, an ofshore company
came in and moved my future client’s
information technology (IT) work to
another country and that made my job
Lost Value
in offshore outsourcing
bpo story
much easier.
Companies choose outsourcing
strategies for a number of reasons
and regardless of the country or out-
sourcing provider, every option has its
own advantages, limitations and risks.
When a company decides to outsource
software development, IT services or
business processes ofshore it must ac-
cept that a major transformation will
occur. Tis is the point when I often
get called to advise companies on how
to better manage the activities they
have sent ofshore.
Step one in working with clients en-
gaged in ofshore outsourcing; review
all contracts and validate how they
support the company’s strategic goals.
Originally, those client goals may not
have been articulated well, so now is
the time to defne success from my
client’s perspective and architect the
desired transformation. Contracts are
flled with legal terms and conditions.
Negotiating an additional partnering
agreement and service level agreement
(SLA) is a way to augment the legal
contract with plain business terms and
specifc targets against which perform-
ance can be evaluated. Each item in
the agreements should have a clear
description, a statement of purpose,
methods for measurement, time tables
and associated incentives.
A good SLA focuses on desired re-
sults with minimal attention to how the
provider will actually achieve success.
Tis leverages the provider’s experience
and brings their best practices to the
table. Any number of items can be put
into the SLA, however, there is a cost
for measuring, managing and tracking
each item. A few key SLA items that I
suggest my clients consider include:
l Defect density and removal rates
l Timeliness of deliverables
l Response times
l Staf control
l Operational improvements
l Average recovery times
l End-user satisfaction
In the practical sense, managing an
outsourcing arrangement comes down
to the client-vendor relationship. Both
parties need to consider and agree on
how they will build trust, share risk,
agree on accountability, and share suc-
cess. Tere has to be continual con-
versations focused on reasonableness.
How will success be demonstrated and
compromise achieved without the bur-
den of an overly taxing bureaucracy?
Once the contractual issues are ad-
dressed, I face changing my client’s
understanding of their outsourcing
senior advisor, meTagyre inc.
outsourcing best practices annual issue 2006
lead to problems if not kept in check.
For example: emailing requirement
changes between staf may seem quick
and efective but can leave projects
at risk for scope creep and cost over-
runs when confguration management
and change control procedures are
not followed. I work with my clients
to keep project communication ap-
propriate for the task and the overall
project goals in mind when we build
and execute the project’s plan. Often
the required communication includes
daily turnover logs, status reviews, is-
sue documentation and review, change
control, query resolution logs, quality
gates and, yes, even the occasional face
to face team building.
By the time I complete my client as-
signment, managers are running their
projects by tracking progress of deliv-
erables, defects, risk reserves, overtime
hours, staf turnover, quality gate evalu-
ations and earned value measures. By
bringing all this information together in
a dash board style presentation, clients
at all levels see the information that sup-
ports their area of responsibility.
At the beginning my client thought
their role was mostly administrative and
had no experience with ofshore. Now
when I look around at their organiza-
tion, I see that project management is
a core competency, service level agree-
ments support their needs, relationship
management is practiced with all pro-
viders and there is a solid governance
program which extends over all IT and
business processes regardless of their lo-
cation. What was once trail and error
is now a sound common sense solution
generating high returns and delivering
positive transformations.
Now if I can just remember where I
left my keys…
responsibilities. Initially I concentrate
my eforts on bringing together execu-
tive sponsorship from IT, HR, fnance
and other key business functions. Tese
executives form the strategic guidance
team which focuses on the outsourc-
ing relationship. As you would expect,
executive members set the tone for
the ofshore efort and its acceptance
throughout the enterprise. Te strategic
guidance team will address existing per-
formance issues, leverage new ofshore
services across the enterprise, and drive
future outsourcing toward a shared risk-
reward partnership.
Ofshore governance is a discipline.
It takes more than a good ofshore pro-
vider to have a positive outcome. Te
client’s ofshore governance program
is responsible for commissioning, ac-
cepting, managing and facilitating of-
shore processes and projects through-
out their enterprise. It is important
to recognize that this governance is an
evolving body of ofshore and project
management knowledge coupled with
the appropriate tools. To facilitate the
governance role, I work with clients to
set up a number of processes and tools
covering operational issue manage-
ment, training, project management
methodology, process tools and sup-
port as well as human resource man-
One often overlooked bonus of
working with an ofshore provider is
the opportunity to learn about a new
culture frst-hand. Culture infuences
all aspects of our lives. Everything from
the work ethics that drive business to
courtship and marriage are afected by
culture. As a result, undocumented as-
sumptions can easily lead to costly mis-
takes. Working with the governance
board, I help them to reduce this risk
by building their processes and tools to
include cultural infuences and ensur-
ing that this knowledge is disseminated
into all projects. When both my cli-
ent and their providers understand all
the cultural infuences, they will begin
to trust in the process and each other.
Without this trust it is impossible to
have a truly successful relationship.
In any business, major organiza-
tional change cannot possibly be trou-
ble-free and all major changes are in
some part a discovery process. Since
the governance program addresses the
organizational change, I fnd it essen-
tial that my client fll the governance
program director’s position with an in-
dividual who is infuential throughout
the enterprise. One of the most com-
mon mistakes is to have individuals
in crucial roles that are not suited to
partnering. Most often interpersonal
skills are more critical than technical
As I move my client’s focus down
to day-to-day activities, we concentrate
on the project management processes
needed to ensure timely delivery, qual-
ity assurance, budget adherence and
scope management. Management by
walking around is no longer an op-
tion. It is replaced by focusing on the
planning, controlling, management
and close-down phases of individual
projects. Te processes defned by
the governance program together with
project management training address
the complexities of communication and
management. Te tools at the heart of
the executing phase involve improving
communication. Te growth of net-
work technologies has made it easier
to share documents and communicate
directly with individuals around the
world. Tis is one area in which tech-
nology has provided advancements for
ofshore projects. Some of the tools
available today include group-ware
and collaboration applications, email,
Internet chat, voice over IP and wire-
less communication.
Tese same tools which provide
improved communication can also
About the Author
Paul Thompson is a Senior Advisor with Metagyre Inc. (www.metagyre.com) a company that
provides assessment advise and management services for companies choosing to outsource.
Metagyre assists client’s in fnding and managing the right vendors to outsource business
processes, software development and infrastructure modernization eforts.
For a free copy of Metagyre’s insights on vendor partnering, go to www.metagyre.com/
bpo story
outsourcing best practices annual issue 2006
anuPam govil
l What is the optimum outsourc-
ing model?
l Whether to go ofshore and, if
so, what is the right blend between on-
shore and ofshore?
l How to time the transitioning
phase to avoid an adverse impact on
balance sheets (especially for public
l To go multi-vendor (best of
breed) or single vendor (economies of
scale)? Which is the ideal engagement
l And the list continues …
To make the task even more com-
plicated, the ramifcations of these
decisions go beyond the immediate
core group that is afected, necessitat-
ing involvement of diferent functional
divisions within the organization-- IT,
Operations, HR, Financial, Market-
ing, Sales, and so on. No wonder that
more and more corporations have been
stafng up their outsourcing team with
Outsourcing as a discipline has
evolved rapidly over the last fve years.
Several major universities now con-
duct courses as part of their Manage-
ment Program that teach profession-
als on managing outsourcing business
and aligning outsourcing strategy
with organizational growth objectives.
However, today there is a plethora of
choices available to outsourcing deci-
sion makers, making the task far more
complex than ever before. Besides
requiring fnancial and operational
number crunching and analysis, a typi-
cal initiative also needs a fair amount of
judgmental and experiential acumen.
And often, experience isn’t enough, be-
cause of fast changes in the outsourc-
ing landscape.
Te list of considerations in a typi-
cal decision matrix continues to grow:
l What processes to outsource?
“Experience is a hard
teacher because she
gives the test frst, the
lesson afterwards,”
multi-faceted management talent and
re-christening it as the “Global Sourc-
ing Group (GSP)”.
One of the main benefts of a cen-
tralized GSP is that it can de-couple the
task of decision-making from various
functional divisions such as IT, Op-
erations, HR and Finance. Not only
does this group take a more dispas-
sionate and objective view of various
cross-organizational processes that can
be outsourced, but it also strives to de-
velop a new chemistry with outsourc-
ing service providers. However, this re-
quires a diferent thought process and
management discipline to strategize,
plan, and implement major outsourc-
ing initiatives. One of the outcomes of
this approach is that Outsourcing Part-
ners (OPs) can now be considered as a
virtual extension of your organization-
-responsible not only for achieving
measurable results but also for creating
incremental business value.
Tis is a signifcant shift from the
traditionally adversarial approach of
maximizing cost savings by “beating
down” the vendor for the lowest pos-
sible quote. Structuring contracts, ne-
gotiating pricing, and defning Service
Level Agreements (SLAs) now have a
diferent objective. But how can an
outside vendor inherit client processes,
perform them at a better SLA, lower
transactional costs, and create business
value? Te solution is through an in-
telligent blend of diferent levers such
as leveraging better process manage-
ment practices, employing automation
methods, dislocation of service delivery
to a lower cost location, and replication
of domain expertise. It’s when some of
these levers are not utilized adequately
that things start to go wrong and an
outsourcing initiative falls apart.
Recently, we have seen some reports
from Gartner that outsourcing is not
delivering the desired results and that
the customers aren’t realizing cost sav-
ing! What’s apparent from this analysis
is that many organizations are not able
to capture the true cost of executing
processes in-house. Hence, it’s difcult
Inside Out and
Outside In
bpo story
Founder & ceo, global equaTions
outsourcing best practices annual issue 2006
for them to estimate cost savings ac-
curately. Most outsourcing initiatives
fail not because of mess-ups by either
party, but because of misalignment
of goals and outcomes. In order to
win the contract, based on lowest cost
model, the service provider over-prom-
ises but cannot deliver the service prof-
itably and thereby has to cut corners.
More often than not, the company
that is outsourcing fails to calibrate the
savings properly or underestimates the
amount of management bandwidth
needed to govern the initiative. Te re-
sult is dissatisfaction and discord, lead-
ing to breakdown of the outsourcing
To achieve success, an organiza-
tion’s outsourcing decisions have to be
rooted in ground reality and based on
engendering a symbiotic relationship
with the outsourcing vendor. Consid-
ering outsourcing vendors as partners
or collaborators--with the same goals
as the customer--is the key. Tis re-
quires structuring contracts and setting
SLAs that impart equal emphasis on
the business value derived from “shar-
ing” process ownership versus lowering
Two trends that refect this shift in
outsourcing philosophy are:
Te Emergence of Gain Sharing as
a Pricing Mechanism
Here, the presumption is that there
will be additional cost-savings achieved
through business process optimization
and that the customer will be willing
to internalize those savings and share
it there forth with the vendor. Giv-
ing an outsourcing provider a fnan-
cial stake in the business for which it
provides services is an incentive that
can work well, yet few companies use
this practice. Te main reason for this
is that most frms do not always trust
the provider’s ability to afect business-
critical processes and it’s often difcult
to come up with appropriate metrics to
measure such eforts. However, mature
buyers catalyzed by progressive vendors
have begun to look at gain sharing as a
way to developing that elusive win-win
Te Decline in Mega-outsourcing
According to Gartner, the number
of outsourcing mega deals has declined
in the recent years as companies are now
opting for multi-sourcing options. In
fact, some previously inked mega deals
are being broken down into multi-
sourcing arrangements
to take advantage of
best-of-breed skills.
Tis clearly indicates
a move towards spe-
cialized BPO players
that understand an in-
dustry’s organizational
and process dynamics,
and enables successful
embedding within the
client organization. It
doesn’t necessarily ring
the death knell for the
large outsourcing frms
since they still get a ma-
jor chunk of these mul-
ti-sourcing deals, but
it certainly augurs well
for small to mid-sized
BPO frms that believe
in process expertise in
certain verticals versus
broad-based service oferings. Tese
frms also have the ability to be end-to-
end service providers, enabling custom-
ers to outsource the entire value chain
rather than discrete tasks. Hence, it’s
likely that services such as Insurance
and Mortgage Processing will be domi-
nated by verticalized business service
providers rather than the outsourcing
Rapidly evolving practices within
the outsourcing domain and contra-
dictory advice (it’s often happening)
in the market have created a profusion
of choices as well as confusion. How
can executives rise above this noise
and make the right decision? It’s best
addressed by Peter Drucker who had
a slightly diferent take on the ration-
ale and objectives of outsourcing than
Jack Welch. According to Drucker,
“Most look at outsourcing from the
point of view of cutting costs, which
I think is a delusion. What outsourc-
ing does is greatly im-
prove the quality of
the people who still
work for you. I believe
you should outsource
everything for which
there is no career track
that could lead into
senior management.”
Hence even the most
core task--assessing risk
for an Insurance under-
writer--could be a can-
didate for outsourcing
if it leads up a dead-end
career path. Eventually,
this ties to how each or-
ganization views itself
and its long-term goals.
Using improvement
of work quality of its
employees--as a factor-
-may be a contrary way
of making critical outsourcing deci-
sions. However, in the long run, that
is what separates the Good from the
More importantly, this does bring
into question the use of the classi-
cal core versus non-core distinction
for identifying processes that can be
outsourced. Te need of the hour is a
more holistic approach that balances
internal organizational dynamics with
external desirable outcomes and a per-
spective that transcends the traditional
buyer versus seller roles. To summarize:
inside is out and outside is in.
initiatives fail
not because of
mess-ups by
either party,
but because of
of goals and
outcomes. In
order to win
the contract,
based on lowest
cost model, the
service provider
About the Author
Anupam Govil is the Founder and CEO of Global Equations, an Ofshore Advisory frm. He has
over 17 years of experience in consulting, business development and venture capital; focusing
on Enterprise Software, IT services and BPO. Currently he also serves as a Venture Partner with
Enhanced Capital Partners and Texas Global LLP.
bpo story
46 Leader’s room
outsourcing best practices annual issue 2006
Aubrey C. DAniels
The Laws of Behavior
A Global
other, they would all describe
themselves by saying, “We’re
diferent.” And you know what?
Tey are right! Every supervisor
and manager creates a work cul-
ture that is diferent from every
other one in the organization. So
it should not be surprising that
when we travel sometimes several
thousand miles that people would
be substantially diferent. Unfor-
tunately, too many managers and
executives focus on the diferenc-
es rather than the similarities.
Although the obvious charac-
teristics are diferent in that we
look diferent, talk diferent, and
act diferent, under the skin we are
all pretty much the same. If I were
to go to the emergency room in
China they would not need to
know where I was from to locate
my heart. Tey would not need
to look up the average body tem-
perature of citizens of the US. As a
When organizations begin to work glo-
bally, they are often overwhelmed by the
apparent challenges—new country, new
language, diferent customs, and more.
However, these obvious diferences
often distract leaders from the task at
hand—to produce an efcient and ef-
fective product or service at a proft.
“We’re Diferent”
For as long as I have been consulting
with businesses, over 40 years, I have
heard people say, “We’re diferent.”
When telling someone in the North
about a successful engagement in the
South, they would immediately say
that they were diferent from people
in the South. Regardless of whether it
was one southern bank talking about
success to another southern bank, one
ofce or bank in the same company,
or one department of the bank to an-
Catch and positvely reinforce people in the act
of doing what you want, and you will always
get better results.
EvEry boss
ain’ t as
as mE!
WorlD’s leADing Authority on
behAviorAl sCienCe
47 Leader’s room
outsourcing best practices annual issue 2006
matter of fact, although my brain may
be smaller than some and veins and ar-
teries that feed it may be in slightly dif-
ferent places from others, my occipital
lobe would be in the same place in my
skull as those in China.
To manage cross-culturally, leaders
need to acquire a secret weapon that is
universal, one that translates in a glo-
bal environment; something that will
undeniably work no matter the setting
or circumstances. Tat secret weapon
is a practical understanding of the laws
of behavior.
No, We Are All the Same
As it applies to business and in life, one
way we are all the same is that we all
follow the same laws of behavior. If that
were not so, they would not be laws. I
have a friend that calls me from time to
time to check to see if the laws of be-
havior are still on. Of course, I laugh
and tell him that they are still operating
like they always have been and always
will. Whether in China, India, England,
and Pakistan, all people obey the laws
of behavior. When day turns to night,
people in all countries look for electric-
ity or fre to light their way. It is pre-or-
dained. We can’t escape them any more
than we can choose to exempt ourselves
from the laws of nature. One may say
that he doesn’t believe in gravity, but he
will still fall if he walks of a roof. On
visiting Saudi Arabia, we don’t need to
ask, “If people run long distances here,
do they get hot and sweaty?” By know-
ing the laws of nature, we can operate
in diferent environments and know
certain ways to respond to them even
without asking.
If the laws of nature are helpful in
dealing with diferences in the physical
environment, might the laws of behav-
ior be helpful in dealing with difer-
ences in a global economy? Te answer
is, of course, yes.
I have worked with people in more
than 20 diferent countries to use the
laws of human behavior to improve the
performance of their organizations. In
each instance, they successfully solved
problems related to performance, qual-
ity, cost, morale, and safety.
How Culture Fits with the Laws
of Behavior
A culture is nothing more than the
characteristic or typical ways that a
group of persons behave. Tese char-
acteristic ways of behaving come about
by patterns of reinforcement and pun-
ishment. Understanding a culture re-
l To map which behaviors are typi-
cally reinforced and which are typically
l To discover what things and ac-
tions act as reinforcers and punishers.
Although these two characteristics
may require some time to understand
fully, knowing how to identify them
gives leaders a distinct advantage over
those who see a culture as something
that requires a complex analysis of a
society, its history, and the subtleties
of its language and economic and po-
litical systems. Not that these are un-
important over the long term, because
they can provide information on the
culture’s contingencies of reinforce-
ment and punishment, but they are
not necessary to get to work.
If you, as a leader, do only one
thing, it should be to fully understand
the power of positive reinforcement
and how to put it to good use.
What Is a Positive Reinforcer?
Technically speaking, a positive rein-
forcer is any consequence that follows
a behavior that increases its frequency.
By this defnition, an atta-boy, a warm
fuzzy or a pat-on-the-back are not
positive reinforcers unless they increase
the behavior that they follow. Yelling
and screaming at someone may be a
positive reinforcer if it increases the
frequency of the behavior that gener-
ated the yelling and screaming.
It could be that negative attention for
the person is better than no attention at
all. By the same token, telling someone
that he has done a good job would be
a punisher if the person stopped doing
what he has been complimented for do-
ing. If the person doesn’t like or trust
you, he may have no interest in doing
something that would please you. We
know reinforcers and punishers by their
efect, not by what was done or by the
intent of what was done.
Simplistic notions of positive rein-
forcement create more problems than
they solve. Banks and fnancial institu-
tions tend to use what they know as re-
inforcers—money and tangible objects
and rewards. While tangible rewards
48 Leader’s room
outsourcing best practices annual issue 2006
certainly have their place, they are woe-
fully inadequate to bring out the best
in people because they fall short on the
critical aspects of reinforcement that
maximize behavior or performance.
Tere are four considerations or rules
for the efcient and efective delivery of
positive reinforcement, no matter where
in the world you use them:
Make it personal. To be efective,
the reinforcer must be meaningful to
the receiver. Some people hate to be
recognized for anything in public, but
many like it. Find out what is mean-
ingful to the individual.
Make it immediate. Te longer you
wait to reinforce desired behavior, the
less efective it will be. Catch and posi-
tively reinforce people in the act of do-
ing what you want, and you’ll always
get better results.
Make it frequent. One positive re-
inforcer will not make a habit. In some
athletic performances, it takes hun-
dreds of positive reinforcers to get to
peak performance. At work, there are
a great many behaviors that require
the same level of reinforcement. We
have been asked many times, “Can
you reinforce too much?” If you do it
wrong, one time is too much. If you
do it correctly, don’t worry about it.
After all, does a golfer ever tire of being
told “Good shot?” People almost never
complain of too much reinforcement.
Tey frequently complain of too little.
Make it earned. Indiscriminate
praise is a very bad practice. Bad for
the person receiving the praise and for
the person giving it. Benjamin Franklin
recognized this when he wrote, “Praise
all and blame all are two blockheads.”
People respect most what they earn,
and they respect leaders who deliver
reinforcement contingent on some ac-
complishment. Leaders who reinforce
the good, the bad, and the ugly alike
are weak leaders who do not have the
respect of the followers.
As you can see, money is an efec-
tive reinforcer when you follow the
rules above. Te problem is that when
using money, it is difcult to follow
the rules. Money cannot be given fre-
quently in most organizations. Money
is most efectively used as a back-up to
social reinforcers. A social reinforcer
can be any interaction that lets the per-
former know that he is liked, valued or
appreciated through some action other
than money or the things that money
can buy. Examples include getting the
people to tell you how they were able
to accomplish a difcult task, asking
their permission to share their ideas
and work practices with others, visit-
ing them in their work space rather
than in your ofce and having a con-
versation about how things are going
in their lives. Of course, smiles, waves,
thumbs-up and other non-verbal ways
of communicating your pleasure with
employees’ performance can never be
over-done and are almost always ap-
preciated and motivational.
In some cultures, physical gestures
such as thumbs-up may have diferent
meanings. While it is generally posi-
tively received in our culture, it is not
in all. We discovered that in certain
work settings, calling people by their
frst name was not a reinforcer as it
typically is in the US. Physically pat-
ting someone on the back also may not
go over well in many workplaces.
Why Positive Reinforcement?
Positive reinforcement is the most
powerful interpersonal tool known.
It is true around the world. Although
there is a time and place for negative
consequences for behavior, the only
way you ever get a group of people to
work at consistently high levels is with
positive reinforcement. While there are
obvious interpersonal benefts in terms
of teamwork and general work atmos-
phere, from a fnancial perspective it is
the only behavioral consequence that
captures the highest value for both the
person and the organization.
Knowing the importance and im-
pact of positive reinforcement on the
performance of an organization, the
frst thing you should do when going
to another country to work is to es-
tablish yourself as a positive reinforcer.
Tat is, someone people want to please
and to be around. Employees seek out
these people for their opinions and ad-
vice, and most importantly, they give
these people their best efort.
Te way you become a reinforcer in
a new culture is to let employees teach
you something. Ask questions that
would let the employees demonstrate
their knowledge and experience. Give
them a socially acceptable way to tell
you how industrious and clever they
are. Once you’ve shown interest in
their accomplishments and that you
value them, they will almost always re-
ciprocate by giving you their best.
When you know positive reinforce-
ment as a scientifc concept, rather
than a common sense one, diferences
are a way to create hybrid vigor in an
organization and in your own life. You
will see diferences not as a barrier but
as something to celebrate. Too many
organizations inadvertently reinforce
behavior they want less of and punish
behavior that they want more of. When
you know the laws of behavior, you are
less likely to make these mistakes and
more likely to create a strong partner-
ship that is positively reinforcing to all.
As the French say, “Vive la diference.”
Tis so-called secret weapon is really
not so secret to those who understand
and can apply the laws of behavior.
about the author
Aubrey C. Daniels, Founder and Chairman of Aubrey Daniels International (ADI),
is the world’s leading authority on behavioral science in the workplace. He is the
author of three best-selling books including, Bringing Out the Best in People
(McGraw-Hill), and his latest release, Measure of a Leader, which lays out a
powerful new vision for defning efective leadership by examining the behavior of followers.
Daniels is an internationally recognized expert on management, leadership, and workplace
issues and has received numerous awards for his work in the feld of behavior analysis.
50 Leader’s room
outsourcing best practices annual issue 2006
The View from a Cubicle:
An Interview with
Scott Adams
ONE of the most infuential manage-
ment observers of the 1990s works
from a simple home ofce in Danville,
California. He spent nine years work-
ing in a cubicle ofce at Pacifc Bell.
But Scott Adams reaches 1.5 million
people every day and his Dilbert com-
ic strip, books, and TV show shine a
harsh, silly, and often deadly accurate
light on today’s workplace. He spoke
recently with Leader to Leader editors
Paul Cohen and Alan Shrader about
his views of management, manage-
ment gurus, and his own work prac-
Leader to Leader: Scott, in a world
full of management gurus, you may
be the frst anti-management guru.
Do you see yourself as kind of an an-
tidote to gurus? Should young peo-
sCott ADAms, CreAtor of Dilbert
leADer to leADer, no. 13 summer 1999
reprinteD With permission of John
Wiley & sons, inC.
ple read your work as an inoculation
against all that they will encounter in
the workplace?
Scott Adams: I never think of my-
self as against gurus. Te thing I’m
shooting for is a point of view. I’m giv-
ing you the employee-in-the-cubicle
point of view. Tat’s very distinct from
what a lot of consultants and gurus
do. Usually they drop in by parachute,
talk to the executives and go away hav-
ing no idea what the employees are
thinking. Sometimes it doesn’t matter.
Sometimes you’re shoving something
down people’s throats and all you want
is higher stock price. Getting touchy-
feely with employees may be counter-
productive to your mission.
I’m not trying to present solutions.
But to the extent that it’s useful to
show what things are silly or objection-
able or just annoying from the employ-
ee’s point of view, that can translate to
some benefts if somebody chooses to
use it that way. It would be interesting
to have a new employee handbook that
was just Dilbert cartoons; that would
certainly tell you what you were get-
ting into—but it’s not my goal.
L2L: It seems that at least one
speaker at every management confer-
ence uses a Dilbert cartoon to illus-
trate a point. So senior managers, not
only cubicle workers, seem to appre-
ciate your point of view. If that’s the
case, why does the absurdity persist?
SA: Often absurdity is more desir-
able than the alternative. I’ll give you
an example. A high level manager in a
large organization who was considering
implementing casual Friday recently
asked for my opinion. I explained that
there’s nothing funnier than the notion
that it would be safe to allow people to
dress comfortably one day of the week
but that if you extended it to two, per-
haps that would hurt your stock price
or morale. But, having said that, I went
out to support the notion of casual Fri-
day because it’s 20 percent better than
not having it at all. So here you have
a clear example of absurdity—one day
that casual is OK—being better than
the non-absurd alternative, all casual
or all noncasual. So absurdity is often
the comfortable compromise. Tat is
just an oddity of the world.
L2L: What is the most absurd prac-
tice that you’ve seen in businesses?
SA: Tere are few things that top
cubicles. If you know the history of the
cubicle—the original idea, just over
30 years ago, was that everyone has
diferent requirements for desk space
and storage space. So if you build an
environment that was modular, then
everyone could pick and choose the
components that were appropriate for
their function. But when big compa-
nies saw it, they said “You know, if we
made them all exactly the same, these
should be really cheap.” So the myth
put forward is that this will help com-
munication and allow the free fow of
knowledge, when in fact it’s just cheap-
51 Leader’s room
outsourcing best practices annual issue 2006
er. Nobody’s fooled by the myth. But
telling people, “We’re saving a lot of
money, so just get in your little box,”
wouldn’t work. Again, it’s more com-
fortable to compromise on the absurd.
L2L: Others call it living with para-
SA: Yes. Te Dilbert Principle, in
my book of the same name, is another
example: “Te most inefective work-
ers are systematically moved to the
place where they can do the least dam-
age—management.” Tat wasn’t just
a comic exaggeration; I was actually
observing that the least skilled people
were being promoted specifcally so
that you didn’t waste your skilled peo-
ple in those jobs. And nothing could
be more absurd than putting the least
competent people in a job that has lev-
erage on everybody’s results.
L2L: You treat bosses harshly in
your work. Is there something about
being in a position of authority in an
organization that brings out the worst
in people?
SA: In Dilbert’s world, the technical
world, where Dilbert is an MIT gradu-
ate with double 800s on the SAT’s,
there are things that he sees as obvious
that his boss is not going to see. But it
has always amused me that you can go
anywhere and the guy in the John Deere
hat will get of the tractor and tell you
why NAFTA won’t work and why trade
policy needs to be diferent. And he
won’t say, “It’s bad for me personally.”
He’ll give you supply side economics
and political theory. Everyone believes
that they’re smarter than the people in
charge. But usually that’s because they
have less information. Every decision
the boss makes may not appear to make
perfect sense. But isn’t it possible he
knows something we don’t?
L2L: But isn’t that also a conven-
ient dodge? “If you only knew what I
knew.” Or, “You don’t have the whole
SA: But then bosses can’t say that
because they’ll be picked to death: “Are
you saying there’s going to be a reor-
ganization? Is there a merger? I better
stop working.” Nothing is more dam-
aging than the usual “what have you
heard” rumor mongering. Tat’s the
kiss of death for productivity.
L2L: Did you ever have a good boss?
And if so, what did that person do?
SA: People are surprised to hear that
I had more good bosses than not. And
the Dilbert world is every bad experi-
ence that I ever had with maybe 30
diferent bosses, plus experiences col-
lected from others. For example, the
boss who said, “My job is to give you
what you need to do your job.” We’d
say, “We really need to create a budget.
Can we talk to you next week?” And
he’d be out for the next month, liter-
ally. He was completely unavailable to
do the thing which he was just telling
us was his only job. Otherwise, he was
a great guy and smart and had lots of
good things going for him.
L2L: Have you ever had to manage
others ? And if so, what did you learn
from that?
SA: I was a bank supervisor and al-
though I did not have my own ofce
then, I had a taller
cubicle. Tat’s what
you got. It was very
special. I had—at the
peak—nine people
working for me. And
they of course all had
completely diferent
requirements. I tried to treat them dif-
ferently. My rule number 1 for boss-
dom is that you have to craft it to the
specifc person in that specifc job. But
that means that basically you’re doomed
if you have a group of even three peo-
ple. You will be inconsistent—treating
some people harshly and others with
encouragement. I try to avoid being in
that position.
Te other thing I learned is that dur-
ing that time I actually thought I was a
good manager. Everyone I meet thinks
never will
a manager
admit, “I am
terrible at
never will
a manager
admit, “I am
terrible at
they are good managers, too. Almost
never will you meet a manager who says,
“You know, I have to admit, I really am
terrible at managing. Everybody hates
me and I’m incompetent.” No one says
it because I think people don’t believe it.
And over time, I’ve come to grips with
the fact that I probably was a bad man-
ager, or certainly bad in some ways that
were completely invisible to me, just
as everyone else’s faults are invisible to
them. Some of the magic of managing is
to somehow not see how you’re destroy-
ing people’s productivity.
L2L: How does a manager get a
sense of what’s really going on in the
organization or with customers?
SA: Te way I’ve seen it done is with
spies. And what that usually means is
befriending specifc employees in key
places who are at lower levels. Teir
incentive is they want to suck up to
somebody who is in power, and your
incentive is you want somebody who
will actually tell you what people are
saying. Of course, all information is
imperfect but the spy method is the
only one I’ve seen that is reliable. Even
now, with no employees, I get fltered
information. Every problem that I’ve
ever heard about—from licensing to
anything else—somebody out there
was willing to tell me anonymously by
e-mail. It’s a pretty wonderful system.
L2L: You have noted that it’s very
hard to assess performance in most
organizations. How would you handle
performance assessment?
SA: You want to avoid any situation
in which your success depends on mo-
tivating someone who can’t be meas-
ured. You can’t win that game. But I
fnd that when people have contracts,
they perform, because they treat you
like a customer. Tere’s an immediate,
specifc reason that they want you to
be delighted with their work. But as
soon as people become an employee,
they feel like they’re a kid in the family
and you can’t really disown them that
easily. Tere’s a process and paperwork
52 Leader’s room
outsourcing best practices annual issue 2006
and you don’t want to feel you made
the wrong decision to hire them in the
frst place. You’re stuck.
L2L: You’re saying don’t be a boss—
be a customer.
SA: Yes. And ultimately, put yourself
in a position where you can assess by
outcomes. But don’t try
to put objective meas-
ures on something that
can’t be quantifed. I al-
ways told my employ-
ees that performance
reviews didn’t matter too much and that
what mattered is whether they were get-
ting better and were learning stuf.
L2L: You’ve said that most employee
recognition and motivation eforts are
degrading—pointing out, for instance,
that senior managers don’t get employ-
ee recognition. How should you recog-
nize and acknowledge efort?
SA: I’ll speak only as an employee
who has been on the receiving end.
What has worked for me is that some-
body let the people I worked with know
that I did a good job. Pure ego gratif-
cation. But the employee of the week
thing—there was a case recently where
the employees were mad because the
only person who ever got the employee
of the week was the top performer.
Tat seemed so unfair. So management
actually caved and started giving it out
on a “fairer” basis—everybody got to
be employee of the week.
L2L: In your ideal company, de-
scribed in “Te Dilbert Principle,”
managers try to keep employees hap-
py, not humiliate them, allow them to
be productive, and let them leave at
5:00. Why is that so difcult for or-
SA: It’s difcult mostly because you
don’t get to choose your employees.
Often, you’re the manager who comes
in and you inherit a group and they’re
already disgruntled. All positive models
of work depend on having people who
want to be there and feel there’s some
“Don’t be
a boss,
...be a
“Don’t be
a boss,
...be a
reason to be working. Part of the prob-
lem also is that so many people have jobs
where what they produce is invisible: I
drafted a contact today. I improved
how my biggest customer thinks about
us—which is real, but you just can’t see
it. So, you look for the stuf you can
see—how long people are in the ofce
and what they’re wearing. You default to
that because it’s visible.
L2L: Have you found any leader-
ship training approaches that have
SA: Te only things that I think
work are where people are doing the
actual job, where they get shared ex-
perience and enjoy some success as a
team. But taking them out and mak-
ing them hang from ropes and trees—I
once experienced a trust exercise where
my partner jumped out of the way and
let me fall on my butt, because she
thought that I looked too heavy. I’m
5’8”, and she outweighed me.
I also was in a problem-solving ex-
ercise where you had to get from one
place to another by putting planks
from some tree stump-like things to
other tree stump things and then col-
lect all the planks and get all your peo-
ple to the other side. And I had a boss
who ignored what everyone was saying
and insisted on doing it his own way. It
ended with all of us on the other side
and him on a plank out in the middle.
It was everything I needed to know—
everything discouraging about where I
worked. It was the clearest signal that
we were doomed as a group.
L2L: You suggest that, outside of
sports, teamwork is dangerous. How
do you think people should organize
complex work that requires multiple
types of expertise?
SA: I’m learning how they do stuf in
Hollywood. Everything there is a virtual
business. If you shoot a pilot episode,
everybody’s a free agent. You fnd your
director, your writers, you put the thing
together, a few people look at it—and
then it dies, usually. Nineteen out of 20
pilots are never shown. So you disband
and then some other group collects. It’s
a diferent model than anything you see
in corporate America. If you’re making
a toothpaste in corporate America and
it’s not exactly right the frst time, you
do your focus group—keep working on
it. In Hollywood you throw it away, and
all the people instantly. And they don’t
ever work together again except in ones
and twos.
L2L: In Dilbert’s world, the mar-
keting department is always the en-
emy. Why? When you put engineers
and marketing people in the same
room, it just doesn’t work.
SA: Tings happen based on how
you’re trained. Economics people can
talk to engineering
people because you’re
always looking for the
cheapest, easiest, sim-
plest, most elegant so-
lution. You’re looking
at complexity and try-
ing to simplify. Mar-
keting people are try-
ing to hide reality.
Tey’re trying to take,
for example, long dis-
tance telephone serv-
ice, which is exactly the same no mat-
ter who you buy it from, and convince
people that one is better. All of your
instincts as an engineer are to be logical
and simple and reliable—and in mar-
keting, everything is to take what is
clear and make it unclear.
L2L: How have you approached
the marketing of your ideas and prod-
SA: If you look at my cartoon work,
what was missing was, I didn’t know
what people liked or didn’t. So I put my
e-mail address in the strip and did what
any business person does—I opened a
channel to the customer. A standard
business practice, but never had been
done because artists don’t use stand-
ard business practices. And it worked,
because standard business practice is
So when
you put
people in
the same
it just
So when
you put
people in
the same
it just
53 Leader’s room
outsourcing best practices annual issue 2006
standard because it usually works, at
least when it comes to stuf like listen-
ing to the customer. Te other thing
that I’m a maniac about is to limit what
I’m involved with—whether it’s the TV
show or licensing the cartoon or the
Webs ite or whatever—to the creative
part, which is the part I know. I don’t
try to program the Web or to be a direc-
tor or editor or sound guy on the show.
L2L: Information overload and
competing priorities are huge frustra-
tions for managers. You get hundreds
of e-mails a day, and you have to meet
daily deadlines. How do you manage
your time and your creative process?
SA: I tend to be really good at time
management. Tis is also the business
part, the hard wiring of the brain. It
turns out that when you get massive
amounts of e-mail it all falls into about
20 diferent types of comments, and
the speed at which you can read them
is phenomenal. Also, I’ve got software
that searches for keywords so it picks
out messages I know I have to deal
with at a higher level of priority.
Let me give you a few other tips. I
don’t answer the phone before 10 A.M.
And I do most of my creative work
from about 7 to 10. Tat’s the great
thing about working at home: no one
can drop in to my cubicle. If I don’t
answer my phone, I am unreachable. I
had a pager for a while—got rid of it.
And when you have control over your
own schedule, you can do busywork
types of things when your mind can
only do those things and do creative
things when you’re at your peak. I just
don’t ever mix those.
L2L: Do you have heroes, people
you admire or look to for inspiration?
SA: Yes. Lately I’ve been reading
about great geniuses through time, like
Isaac Newton and Richard Feynman. I
also like Bill Gates. Maybe the fact that
he’s so demonized appeals to me on some
level. But the thing I can’t escape—this is
the economist part of my hardwiring—is
to compare Bill Gates to Mother Teresa.
Now, on the surface, it’s hahahahaha—
he’s evil, she’s good. End of story. Mother
Teresa worked her whole life with lep-
ers, and she left a great legacy. Bill Gates
wrote one check for $100 million dol-
lars to give vaccinations to children. He
helped a thousand times more people
than Mother Teresa, and he did it in the
time it took to write a check.
You can argue about specifc tactics
or things that Microsoft has done or not
done. But for the most part, Gates has
really big goals and he works on them
very diligently and—this is the inter-
esting part—he works on them like a
scientist. He doesn’t work on them like
a Mother Teresa. He’s not the market-
ing guy, he’s the problem solver, he’s
the game winner. If his wealth doubles
every 10 years, he could become the
frst trillionaire! And he says he wants
to give it away. Let’s say he does, and he
does it the same way he gave away the
frst little bit: he picked something the
government just wasn’t going to do. It
had immediate, amazing lifesaving im-
pact. Did 10 million people live because
he wrote that check? Possibly. So he is
picking out those places where only he
can make a diference and have long-
term benefts and are not just washing
the feet of a leper. Tat’s a holy thing to
do, but when you’re done, all you have
is a leper with clean feet. I know it’s
a totally unpopular point of view, but
you can’t escape the math of it.
L2L: You’re not far from the point
in your career where a lot of success-
ful entrepreneurs start thinking about
their legacy—what they want to do for
others. Do you have any such plans?
SA: I do, yes. I just created a com-
pany that makes a nutritious food item
called the “Dilberito”. It’s a microwave-
able burrito with 100 percent of your
23 daily vitamin and mineral needs.
On the surface, this doesn’t sound
like a big deal. But the biggest cause of
illness and death in the United States
is poor diet. Tat means the single big-
gest opportunity to improve health is
by improving diet. I assumed, as most
people do, that if you eat “right” you
get most of what your body needs.
But check the nutrition labels on your
food. You could eat a wheelbarrow full
of food before you got your vitamin
and mineral requirements.
I’d call what I’m doing enlightened
capitalism. I’m investing in a nutrition
product—as opposed to making a new
kind of hubcap—because improved nu-
trition will make life on earth better. I
chose capitalism as
my engine because
it’s self-sustaining
and relatively ef-
cient. And it’s some-
thing I’m good at.
My economics train-
ing doesn’t allow me
to make the clean
distinctions between
charity and capitalism that most people
do. In any case, I plan to rid myself of
whatever wealth I’ve created before I
die, so in my case the only diferences
between capitalism and philanthropy
are timing and efectiveness.
L2L: Scott, we started by talking
about gurus, so let’s fnish with this.
Some people view you as a kind of
spokesman for our times. What do
you make of the impact that your
work has had on others?
SA: I’ve never been comfortable
with the “spokesman” label. I think
Dilbert’s impact has less to do with
what it says than what it hears. I sense
a collective relief from Dilbert readers
that their unspoken frustrations have
been heard. Sometimes people just
need to know someone is listening.
I can’t make
the clear
charity and
that most
people do.
I can’t make
the clear
charity and
that most
people do.
about the author
Scott Adams is the creator of Dilbert, which appears in 1,900 newspapers around the world,
and author of four bestselling books, including The Dilbert Principle, which has sold 1.5
million copies since 1996. His publications, prime-time TV show, Web site, and 700 licensed
products have made Adams the head of a virtual company with an estimated $200 million in
annual revenues.
54 Leader’s room
outsourcing best practices annual issue 2006
Why Leaders
the conference table had no idea what
could be done to improve any of these
numbers. If the numbers were good
they would smile. If the numbers were
bad they would click their tongues and
make a careful note that something
would defnitely have to be done to im-
prove that measure by the next execu-
tive meeting. Ten they would move on
to the next item.
Te measurement system did not
connect the numbers to each other in a
meaningful way or
provide executives
with any guidance
as to how to im-
prove them.
Tis should
not surprise us.
After all, most measurement systems
were designed not for leaders but for ac-
countants so that companies could report
their fnancial results to shareholders and
tax authorities. Tese systems were then
inappropriately pressed into service to
support management decision making,
where for the most part they are useless.
When you see that costs are high, sales
are low, and proft is falling, you know
that action is necessary, but you do not
systems were
not designed
for leaders.
systems were
not designed
for leaders.
THE chaotic state of contemporary
measurement was impressed upon me
when I attended a senior executive
meeting of a major electronics compa-
ny, at which the company’s leaders were
carefully reviewing their dozen or so key
performance measures.
Te executives meticulously exam-
ined a list of measures that was notable
for its breadth: customer satisfaction,
sales closure ratio, market share, order
fulfllment time, employee satisfaction,
working capital, service cost per cus-
tomer, customer retention, new product
break-even time, revenue per employee,
and return on equity. Some of these
numbers described overall company
objectives (return on equity and market
share), some were operational metrics
(service cost per customer and order
fulfllment time), some were miscella-
neous items (employee satisfaction and
customer retention).
But what was most enlightening
about the meeting and the list of meas-
ures was that the executives around
miChAel hAmmer, mAnAgement guru
AnD Author
leADer to leADer, no. 24 spring 2002
reprinteD With permission of John
Wiley & sons, inC.
know what kind. Or, to cite an oft-used
cliché, “Using fnancial measures to man-
age your company is like driving while
looking into the rearview mirror.”
In simpler times, the dynamics of
business were easier to comprehend.
When a measurement indicated trou-
ble, leaders intuitively knew what to
do. Before the advent of the customer
economy, they didn’t need sophisticated
measurement systems and, for the most
part, they could get by with only the
most basic fnancial information. In a
world of placid customers and genteel
competition, performance was a low
priority. Higher costs could be passed
along, dissatisfed customers could be
safely ignored, and innovation was op-
tional. Businesses were less complex.
Customer demands were more narrowly
focused, product lines were thinner, and
the technologies of manufacturing were
less intricate. Te size and scale of most
operations were a fraction of what they
are today. Intuition and relatively sim-
ple interventions worked. If sales were
down, managers could push their re-
gional sales reps to push their sales reps
harder; they could raise or lower prices,
or they could fre all the sales manag-
55 Leader’s room
outsourcing best practices annual issue 2006
ers. Tose were the choices. With such
limited options for treatment, there was
little need for elaborate diagnosis. Te
analytics associated with sophisticated
measurement were overkill.
But now the age of intuition is over.
Businesses are so complex and change
so rapidly that a gut feel for what is im-
portant is extraordinarily difcult to de-
velop and impossible
to maintain. Tere is
relentless pressure to
improve performance
and to do so immedi-
ately. It is not obvious what steps are
necessary to achieve the required im-
An organization’s measurement
system should be able to reveal the
sources of performance inadequacies.
Yet few measurement systems do so. As
businesses became more complex and
harder to understand, many compa-
nies responded by grafting nonfnancial
elements onto their existing fnancial
measurement systems. Tese systems
developed as department managers
were called upon to improve the per-
formance of their various domains. To
this end, managers invented measures
to track how their people were doing;
they measured cost, accuracy, speed,
and productivity, often using dozens of
variables. Tey compiled these statistics
with the unarticulated belief that if their
employees performed well according to
them, then the company as a whole
would achieve its overall objectives.
Tis was an idle hope—no connection
was ever made between the items being
measured and the company’s objectives.
Instead, what was created was a meas-
urement monster, a vast outpouring of
data that was of little use to anyone and
therefore ignored by almost everyone.
Companies need a new approach to
measurement, one that begins with the
recognition that measurement is now
an essential part of managing. A Tal-
mudic dictum teaches, “Study is not the
essence, but action.” Similarly, measure-
ment is not the essence, but improve-
ment. Te purpose of measurement is
The age of
intuition is
The age of
intuition is
not to know how a business is perform-
ing but to enable it to perform better. To
this end, a contemporary measurement
system must have two basic features.
First, all data must include a rationale
and a purpose; people must know why
things are measured and, more im-
portant, what they are supposed to do
about them. Second, all measurement
must be based on a careful analysis of
the business, one that links the objec-
tives of the business to the things over
which managers and front-line person-
nel have control. Only then can the
recognition of a problematic measure
lead to the right actions that will correct
it and to improved performance of the
business as a whole.
Te old saw “Be careful what you
wish for, you may get it!” has a business
version: “Be careful what you measure,
you may get it—and it
may kill you.” Unfortu-
nately, it is common-
place for companies to
measure their way into
disaster when they have
not paid sufcient attention to the de-
sign of their measurement system. Con-
fronting unprecedented competition in
the aftermath of deregulation, one major
telephone company was trying desper-
ately to improve customer satisfaction.
Its measures of this variable seemed stuck
in concrete. Its managers’ intuition was
good enough to tell them that the caliber
of service delivered to customers was a
key determinant of satisfaction. But how
they measured the performance of the
people who helped solve customer com-
plaints was their downfall.
Te customer service representatives
(CSRs) were measured on personal pro-
ductivity-how many calls they handled
each day. Te dispatchers who sent feld
crews to fx the problems were meas-
ured on how much time the crews spent
working on site, as opposed to traveling
between sites. Te feld crews were
measured on productivity—how many
jobs they fnished each day. Everyone
did their best to perform well according
to these measurements. Unfortunately,
What you
may kill
What you
may kill
all this measurement and diligence
produced nothing that was of even the
mildest interest to the customer, who
was interested in accurate information,
the immediate restoration of service,
and a neat, durable repair. Te CSRs
were motivated to end each call quickly,
even if that meant failing to give nec-
essary information. Te dispatcher was
motivated to send feld crews to sites
that were located close together, even if
that increased customer waiting time.
Te feld crews were motivated to fn-
ish jobs quickly; the quality of the repair
was secondary. In theory, the idea be-
hind these measurements was that the
faster everyone worked, the faster cus-
tomers would have their service back,
and the happier customers would be.
In practice, the theory and the reality
didn’t connect.
To make them connect, an organiza-
tion needs to create a formal, structured,
and quantifed model of the enter-
prise—the kind that scientists and en-
gineers use to describe physical systems.
Such a model connects an organization’s
overarching goals with its controllable
activities. Ten, the organization needs
to create a deliberate process for using
measurement data to improve enter-
prise performance. Tis process must be
structured and focused to use measure-
ment information to identify the causes
of inadequate performance and then do
something about them.
Building a model of an organization
means understanding the dynamics of
the business. When it works, it works
beautifully. For example, a few years
ago, a credit card company wanted to
improve customer retention and in-
crease card utilization (that is, to in-
crease both the percentage of custom-
ers who renewed expiring cards and the
percentage of each customer’s spending
that went through the company’s card),
thereby boosting the number of card-
carrying customers and the company’s
revenue from the commissions it re-
ceived from merchants. Te company’s
leaders had many ideas about how to
achieve these goals—strong ideas. But
56 Leader’s room
outsourcing best practices annual issue 2006
the leaders couldn’t reach a decision
because there was so little supporting
evidence about which idea was most
likely to be successful. To get the facts,
the leaders decided to build a model of
their business.
Te frst draft was qualitative and
answered the question, Why do our cus-
tomers buy our product? Answer: they
are satisfed with our product and they
are not drawn to the competition. Te
leaders recognized that the second fac-
tor was out of their control, but the frst
was not. Tey continued building their
model, asking themselves what it was
about their credit card that satisfed the
customer. Tey made a list: its value (in-
cluding cost and value-added services),
customers’ experiences using it, custom-
ers’ experiences interacting with the com-
pany, and the overall corporate image.
Te second draft was quantitative.
Te company used its databases and
did research to determine the relative
importance of each factor in the quali-
tative model. Some of what the model
revealed surprised them. One service
enhancement their intuition told them
was important turned out to have lit-
tle impact on either retention or usage.
Corporate image was important to re-
tention but not usage. And so on. As a
result, they made adjustments in their
priorities and resource allocation. As all
the steps were taken, the customers re-
sponded just as the model had predict-
ed. Usage and retention—and in turn
proftability and growth—all went up.
Te credit card company had suc-
cessfully modeled how its products and
services afected customer behavior. But
this is not a model of an entire enter-
prise since it does not include the rest of
the company’s operations. A complete
model is one that correlates all a com-
pany’s specifc activities with desired
outcomes. Connecting these individual
activities to company results is the great
challenge in the area of performance
measurement and improvement.
Allmerica Financial has created and
used such a model with great success.
Its managers identifed three goals for
achieving its fnancial ambitions. Tese
became the company’s overall objectives
and were placed at the top of the model.
Te frst was customer retention. Te
second was employee retention. Te
third was to add more products and ac-
quire more partners to distribute them.
Ten the company analyzed each
of these goals, and came to understand
what factors would lead to achieving
each goal—and which of these factors
Allmerica could control or infuence. For
example, using an industry-wide measure
of customer satisfaction, the Dalbar rank-
ings, Allmerica discovered that it ranked
37th out of 55 companies on the list.
Like the credit card company described
earlier, Allmerica undertook, through
research and surveys, to determine what
would improve customer satisfaction. It
made a model—a fairly complex one—
and in a very disciplined way set out to
climb to the top of the Dalbar rankings.
Two years later, it was number 4 out of
55 while cutting expenses by tens of mil-
lions of dollars. Its people were able to
cut costs because their model allowed
them to stop doing what was unneces-
sary and to concentrate on what was im-
portant—serving the customer!
Once a company has a model, it has
to use the information it generates. Duke
Power has 200 measures, each of which
tracks an important aspect of the com-
pany’s progress toward its goals: boost-
ing revenue and cutting costs. Every
month, the 200 go out in a notebook to
every manager, providing a freeze-frame
image of the company. Each measure
is on its own page: current value, trend
over the past several months, value in
each of the company’s locations. Team
leaders receive printouts of the measures
that their teams can infuence and for
which the teams are held accountable.
(Teams are held accountable for a set of
measures, not just the lagging ones, to
prevent slippage.)
Tis—or any other—organizational
model is not useful until a formal system
for using the information is created. First,
target levels must be established for each
of the important measures. Ten actual
calculations must be performed regularly
so that the value of each measure will be
known. Ten the obvious comparison
must be made between achievement and
aspiration. If all measures are on target,
then no improvements need to be made.
If they are not, managers must intervene
by addressing the root causes of the per-
formance problems.
Most managers know how to rec-
ognize and handle problems that stem
from inadequate individual perform-
ance. But what can be done when indi-
vidual performances are fne yet organi-
zational performance lags? Te frst step
is to recognize that when this occurs,
the strong suggestion is that the fault
lies with the model and how it connects
the company’s goals to the work the
people in the company are doing.
Tere are two possibilities to inves-
tigate. First, the model may have been
fawed from the outset. Perhaps the
model makers did not understand their
customers well enough so the compa-
ny’s imperatives have been incorrectly
defned. Second, the model may have
become obsolete as a result of changes in
customer needs or competitors’ actions.
Using models as a basis for measuring is
an excellent way to keep up with changes
in the marketplace in a disciplined fash-
ion. It is to be expected that models will
be revised and retooled over time as
conditions change. In either case, when
a model isn’t working, it needs to be up-
dated, and the whole cycle begun again.
As with so many things, the true value
lies in the process, not in the end result.
about the author
Michael Hammer is the originator of reengineering, process-centered enterprises, and
superefciency -- managerial innovations that have become part of standard business
practice. He has written four books, including the international best-seller Reengineering the
Corporation. From his base in Cambridge, Massachusetts, he disseminates his latest ideas
and discoveries through public courses and conferences that are attended by thousands of
people annually.
outsourcing best practices annual issue 2006
Do you see a trend in moving cost
beneft regime to other factors for
ofshoring like quality and technol-
Yes, cost savings alone aren’t suf-
cient to sustain a momentum towards
outsourcing. If you save money but the
quality of the work is not high, then
the outsourcing initiative will have es-
sentially failed. Terefore, quality is of
critical importance. Te ability to pro-
vide process transformation benefts is
also very important, and technology
tends to play a role here. Business proc-
esses within an organization are often
very complex and not always fully
documented. Knowledge tends to be
embedded in the minds of the people
performing a particular function for
a very long time. Going through the
exercise of assessing and implementing
outsourcing ofers an opportunity to
In your recent report “BPO in
Banking—A Review of Strategies
& Trends”, it’s estimated that the
spending by North American banks
on BPO will be $7.9 billion by 2007,
what according to you are the key
drivers for such a growth in spend-
First, I think we are starting to see
a shift in how companies think about
outsourcing—a shift from a purely IT-
driven decision-making process to one
that is more business-driven. So rather
than asking the question “Should I
outsource my IT department?” fnan-
cial institutions are beginning to ask
whether they should outsource a par-
ticular business process, along with the
underlying IT that powers it. So, the
growth that’s projected in BPO spend-
ing levels refects this broader view of
outsourcing, because virtually all busi-
ness processes are IT-enabled and BPO
will increasingly also drive ITO.
Looking at key drivers, the main
driver of outsourcing has traditionally
been cost savings. But other factors
have become increasingly important.
Outsourcing can allow companies to
accelerate process re-engineering ef-
forts, and to shift from a fxed to a
variable cost structure. Outsourcing
to specialized providers can also allow
banks to take advantage of special-
ized skills that may be scarce in-house,
which can lower the time-to-market for
new products and services. Outsourc-
ing can also allow companies to free up
internal resources—both people and
capital—to focus on the core, such as
on revenue generation initiatives.
What are the various trends driving
banks to look for BPO as an option?
at ofshoring,
activity is likely
to focus on loan
process of
mortgage life
Madhavi Mantha, senior analyst
with Celent’s banking group talks
about emerging trends of BPO in
outsourcing best practices annual issue 2006
deconstruct the business process into
its component pieces and identify po-
tential areas of improvement. Te goal
is to streamline the process and actu-
ally improve performance. Technology
often plays a role in this transforma-
tion by allowing for automation of
previously used manual processes.
North American banking is going
through a consolidation phase, how
prudent will the decision be to of-
Tere are two schools of thought
on this: some feel it’s risky, some feel
it’s a very good opportunity. Te real-
ity is that integrating organizations is
a very resource-intensive process and
banks may not have sufcient internal
resources to help them through their
consolidation phase. Some will look to
third parties to assist in this efort.
What according to you are the key
challenges faced by banks to ofshore
their processes?
Banks need to have a well-defned
process for deciding what to out-
source or ofshore and how to do it.
Deciding what to outsource requires
an understanding of the bank’s focal
point within the industry value chain
to determine which processes are
most amenable to outsourcing based
on well-defned risk and ft criteria.
Te question of how is about ensur-
ing that the right governance process
is in place to manage the relationship
with the service provider. Banks must
ensure that they have the right people
and tools to manage such third-party
relationships, to ensure that perform-
ance can be measured and that service
levels can be monitored.
What according to you are the best
practices in evaluating a particular
process for ofshoring in the whole
banking value chain?
Te BPO and ofshoring industries
are still quite young and I would argue
that mature best practices have yet to
emerge. However, many service pro-
viders as well as fnancial institutions
have developed their own method-
ologies. Some examples of successful
practices include: Identifying criteria
for evaluating the “ofshorability” of
specifc processes based on factors such
as risk, customer impact, employee
impact, and degree of automation,
ensuring that a proper governance
structure is in place for assessing the
success of a process once
it’s outsourced. In general,
a systematic analysis across
business processes is re-
quired. It‘s also critical that
a cross-functional team
from within the bank be
involved in the evaluation
exercise including process
experts from the line of
business, IT, risk manage-
ment, etc. to ensure that
an ofshored process is well
integrated into the organi-
zation’s internal activities.
How do you see the mort-
gage industry responding
to BPO as a long-term
business strategy?
Te mortgage indus-
try is going through a pe-
riod of rapid technological
change. Tere is still much
room for automation and
process improvement with-
in the mortgage-processing
life cycle. Moving forward,
I think that banks will leverage a com-
bination of both internal and external
resources to improve the efciency of
their mortgage operations and BPO
will likely play a role in these eforts.
In the Mortgage Life Cycle, what key
processes are high on the ofshoring
Te range of processes being
outsourced by mortgage lenders re-
ally cuts across all three areas of the
mortgage processing life cycle, from
acquisition to origination to servic-
ing. However, mortgage servicing is
a fairly mature market and ofshor-
ing plays a smaller role there. Look-
ing specifcally at ofshoring, activity
is likely to focus on loan origination
processes. Te sub-proc-
esses within loan origi-
nation tend to be less
efcient and relatively
expensive to conduct, so
there are opportunities
in this space. Acquisi-
tion is another area with
potential, particularly in
areas such as analytics
and lead generation.
What is your outlook
for the next three-four
years in this industry?
With the boom in
mortgage refnancing
coming to an end, lend-
ers can no longer counter
the rising unit cost per
loan through increased
mortgage volumes. Lend-
ers will be looking to cut
costs without compro-
mising service, and some
will turn to third parties
to provide assistance.
Terefore, we are likely
to see an increase in mortgage out-
sourcing and ofshoring over the next
three-four years. But ofshore providers
will also face challenges as questions of
data security; regulatory compliance,
and operational transparency receive
greater attention. Ofshore service pro-
viders will have to be proactive in ad-
dressing such issues.
Banks need
tO have a
PrOCess fOr
what tO
OutsOurCe Or
OffshOre and
hOw tO dO it.
Madhavi Mantha is a senior analyst with Celent’s banking group and is based in Montreal.
Ms. Mantha’s research and consulting focus on emerging technologies and business
strategies across retail and wholesale banking, with a focus on sourcing strategies (including
outsourcing and ofshoring), ATMs, and content and business process management. She
is the primary author of recent Celent reports on business process outsourcing and ATM
advanced functionality.