Introduction to Business Process Outsourcing

What is Business Process Outsourcing (BPO) ? Insourcing business processes are

performed by the client itself or a client entity (e.g. subsidiary or an internal dept) Outsourcing Supplier) Outsourcing is the delegation of non-core operations/jobs from internal production within a business to an external entity that specializes in that operation business processes are performed by non-client entity (e.g. Vendor,

What is Business Process Outsourcing? BPO is the leveraging of technology vendors to provide and manage a company's critical and/or non-critical business processes Strategies Option to Reverse Divest Completely

In-source When?
Processes that incorporate your core competencies NonNon-labor intensive tasks Greater control over the strategic assets & resources Uncertainty of business process

In-source When? -2
Processes that require high firm specific knowledge security & confidentiality Processes that require access to intellectual property of the Co. Processes associated with image of the Co. Opportunistic behavior of a vendor

Outsource When?
Significant cost advantages Repetitive tasks with little variation NonNon-core function and/or not a competitive niche - Labor intensive tasks that do not require organizations intellectual property Skill competencies not available in organization

Outsource When? - 2
Processes that will tie up large amounts of capital in assets Processes that do not add value to a product or service Comparable or better service levels offered by service provider Ex : IT, HR, Sales & Marketing, Data Entry

Outsource - Why?
Cost Savings Inexpensive skilled professionals Save on manpower and training costs Reduce operating cost No investment in Infrastructure or Technology Capital expenditure Manage labor Upsurge or Downswing

Outsource - Why? - 2
Access to Process & Technical Expertise Specialized skills Focus on core business Non core business eat up mgt. time & resources Development of core competencies & processes Competitive edge

BPO - Categories
On the basis of Operations
Back Office Outsourcing : Includes internal business functions . e.g. billing, purchasing, payroll & benefits administration Front Office Outsourcing : Includes customerrelated services. e.g. marketing, tech reports, claim processing

BPO - Categories
On the basis of Contracts
Off-shore outsourcing : Contracted outside a company's own country Near-shore outsourcing : Contracted to a company's neighboring country On-shore outsourcing : Contracted within the company's own country

BPO Services Offered (1/6)

Customer Support Services Order status, Services, Products, Acc. status, Reservation status Technical Support Services Home PC, S/w & H/w problems, About ISPs Employee IT Help-desk Services HelpOS, Connectivity, Browser, Mail, IT operational issues Data processing services

BPO Services Offered (2/6)

Telemarketing Services Sale and purchase of products and services, crosscross-sell & up-sell upBook Keeping and Accounting Services Managing accounts, General ledger and financial issues Insurance Processing Policy Insurance, Claim payments, Record Managements

BPO Services Offered (3/6)

Data Entry Online Data Entry Services Offline Data Entry Services Directory Services Image Data Entry Services Book Data Entry Services Document Data Entry Services Data Capture Services Data Extraction Services Document Management Systems Copy Paste Services Database Development & Migration Services Data Enrichment Services Data Conversion Document Conversion Services File Conversion Services XML Conversion Services PDF Conversion Services Book Conversion Services HTML Conversion Services SGML Conversion Services Data Conversion Services EDM Services Word Formatting Services

BPO Services Offered (4/6)

Data Processing Data Processing Services Forms Processing Services Order Processing Services Image Processing Services Data Mining Services Data Cleansing Services Insurance Claims Processing Market Research Forms Processing Check Processing Services Credit Card Processing Services Transaction Processing Services Survey Processing Services Data Deduplication Services B3 forms - Customs Brokerage Bill of Lading Generation Fulfillment and Mailing Services Mailing List Compilation Services

BPO Services Offered (5/6)

Scanning Document Scanning Services Document Digitizing Services Microfiche Scanning & Conversion Microfilm Scanning & Conversion Indexing services

BPO Services Offered (6/6)

Creating Online Catalogs Catalog conversion services Catalog Building & Indexing Catalog Updation Services Catalog Processing Services Catalog Content Management

Knowledge Process Outsourcing (KPO)

Involves application of specialized domain pertinent knowledge KPO business entities provide typical domain-based processes, advanced analytical skills and business expertise, rather than just process expertise KPO derives its strength from the depth of knowledge, experience and judgment factor; BPO in contrast is more about size, volume and efficiency Law firms in the US charge an average of $400-450 per hour, where as in India the same work is done for $75 to $100 an hour

KPO -2
In Indian context, KPO salaries could be 25-50 % higher than those offered to the same domain experts such as Engineer, Doctor, CA, Lawyer, Architect, Biotechnologist, Economist, Statistician and MBAs Billing rates for KPO are higher at $30-45 per hour compared to just $10-14 in the BPO business Legal Processes (LPO), IPR and Patent related services, Engineering Services, Web Development application, CAD/CAM Applications, Business Research and Analytics - Research Process Outsourcing (RPO) , Legal Research, Clinical Research, Publishing, Market Research etc.

Concern for Indias Outsourcing Sector

Cutting Costs decrease quality? High Attrition Rates Increasing Wages Low employability despite high graduate turnout Competition with other BPO destination Philippines, Mexico, Canada, China, Israel, Russia, Ireland, and the Czech Republic Impact of US Slowdown US Presidential candidates against Outsourcing

Indian IT-BPO Industry Overview

Indian IT-BPO sector reached USD 58.8 billion in FY0809 up from $ 52 billion in FY07-08 Export revenues of $ 46.3 billion in FY08-09 recorded growth of 16.3% up fro USD 40.4 billion Domestic segment revenues grew by 21% to INR 570 billion in FY 08-09 from INR 470 billion in FY 07-08 Within the export segment, IT services grew by 14.7% to revenue of $ 26.5 billion BPO exports grew by 16.5% to revenue of $12.7 billion Engineering services & Product export grew by 11% to revenue of $ 7.1 billion

Indian IT-BPO Industry Overview contd.

Indian BPO Export

For FY 2008-09 BPO exports are up by 16.5% registering revenue of 12.7 billion USD BPO exports up by 30% registering revenues of USD 10.9 billion USD in FY 2007-08

BPO Contracts (1/8)

What Services Are to be Performed? Parties to a BPO contract need to perform thorough due diligence on each other Describe in extensive detail the services to be performed by the service provider, together with the customer's role and responsibilities Customer employees responsible for the functions to be outsourced should take an active role in developing the scope of services. They need to think about and document their daily activities and responsibilities associated with the outsourced function Many BPO projects involve the management of financial documentation or the delegation of responsibility over processes that could affect the customer's financial reporting. Under Section 404 of the Sarbanes-Oxley Act (the "Act"), public companies must annually assess and report to the Securities and Exchange Commission (SEC) on the effectiveness of their internal controls over financial reporting, including their service providers' applicable controls. Outsourcing customers subject to the Act must not only understand and document what services will be performed, but also what controls the service provider has in place and whether those controls are effective in properly authorizing, recording and reporting transactions that affect the customer's financial reports

BPO Contracts (3/8)

Service Levels Service levels are specific measurable performance standards for the outsourced services that detail exactly what is expected of the service provider in the performance of such services Set a realistic baseline for performance ideally derived from the existing performance metrics associated with the business The service levels should require continuous performance improvements over the term of the contract to motivate the provider to enhance service quality and take advantage of improvements in technology and capabilities The form, frequency and nature of reports, scorecards and other measurement tools should be stated clearly in the contract, as should the procedures for resolving service-level failures; so should the timing and format of meetings between the parties to discuss performance and other relationship issues Service Level Credits and Bonuses Service-level credits are specific amounts that will serve as credits against fees payable by the customer upon the provider's failure to meet one or more service levels The credits should be set high enough to encourage the provider, and should

BPO Contracts (4/8)

Pricing Issues / Audit Rights The parties should fully understand the pricing structure in the BPO contract What portion of the fees is fixed and what portion is variable? If variable, what factors will be used to determine fees payable, and when will adjustments apply? How will out-of-pocket expenses be addressed, especially if the expenses benefit the service provider's other customers? Finally, the fee section should be flexible enough to handle the service changes described above to compensate the provider when appropriate. The customer should have the right to inspect and audit the books and records of the provider to verify the provider's compliance with the contract in regard to fees, expenses and other matters. For customers subject to the Act, consider whether the contract should require the service provider to undergo an SAS 70 (which covers service agreements for third parties) Type II examination at least annually. Moreover, the customer should seek the right to review the provider's SAS 70 Type II reports and otherwise assess the effectiveness of the service provider's internal controls over financial reporting in relation to the outsourced services

BPO Contracts (5/8)

Subcontracting by Service Provider The service provider will often request the right to subcontract to third parties, which is generally acceptable as long as the provider remains liable for the subcontractor's performance or non-performance For many reasons--including, with respect to public companies, concerns over compliance with their obligations under Section 404 of the Act--customers may be reluctant to allow large-scale delegation of services by the provider. That is especially true if the outsourced functions relate to critical aspects of the customer's business, including financial reporting obligations, or the customer has concerns about maintaining the confidentiality of its or its customers' data or personal information Standard of Care What should be the standard of care for measuring the provider's performance? Should there be an overlay of liability beyond service-level credits for negligence (the failure to use such care as a reasonably prudent and careful person would use under similar circumstances) or gross negligence (the intentional failure to perform a duty in reckless disregard of the consequences)? Providers often resist a negligence standard, saying it imposes too great a

BPO Contracts (6/8)

Limitations on Liability And Exclusions Contract discussions with regard to limitations on liability generally focus on two areas: qualitative limitations and a quantitative cap on liability. A qualitative limitation refers to an exclusion of claims under the BPO contract for consequential, indirect, special, incidental and punitive damages. A quantitative cap on liability refers to an absolute aggregate amount of liability that a party will be required to bear under the contract. The cap usually resets annually. Exclusions to these limitations are often heavily negotiated. Common exclusions are: Amounts that are paid by an indemnitiee in respect of an indemnifiable third-party claim (such as, consequential damages paid by an indemnitee to a third party should be recoverable against the indemnifying party, even though recovery of consequential damages is otherwise prohibited). Indemnification associated with fraud, willful misconduct or infringement of another's intellectual property by the indemnifying party. Breach of the confidentiality or record retention provisions in the BPO contract by the other party.

BPO Contracts (7/8)

Dispute Resolution If the parties to the BPO contract have a dispute, the contract should clearly stipulate the dispute-resolution procedure. Will the parties be required to escalate the dispute within their organizations before triggering the formal dispute-resolution procedure? Are mediation and/or arbitration more appropriate for what is likely to be a technical and fact-intensive dispute? Or does the court system offer the best method for dispute resolution, and, if so, what is the appropriate venue? Exits and Transition The BPO contract should specify the term of the contract and termination right trigger events If the contract renews for successive terms automatically, either party should have the right to provide a notice of non-renewal Upon the contract's expiration or termination, the customer should be eligible to receive transition services and cooperation from the provider to enable the customer to smoothly and efficiently transfer the services to another provider or to internalize the outsourced function

BPO Contracts (8/8)

A maximum period for the transition should be set to encourage the parties' separation Provider may seek an escalation of fees over the course of the transition period to create a strong incentive for the customer completing the transition Consider what rights or assets will be critical to a successful transition (e.g. rights to intellectual property, leased space or equipment; the customer should address these matters as a part of the transition services to be performed by the provider) Events that might trigger termination Insolvency and related events affecting the other party A material breach of the contract which remains uncured after a stipulated cure period Provider's "consistent failure" to meet the service levels A force majeure event that has a material impact on the performance of the services for a minimum period (usually termination right for the customer only, should not relieve the provider from activating a disaster recovery or business continuity plan if otherwise part of the agreed-upon services) Customer's right to terminate for convenience (although this right, if exercised, is often accompanied by a large payment to the provider to compensate it for the capital outlays associated with the project and a reasonable amount of lost profit over the full contract term)

Service Level Agreement

SLA details the service levels (e.g. downtime, response time ) you can expect from a vendor and the consequences for failing to achieve them Sets out how the vendor is going to demonstrate its performance of the underlying BPO agreement Allows the parties to come up with a framework to establish a monitoring and reporting process so the parties can determine areas where the vendor needs to improve and where the vendor is hitting SLA targets Key Performance Indicators (KPIs) are metrics used to quantify the performance of the supplier and monitor adherence to the Service Level Agreement Identifying the relevant KPIs for effective adherence to SLA SLAs are not really a separate agreement, but should be an addendum to the main agreement Consequences as defined could include, credits against future fees right to end the contract bonuses if the provider exceeds service levels

Non Disclosure Agreement (1/2)

Also known as Confidentiality Disclosure Agreement or Propriety Information Agreement This is a legal contract between two parties which depict the restriction of access by a third party to what is considered as confidential material For example, NDA between a client and a content writer should indicate that the output of the work provided for the client should by no means be re-used by the content writer for any other purpose The Importance of an NDA from a Clients & an Outsourcing Professionals Point of View From an outsourcing professionals point-of-view: An NDA will protect your rights to your work so that the quality of output is never in doubt or in dispute. Lets say that you are a web designer. Usually, you would want to retain appropriate rights to your work so that you can re-use portions of it in the future. This way of assuring that a portion of your work is your stamp or signature should come along with a corresponding section in a written agreement

Non Disclosure Agreement (2/2)

From the point-of-view of the company/client requiring the outsourced service: An NDA states that any piece of information that you will provide to the outsourcing professional is confidential. Therefore, he or she must not share the information that you will provide with anyone else The outsourcing professional will not advertise that he or she works for you as a client whether it is through phone calls, e-mail messages or web marketing For contracts which require the creativity of an outsourcing professional, acquiring the rights to the design or the written content, for example, will allow you to make changes in the future