Everest Report Forecasts 20% Growth in FAO Pg 8
All Eyes Are on Latin America Pg 20
New Face of The BPO Sector Pg 27
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April 2011
features
10 BPO: 3 Rules to Live By by Ed Nair
10
Convergence, process performance, and analytics define the vector for the growth of BPO.
All Eyes are on Latin America 20 by Smriti Sharma Latin America has grown to be a region of great promise for the global services industry. A look at the characteristics of the region and recommendations for buyers and service providers.
8
Everest Report Forecasts 20% Growth in FAO by Smriti Sharma FAO market growth continues to see strong adoption across most industries with manufacturing, financial services, retail, travel and logistics, and energy and utilities accounting.
15
What’s Driving the FAO Market? by Smriti Sharma FAO demand will continue to come from late adopters; the mid-market also has strong potential
xperts
New Face of The BPO Sector by Kumar Parakala, KPMG
27
Keeping Pace with Evolving Technology Key for LPOs 31 by Vineet Ramachandran, Analyst at ValueNotes Sourcing Practice BPO: Where is the Innovation? By Nigel Hughes, Global Services Director, Compass Management Consulting
18
Delivering Product Quality as a Managed Service in Outcome-Based Model
by Ed Nair Outsourced product development is no longer about engineering at lower cost. The process of product engineering is now more value-driven and quality focused.
Global Services Digital Magazine
Next Issue: The Promise of IaaS
Learn about the promises of IaaS in the May special report.
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C
OMING SOON
Editor’s Note
Rewriting the Rules T
he recession in 2008 brought about many changes in the outsourcing industry. Borne out of the need to seek more bang for the buck, be it in ITO or BPO, these rules were then famously called ‘the new normal’. One aspect of this ‘new normal’ was the stress on outcome rather than effort. This led to the popularity of outcome-based pricing (at least in terms of discussions) over input-based pricing and output-based pricing.
Ed Nair Editor
ed@cybermedia.co.in
In the aftermath of the recession, the BPO industry overall seemed lackluster and had very few pockets of growth. Things got better in 2010.
Opinions are divided on which industry weathered the recession better – ITO or BPO? ITO contracts recovered with more contract renewals, marked by lower contract periods and lower contract values, with very weak new scope contracts. The BPO industry gave mixed signals. For one, large-scale BPO contracts were an exception, and then, many BPO projects that were signed were incremental in scope. The BPO industry overall seemed lackluster and had very few pockets of growth. Things got better in 2010. The outlook for BPO in 2011 is very positive. The impact of the ‘new normal’ is more visible now (than it was in 2010) in the context of the BPO industry. Many of the rules of the industry have been rewritten. This issue of the digital magazine covers quite a bit of ground in characterizing the various trends and drivers of the industry in general, although there are more specific references to the FAO segment. The other key trend story covered in this issue is the unprecedented rise of Latin America as an outsourcing region in the last few years. Countries like Chile, Colombia, Costa Rica, Brazil, Argentina to name a few have emerged as very attractive destinations. They are an interesting set of countries, ambitious and aggressive, in the way they are going about attracting outsourcing traffic. The story gives a good snapshot of the countries in the region and gives recommendations to buyers & services providers about making forays into Latin America. GS
COUNTRY-IN-FOCUS Ensuring Global Visibility
A special feature for countries to showcase their uniqueness
There are numerous outsourcing destinations that exist as great alternatives to India and China.
Inviting Countries to showcase capabilities that accentuate their uniqueness.
Examples of Country-in-focus feature Egypt
Philippines
Jordan
JORDAN
For more information write to satishg@cybermedia.co.in
Finance and Accounting Outsourcing
Everest Report Forecasts 20% Growth in FAO FAO market growth continues to see strong adoption across most industries with manufacturing, financial services, retail, travel and logistics, and energy and utilities accounting for 70-75 percent of total FAO spending in 2010. by Smriti Sharma
T
he Finance and Accounting Outsourcing Annual Report 2011, published by Everest Group states that Finance and Accounting Outsourcing market is expected to grow 15-20 percent and top $4B in annual contract value in 2011. Analyses of the report encapsulate multi-process FAO contracts with a minimum of two F&A contracts with a minimum of two F&A processes, over $1M in annualized contract value (ACV), and a minimum contract term of three years. As per the press release on the report from Everest, the FAO vendor landscape features Accenture, IBM, Genpact, Capgemini, Infosys BPO and HP as leading service providers. Other service providers in the analysis include TCS, Wipro, WNS, ACS-Xerox, Steria, Vengroff Williams & Associates (VWA), Outsource Partners International, Cognizant, EXL Services and Intelenet. Also included in the report are emerging providers: iGate-Patni, Minacs, HCL and KPIT Cummins Infosystems. According to the study, in 2010, ACV grew almost 15 percent in comparison to about 10 percent growth during 2009, and total contract values (TCV) of new engagements reached $5 B. The FAO market reached $3.5 B in ACV in 2010, representing about $28.5B in total FAO spending. “Last year saw a strong rebound in multiprocess FAO adoption, which we expect to continue this year as buyers look to reduce costs and optimize processes. However, buyers remain cautious and adopt a more phased approach rather than going in for big-bang solutions,” articulated Gaurav Gupta, managing partner, Everest Group.
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“Increasing competitive intensity among service providers is driving innovation. Beyond cost arbitrage, the FAO value proposition will expand this year to include best-in-class process optimization and, as contracts mature, we’ll see more demand for business and strategic impact. This also will be a testing year for platform and SaaS-based offerings,” added Gupta. The report highlights that F&A sourcing represents a $150-200B opportunity split equally across third-party service providers and captives/shared services. Current penetration of the third-party sourcing market represents only 5-10 percent of the overall potential, implying a significant value creation opportunity.
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April 2011
Finance and Accounting Outsourcing
FAO Bytes 1.
2. 3. 4.
5.
6.
7.
FAO market growth continues to see strong adoption across most industries with manufacturing, financial services, retail, travel and logistics, and energy and utilities accounting for 70-75 percent of total FAO spending in 2010. The United States accounted for over half of total FAO spending in 2010 while Asia-Pacific witnessed the fastest growth. Large buyers accounted for 55 percent of contracts signed in 2010. Mid-market companies, which have revenues of US$1-5 billion annually, revived adoption of FAO last year. Outsourcing of accounts payable, accounts receivable and general ledger continue to be the most outsourced processes whereas outsourcing of financial planning and analysis is an emerging trend. An end-to-end process-driven approach to FAO is also emerging as opposed to a traditional functional and piecemeal approach. More than 50 percent of the new contracts in 2010 had end-to-end scope (Procure-to-Pay, Order-to-Cash, Record-to-Report). Nearly 95 percent of FAO contracts had an offshore component with maximum offshore growth occurring in Indian tier-2 locations, Central and South America as well as Southeast Asia. Several new locations entered the FAO delivery location map including South Africa and Morocco. In 2010, technology augmentation emerged as the new “normal” – nearly 50 percent of the new contracts included add-on tools such as workflows, interfaces, document management, business process management, business intelligence and user portals/dashboards.
In addition to an increase in new FAO contracts last year over 2009, the market also reached an all-time high in contract extensions that along with contract expansions, represented nearly 55 percent of ACV growth in 2010. The study predicts organic growth to continue as contracts valued $6.2B or more are up for extension within the next three years. Shantanu Ghosh, senior vice president and global head of practices, solutions and transitions, Genpact shared his
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strategy for addressing the market in 2011. He said, “2011 plan is not different from a 2010 plan which is that we will beat the market, we will be ahead of the market in terms of growth, our penetrations in the market share will improve, and our client acquisitions will continue to be very aggressive in terms of both new logos as well as expanding our footprints with our existing logos. Genpact’s strategy is strengthened by technology platforms that enable processes in different functions and industries. Said Ghosh, “New markets like India which has got lot of small and medium is seeing traction. We will start addressing the small and medium business segment market through a combination of our traditional service model and our business process as a service.”. Further, from a competency prospective, couple of areas like statutory accounting for European landscape is very tough to do from one centralized location. Here Genpact has the strategy to do it through partners. Second Vendor aggressively contesting to gain market share Second tier vendors are aggressively contesting to gain market share and are creating differentiated offerings to distinguish themselves in the crowded FAO market. Gupta highlighted their areas of focus: a) Innovative value propositions – process maturity models, industry-specific solutions, end-to-end processes solutions, specialized process offerings, bundled FAO-PO offerings. b) Strategic alliances between pure-play FAO service providers and technology providers to offer platform/SaaS-based offerings. c) Increasing presence and foray into emerging locations such as Africa, Latin America, and Tier-2/Tier-3 cities in mature destinations such as India. Also, focusing on midmarket and small-market buyer. GS
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April 2011
Tools & Technologies
3
bpo:
10 GlobalServices
Rules to Live By
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February 2011
Tools & Technologies
Rule 1: BPO and IT are not two separate worlds. There’s a lot to gain when these glaciers collide. Rule 2: Process improvement is reaching its limit. Tie in process to business outcomes and performance. Rule 3: Acquire business smarts through analytics. And be smart about acquiring analytics.
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February 2011
Special Report
BPO: 3 Rules to Live By Convergence, process performance, and analytics define the vector for the growth of BPO. by Ed Nair
T
he BPO industry is getting more interesting than ever. In reality, it is a stodgy old industry. But the last decade has brought the BPO industry into the limelight and it gets constantly compared to its other famous cousin, the IT services industry. Once very dissimilar with each other, there is now more similarity than ever. Comprised of a motley set of horizontal and vertical industry-specific processes or functions, the BPO industry is growing along all axis (the segments). The vendor landscape is showing great dispersion and yet presents dense clusters of strengtOverlaying all the varied dynamics of business and underlying all the varied forces of economic change, there are three rules regarding BPO and BPO service providers that organizations should watch out for. Rule 1: BPO and IT are not two separate worlds. There’s a lot to gain when these glaciers collide. BPO is no longer about running sweatshops with people toiling away at processing work mechanically. The development of specific technologies like document management, information retrieval systems, and such had speeded up work in many document-intensive processes. But the advent of IT-based solutions that automate specific parts of the process lent further improvement in efficiency. For example, solutions dedicated to processing insurance claims or processing mortgage applications, automated the process to deliver better efficiency and required lesser resources. At one level, this could be called as the integration of process with technology, but at another level, it could be called as the integration of IT with operations. There is a shift in approach by BPO vendors to having increased focus on technology development. BPO vendors with the parentage of an
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IT services company call it as platform-based BPO, whereas pure play BPO vendors are looking at acquiring technology capabilities. These involve the client transitioning from its legacy software to adopt a standardized platform used by the vendor. This could be enterprise resource planning (ERP) or financial management and accounting software, payments, or a billing system, for example. Platform-based BPO usually involves the development of IP in the form of a solution that delivers the process. This is then overlaid on an IT infrastructure and services are delivered using a per transaction-based pricing model (rather than per FTE-based). Consequently, platform BPO can be thought of having four stages: hosting (involves hardware and infrastructure set-up, networking, disaster recovery); implementation (covers system design to deployment); process management (process standardization, best practices, analytics); and maintenance. Some examples include TCS’ platform BPO for procurement that handles the source-to-pay cycle; IBM’s Lender Business Process Services for mortgage processing; and Caliber Point’s (Hexaware) Republic which is a multitenant HR services delivery solution.
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April 2011
BPO: 3 Rules to Live By
Rule 2: Process improvement is reaching its limit. Tie in process to business outcomes and performance. Gains through process improvement have been incremental and may have reached its limit. It is now time to relook at the process from the point of view of business outcomes and tie it into delivering some of the performance goals. Check whether your BPO vendor is able to deliver on this front. In a survey of 151 senior finance executives, done by CFO Research Services and Genpact, the respondents showed that they take a broad view of the benefits of process improvement throughout their organizations. Many of them link process improvement to overall company performance窶馬ot just to process efficiency.
They also seek a wide range of secondary benefits that can improve both efficiency and effectiveness, including standardizing and simplifying processes throughout the enterprise and making better connections between different processes. Finance executives in the survey place equal importance on improving overall company performance and on improving the efficiency of processes themselves. A majority of respondents (58%) say that efficiency gains in processes (e.g., faster, lower cost, less rework) are a high priority for their improvement initiatives, but just as many (55%) place a high priority on the ability of process improvements to improve company performance overall.
Source: CFO Research Service Report 2010
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April 2011
Special Report
Rule 3: Acquire business smarts through analytics. And be smart about acquiring analytics.
intelligence is thus derived from the process level. BPO providers who are able to do this demonstrate higher level of leadership.
Analytics is about tapping into the embedded intelligence of a system. Analytics helps in identifying patterns in behavior and performance and is both diagnostic and prescriptive. The application of analytics in other spheres like marketing and engineering have yielded results that go beyond improving efficiency to delivering better outcomes and therefore higher performance. The same is true of business processes and how they are handled. Smart enterprises derive decision-making power and agility from analytics that run across various business functions, but it is a very challenging proposition to put into practice. This is because process measurements are oriented towards efficiency and not effectiveness. Process analytics have to be measured in terms of performance parameters and thereafter be made part of the managerial decision-making framework. The organizational
However, analytics often does not come as part of the BPO deal unless business outcomes are specified as part of the deal deliverables. A recent report on analytics offshoring by HfS Research, titled ‘Where Offshore Analytics is Heading in 2011’, states: “Analytics straddles across data management, MIS reporting, predictive model development, and business consulting. We explored the trend of IT-BPO players pushing these analytics services bundled together with other ITOBPO offerings. We recommend tjat the business need ultimately must determine the nature of bundling for clients, along with the organization’s level of experience with analytics. When analytics is proposed for process optimization, it makes business sense. However, when business decisions (such as defining marketing strategy for the next 5 years) are based on high-level analytics, saving a few dollars by bundling in a few processes is not recommended.” GS
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April 2011
Finance and Accounting Outsourcing
What’s Driving the FAO Market? FAO demand will continue to come from late adopters; the mid-market also has strong potential by Smriti Sharma
J
ust as the Philippines continues to be the hub of contact/ call center outsourcing, India has scaled up remarkably in the FAO segment of BPO. According to estimates from Everest Research, nearly more than 55 percent of FAO contracts offshore F&A services to India. Of more than 20 leading FAO service providers tracked by Everest, 18 have delivery presence in India with close to 80 delivery centers when taken together. Gaurav Gupta, managing partner, Everest Group, said “India continues to be the location of choice for offshoring F&A services.In 2010, the maximum FTE growth took place in Indian tier-2 locations, followed by South East Asia, and Central & South America. India-heritage providers also continue to register a strong presence on the FAO service provider landscape.” “Beyond its prominence as a delivery location, in recent years India has also emerged as a buyer geography for FAO. Last 2-3 years have witnessed a significant growth in terms of domestic FAO deals, with most leading FAO service providers considering this market segment as an important part of their future growth strategy” added Gupta .
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Top Trends to Watch Out For in FAO • Demand in the emerging market- whether it is India or Asia Pacific or Latin America- for FAO services will grow this year. Shantanu Ghosh, senior vice president and global head of practices, solutions and transitions, Genpact said, “The reason being a lot of multinationals - which are US and continental Europe based- have done their first wave of FAO, where they obviously focused on high impact geographies like US or UK or continental Europe are now focusing on their second or third wave outsourcing through the new market. These economies are creating companies that are growing from small to medium to big and they are expanding outside their home territories. They are also looking not only from the prospects of labor arbitrage but also from the prospect of creating growth platforms along with delivering process excellence through use o process management expertise.” • FAO will continue to increase in the developed markets, which is the source destination for demand. Demand will continue to come from late adopters. Ghosh shared, “These are the people who have not jumped on the FAO bandwagon earlier, but now have seen the model get proven and have got enough confidence that this works and they are therefore now coming in the market. Many of them are large but that also includes the medium business segments that are now beginning to show interest in now getting into the FAO market.” • For people who have experienced their first wave of FAO, they can be clearly seen going up the value chain. Lot of the business with existing customers that was in the initial pieces of transactional and little beyond transactional like ledger FAO has now moved on to closing reporting, financial planning, tax support etc.FAO is on its second generation of what can be done. Gupta stated, “Financial Planning & Analysis (FP&A) represents an emerging area in
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April 2011
Finance and Accounting Outsourcing
FAO. FAO has moved beyond just Accounts Payable, Accounts Receivable and General Ledger. An end-toend process-driven approach to FAO is also emerging as opposed to a traditional functional and piecemeal approach.” • The role of technology in FAO has evolved from the basic “tie-and-run” model to an “augmentation” model. In 2010, technology augmentation emerged as the new “normal” – nearly 50 percent of the new contracts included add-on tools such as workflows, interfaces, document management, business process management, business intelligence and user portals/ dashboards. • The adoption of performance-based incentives and/or gain-sharing has increased. As the FAO value proposition expands, the interest in performance-based incentives and/or gain-sharing models has increased to incentivize service provider to deliver beyond standard expectations. Buyers are looking at value propositions beyond just labor arbitrage. • There is an increasing trend of “verticalization” in FAO, moving away from the traditional assumption that FAO is a horizontal function. Gupta shared, “Many service providers are coming up with industry-specific FAO solutions (e.g., focused offering in travel, telecom, utility etc.). Service providers are also aligning their sales and delivery team along key verticals to make a targeted market approach.”
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Interview Viewpoint
“Increased alliances between pure play BPO providers & FAO technology providers” Milind Godbole, President of Operations, Asia Pacific, Aditya Birla Minacs offers his perspective on FAO GS: How do you compare FAO market performance in 2010 and what’s the outlook for 2011? MG: The FAO market has attained maturity with respect to the large North American buyers and most of the growth for this segment in 2010 was related to contract renewals. As per Aditya Birla Minacs market intelligence, only 30 new large deals were signed in 2010 which is 15-16percent higher compared to 2009. The EMEA saw 10-12 new large deals that was similar to NA, rest of the growth in this market was due to contract renewals and scope expansion. Mid-market (both in NA and EMEA) witnessed unprecedented growth in 2010 and this trend will continue to been seen until 2015. Based on our market survey, 2011 will be the FAO year for mid-market customers; this segment has started focusing on profitability and is looking at all possible avenues for cost reduction. FAO in APAC has continued to lag behind rest of the world. However, we believe that from 2011 onwards we expect the APAC FAO market to get onto a growth trajectory which will gain further momentum 2012 onwards. FAO in APAC will not mature until 2016. Client F&A operations in APAC continue to be primitive in comparison to NA or EMEA. The processes are paper based, limited use of technology, decentralized and mostly non-standard. We have already started noticing an increased interest in setting up Shared Service Centers (SSCs) which will pave way for FAO. SMB is another market segment that has huge market potential, but given the nuances, it might take a significant time
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April 2011
Finance and Accounting Outsourcing
Milind Godbole
for large service providers to make a significant impact. Given our recent acquisition (Compass BPO) in the FAO space we have made a silent entry into the SMB space and are well poised to ride the growth. We believe that with respect to industry segment, healthcare, insurance, retail, energy & utilities will witness maximum growth in 2011.
GS: What are the top trends seen in FAO for this year? MG: The market would witness increased alliances between pure play BPO players and F&A technology providers. There are multiple drivers behind this strategy including the need for non-linear growth, higher revenue productivity & ability to provide value added services. This would also result in additional platform based offerings, mostly targeted towards mid-market customers. Increased demand for analytics and other high-end F&A services (e.g. FP&A type services).Service providers will have to develop industry specific analytics capabilities in order to show differentiation in this market. FAO market consolidation - Increase in acquisition of captive FAO SSCs by third party service providers and also
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M&A activities in the specialized FAO service provider space. Increased investment in building onshore capability by traditional offshore (India) origin service providers. Similarly increased traction in Tier 2/3 cities in the offshore market for FAO delivery so as to nurture new talent and reduce costs. GS: What is your strategy to push your services for 2011? MG: Minacs has adopted a Blue Ocean* FAO strategy for developing the FAO market 1) Process & Domain Led - This allows us to offer niche solutions focused not only on outsourcing but more importantly address CFO pin points. 2) Target Market Led - Minacs targets its solutions towards Mid-Market & SMB customers allowing us to create sole source opportunities. 3) Technology Led - Minacs offers technology led FAO solutions and end-to-end managed platform for Automating Legacy Processes * Blue Ocean Strategy is a business strategy book first published in 2005 and written by W. Chan Kim and RenÊe Mauborgne. Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. GS
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April 2011
Product Development
Delivering Product Quality as a Managed Service in an Outcome-Based Model Outsourced product development is no longer about engineering at lower cost. The process of product engineering is now more valuedriven and quality-focused. by Ed Nair
O
utsourced product development is no longer about engineering at lower cost. The process of product engineering is now more valuedriven and quality focused. Companies such as Symphony Services are leading the trend by offering product development as a managed service and delivering new outcomes. In an interview with Global Services,Sunil Gupta, Head of PQM, Symphony Services offers his perspective on product quality management and how these new outcomes can be delivered. Excerpts: GS: What are the differences between process/service quality management and product quality management(in the context of outsourced product development, which in itself is a service)? SG: The differences between process and service quality management and product quality management (PQM) are Sunil Gupta small. In fact, PQM is actually a combination of process quality—measured through process maturity compliance—and service quality—measured through service level agreement. Because of this combination, PQM is delivered as a managed service in an outcome-based model to achieve an agreed business result, including reduction of test cycles by 25-30%, reduction of escape defect in to QA and out of QA by 20%, or reduction of Dev and Test Infrastructure cost by 25%. 18 GlobalServices
In today’s environment, independent software vendors encounter a frenetic pace to deliver innovative software releases to market, outstripping traditional product quality management objectives, methodologies, and processes. To keep pace, we are seeing more and more ISVs move to a managed product quality solution. This has been shown to improve customer satisfaction, increase release cadence, shorten test cycles, lower defect leakage and testing costs, thus saving R&D budget that can be meaningfully repurposed to increase investments in new product innovation and development. GS: What are the key drivers of product quality in outsourced R&D/product development? SG: Symphony sees successful product developments resulting from staying true to a few suggested “guidelines.” Product development managers execute against these specific key drivers for product quality:
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April 2011
Product Development
a. Building and checking quality at each stage – for build processes and practices in to each stage to be checked at each stage b. Checking early and often – as early as the build stage and continue full automation testing for every build c. Quality through process – repeatability and predictability is key d. Managed process- to ensure continuous evolution and improvement e. Managed service model -for sustained and continuous results f. Outcome engagement model - for measuring and achieving results GS: How are some of the mature ISVs handling PQM? SG: In handling PQM, most of the mature ISVs have realized limited benefits due to marginal knowledge of the previous drivers, and by starting their product quality initiative by setting up their own teams, invested in tools and infrastructure. However, realizing the down fall in this, ISVs have later moved to a managed service model to achieve the desired resulting and benefits, where the focus is still on managing outgoing metrics of QA phase rather than managing quality at each stage. GS: What are the essential steps to manage and optimize PQM? SG: At Symphony Services, we deliver five steps to achieve effective product quality management as a service:
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a. Early-stage build management and certification– This helps to improve build success rates while reducing re-work resulting from problem identification early in the development cycle—thereby increasing the efficiency and productivity of teams, including reducing initial defect escape rates to less than 20%. This is especially true for companies with a multi-site build model. b. Dynamic automation and regression testing–Faster and frequent testing ensures that you meet commercial grade software requirements for performance, scale and availability consistently. This can increase a company’s test coverage, reduce resource constraints of manual testing, and give more flexibility to adapt to changing requirements. This is achieved in every daily build in an 8-10 hours cycle. c. Experience-based usability and performance testing– We are able to improve usability and performance guaranteeing high levels of customer satisfaction. d. Cloud-based development and testing–Symphony works to enable optimum utilization of IT infrastructures by moving to a cloud-based model for development and testing. This results in 1.) optimizing cost and 2.) moving from a CAPEX to OPEX model and from fixed, dedicated environments to flexible and on-demand provisioning of environments. This allows users to manage peak infrastructure requirements on the cloud. e. Causal-oriented problem management–We conduct fine-tuning of product quality by performing a causal analysis on the field defects and taking corrective and preventive actions accordingly. GS
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April 2011
Special Report
All Eyes Are on Latin America Latin America has grown to be a region of great promise for the global services industry. A look at the characteristics of the region and recommendations for buyers and service providers on how to make forays into this region. by Smriti Sharma
R
ecent times have witnessed this region draw ace players of the outsourcing world American Express, General Motors, Intel, Genpact, Sitel, Wipro, Citibank and more. Business process outsourcing (BPO), shared service centers (SSC), call centers, offshore delivery centers have grown significantly in the region. For example, Wipro currently delivers finance and accounting services to the largest beverage company in Latin America from a service center in Curitiba, Brazil. For years, TCS had had significant presence in Uruguay. Similarly, many of the global leaders have presence in countries like Chile and Colombia. Still, many potential areas beyond call centers and IT have been untapped. Areas like HRO, FAO and procurement outsourcing have still not started to make best use of the available resources.
Juan Diaz, consulting manager, Wipro Consulting Services, author of the recent report (by Wipro Consulting Services) titled Latin America- A New World Option for Offshoring said, “When clients look at Latin America they look for Spanish language skills, geographical proximity, and also cost effectiveness. For example, if you look at India which is the most developed sector in outsourcing or shared services, there is a lot of wage inflation going on, and inflation is on the rise every year. In that comparison, Latin America is more stable. If you look at long term in that case, it is going to be probably same cost for some years and these are the kind of things companies are looking at. So, probably if you have the same cost, if you have the same talent and it takes you the same to go from Europe to India or from Europe to go to Latin America, then Latin America is also a good option.� Allure of Latin America H Karthik, vice president, Everest Group stated four drivers apart from the obvious: 1. Language Skills: Especially, in terms of Spanish and Portuguese it becomes a potent force as you think about the Spanish population in the US. There is probably no other region in the world that offers the combination of language skills at scale plus cost savings. 2. Domestic Regional Opportunities: In addition, to Latin America being a region to serve the US, it also offers a fairly significant domestic or regional opportunity especially in large countries like Brazil and Argentina where the domestic market is also fairly large. Ou estimate suggests that between 60-70 percent of the work in the region is focused on the region itself and 30-40 percent is focused on offshore, primarily the US. So domestic market is a large opportunity.
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April 2011
Special Report
3. Same Time Zone: The same time zone with the US and Canada. 4. Domestic Business Opportunities: If you are to look at large global companies, they also see domestic business opportunities in Latin America. This is irrespective of outsourcing. Speaking of how Genpact’s client feels about their chosen locations -Juarez, Mexico and Guatemala. Mary Korthuis, vice president and operations lead, Mexico and Guatemala, Genpact said, “Drug cartel-related violence and related media stories has caused concern with some customers and their own security organizations have limited/eliminated their travel to Juarez. Other customers are fine and continue to travel in and out with no concern. Besides the city issues, customers are pleased with the near shore location; easy access for mail pick up/drop off; facility literally within a “stone’s throw” from the US; easy hiring of English speaking resources who go back and forth across the border themselves so they are integrated into US culture. Technology is all in the US, so for all intensive purposes – on-shore functionality at near-shore prices.” Strategy of companies that see Latin America as a destination of choice should reflect on the following elements: • Rather than a company-by country approach, companies should adopt a regional, networked approach. They need to capture the right skill in the right cities. • Differentiated advantages should encapsulate cultural similarities and the physical proximity part. These advantages should be promoted aggressively on how they can translate into real business value. • Don Berryman, general manager of Americas at Sitel said,“You must remember this is not a domestic US location. There are many cultural and sociological similarities but they still don’t have the infrastructure of the typical U.S. location. So customers will not have the same experience they would with a US call center. Expectations have to be aligned to the uniqueness of the environment, similar to when we developed our presence in the Philippines or India.” • Focus on the services that are best provided in this region and also carve out new niches that may do well. • Compete vigorously in the local market and the global service delivery playing fields to mitigate risk and enhance economic benefit.
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• Diaz stated, “I would recommend a company that is looking at setting up their operations is that they need to have local support. As they are the ones who are operating in this location, they are the ones who know the region and they are the ones who know which are the countries that bring the best benefit depending on what you want to do.” Recommendations for buyers Location strategies must place a high priority in identifying market saturation as Latin America is not one location, but several unique countries. Buyers need to keep in mind that there are significant differences across the region in terms of cost and labor pool. For example, between Brazil and Argentina, Brazil is almost 40 – 50 percent more expensive than Argentina. There is cost dissimilarity across the region, this is something companies need to keep in mind while zeroing upon locations. Also, there are significant variations in the scale of talent pool in skills and language capabilities across the region. For example, countries like Argentina and Brazil support large scale, but countries like Colombia, Costa Rica can only support small scale centers. Also, in terms of scale there are contrasts, Brazil has fairly evolved in terms of IT skills such as SAP but countries like Costa Rica is more favorable for contact center work in Spanish and English. Differences in language skills - Brazil is more suited for Portugese work; Argentina, Chile, Mexico are more on the Spanish side. Broadly, all locations offer some advantages, there are differences across the region both across countries and cities in the countries, which companies need to keep in knowledge. Karthik said, “Most countries in this region have issues of fluctuating currency. For example, in recent months, Brazilian and Chilean currency are becoming less competitive, while Argentinian currency is becoming more competitive.” Diaz added, “Buyers need to have a clear overview of where they want to get to and what each of those countries offers to them. It comes to what they want to do in the country; if you want to do just plain call centers, then just go for a cheap location and if you want to go further and into operations across all the US and other places and company processes like procurement, then you need to be very careful where you set up those operations. They need to talk to the local people. Companies are already operating here and they have done the homework.”
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April 2011
All Eyes on Latin America
Recommendations for services providers Services providers should approach this as an integral component of their global strategy. In other words, think about what complementary roles that Latin America or the cities/countries in Latin America can play to their network of existing centers. For example: Are you thinking of Latin America as a location to do very niche work focused on the US market, or are you thinking about Latin America as a location to get certain skills? Karthik stated, “Overall, the strategy on how Latin America fits in the global play needs to be very clear and there are lots of differences across the cities and countries so people need to be very clear on how they need to use Latin America. If you are thinking of it on both the grounds of domestic opportunity and offshore opportunity, then some of the larger countries are more favorable to locate in. Also, in terms of strategies, acquisition can be a powerful mode of entry.” Don Berryman, general manager of Americas at Sitel states questions service providers should be cautious and ask before approaching the Latin American market:
• What kind of business am I planning to put in Latin America? • What kind of agents am I looking for? • Is there support in terms of workers, education level, service or sales experience and English speaking skills? • How will this location benefit my overall global location strategy? Failing to answer these questions is a common mistake that outsourcing providers have made in new markets. Added Don, “Also, there are countries in Central and South America that might not make good call center locations because they don’t have the workforce in place, so service providers need to carefully assess what kind of business they want to put in there, what kind of work experience the local people have, and can the business model sustain a long period of time to be a viable investment.” Talking about the major challenges Genpact is facing, Korthuis shared, “The main challenge is the drug cartelrelated violence and the related media stories. That said, this violence has not disrupted our operations there at all and we ensure that our employees are safe at all times.”
Tax incentives make deal comparisons difficult to do Country Argentina:
Incentives Income tax exemption of 60%, employer’s social security contributions reduced by as much as 70%, no restrictions on foreign currency wire transfers for imports of goods and services and a range of benefits derived from the recognition of software as an industrial activity.
Brazil:
Reduction in social security contributions up to 50%, tax exemptions for imports associated with software development, tax exemption on goods purchased for export, plus local government incentives, particularly around Rio de Janeiro and São Paulo.
Mexico:
PROSOFT agency provides grants for IT companies setting up in Mexico. Additional incentives are available from local government these vary from region to region, but tax credits on R&D and other investments are typical.
Rest of Latin America:
Nicaragua offers a 15-year tax holiday. Panama, Costa Rica and Uruguay have setup special tax free zones near major IT and business process outsourcing centres. Colombia has the following incentives: Free Trade Zones offering up to a 50% tax break on sales into the local market, 40% tax deduction on the cost of purchased machinery, Service exporting companies can import capital goods exempt from custom duties and VAT. Chile has setup Chilean Economic Development Agency (CORFO) which helps by co-funding projects. Chile also benefits from trade agreements with US, Australia, China and Canada.
Source: HFS Research, 2011
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www.globalservicesmedia.com
April 2011
Special Report
Country Scorecards Diaz shared, “If we take an overall assessment where you just mix what you have in terms of talent, what you have in terms of cost, infrastructure, countries been stable.. if you take all that and mix it then I’ll say Colombia and Brazil are best option. Brazil is the best option because it is where the biggest market is and most developed next to Mexico in the region. And Colombia is the one as it is the cheapest one and most business friendly and it is here where all the big players are actually going because there is huge potential there.” The report, A New World Option for Offshoring, states Wipro has developed a ranking methodology to help organizations decide which of these countries would offer the greatest benefits based on their needs and priorities. The ranking method is based on three primary business criteria, each composed of a group of key factors namely cost effectiveness, talent and resource availability and business catalyst. Here is the combined score (5= Best Ranking) 1. Colombia: Ranking: 3.34 Negative publicity about guerrilla, drug cartels and high crime rates has slowed investments by corporations. However, during Alvaro Uribe’s presidential period, security and crime rates have improved significantly. Today, countries like Brazil and Mexico are ranked as even more dangerous and risky locations. With a good combination
of low cost, talent pool and government support, Colombia is becoming among the best options in Latin America, especially in Call Centers. The number of local and foreign BPO suppliers operating in Colombia and the significant growth the sector has had in the last couple of years, show the country is gaining the confidence of foreign companies. 2. Brazil: Ranking: 3.08 • Largest call centers industry in the region. Very strong telecom network (150 million mobile phones in operation and 50% of households linked to broadband by the end of 2011 3. Chile: Ranking 2.98 Chile is ranked as one of the best Spanish-speaking delivery locations. It’s pushing to grow in the sector by covering operations as an offshoring location for companies in Spain. 4. Argentina: Ranking: 2.91 Inflation in 2009 was 13% and it is predicted that Argentina will suffer higher inflation increases in 2010, which adds an additional risk when offshoring to this location. It is key that these projections are assumed in the business model to ensure benefits realization in the long term. 5. Mexico: Ranking: 2.70 Biggest call center industry in the region after Brazil. Proximity to US attracts US customers. GS
Source: Wipro Consulting research (5=Most cost effective)
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April 2011
All Eyes on Latin America
“We look out for oversaturation in markets where we compete for resources” Excerpts from an interview with Don Berryman, general manager of Americas at Sitel by Smriti Sharma GS: What are the main growth areas for this region? DB: In the past few years, Sitel has experienced great growth in Brazil, Nicaragua and Panama. Additionally, Sitel has cultivated aggressive development with our Englishspeaking agents in Bogota, Colombia. We have seen the Brazilian domestic market growing rapidly, and business opportunities are expanding by 20-25% a year. In fact, Sitel opened a state-of-theart facility located in the city of Sao Paulo in January 2011, doubling our capacity in Brazil, and bringing Don Berryman Sitel’s total employee count in Latin America to over 11,000. Managua, Nicaragua continues to explode with growth, focusing on the service of English and Spanish-speaking U.S. consumers. As an innovator, Sitel first entered Nicaragua in 2008 to provide customer and tech support for Fortune 1,000 companies in wireless, consumer electronics, media services, banking and other financial product lines. Three years later, we continue to expand in this area due to the location’s unique ability to offer culturally aligned, multilingual talent for a wide range of U.S. consumer markets. Today we are the largest contact center provider in this country. And with the ongoing support of organizations such as ProNicaragua, as well as 24 GlobalServices
the established free trade zone regime, Sitel sees the continued investment as a sustainable win-win for our client base and employees. GS: How does your client feel about your chosen destination in Latin America? DB: Sitel has an expansive footprint in Latin America. Choosing one specific location can be an interesting dynamic—when Sitel recommends specific locations to our clients, many have preconceived ideas about certain markets without experiencing the destination firsthand. But, as we tour the markets with our clients, and they are able to see our skilled staff in action, plus the existing clients we are servicing in those regions, the perceptions are immediately replaced with a much different reality. Colombia is a great example of a market that clients tend to have perceived opinions, mostly generated from news stories about crime or corruption. However, once they experience the real Colombia, its outstanding workers and the vibrant infrastructure, they are able to shape a more accurate depiction of the true opportunity. GS: How has this destination helped you offer specific advantages to your clients? DB: The biggest advantage for our clients is convenient travel time and time zone alignment. It takes a full day to travel to the Philippines or India, and clients are forced to work a night shift to align with the North American workday. So, call centers and business functions requiring work to be completed during US business hours lend themselves to a working location in this general time zone.
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April 2011
Special Report
GS: What challenges are you facing? If any, what are your barriers to increased investment? DB: Sitel is always on the lookout for oversaturation in a market where we are competing for resources with our competitors or local providers. However, an interesting development is surfacing where our clients desire to enter markets that we see as slightly oversaturated. This may be happening because of regional promotion directly to our clients or even the loss of expertise within the contact center industry. The key is creating a great work environment and offering incentives like continuing education to become the most desirable place to work in these areas. But, at the same time, you need to consider other markets so you don’t saturate an area. We work with our clients to provide an honest assessment of the situation.
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GS: What’s the methodology followed at a company like Sitel? DB: Great talent. Agents and front line supervisors are the foundation of our business and Sitel always builds our operations from the ground up. We have an outstanding real estate group at Sitel, and they do a great job of analyzing these locations and markets. In some cases, we are looking at the quality of people, quality of education and the support in the call center. Other times, Sitel looks at the role of government to see if they are active in terms of subsidies, credits or opportunities for job training in preparation for positions in a new call center. Sitel believes it’s not just the quantity and quality of the people; it’s also the participation of the government on a local and national level that can elevate a destination’s capabilities. GS
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April 2011
xperts
by Kumar Parakala, KPMG
New Face of The BPO Sector Traditionally, BPO industry has been synonymous with the ‘lifting and shifting’ non-core tasks to a vendor shop for benefits such as cost arbitrage and abundance of cheaper workforce. The BPO industry has successfully enabled buyers, across the globe, to improve their bottom-line while growing into $158B industry.
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he last few years have been defining in several ways for both; the supply and the demand end of the industry. On demand end, cost arbitrage has become baseline for the buyers and now they are expecting new initiatives to attain higher thresholds of productivity, efficiency and revenue growth. On supply end, service provision has commoditized
Commodity Vs Partnering 27 GlobalServices
and market is flooded with service providers pushing services in similar price band. These pressures have led the way for shift of BPO industry from “commodity behavior” to “partnering behavior”. In this new phase, the business objectives of buyers and service providers are better aligned and focus of industry has moved to “value creation” instead of only “cost arbitrage”. Lever of the new face of BPO Some of the key words that will resound in the new phase of BPO sector will be automation, process improvement, innovative business model and pricing models. Automation initiatives– Most of the leading service providers are leveraging their technological competency to www.globalservicesmedia.com
automate processes. Automation of processes has helped service providers to reduce the process cycle time and attain higher productivity. Back office operations such as invoicing processes gained from improved and optimized processes. Analytic models created through technology automation gave a huge boost to customer analytic service providers. With technology advancements, complex processes are also being automated by service providers. Other key benefits of Automation Initiatives – • Reduces of risk of operations from offshore model • Provides buyers with real time control over operation through portals • Enables service providers to attain higher quality standards Continuous improvement programs– After attaining deeper understanding of the buyer’s business and processes, service providers are increasingly adopting best practices such as “six sigma” and “lean”. These processes are enabling service providers to attain higher efficiency, better resource utilization and improved skill index of service provider. Buyers April 2011
BPO
Features of Platform based BPO
have gained through reduced risk in operation and increased throughput of operations. Back office operations that are highly process-driven, gain most from implementation of these practices. Other key benefits of improvement programs – • Enables service providers to move up the value chain • Minimizes risk of operations Innovative business modelsAs the BPO industry evolves from high growth phase to mature phase, the challenge of delivering services will be replaced by delivering them effectively. Evolution of new business models - “Platform based service” and “Business Process as a Service” - to cater to dynamic needs of buyers will play a significant role in imminent future. Platform based services is an innovative business model that industry is very excited about. The matured service providers undertake the management and execution of client’s business processes on their own technology platforms such as CRM and ERP. The model enables service provider to own processes, the underlying platform and 28 GlobalServices
application, people and infrastructure. It also allows the delivery from being “people centric”, as in the traditional ‘lift and shift’ model to being platform centric. BPO service providers, which have strong presence in IT application development and maintenance, could comfortably adopt this model. They are offering HRO platform, F&A platform, procurement platform and analytic platform BPO solutions. Platform based services became popular during the global recession, when clients were looking for higher efficiency in services without incurring large upfront transformational cost. Other key advantage of Platform based services are – • Assures higher compliance with standardized processes, stringent security regulations, local statutory norms and internal controls. • Defines the ownership and accountability of the processes by resting ownership of all aspects of BPO with the service provider. • Allows buyers to reduce time-to-market by leveraging www.globalservicesmedia.com
service provider’s pre-configured business processes, prebuilt deployment accelerators and organization change management. • Allows smaller buyers to leverage best IT infrastructure to support their business processes. Business process as a service (BPaaS) is the umbrella term that is being increasingly used to capture the whole range of ‘Cloud-enabled’ innovation within the BPO marketplace. With wider acceptance of “Cloud” technologies in most of the industries, BPaaS might prove to be the biggest game-changer in the BPO space. BPaaS proposition may include Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and SaaS as well as the traditional benefits of outsourcing such as process expertise and labor arbitrage. In addition, BPaaS offerings will provide a cost, sales, and delivery model to reach the medium-sized enterprise market. Other key benefits of BPaaS • Allows service providers to spread their investments across multiple customers. • Enables buyers to enjoy financial benefits by reducing operating costs up to 30 percent, thereby cutting capital expenditures. They do this by using a pay-as-you-go pricing model. • Enables buyers to get faster payback, quick return on investments, and solutions where they do not have to think about infrastructure, software, and process services. • Provides benefits particularly to small and mid-sized capital-starved firms. In future, the cloud will provide the platform for service providers of April 2011
BPO
all shapes and sizes to re-energize traditional outsourcing services and also to launch new services. There will be significant traction. BPaaS will force people to standardize their processes. Infrastructure and software become more of a choice that allows buyers to leverage the right ecosystem. Innovation in pricing modelsTraditionally, business proposition of most of the service providers centered around cost arbitrage, which led to widespread adoption of “input based” or “FTE based” pricing. With customer focus moving to achieving higher efficiency and productivity as well as sharing risks, innovative pricing models are becoming increasingly significant. Transaction based pricing is one such innovative pricing methodology that is catching up in the industry. Pricing of the deal is based on number of transaction processed by the service provider. A well defined “transaction”, with a definite beginning and end point, is essential for implementation of transaction based pricing model. Deep understanding of processes, well defined methodology and unambiguous service level agreements are required defining “transaction” with such certainty. The model enables service provider to decide the number of resources and time allocated to execute a “transaction”, while meeting the quality standards and service level agreements. Service provider manages the risk of ownership by utilizing the resources efficiently across multiple customers and by charging an appropriate risk premium in the price of transaction. It also motivates service provider to increase efficiency of every resource through innovative delivery models and by leveraging better technology.
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Other key benefits of transaction based pricing model – • Offers buyers flexibility and scalability as pricing is dependent on consumption • Enables buyers to effectively monitor costs due to enhanced visibility of consumption pattern. • Results in lower per unit cost due to higher efficiency • Creates more value and owning more risk, service providers can increase profit margins • Gives service providers higher control over operation through freedom of ramp up/down and reallocation of resources Despite of it’s benefits, for widespread adoption of this model the industry needs mechanisms to predict volume of transactions with some degree of accuracy and standardization of processes and technology.
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Outcome based pricing is likely to be the most impactful change that BPO industry might undergo in next five years. As per this model, the service provider is paid as per contribution made by services to achieve buyer’s business objective. Outcome-based models become relevant when the objective of the outsourcing relationship goes beyond cost. They deliver a measurable impact on the end business result, and align the interests of both the customer and the service provider, enabling them to work towards the same goal. As “value creation” is at the core of this model, it requires service provider to have in-depth understanding of buyer’s industry. Along with this, strong service level agreement and well defined scope of contract are essential to measure outcome of the services.
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BPO
Also, it is extremely important that the buyer understands the level of risk the provider must take to help the buyers achieve the desired business outcome. It requires that the buyer have a deep level of trust in the provider — not only its capabilities but also its continual demonstration of partnering. It requires “partnership” relationship between the buyer and service provider with strong governance and relationship management. The senior leadership of both sides requires higher degree of collaboration. To further solidify the commitment of both parties to a value-adding partnership, employing
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a model in which the responsibilities for risk mitigation and maximizing returns on investment are shared. Other key benefits of outcome based pricing models – • Redu • Enables service providers to rise in the value chain • Encourages “value creation” and “innovation” in delivery models • Enables buyer and service providers to align business objectives Most of these innovations are being led by the leaders in the BPO market. Due to lesser capacity to
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absorb the risk involved with innovation, niche players find it tough to initiate innovation. But increasing pressure to differentiate themselves from the peer will drive niche players to join the innovation wave. Imagine the transformed face of the BPO sector when innovations would be driven from players across the bands of BPO sector. The industry is eagerly looking forwards to this phase of the BPO market. GS Kumar Parakala is Head of IT Advisory, KPMG EMA & India and Chief Operating Officer, Advisory in KPMG in India. He is also a global head for Sourcing advisory.
April 2011
xperts
by Vineet Ramachandran, Analyst at ValueNotes Sourcing Practice
Keeping Pace with Technology is Key for LPOs Technology has played an integral role in the outsourcing industry. In the knowledge services outsourcing segment especially, there has been a quick evolution of technology, tailored to multiple verticals and services.
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he egal process outsourcing (LPO) industry is one such segment that has seen tremendous growth in terms of technology from its inception. Technology is now a focal point in almost every facet of LPO services, from being an enabler of services to monitoring workflow. It offers service providers the opportunity to widen their scope of offerings. Technology’s greatest impact on LPO services is through its ability to facilitate easier and more thorough delivery of their services. Legal services such as contract management or litigation support make use of software platforms for a variety of reasons. With document review specifically, having to sift through thousands of documents manually would take up too much lawyer time. With a software platform, documents can be scanned fairly quickly to determine which of them might be relevant to the litigation suit the client is involved in. This automation of high volume work increases the time lawyers can spend on other tasks for the client. Having a single platform for managing multiple client contracts can drastically can make the task of abstraction or redlining easier for employees. Platforms used for such services are generally sourced
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from third party software vendors. A small percentage of LPOs have also developed proprietary platforms that are available for their clients should they choose. As these platforms continue to evolve ever so rapidly, the automation of lower value work will increase thereby leaving lawyers with the opportunity to tackle medium to high value services. The inclusion of workflow management and data security, two elements where technology once again rears its head, are not limited to the LPO space. These tools are commonly used across businesses and services. How
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LPOs differentiate themselves in this segment however, is the manner by which they are able to integrate these industry generic tools into their existing LPO specific software platforms. This is primarily to streamline and make their processes more efficient and cost effective. Within LPO service offerings, technology is used for workflow management. Various LPOs have different work flows tools ranging from tracking attendance of employees to something as advanced as monitoring employee productivity. For example, for clients that are being billed by the
April 2011
LPO
hour, there are software tools in the market that enable LPOs to monitor exactly how many hours an employee spends on a particular project or task. This makes billing the client easier by ensuring that the number of hours required by the client has been fulfilled and being able to offer the client cost predictability from the start of the project. Managers also use tools to keep themselves updated on the status of projects being worked on to ensure deadlines are met. These tools, much like software platforms, can yet again be sourced from third party vendors, provided by the client or developed
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in-house at times based on client requirements. Technology also plays a huge role with respect to data security. With the constant upload of documents, often in the hundreds of thousands, maintaining the confidentiality and ensuring safe storage of these documents becomes a key concern for clients. Technology from the side of the LPO ensures this information is stored on secure servers with the ability by either party to access any or all files at any given point in time using encrypted passwords. With a constant reliance for client files for
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the completion of work LPOs also have dedicated bandwidth to ensure smooth uploads and downloads by their employees. The points above serve as testament to the fact that technology is an important asset across levels in LPO services. Going forward, technology tools will help broaden the range of services offered. Healthy competition amongst software vendors to remain market leaders will also benefit clients by giving them greater flexibility and variety when choosing software platforms. The opportunity costs for parties involved in this technological progression should not be overlooked. With LPOs having their pick of cutting edge platforms, costs will continue to decrease while the efficiency and speed by which they are able to deliver legal services globally will increase. This in turn will put added pressure on software developers to keep themselves updated on the requirements of buyers to remain competitive. IT/BPO players, the true technology giants, should have an advantage by being able to churn out highly sophisticated home-grown software that can be used internally and licensed for external use as well. GS Vineet Ramachandran is Analyst at Value Notes Sourcing Practice
April 2011
xperts
By Nigel Hughes, Global Services Director, Compass Management Consulting
BPO: Where’s the Innovation? Recent surveys suggest that organizations seeking innovation from BPO initiatives often fail to achieve desired results. A variety of factors are at play, including mismatched expectations, poorly defined objectives and governance structures, and a lack of clear measures to chart progress. What can clients and service providers do to more effectively drive innovation from BPO arrangements?
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or client organization executives managing BPO relationships, the goal of “innovation” continues to be elusive. Part of the challenge lies in defining innovation and recognizing and quantifying it after the fact. Then there’s the issue of mixed signals and unrealistic expectations – “but we want cost reduction and innovation.” And, there’s always the sticky question of who’s responsible for delivering innovation, and who’s to blame when it doesn’t happen.
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“Specifically, a “30/70” approach to client/service provider resourcing was seen as necessary to address the cultural challenges posed by a BPO engagement, while the “10/90” resourcing model typically used for ITO was not appropriate for BPO. ” www.globalservicesmedia.com
The topic of innovation was central to a recent BPO Executive Roundtable discussion held in conjunction with the Sourcing Interests Group Summit in Amelia Island, Florida. The Roundtable comprised senior executives, primarily from financial services organizations, and focused on key challenges and opportunities in the BPO space. Bill Huber, Partner and Director of CPO Services at sourcing advisory firm TPI, co-chaired the discussion and shared his and participants’ observations. (Compass and TPI are both owned by ISG, Inc.) According to Huber, the Roundtable participants collectively defined innovation as “a dramatic game changer exemplified by improved margins, reduced risk, delighting customers, and new capabilities.” Agreeing on what is meant by innovation may seem like a minor point, but it’s actually central to the overall discussion. For one thing, as one participant said, “Sometimes we confuse productivity improvements with innovation.” There’s a somewhat related issue of unrealistic expectations. According to one participant, “How can we April 2011
BPO
expect providers to reduce our costs by 30 percent, deal with 30 percent attrition, and understand our business sufficiently to innovate?” Well, one could argue that clients’ unrealistic expectations are often fueled by vendors’ unrealistic promises. That said, it’s certainly true – as one participant pointed out – that the cost reduction pressures faced by BPO service providers trump opportunities to innovate. The Roundtable participants (all of whom were client organization executives) were clearly not in an accusatory mood when assessing blame. When asked, “When innovation fails to occur, whose fault is it?” 70 percent responded that it was entirely
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the customer’s fault. Thirty percent, meanwhile, felt it was the shared responsibility of client and service provider, and a somewhat surprising 0 percent blamed the provider. So what are the keys to a successfully innovative BPO arrangement? At a high level, the Roundtable concluded that innovation requires partnering and mutual commitment – no surprise there. More specifically, says Huber, the participants discussed possible ways to build shared incentives into BPO agreements. “For example,” says Huber, “you might build X number of Provider consulting hours into the contract to identify and quantify opportunities for process transformation or creating new sources of value. “Gainshare” approaches for both the service provider and the customer to share in the benefits of innovation provide another powerful incentive.” Another critical issue is measuring innovation and its impact on the business. Roundtable participants discussed ideas around how to track the acceptance rate of innovative ideas introduced by the service provider team through an innovation review and dispositioning process as part of the strategic governance framework. The best frameworks will report the
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speed and effectiveness of both the service provider’s innovation generation and the client’s disposition cycle. Process efficiency – specifically the application of technology to eliminate process inefficiency – was also cited as an area of opportunity. Indeed, Compass analyses of outsourced business process operations in the financial services sector confirm that significant improvements can be made in many environments to streamline redundant and unnecessarily people-intensive processes, as well as to improve processes where technology has been applied to simply automate inefficient ways of doing things. The Roundtable concluded that effective BPO required more hands-on management than IT outsourcing. Specifically, a “30/70” approach to client/service provider resourcing was seen as necessary to address the cultural challenges posed by a BPO engagement, while the “10/90” resourcing model typically used for ITO was not appropriate for BPO GS Nigel Hughes is Director of Global Service Development at Compass Management Consulting. Bill Huber is Partner and Director of CPO Services at TPI.
February April 2011