Outsourcing various business processes to external service providers has become a go-to strategy for many companies looking to reduce costs, improve efficiency, and focus on their core competencies. By handing off non-critical functions like payroll, IT support, customer service etc. to specialized outsourcing firms, companies can redirect resources to more mission-critical areas of their business.

However, business process outsourcing (BPO) isn’t as simple as just shipping work overseas to save money. There are many factors to consider, and handled poorly, outsourcing can actually hurt rather than help your business. Loss of operational control, hidden costs, overdependence on vendors, are just some of the potential pitfalls. 

So if you’re considering outsourcing, it’s crucial to approach it strategically, with clear objectives, eyes wide open to the risks, and plans to actively manage the outsourcing providers. This post provides a guideline for key areas to analyze when implementing a business process outsourcing strategy.

Determine Goals and Objectives

First and foremost, you need to identify what you expect to gain from outsourcing. Companies pursue BPO for different reasons including:

Cost Reduction

For many companies, the #1 driver for outsourcing is cutting costs, especially labor costs. Transferring manual, repetitive tasks like call center operations or claims processing to regions with cheaper wages can result in major cost savings. 

But don’t assume outsourcing automatically reduces labor costs. You need to thoroughly analyze comparative costs vs doing the work in-house. Factor in expenses like vendor selection, transition, travel, governance, and training. Significant upfront investment may be required before long term savings can be realized.

Focus on Core Competencies 

Outsourcing can free up your managers and internal resources to focus on high-value functions that drive competitive advantage and growth. For example, marketing agencies can outsource campaign production work to focus on strategy and creative.

However, don’t outsource activities that are closely tied to your core value proposition. Also consider risks like loss of organizational knowledge.

Increased Efficiency

Specialist outsourcing providers can often perform certain business processes much more efficiently than non-specialized internal teams. This is especially true for repetitive, rules-based processes like payroll.

But efficiency gains aren’t guaranteed. Poorly executed outsourcing can result in the opposite outcome. Clearly identify expected efficiency improvements and requirements for achieving them.

Improved Quality

In addition to efficiency, outsourcing providers can also deliver higher quality work. Expertise, best practices, and technology investments that a vendor provides may surpass your internal capabilities for certain activities like analytics.

But subpar vendors lacking robust quality practices can also deliver lower quality work. Scrutinize providers’ quality track records and governance processes.

Business Transformation

For some companies, outsourcing is a catalyst for major business transformation. It facilitates dramatic changes to operating models, service delivery, and workforce skills.

If this is your main goal, tie outsourcing initiatives directly to the transformation roadmap and communicate changes company-wide to gain buy-in.

In summary, outsourcing for unclear reasons, without tangible objectives aligned to strategy, is a recipe for disappointment. Articulate exactly what business needs outsourcing aims to fulfill, and let those objectives guide decision making.

Conduct Cost-Benefit Analysis

Once you have clear objectives, the next step is a detailed cost-benefit analysis. Tally up the expected costs versus potential benefits to make the business case for outsourcing.

Cost considerations may include:

– Vendor selection costs – resources for identifying and evaluating providers

– Transition costs – knowledge transfer, documentation, training

– Ongoing management expenses – governance, relationship management, travel 

– Unexpected costs – service disruptions, shoddy work requiring rework

– Contractual issues – misunderstandings resulting in penalties or legal expenses

– Loss of organizational knowledge over long term

– Lower quality work requiring inspection and rework

When estimating costs, take a long-term view spanning at least 3-5 years. Short term thinking can obscure the full risks and costs of outsourcing arrangements.

On the benefit side, pin down specific performance improvements expected, like:

– % cost reduction 

– Turnaround time reduction

– Quality metric improvements

Avoid vague benefits like “business transformation” that are hard to quantify. Analyze outsourcing’s impact on key business metrics to justify the investment. 

You may find that some business processes lack a compelling cost or efficiency rationale for outsourcing. In-house retaining control may better serve performance. Know when to say no.

Assess Technical Requirements and Data Security

If outsourcing business processes involving customer data or sensitive systems, assessing technical capabilities and data security is mandatory. Get detailed answers from providers regarding:

Infrastructure Architecture

– Can they handle required data storage, processing, and transmission volumes?

– Do they provide needed availability, scalability, and redundancy? 

– What are their backup, disaster recovery, and business continuity provisions?

Data Security 

– How is data encrypted in transit and at rest?

– Who has data access and under what controls?

– How are credentials, roles, and access managed?

– How is data isolated and segmented between clients?

– What employee background checks are performed?

Compliance Posture

– What regulations, security standards, and codes of conduct govern their operations?

– How are compliance requirements verified internally and by third parties?

Knowledge Transfer

– What documentation and training will they provide for any proprietary processes and systems involved?

Don’t just accept vague assurances. Dig into the details of their technical environment and security controls. Failing to properly assess these factors puts your data at risk.

Choose the Right Outsourcing Provider

Picking the right outsourcing partner is clearly critical. Key selection criteria include:

Domain Expertise 

Seek specialists in the business process being outsourced, not generalists trying to be all things to all customers. Domain expertise results in higher performance.

Technical/Infrastructure Capabilities

As described above, verify they have the technical architecture for security, availability, scalability, and disaster recovery.

Cultural Fit

Look for philosophical alignment on values like transparency, integrity, and commitment to quality. Mismatched cultures breed miscommunication and tension.

Quality Focus

Evaluate their quality management maturity. Do they follow established protocols like ISO 9000? Can they provide performance benchmarks?

Location

Factor in location implications like time zones, language, regulations, and travel time needed to manage effectively.

Pricing Model

Understand exactly how they price services. What activities and outcomes can impact fees? Hidden costs may lurk in pay-for-performance models.

Contract Terms

Carefully scrutinize service levels promised, privacy terms, liability, termination policies, and other contract terms.

Compliance Record 

Review their track record on infosecurity, regulatory compliance, and audit results. This signals how they’ll handle your data.

Rather than just checking boxes on “requirements”, make site visits, interview project teams, inspect process documentation, and verify performance metrics. Get beyond the sales pitch to truly vet providers’ capabilities and quality focus.

Establish Performance Metrics

Once an outsourcing provider is selected, you’ll need processes for governing and measuring performance. Key steps include:

Define Metrics

Collaborate to define KPIs that align to business objectives, like cost, quality, and cycle time. Metrics should be unambiguous and easily measured.

Establish Targets 

Base targets on current performance baselines and expected improvements. Targets should stretch the provider while remaining realistically achievable.

Monitor and Report

Agree on cadence for metric monitoring, data exchanges, and reports. Make sure data is accessible and verifiable.

Formalize in SLAs

SLAs should codify KPIs, measurement methods, reporting frequency, and performance targets. This formalizes accountability.

Create Scorecards

Publish scorecards ranking performance against targets. Scorecards create transparency and drive improvement. 

Perform Reviews  

Establish regular reviews to discuss scorecards, issues, and initiatives. Reviews facilitate collaboration and ensure alignment.

Effective governance enables you to spot problems early, address issues promptly, and guide continuous improvement. This helps the outsourcing partnership reach its business objectives.

Manage Vendor Relationships

Signing the contract is just the beginning. You must proactively manage the outsourcing provider relationship to maximize its value. Best practices include:

Maintain Regular Communication

Have regular calls and meetings at multiple levels of each organization – executive, managerial, and operations. Nip issues in the bud before small problems become major crises.

Build Strong Rapport 

Take time to understand each other’s cultures and values. Visit sites and build personal connections. Trust and rapport grease the wheels for resolving inevitable problems.

Collaborate Deeply

Brainstorm process innovations and technology improvements together. View the outsourcer as a strategic partner, not just a vendor.

Resolve Disputes Swiftly

When disagreements occur, address them professionally but decisively. Avoid escalation by focusing on solutions, not blame.

Learn from Experience

Openly discuss lessons learned after major initiatives, challenges, or milestones. Learn from both successes and failures.

Keep Executives Engaged

Secure senior management commitment on both sides. This provides sponsorship to tackle difficult issues and drive innovation.

Know When to Switch

If the relationship deteriorates or underperforms expectations, know when to pursue a new partner. Know your walkaway position.

This “high touch” relationship approach requires investment, but pays dividends in higher outsourcing ROI and reduced risk. Treat it as a strategic partnership.

Conclusion

Business process outsourcing clearly offers many potential benefits, but also poses risks if not managed carefully. By following best practices around vendor selection, contract terms, governance, and relationship management, you can maximize your likelihood of outsourcing success.

The most successful companies approach outsourcing with eyes wide open – realistic about costs,disciplined about vetting providers, and dedicated to active partnership. They realize that outsourcing is not a “one and done” event, but an ongoing process requiring oversight and collaboration. With this mindset, you can turn outsourcing into a valuable mechanism for business transformation and competitive advantage.