Outsourcing Business Processes for Innovation

Many companies look to business-process outsourcing to save money. But the most successful clients concentrate less on cost savings and more on achieving innovation.

In recent years, the number of companies that outsource critical business processes to outside suppliers has grown significantly worldwide. The business-process outsourcing (BPO) market has been estimated to be worth $309 billion in 2012,1 including activities such as finance and accounting, human resource management, procurement and legal services, and the overall volume is estimated to be growing at a rate of around 25% annually.2 Many organizations initiated BPO as part of an operational effort (for example, to reduce costs or access skills), but it has evolved into much more. Senior managers today expect more from BPO service providers than short-term cost savings and meeting minimum contractual requirements.3 Moreover, they are skeptical of big-bang improvements.4 Companies want service providers to innovate constantly. (See “About the Research.”) In relationships that companies classify as high performing, the service providers perform a series of innovation projects that deliver substantial long-term improvements to the client’s operating efficiency, business-process effectiveness and strategic performance. Consider the following examples:

  • A BPO provider helped a health care company improve the claims adjudication process by using analytics to predict claims likely to result in rework. The predictive tool now intercepts more than 50% of claims that would have been reworked, saving the client $25 to $50 in administrative costs per overpaid claim and $6 to $12 per underpaid claim.
  • An aerospace manufacturer worked with its BPO provider to add new key performance indicators and processes to manage third-party vendors. This allowed the client to improve customer-order fill rates for new parts from 60% to 85% and turnaround times for delivering parts to grounded vehicles from 21 hours to 17 hours.
  • A supermarket chain collaborated successfully with its BPO provider to implement new forecasting tools, techniques and methods that improved the client’s stock fill rate from 80% to 95%, reduced inventory by 27% and reduced error rates by 50%.

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References

1. J. Harris, K. Hale, R.H. Brown, A. Young and C. Morikawa, “Outsourcing Worldwide: Forecast Database,” September 13, 2010, www.gartner.com.

2. V. Couto and A. Divaran, “Outsourcing for Virtuosos: How to Master the Art of Global Enterprise” (Booz & Co. webinar, Dec. 6, 2006); and M. Lacity and L. Willcocks, “Advanced Outsourcing Practice: Rethinking ITO, BPO and Cloud Services” (London: Palgrave, 2012).

3. Lacity and Willcocks, “Advanced Outsourcing Practice.”

4. We recently reviewed empirical results from 87 academic studies on BPO. The review found that most clients outsourced business processes for operational reasons — to reduce costs, improve process performance, access skills, increase scalability and/or speed delivery. A minority of clients pursued BPO to achieve a rapid and substantial transformation of a back office, like the creation of a commercial enterprise, which can be high risk. Our current research focuses on long-term results; clients from high-performing BPO relationships remain high performing because they foster continuous, dynamic cycles of innovation. For the BPO review, see M. Lacity, S. Solomon, A. Yan and L. Willcocks, “Business Process Outsourcing Studies: A Critical Review and Research Directions,” Journal of Information Technology 26, no. 4 (December 2011): 221-258; for transformational outsourcing, see M. Lacity, D. Feeny and L. Willcocks, “Transforming a Back-Office Function: Lessons from BAE Systems’ Experience With an Enterprise Partnership,” MIS Quarterly Executive 2, no. 2 (2003): 86-103; and J. Linder, “Transformational Outsourcing,” MIT Sloan Management Review 45, no. 2 (winter 2004): 52-58.

5. M. Lacity and J. Rottman, “Delivering Innovation in Outsourcing: Findings from the 2012 IAOP World Summit Survey,” Globalization Today, March 2012, 26-31.

6. See M. Lacity and L. Willcocks, “Transformational Leadership: Microsoft’s OneFinance Initiative,” case study, Accenture, 2012.

7. See M. Weeks, “Information Technology Outsourcing and Business Innovation: An Exploratory Study of a Conceptual Framework” (Ph.D. diss., Oxford University, 2004); and M. Lacity and L. Willcocks, “What Suppliers Say About Clients: Part 1 — Establishing the Outsourcing Arrangement,” executive report, Cutter Consortium, Arlington, Massachusetts, May 19, 2011.

8. E. Whitley and L. Willcocks, “Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation,” MIS Quarterly Executive 10, no. 3 (2011): 95-109.

9. Researchers have found that people innovate more when incentives are based on recognition and status rather than monetary rewards. See J. Birkinshaw, C. Bouquet and J.-L. Barsoux, “The 5 Myths of Innovation,” MIT Sloan Management Review 52, no. 2 (winter 2011): 43-50.

10. For more ideas on how senior managers can build “innovation funnels” to find the best innovation ideas from employees regardless of where they are based, see M. Reitzig, “Is Your Company Choosing the Best Innovation Ideas?” MIT Sloan Management Review 52, no. 4 (summer 2011): 47-52.

11. Francis Bidault and Alessio Castello found that both very low levels and very high levels of trust are detrimental to innovation. They found that the optimal level of trust is somewhere in between. See F. Bidault and A. Castello, “Why Too Much Trust Is Death to Innovation,” MIT Sloan Management Review 51, no. 4 (summer 2010): 33-38.

12. Two researchers, Jason Davis and Kathleen Eisenhardt, also found that rotating leadership produced more innovation in interorganizational relationships. See J. Davis and K. Eisenhardt, “Rotating Leadership and Collaborative Innovation: Recombination Processes in Symbiotic Relationships,” Administrative Science Quarterly 56, no. 2 (June 2011): 159-201.

5 Comments On: Outsourcing Business Processes for Innovation

  • Joe Tillman | April 24, 2013

    Great article speaking to the benefits of Vested (aka Vested Outsourcing)! I’m glad to see more articles being written on Vested, such as this one. The Microsoft Accenture OneFinance deal was recently featured as a case study in the book Vested: How P&G, McDonald’s, and Microsoft Are Redefining Winning In Business Relationships.

    The University of Tennessee has been researching the exact same topic since 2003 as well and has numerous case studies supporting all types of buyer – supplier (service provider/vendor) relationships (BPO, Supply Chain, Facilities Mgmt, Charities, Gov’t Contracting, etc.) to drive innovation. For more information, check out http://www.vestedway.com.

    Joe

  • Jennifer Bach | April 30, 2013

    Excellent article. Outsourcing partnerships that focus solely on cost savings will not produce innovations and are also not likely to last. Innovation cannot occur unless you have the right team and can build towards a healthy relationship with your BPO service partner.

    In our recent white paper, we partnered with Everest Group and discovered the “8 Habits of Highly Ineffective Outsourcing Relationships” (http://www.telusinternational.com/strategic_outsourcing). The research recognizes that innovation occurs by creating a shared culture that builds the partnership. Establishing trust allows for operational improvements that go beyond the bottom line.

    We have found that relationships that foster innovation are the result of shared vision, collaborative communication, mutual trust and a commitment towards resolutions.

    Jennifer Bach, TELUS International

  • Alleli Aspili | May 27, 2013

    Innovation has been taking over every industry today and it’s becoming more visible in the outsourcing industry. Outsourcing Insider also published an article about this recently – Paradigm Shift: Not Just Providers, but Partners in Innovation (http://www.blog.infinit-o.com/paradigm-shift-providers-partners-innovation/) – and I think it does explain some of the points you have touched here. Well, that being said, I’m still looking forward on how innovation will take over outsourcing these days.

  • Cha Wi | March 10, 2014

    It’s really important focusing on innovation instead of traditional view of reducing cost although it makes some profit for the organization, it’s not accepted in the long run. Outsourcing will permit you to lead your business team for innovation which would be more successful as well as applicable for a long period and thereby you would be able to get a competitive advantage of having more profit.

  • Eli Stutz | April 9, 2014

    I feel that in order for a BPO relationship to be successful, cost savings and innovation are necessary. Innovation alone without ROI is not going to create a lasting relationship or a successful project. We recently did a case study on our implementation with Ossur, improving their customer service process using BPM software: http://www.pnmsoft.com/resources/case-studies/ossur-case-study/
    The fact that we reduced resolution time, and streamlined the feedback process was just as important as the innovation we introduced to integrate their existing customer service platform with BPM processes.

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