Companies should evaluate an outsourced process on several dimensions and then tailor the contract accordingly.
According to SAP INFO Solutions, four out of five business process outsourcing (BPO) contracts inked today will need to be renegotiated within two years. And 20% of all such contracts will collapse. When BPO arrangements fail, companies and their outsourcing providers pay the price in lost time and money. Moreover, customer satisfaction and competitiveness can suffer as companies fail to achieve the efficiencies and cost savings promised by BPO.
Yet these scenarios can be avoided if companies carefully analyze the nature of the processes they are outsourcing and establish the right contractual relationship with their vendors. The correct fit between processes and BPO relationship governance can improve the odds that the arrangement will generate the competitive advantages that outsourcing promises, assert Deepa Mani, Anitesh Barua and Andrew B. Whinston in a May 2005 University of Texas at Austin working paper titled, Of Process Analysis and Alignment: A Model of Governance in BPO Relationships.
The authors, from the McCombs School of Business, draw their conclusions from a survey of 145 executives in a variety of organizations that have outsourced business processes. The survey instrument was a questionnaire comprising 50 items, asking respondents to describe the processes they outsourced; the contractual relationships they established with their vendors; and their level of satisfaction on criteria such as the reliability, responsiveness and accountability of the BPO arrangement, as well as the operational efficiencies gained.
The researchers found patterns in the data suggesting that BPO arrangements stand a better chance of generating the desired benefits if companies evaluate an outsourced process on several dimensions and then tailor the contract to fit those dimensions. According to the authors, three particularly relevant process dimensions are:
- Complexity: The extent to which the people performing the process must adopt different methods or procedures to do their work and the degree to which these individuals lack immediate, established solutions to process problems.
- Independence: The degree to which a process can be analyzed and changed without affecting other processes in the organization.
- Strategic importance: The extent to which the process affords the organization a competitive advantage.
Any process, the authors contend, can be a candidate for BPO. But to improve the odds of a successful outsourcing arrangement, the approach to relationship governance should reflect the nature of the process in question. That is, the two should be aligned — with the BPO governance structure matched to the nature of the outsourced process.