Business process management and reengineering have their roots in manufacturing. Early research in this area focused on process optimization and operations management, using techniques such as linear programming to reduce cycle time and inventory levels. The Japanese automobile industry in particular was quick to adopt Western research concepts into its manufacturing process, thus bringing to popular acceptance ideas such as just-in-time manufacturing, kaizen, and supply chain management. Research and experimentation then extended into business process reengineering and the principles of core competencies, with management leaders urging organizations to redesign their business processes, retain what were their key competitive differentiators in-house, and outsource those processes to which their value addition was low or were core competencies of suppliers they had access to. Thus, outsourcing in manufacturing is widespread to the extent we see extreme examples such as that of Coca-Cola, where almost the entire supply chain is outsourced and the company is essentially a marketing organization.
The outsourcing of business processes in service industries such as financial services has rapidly followed a very similar path. The financial services industry has historically thought conceptually in terms of front and back offices, and outsourcing of back-office business processes has occurred across various sectors within the industry. Within retail banking, functions such as check clearing and payment processing have been outsourced for some time now. Similarly, within the trading industry, clearing and settlement functions are outsourced to central clearinghouses to improve the efficiency of the process. Other examples include credit rating within the lending industry and custody of assets functions within the investment management industry.
A logical extension of outsourcing has been the more recent move to migrate some of these processes offshore. Several critical influential factors have enabled the rapid growth of this sector, particularly in countries like India. Telecom deregulation and an increase in bandwidth have significantly improved the quality and stability of communication links at lower costs. Integration applications and business process management software are becoming more scalable and sophisticated. The availability of talented, well-educated human resources in countries such as India, Russia, and China provide a potential supply of workers to meet changing needs. Differences in the costs of resources between these countries and those in the West yield an almost immediate cost arbitrage opportunity of 30%50%. The definition and wide acceptance of quality standards such as ISO, SEI CMM and Six-sigma have ensured the quality of business processes moved offshore can be enhanced through a focus on productivity improvement. Finally, in a difficult market environment for financial services, offshore outsourcing yields significant opportunities for improving flexibility and making fixed costs variable.
The range of business processes being offshored is continually increasing. Many companies have taken the "core competency" approach to selecting processes to move offshore, beginning with customer support through overseas call centers. Outsourcing of support functions such as finance, accounting, and human resource management has been increasing. Companies are also tapping into more highly skilled resources, such as lawyers, accountants, engineers, and researchers, to perform more value-added processes such as product design, pharmaceutical research, tax processing, and investment research. Well-defined, self-contained, and measurable processes are most suited to offshoring. Further, stable processes with robust practices and low levels of variance typically make the easiest transition to an offshore outsourcing arrangement.
An important factor for successful outsourcing is the quality of the supporting tools and application software. Offshore service providers often provide both IT and business process outsourcing services to the same client. These providers are drawing upon their technology capabilities to manage and support the business processes they run on behalf of clients. IT-enabled business processes, such as account opening, claims handling, and collections, draw on software applications in areas such as work force management, quality monitoring, document imaging, work flow management, business activity monitoring, and business intelligence. Work force management, for instance, is crucial to ensuring the right resources and skills are available at the right place at the right time. Similarly, business activity monitoring ensures the right information is available to the right resources in the right format at the right time. In addition, when integrated effectively, these applications share information to enable a substantial improvement in the stability of business processes, the cost of operating them, and transparency of process performance to the customer.
Other key factors to ensuring the successful transitioning and operation of business processes offshore are related to management and governance. The three principal phases of the life cycle are migration, monitoring, and improvement. Key enablers of governance and control are dashboards/virtual team rooms to monitor performance against commitments, active project plans, virtual team alignment, communication and review calendars, and periodic audits for control and compliance (internal, accredited third-party, client themselves). In our experience the best management and governance models fall midway between micromanagement of offshore processes and throwing processes "over the wall." Change management is particularly important during the transition process so that sponsorship is built for the initiative and expectations are managed. Communication to the key stakeholders of the business process is an integral part of change management. From the service provider's perspective, it is essential that the service operators, or agents, have a good cultural context and understanding of the client organization. Training is crucial, and service providers make significant investments in this area to ensure agents are capable and motivated.
The offshore business process outsourcing trend is currently at a relatively early phase of development. With increased sophistication of associated technologies and software and reducing infrastructure costs, as well as the increased maturity of offshore capabilities, we foresee tremendous growth in this industry. New opportunities are also emerging where the additional bandwidth provided by offshore resources can be channeled toward creating new services or capabilities. Early adopters and proactive managers who know how to build long-term partnerships with offshore service providers will potentially benefit through reduction of costs and improvement of the quality of business processes.
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