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BPO Journal

Thursday, December 15, 2005

Back to blogging!

I was away on a conference last week sans time to blog. And now, am off to the Gold Coast sans microchips and the Internet. Will be back on December 28th. Back to blogging then with the promise of more frequent posts in the new year.

Monday, December 05, 2005

BPO moves closer to the core

The Financial Times reported today that JP Morgan Chase is planning to hire 4,500 graduates in India during the next two years with the aim of moving 30 per cent of its back office and support staff at its investment bank offshore by the end of 2007. And it seems the rest of Wall Street is not far behind. Goldman Sachs has about 700 staff in India - out of a total workforce of 22,000 - with about 300 in operations, including clearing and settlement, and 30 in research.

The article purports that reduced costs of process ownership through Indian operations are not the sole benefit of captive centers. Veronique Weill, head of operations for JP Morgan, states that the bank will benefit by ensuring that the Indian operations are firmly integrated with the rest of the group. However, I think that such integration may be the downside to offshoring via a captive unit. The alignment of a firm's captive unit with broader organizational principles and structure requires investment in standards, processes and technologies that, in turn, result in high transaction costs for the BPO relationship. In the recent past, this has resulted in organizations such as GE and Citigroup spinning off their captive units to take on third-party customers. Other factors that weigh in on the decision to go captive versus third party solutions are the need to extract value from an asset, a volatile labor movement that disrupts captive operations, and pressure from local managers seeking independence, allied with the frustration felt by headquarters about running a distant unit.

The primary factors that propel firms to adopt a vertically integrated structure such as a captive BPO center are the risk of information loss associated with knowledge-intensive business processes, the increased investment required in knowledge process outsourcing and the resultant loss of scale economies to traditional BPO vendors, and the costly incentives required to motivate the vendor to invest in process technologies and capabilities. However, some firms are successfully using a potent mix of contracts, processes and technologies to mitigate these risks and deliver value through their party solutions.

My favorite example in this regard is that of Merrill Lynch's largest outsourcing initiatives, the complex restructuring of its wealth management workstation platform. Executives at Merrill argued that outsourcing the process would reduce the cost of empowering financial advisers with better, faster information, and raise the cost of entry of being a financial advisory firm, thereby generating competitive advantage. Therefore, the outsourced process was strategically important and marked by strong interdependencies with other organizational processes. There also existed interdependencies between components of the outsourced process - market data, financial planning tools and CRM capabilities. Merrill adopted a partnership approach to governance. The contract with its solution partner, Thomson Financial, provides for flexibility to adapt to changing process and user needs. Also, the contract, in addition to specifying SLAs and performance bonuses, links compensation to measures of customer satisfaction. It is supplemented by a tight relational association between Merrill and Thomson. The project involves frequent interaction and communication between the firms, and is marked by the sponsorship of senior management at both firms. The process is jointly owned, and employees work in tandem under the guidance of Merrill's managers. Senior management asserts that this governance model, involving shared responsibility for the success of the platform, is central to realizing expected benefits from the project.

Nevertheless, as BPO becomes more knowledge-intensive and moves closer to the core competence of the firm, managers will be confronted with significant complexity and ambiguity in the decision process. For now, there's a pattern. First, GE, then Citigroup. Is JP Morgan next?

Saturday, December 03, 2005

Paradox Revisited

A few months ago, I had posted on the nature of the "outsourcing paradox" - the growth in outsourcing investments despite the increased failure of these investments to deliver value. Several studies, including surveys by consulting firms (of course, one might point to a hidden agenda in such studies) such as Deloitte and Bain point to dissatisfaction of firms with their outsourcing arrangements.

In response to that post, owners of outsourcing relationships wrote in saying that firms were not off-base in the value that they expected to realize from outsourcing; the dissatisfaction arose from a failure to capture that value. They suggested that while firms devote significant attention to whether to outsource, concomitant attention is not paid to how to outsource. Yet, there were others who said that their firms displayed herd behavior and followed the competition when it came to outsourcing. This failure to evaluate the applicability of outsourcing to their unique business context resulted in . In either case, it seemed that firms were unprepared for the transformation that outsourcing entailed. One reader also pointed out that his firm did not have a plan to backsource the outsourced process when the outsourcing arrangement failed. Although the contract specified exit conditions, the firm did not have a plan that specified routines and procedures to transfer the process in-house, exacerbating failure.

While I am researching these independent effects on outsourcing efficiency, I'd like to gain more insights into the decision process that is followed in outsourcing firms. Why does your firm outsource? In your experience, what are some of the reasons that outsourcing relationships fail?

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