BPO outsourcing is growing geometrically. And when companies outsource an entire process, the contract usually includes the IT segment. This trend has not gone unnoticed by the IT outsourcing suppliers. These IT outsourcing leaders have created new offerings to do BPO their way.
At Compaq Computer Corporation, a Houston, Texas-based global enterprise provider, creating a BPO offering is the job of Stephen Bunney, senior director for the strategic engagement group. “We act like a Special Forces unit. We parachute in to help structure a complicated outsourcing deal. We specialize in alliances and joint ventures – all the big and ugly stuff,” says Bunney with a grin.
Bunney says one of the big advantages of BPO outsourcing is that its pricing works like utility bills. Companies only pay for the actual amount of the services they use. The cost of the service becomes predictable because the organization knows how much of the service it needs to use.
Another reason BPO “is getting increased traction” is that the outsourcing provider is a specialist in that particular process and employs “focused, experienced personnel,” according to Bunney.
Utility-based Pricing for Core Processes
Compaq crystallized its thinking on BPO working with Optus, Australia’s second-largest telecommunications provider. Bunney says Optus wanted to take advantage of BPO’s utility-based pricing, predictable costs and variable use of services but still wanted to retain control of its processes. And it wanted to enjoy these BPO advantages in its core competencies as well, which were processes it clearly didn’t want to give up.
Compaq bridged the gap between IT and BPO by using a partnership approach. Employees from both companies staff the business program office, whose job is to link the Chief Financial Officer with the Chief Information Officer.
The resulting service level agreements reflect the joint goals of the partners instead of Compaq’s technical capabilities. “Our SLAs aren’t about keeping the lights flashing on the network servers in their data centers. What businesses want is for their processes to work. There’s a disconnect between what the business considers important and what the IT department thinks is critical,” Bunney explains.
SLAs Become Service Value Agreements (SVAs)
To address this question, Compaq moved away from SLAs – Bunney calls them “a technology driven metric” – and replaced them with service value agreements (SVA). These describe how the supplier executes the outsourced business process. Typical service value agreements cover customer satisfaction with Compaq’s call center or its ability to invoice customers accurately. Some SVAs describe intangible benefits like making a process run smoother.
The business program office developed the SVAs that mesh the business service plans with the Optus’ IT strategies. The goal is to have the IT department deliver technology according to the business models expressed in the SVAs.
Compaq offers Optus what it calls “computing on demand.” Compaq bundled all its offerings – help desk, customer support, procurement, and asset management – into one fee per user. Then it employs the “variable capacity model.” Optus can vary the number of units it outsources depending on its need. The result is “a repeatable, predictable monthly fee.”
This “half-wayouse solution” works for large companies with massive IT operations, reports Bunney.
Finding a Fund To Fund Innovation
Partnership arrangements like this allow Compaq and its customers to share both the risks and rewards of the outsourcing relationship. Historically, Bunney has noticed “there is little incentive for the supplier to bring continuous improvement into the relationship to reduce costs.” Success based on SLAs didn’t reward a supplier for reducing costs. “If the charging mechanism for a help desk operation is per call, the motivation is to increase calls, not reduce costs,” Bunney explains.
Under the old way of doing things, suppliers had no way to recoup the capital investment such improvements required. For example, someone suggests a way to reduce the cost of the calls. This solution requires a $2 million capital infusion. Under Compaq’s partnership arrangement, each partner ante’s up $1 million. “Then both partiers determine how to recover their investment,” he says.
In this example, the new idea reduces the cost to service a call from $10.00 to $8.00. Lowering the cost to $8.00 will hurt the supplier’s profitability, however. So both parties agree to pay the supplier $9.00 per call to allow the supplier to recover its share of the investment and make a profit. The customer, of course, benefits because the change significantly reduces its cost.
Outsourcing partnerships like this provide “continuous motivation for innovation,” Bunney observes.
Lessons from the Outsourcing Primer:
- Companies want to enjoy the benefits of BPO outsourcing “utility-based pricing, predictability and variable levels of service” across an entire enterprise. Compaq has devised a “halfway-house” solution to allow them to enjoy the benefits of BPO while still retaining some control of the process.
- Forming a partnership between buyers and suppliers creates economic incentives for innovation and improvement in the outsourcing relationship.
- Service value agreements, which reflect the needs of the business process, replace service level agreements in this IT/BPO relationship.