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«Executive Summary Innovation is now the critical ingredient for most buyers of Business Process Outsourcing (BPO) services –unequivocally proven by ...»

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An HfS Research Report

Desperately Seeking Innovation in Business

Process Outsourcing: Enterprises Speak Out

Phil Fersht, Founder & Chief Executive Officer, Horses for Sources

Executive Summary

Innovation is now the critical ingredient for most buyers of Business Process Outsourcing (BPO) services

–unequivocally proven by a new HfS Research study. Most buyers of BPO services are initially delighted

when they trimmed 30% of their costs on one process, and 50% on another, but once those costs disappear from the balance sheet, they are quickly looking at new initiatives to help them attain new thresholds of productivity or revenue growth: what HfS Research terms as “innovation”.

Moreover, while half of buyers are dissatisfied with the innovation they are currently achieving from their BPO endeavor, the majority are seeing significant potential to achieve it across certain processes within a two-year timeframe. Essentially, once they have out-tasked as much of the feasible routine administrative work to service providers, they quickly discover that next tranche of productivity is not nearly as straightforward as documenting standard processes and training an offshore team to replicate them effectively (commonly termed in the BPO industry as “lift and shift”). Those buyers realize they actually need to introduce new, creative methods to actually change the old way of managing processes to find improvement. This scenario continues to dominate the vast majority of large-scale BPO engagements today.

The answers lie with both BPO buyers and their service providers working together to achieve measureable business outcomes as part of organized and collaborative long-term partnerships. However, too many enterprise buyers jump into a service provider relationship polarized on the initial cost take-out from the “lift and shift”, and gloss-over the future initiatives they will need to implement in a couple of years, when they seek to find new value through better processes, talent and technology.

We believe buyers need to put the innovation track-record of service providers high up the decision-making tree when they select make selection decisions. As earlier HfS Research has demonstrated, service provision is commoditizing and leveling the playing field, with several BPO service providers today pushing services within a similar price-band, and sufficient track record of successful “operational” delivery. Most large enterprises have already experienced offshoring and outsourcing varying degrees of their operations for several years, and are smart enough to realize outsourcing provides an opportunity to deliver more than simply cost-savings through lower cost labor. Consequently, the ability to provide outcome-based solutions that encompass helping BPO buyers achieve innovation, is fast becoming a crucial differentiator.

© Horses for S

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This report dives into the experiences and expectations of today’s enterprise BPO buyers when it comes to achieving innovation, and offers actionable recommendations for devising a strategy to improve their innovation

agenda with their BPO endeavor:

Table of Contents Executive Summary

Introducing a new HfS Research Study: Achieving Innovation in BPO

Key Study Findings

Innovation is Becoming a Critical Component of BPO

Figure 1: Importance of achieving innovation from Business Process Outsourcing endeavors

Figure 2: Enterprise BPO buyers and service providers fail to meet each other’s expectations

Enterprise Buyers are Blaming Themselves for Innovation Failure

Figure 3: Buyers view change management and governance failures as the impediments to achieving innovation

Identifying the Innovation Gaps is critical to developing an Innovation Roadmap

Figure 4: The Innovation Gap shows huge potential for BPO buyers

When selecting Services Providers, Smart enterprises seek the right balance between Operational Efficiency and Innovative Value

Figure 5: When evaluating service providers, financial stability and operational excellence are table stakes; business transformation and innovation capabilities are the differentiators

HfS Research Recommendations to BPO Buyers

About the Author

About Horses for Sources

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Introducing a new HfS Research Study: Achieving Innovation in BPO When it comes to BPO, Innovation is proving both a bane and a boon. Buyers want innovation as they recognize the significant value it can bring to their organizations but their expectations are falling short, in large part because they are not working effectively with their providers to achieve it.

To gain heretofore unattained insights and a much-needed dose of reality, HfS Research in May 2010 conducted a survey entitled “Are you Achieving Innovation in BPO” in conjunction with the Shared Services and Outsourcing Network’s (SSON) network of senior finance and operations executives. 588 senior decision makers within buy-side enterprises, BPO service provider executives and outsourcing advisors participated.

For the purposes of the study, the definition of “Innovation in BPO” used was, "the customer going beyond transactional/operational work to achieve new productivity gains and/or new revenue streams by implementing new practices through unique, creative methods."

Analysis of the study results revealed that an increasing majority of buyers are aware they can achieve innovation, and know the potential is there to do exactly that. They also realize certain processes are extremely ripe for an injection of innovation. And in acknowledging that much of the blame for lack-luster innovation results fall squarely on their shoulders, buyers are increasingly understanding the need to craft clear, detailed and formalized innovation plans in partnership with their providers. While the present disappoints, hope for future innovation is abundant.

Key Study Findings

 43 percent of buy-side decision makers now view innovation as a critical element of BPO  Half of today's enterprise buyers are disappointed with their current state of innovation  Half of the BPO engagements today are having adequate talent and technology provisioned, from both the client and service provider sides, to help drive innovation.

 Customer care, recruitment, payroll and management reporting are noticeably failing to meet clients’ innovation expectations  There is enormous medium-term potential to achieve innovation across industry-specific processes, analytics and several maturing BPO areas including procure-to-pay, supply chain and recruitment  Major impediments to buyers achieving innovation include ineffective change management and communications, and unempowered internal governance teams

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Innovation is Becoming a Critical Component of BPO In the past, a significant number of buyers shied away from innovation due to their laser-focus on achieving operational stability within their BPO environment. Many claimed they would have to sacrifice meeting service levels if they tried to tinker with their processes to find new ways of achieving better outcomes. However, the importance of innovation in today’s BPO engagements is abundantly clear, as shown in Figure 1 below.

Figure 1: Importance of achieving innovation from Business Process Outsourcing endeavors Q. How important is achieving innovation from your service provider in BPO engagements to your operational leadership?

(Buyers with significant influence only)

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Source: HfS Research, May 2010 Sample: 136 Enterprise Buyers of Business Process Outsourcing Services Survey conducted in conjunction with the Shared Services & Outsourcing Network (SSON) With 94 percent of respondents stating their operational leadership today view the achievement of innovation as a critical or quite important component of their BPO strategy, and with most providers now operating within a similar price band, innovation is clearly becoming the major differentiator in provider selection and a major contributor to BPO satisfaction.

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Yet, as the following data illustrates, both BPO buyers and service providers are equally disappointed with each other’s provision of resources and technology to meet innovation attainment expectations.

Figure 2: Enterprise BPO buyers and service providers fail to meet each other’s expectations

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Source: HfS Research, May 2010 Sample: 588 Shared Services & Outsourcing Executives Survey conducted in conjunction with the Shared Services & Outsourcing Network (SSON) Given how important innovation is to the operational leaders in buy-side enterprises, the fact that 41 percent of both BPO buyers and providers stated the other party “somewhat disappointed to meet expectations” spells a major concern for the future of BPO services. Only half of the BPO engagements today are having adequate talent and technology provisioned, from both the client and service provider sides, to help drive innovation.

Moreover, the fact that such a small proportion of today’s engagements (less than ten percent) are surpassing expectations of innovation achievement, is a very telling sign that most of them today have failed to progress beyond the “lift and shift” phase, where buyers are merely focused on operational stability.

On the upside, while buyers are clearly not yet seeing much business value beyond operational delivery, they do see abundant potential for innovation in both generic processes and industry-specific domains. We’ll discuss this later in this report.

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Enterprise Buyers are Blaming Themselves for Innovation Failure In days gone by, when a buyer was not getting optimum performance from an outsourcing endeavor, the blame quickly was targeted squarely at the service provider. However, our new research shows that most of today’s buyers realize their failure to achieve innovation rests with primarily them.

In many of our client interactions at HfS, buyers acknowledge that they need to get their own house in order before they can truly call their provider to task for not providing them the resources they need to achieve innovation. Both parties need to work together to develop a well-crafted plan that not only introduces innovative goals and milestones over time, but also ensures against derailing meeting service levels that truly matter. This involves buyers developing more partnership-oriented relationships with their service providers, increasing IT-enablement of business processes, and developing gain-sharing metrics based on business outcomes.

Our question posed to executives with significant influence over BPO decisions (Figure 3) on their prime concerns for failing to achieve innovation in BPO, shows that today’s BPO buyers actually recognize the blame lies a lot more in their camp than their provider's.

Figure 3: Buyers view change management and governance failures as the impediments to achieving innovation Q. To what extent are the following issues a great concern when it comes to your organization achieving innovation with your BPO endeavors?

(Buyers with significant influence only)

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If buyers were going to lay primary blame on their providers for lack of innovation prowess, far more than a fifth of buyers would have cited "the wrong composition of skills among their governance team and the provider's relationship team" as a major concern. Buyers’ acknowledgement of the need to fix broken internal change management, communications and governance initiatives and start driving the innovation agenda, is encouraging. The future for innovation is bright, and many of today's enterprises are figuring out how to make some progress toward achieving it.

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Identifying the Innovation Gaps is critical to developing an Innovation Roadmap Innovation is about deploying creative and unique methods to drive new productivity, or top line growth, into the company. In reality, some processes have that potential to foster innovation, while others, frankly, only offer a means to an end. When it comes to achieving BPO innovation, buyers need to identify where real innovation is possible, and where they only really need operational efficiency.

Figure 4 shows key processes where senior BPO buyers are achieving significant innovation today, and where they view

the potential to achieve significant innovation within a two-year timeframe:

Figure 4: The Innovation Gap shows huge potential for BPO buyers

Within the following business functions where your company has performed some BPO:

a) How much innovation, based on our definition, has currently been achieved?

b) How much innovation is possible over the next 24 months, beyond your standard operational delivery?

Answer = Significant Innovation

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Figure 4 reveals volumes about buyers’ views of outsourcing today, in terms of where they currently are on their roadmap, and where they would like to get to in the future. Most outsourced business processes can be improved to a

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certain extent, whether through better workflows, application of new technology or domain knowledge from experts.

And most buyers today still feel most - or all - of their outsourced processes can benefit from further innovation.

However, some processes clearly have a ceiling of attainable innovation value. For example, once a benefits administration solution provides the required functionality, is delivered via a hosted/SaaS model, and the costs and service quality are performing to acceptable levels, little more can be done to deliver additional value in terms of increased productivity or new top-line growth. Although fine-tuning the Cloud Computing/SaaS model can help optimize delivery and further drive down operating costs, once the buyer is happy with the processes and the service delivery, that may be the limit of future innovative value that it can ever expect to attain.

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