Business Process Outsourcing – Implications for e-Government

Johan MagnussonCentre for Business Solutions

School of Business, Economics and LawGöteborg University

www.handels.gu.se/cfa

Magnus ErikssonDepartment of Technology, Management and

EconomicsChalmers University of Technology

www.chalmers.se/tme

General outline

1. Background to Outsourcing2. Effects on IT Governance3. Business Process Outsourcing4. Offshore Outsourcing5. The Gospel of Standardization6. Lessons from Industry – BPO at IFS7. Lessons from Industry – Process

Industrialization at Volvo8. Implications for e-Government

Outsourcing…

• ”A world on-demand”• Function, technology or process• Between Lego and Sandviken• From make/buy to make/buy/share• Easy does it… Multisourcing… Motives for

Outsourcing

Financial MotivesManagerial

Motives

Technical Motives Political Motives

Periodic costingFree liquidityReduce costs

Streamline management agenda

Focus on core-business

Enhance IS qualityIncrease staff competence

Economics of Scale

Miscontent with IT-departmentTrends

View of IT as support-function

Inspired by Bhattacharaya et al, 2003

Effects on IT Governance

• New models of governance are needed

• Portfolio management becomes imperative

• Need for consensus on definition of atoms

Business Initiatives

IT Investment

Business Architecture

Technology Architecture

Information Architecture

Projects and Support

Business Processes

Application Inventory

Resources and infrastructure

Constrain ChangeEnterprise

ArchitectureInvestment Portfolios

Existing Systems

Source: Gartner Group, 2005

Business Process Outsourcing

• ”the delegation of one or more it-intensive business processes to an external provider that, in turn, owns, administers and manages the selected processes based on defined and measurable performance metrics.”

• HR, Finance & Accounting, Sales & Marketing and Supply Chain Management

• Range from Discrete to Utility BPO• Whirlpool & Dupont (10-13 years) Megadeals

Technological developments

• Increase in integration cost, complexity and multiplicity during the 1990s

• Open standards!• Decrease in integration cost, complexity

and multiplicity during the 2000s– Standardized Enterprise systems– Commercial Off-The Shelf software– Service Oriented Architecture

UDDI WSDL

Web Service

1. Create

2. Register

3. Search

4. Use

Web-client

Offshore outsourcing is a global trend

“Offshore outsourcing will continue to rise at an estimated annual rate of 65 percent within the next few years, and will reach $147 billion by 2008” (McKinsey & Co)

When it all ads up…

• Process Orientation as a new Lingua Franca and highly formalized process descriptions

• IT-based platforms facilitating full transparency and control over flows

• Total interoperability on both technical- and process levels

• Standardization as the final level of process maturity

• Heightened steerability regarding both operations and sourcing

”It is important to have the guts to standardize one hundred percent, otherwise you will not get the full benefits of outsourcing.”

Global HR Manager Sandvik

Case 1 – Business Process Outsourcing at IFS

• “one of the world’s leading providers of component-based business software developed using open standards”

• Founded 1983• Number of customers 2,200 • Number of employees 2,600• Net revenue, 2005 SEK 2,149 million• Experienced different ‘business models’ during its life-time

Case 1 – The challenge in the expansion phase

• Until mid 1990s, IFS could easy recruit employees in Sweden, the production operations took place in Sweden, and IFS could expand with own financial resources

• The business model was to grow rapidly during the 1990s: The Expansion period

• However, in the late 1990s the present business model could not meet an increased demand from customers and an increased competition from competitors

• To expand, and more essential to survive, the company needed to– raise new capital: IPO– continue to recruit high-skilled employees: development office established in Asia

Case 1 – From Expansion to Consolidation

• But in 2000, the stock market bubble hit the company• There was a need to change the business model: The Consolidation period• What was this strategic change really about?

Case 1 – The Solution: Business Process Outsourcing

• The firm could still expand and develop its business by establishing production operations offshore at their already established office in Asia

• Advantages– Lower costs– Shorter development time, optimizing

workload design– Access to a large amount of skilled labour– Closer to more markets, and new,

emerging markets

• Challenges– Communication and cultural differences– Local infrastructure such as broadband and

information technology– Lack of domain knowledge, i.e. industrial

expertise– Knowledge transfer between Swedish’

employees and Asian’ employees

Case 1 – Implications

• Success factors– The company established an office in Asia already in the late 1990s– The company transferred needed competence and knowledge gradually– The company has very good relations with the local community

• The development process is now production-oriented and is relative cost efficient

• Significant reduced development cost and development time & increased productivity

• Increased license revenues in emerging markets from 7% (1998) to 23% (2005)• The company still exist and are now becoming profitable• In conclusion, offshore outsourcing has been one viable part of the firm’s

business model in an increasingly competitive and rapidly changing world

Case 2 – Process Industrialization at Volvo Business Services

• Volvo Business Services – Shared Service Organization, NOT centralized Economic Department

• ”to provide rational, cost-efficient and high quality services in the financial administration area for the Volvo Group companies”

• Formed 1998• 600 employees in four general processes

– A/R, A/P, FR and recently HR

Case 2 – Shared Service Centres

• Business Administrative Services• Grasp throughout the entire value-chain• Roll out strategy

– Platform– Standardize– Optimize

• Strive towards efficiency, quality and customer influence

• PPM from IDS Scheer links SAP reference model to management dashboard

”As long as you work from a customer-unique perspective, it is hard to standardize.”

You often choose to move geographically, hardly to focus on business value.”

Process Manager VBS

Case 2 – Lessons learned

• Managers want to outsource, regardless if this is the best alternative or not

• Shared Services should be everything but unique for the specific customer

• 100-300 is the best number of employees per site

• Strive for designing the workload for continuous process improvement

• Secure traceability via Business Activity Monitoring

Implications for e-Government

• Process overview BEFORE sourcing decision• Know at least some of the”WHY’s”• Consider the whole life-cycle of the

potential outsourcing• Retain personnel with development and

integration competence• Strive for SOA-based architecture, usage of

open standards and interfaces and process management methodology

• Be careful with the outsourcing of e-services

• Don’t fall for the mega deals!