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Innovation - The BPO industry needs to escape from purgatory

May 17th, 2010

While there's a lot of puff coming from several providers, expectations are not being met when it comes to the actual achievement of innovation within many Business Process Outsourcing (BPO) engagements. Consequently, this improves the options for the first-time BPO buyer to select a provider that can demonstrate a proven track record of innovation, but what about the second-time buyer, firmly-rooted in BPO purgatory?

Our brand new survey* of 588 shared services and outsourcing executives, studying the current achievements of innovation within BPO, serves up a major does of realism to the global sourcing industry: buyers want it, but they are not working effectively with their providers to achieve it. And many buyers and providers are pointing the finger at each other. So why should we care?

Innovation is becoming a critical component when it comes to BPO

In the past, many buyers shied away from innovation because they were so laser-focused on achieving operational stability within their BPO environment. Many claimed that 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, when we look at how those buyers with significant influence over BPO decisions are viewing innovation today, the importance being placed on innovation is distinct:

Close to half of enterprises’' operational leadership today now view the achievement of innovation as a critical component of their BPO strategy. With most providers operating within a similar price-band today, this is clearly becoming the major differentiator for the first-time BPO buyer, as we first discussed in our "New Normal in Outsourcing Delivery" study, earlier this year.

First time BPO buyers can select proven innovators, but the second-time buyers have a challenge on their hands to escape BPO purgatory

As the following data illustrates, both buyers and service providers of BPO services are equally disappointed with each others’ provision of resources and technology to meet their expectations of achieving innovation. Considering 38% of enterprise customers view innovation in BPO as critically important to their operational leadership, with a further 50% viewing it as quite important, this is becoming a major concern for the future of BPO services:

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While the present disappoints, hope for future innovation is abundant

While buyers are clearly not seeing a lot of business value beyond operational delivery today, they see abundant potential for innovation in both generic processes and industry-specific domains. Major findings, which will be featured in a forthcoming HfS Research report, include the following dynamics:

More innovation has currently been achieved across industry-specific, analytics, supply chain and general accounting processes. Customer care, recruitment, payroll and management reporting are noticeably failing to meet customer expectations.

The potential to achieve innovation across many core business processes is huge. This was notably cited in industry-specific process and analytics areas, in addition to some maturing BPO domains, namely procure-to-pay, and payroll and recruitment.

Major impediments to buyers achieving innovation included underpowered governance teams, and ineffective change management and communications.

The Bottom-line: escape-plans from BPO purgatory are bring hatched, but the hard work starts now

All-in-all, an increasing majority of buyers are aware they can achieve innovation, and know the potential is there to do exactly that. Moreover, most realize the blame doesn't always sit with their service provider - it rests with both parties to work together to a well-crafted plan that introduces innovative goals and milestones over time, that do not derail from meeting service levels that actually matter. This involves developing more partnership-oriented relationships with their service providers, increased IT-enablement of business processes, and developing gain-sharing metrics based on business outcomes.

So why aren't half of today's enterprise buyers achieving innovation?

When we asked those executives with significant influence over BPO decisions their prime concerns for failing to achieve innovation in BPO, they cited the following reasons:

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It is abundantly clear that enterprises buyers recognize that the blame lies a lot more in their camp than their provider's, with well over a third citing poor change management and communications as a great concern, coupled with the fact that their current governance team has little juice internally to drive an innovation agenda. If they were going to blame primarily their provider's lack of innovation prowess, much 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.

In the next installment of this innovation saga, we will reveal what buyers are planning to do to achieve innovation, but here are a few clear areas they can work on:

Create a aggressive innovation agenda and a plan to keep that agenda fresh over time. Buyers need to stipulate the need to explore new and creative ways to improve productivity and top-line growth as a core element of their BPO endeavor and communicate this aggressively, on a repeated basis, to their entire retained operations organization.

Communicate this innovation agenda to both governance and provider teams. Talk to any buyer beginning to achieve some innovation success with their engagement, and they will tell you the same thing: "We recognized what we needed to do internally, and communicated aggressively with our provider to start delivering it with us". Until buyers take the bull by the horns internally and communicate to their partners the new direction they are taking, they will never escape from innovation purgatory.

Create an innovative contract with their provider. Buyers need to incentivize their provider financially to help them achieve gains in both productivity and growth. This is already beginning to happen with several recent BPO engagements, where the provider has demonstrated the confidence to insert productivity incentives as high as 20% in some of today's recent contracts. Providers will step up to the plate with the right approach, if they have the financial incentive to do so.

Stop playing providers off in a low-cost bake-off. If the buyer simply squeezes the life out of their provider with a cost bake-off, they are unlikely to get much in return beyond operational delivery to meet the contracted service levels. Some of the leading BPO providers are now inserting gain-sharing elements into their deals in order to beat off competitors dropping their prices, because it is desperate to win the deal. The better providers now have the advantage of knowing where they can offer innovation incentives to gain ground in tough pursuits. In any case, most of the providers are now operating within a similar price band, so focus needs to

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move away from simply price, and more to which ones are better prepared to be incentivized financially for driving innovative results.

All-in-all, we are encouraged that many enterprise buyers have recognized the need to get their act together and start driving the innovation agenda. The future for innovation is bright, and many of today's enterprises are figuring out how to make some progress towards it.

When it comes to achieving innovation when outsourcing, buyers need to identify where real innovation is possible, and where they only really need operational efficiency.

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, while others, quite frankly, only offer a means to an end.

Our new innovation study, conducted in conjunction with our BPO networking partner, the Shared Services & Outsourcing Network, reveals some staggering results from 136 senior BPO buyers, when we asked them where they were achieving significant innovation today, and where they saw the potential to achieving significant innovation within a two-year time frame:

Determine the ceiling of innovation value

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This data reveals an awful lot about outsourcing today. Essentially, most business processes can be improved to a certain extent when they are outsourced, whether it be through better workflows, application of new technology, and 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 innovation value that can be attained, which is where the move towards standardization comes into play. For example, once you've got a benefits or payroll solution that delivers the required functionality, is delivered via a hosted / SaaS model, and the provider has the costs and service quality performing to an acceptable level, is there really a whole lot more value your business can gain from them, to increase productivity further and drive new top-line growth? Cloud Computing and SaaS can further help drive down the operating costs and optimization of delivery, but once you're happy with the processes and the service, that may be the limit of future innovative value that you can expect to attain.

Pinpoint where future growth and productivity can be attained with a BPO provider

Where there is significant opportunity to achieve innovation, is where there is significant room to improve process flows, add domain knowledge, creativity and technology into the mix to achieve imp actual business outcomes. This is especially prevalent with those processes that are often a long way from standardization, and can benefit from consultative business partners to develop a specific innovation agenda. Analytics innovation clearly represents a major opportunity for providers and buyers to work together to make better use of information to drive results, in a cost-efficient manner. It also encompasses a much greater need for consultative support from the provider. And it's the same story as you go through those processes where the innovation opportunity is significant, for example, P2P (massive productivity and cash flow); supply chain (driving product to market quicker); customer--care (driving new income), recruiting (reducing time-to-hire and improving talent selection), and so on. Each innovation gap tells a story of where the future value lies.

The HfS Viewpoint: The key lies in determining and achieving the right balance between operational efficiency and inno-avtive value. Both are crucial.

That means, when selecting BPO partners to drive new business value, buyers need to focus on identifying which ones can genuinely help them innovate, versus those who can keep the machine cranking. In most cases today, buyers are increasingly finding they can source to multiple BPO and consulting partners - those to help them innovate in processes that have real value-potential, and those which can keep the costs down and the operations functioning. Many buyers today with some BPO experience are now seriously considering adding more competitiveness to their provider mix to get more creative value.

On the flip-side, providers need to determine where they add the most value. For example, ADP has the lion's share of the managed payroll business - so does it need to broaden beyond that into adjacent processes, for example P2P, that requires greater innovative and consultative support? Cognizant has a strong arrange of industry-specific offerings in areas such as life sciences and banking - does it need to broaden more aggressively into more horizontal processes, such as finance or procurement? Accenture and IBM have strong offerings across many of these processes, so where do they choose to invest more of their resources in a tightening market? Buyers and providers need to work out a game-plan where they determine what innovation is possible, and how it needs to be achieved. Some buyers feel they don't need a hell of a lot of innovation, and some providers are happy delivering standard services with little innovation impetus, beyond a few basic requirements. In the future, we'll be drawing up illustrations of the innovators and the operational players. There is room for both - the key is to determine how much focus to put into each area.

All-in-all: Both buyers and providers need to be honest with themselves to determine whether they are truly prepared to invest in either achieving or delivering innovation. If not, stick to being operationally efficacy and stop talking about an innovation game-plan that will never happen.