We have all heard about the 4P’s of Marketing – Product, Pricing, Promotion, Place or the 3 C’s of Pricing – Cost, Customer, Competition. If you are from the lending space you have possibly heard of the 4 C’s of Underwriting – Credit, Capacity, Collateral and Character.
In this article I propose the 5 C’s of Business Process Outsourcing. The 5C’s elaborate why companies outsource and what are the key drivers behind their outsourcing decision. Although the discussion applies to all forms of outsourcing, these decision points are most relevant to outsourcing of services commonly called Business Process outsourcing (BPO).
1. Cost: Often the outsourcer can provide a lower cost of operation than can be achieved internally by the company while maintaining equal or better service levels and quality. Typical ways outsourcers can achieve this cost arbitrage are by utilizing:
- geographical advantage – lower cost inshore, near-shore or offshore locations
- non-replicable technology automation and process efficiency IP
- greater economies of scale and better capacity utilization
2. Capacity: When volumes are unpredictable or seasonal, companies want to reduce the costs of maintaining excess capacity by utilizing variable staffing. The intent is to shift the variable capacity risk to one or many outsourcers that can manage this risk better by load balancing and moving their resources between different projects with multiple similar clients. Sometimes, even with predictable volumes, companies may want to keep a portion of their work outsourced to:
- champion, challenge their internal workforce
- adhere to hiring freezes for internal hiring
- deal with limitations in infrastructure
- address limitations in hiring ability – cannot hire fast enough for new positions
3. Capability: In many cases the outsourcer may have a unique set of capabilities that their clients do not have. If the knowledge is more person based requiring subject matter experts and the project strategic rather than operational, then the work might be best handled by a high end consulting firm. However, if the capability at the outsourcer is on an organizational level then it is suitable for business process outsourcing. The outsourcer’s enhanced capability may be derived based on their experiences working with other clients who are in the same domain with more mature processes. New clients can thus benefit from the outsourcers advanced knowledge and case studies from their similar clients as well as their expertise in tackling business problems that are new or in unfamiliar territory for the client themselves.
4. Criticality: Not very long ago Business Process Outsourcing used to be equated with back-office processing a blanket term for processes that were not business critical (sometimes also called “non-core”) but essential to perform. “Non-core” work could also be strategic projects that were on an unfinished project list because adequate resources or focus was unavailable to complete them. As the outsourcing function and subsequently the outsourcers that deliver the service have become more mature and capable over time, this rather subjective black and white distinction between back-office versus front-office or core versus non-core and has been grayed. Consequently a new definition emerged in outsourcing circles of KPO or Knowledge Process Outsourcing to indicate outsourcing of core functions requiring high skills and advanced domain knowledge.
Perceived business criticality is still a key factor in outsourcing decisions especially when a company first starts outsourcing and has not developed the adequate maturity to manage the risks associated with the outsourcing of these critical functions.
5. Compliance: Often, in highly regulated industries and consumer facing businesses such as residential mortgage banking, certain activities cannot be outsourced as regulators, rating agencies, board of directors, investors and other company stakeholders specifically prohibit or restrict such outsourcing. These guidelines may sometimes allow certain kinds of outsourcing while prohibiting others. A typical example would be a case where they allow onshore outsourcing but prohibit offshore outsourcing due to political pressures, lack of similar business or security standards at outsourcers offshore country location and company or customer specific national biases.
I would love to hear your thoughts, would you agree on these 5C’s of Business Process Outsourcing. Are there any other areas that you feel should be added to this list?