CONTENT 4   Executive Summary 5   Technology in Business     Process Outsourcing 6   managing Costs Through     Technology...
ExECUTIvE SUMMARYTeChnology: The underesTimATed ForCein reduCing Bpo CosT                                                 ...
TECHNOLOGY IN BUSINESS PROCESSOUTSOURCINGWhy you should CAreWhat is the impact of technology on              since Bpo buy...
especially when it comes to software             substantial. These scenarios are highly      Another significant focus of...
These companies typically haveerp-based, standardized processes.             Bpo customers should consider and factor into...
BPO COST STRUCTUREThe CompleTe piCTureCost reduction is still the main driver            customer and cause them to incur ...
Cost items typically considered include       today is mostly applied to labor-              offshore resources. This situ...
Figure 3 illustrates these scale effects                                             customer. in fact, customers also    ...
outsourcing governance                      case and decision making. At first                    impact of potential exit...
• Loss of process know-how – during                respective data have to be trans-         with processes in the rest of...
every error made during an outsourced process has                                          incidental expenses may add sub...
Management of Overtime Process (Outsourced)                Examples of Required Integration   Other Processes (Retained)  ...
CONCLUSION ANd OUTLOOkConsider All releVAnT CosTsAs previously discussed, companiesconsidering Bpo as a strategic option  ...
50 080 983 (09/07)©2009 by sAp Ag.All rights reserved. sAp, r/3, sAp netWeaver, duet, partneredge,Bydesign, sAp Business B...
Reducing BPO Costs
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Reducing BPO Costs

  1. 1. SAP White PaperBusiness process outsourcingTHE IMPACT OF TECHNOLOGY ON COSTIN BUSINESS PROCESS OUTSOURCINGThe CompleTe Business proCessouTsourCing CosT piCTure
  2. 2. CONTENT 4 Executive Summary 5 Technology in Business Process Outsourcing 6 managing Costs Through Technology 7 Cost Control: shared responsibility of Bpo Customer and provider 8 BPO Cost Structure 8 The usual Costs – Costs normally Considered by Bpo Customers 8 Transition of people, processes, and iT systems 9 process operations10 information Technology11 outsourcing governance11 The surprise Costs – less obvious, easily overlooked11 integration Costs11 impact of potential exit scenarios12 The sneaky Costs – over- looked Costs with potentially significant impact12 effects on the retained organization13 scope Creep and gliding Cost paths15 Conclusion and Outlook
  3. 3. ExECUTIvE SUMMARYTeChnology: The underesTimATed ForCein reduCing Bpo CosT This white paper, the first in a series from sAp, examines the cost structure With the right software, organizations can balance associated with Bpo and shows that a their needs for personalization and standardization diligent assessment needs to address several cost components that are not of outsourced processes by creating the capacity to included in the provider’s total contract design process and iT implementation jointly. value (TCV), and are often overlooked by buyers. subsequent white papers examine how technology impacts all Bpo cost components in detail andmany different factors contribute to the With the right software, organizations compare the cost of different Bpocost of a business process outsourcing can balance their needs for personal- delivery methods based on comprehen-(Bpo) engagement. Among them, iT, ization and standardization of out- sive modeling.especially software, is a key cost deter- sourced processes by creating theminant that is often underestimated. capacity to design process and iTWhile software licenses and mainte- implementation jointly. in addition, soft-nance typically represent no more than ware is the key enabler for integration3% to 5% of a Bpo provider’s total between buyer and service provider,cost, they directly drive process auto- both on process and iT levels. Finally,mation that immediately impacts the the software choice has a substantialcost of operations. long-term impact on cost as it influenc- es the organization’s flexibility toTechnology drives the Bpo cost struc- accommodate changes in scope includ-ture in three ways: it enables econo- ing process coverage and regionalmies of scale, supports sustainable scope, or scale; allow for organizationalprocess optimization, and makes labor developments, such as reorganizationarbitrage possible by connecting and or merger and acquisition activities;controlling remote location workflows. and cater for potential changes in sourcing strategy.4 SAP White Paper – The impact of Technology on Cost in Business process outsourcing
  4. 4. TECHNOLOGY IN BUSINESS PROCESSOUTSOURCINGWhy you should CAreWhat is the impact of technology on since Bpo buyers invest significant For example, if the size of the organiza-the cost of a business process out- time, money, and other resources in tion triples, the cost of payroll as wellsourcing (Bpo) relationship, and why the Bpo project, it helps both buyers as time and attendance per employeeshould Bpo buyers care about technol- and providers to understand the Bpo will decrease by approximately 30%.ogy in the context of Bpo? cost structure, and the impact of tech- nology on it, as clearly as possible. Figure 1 illustrates that in order tountil not long ago, the buyers’ commu- here are some guidelines to under- reduce costs through technology,nity was often uninterested in the tech- standing the Bpo cost structure. minimizing the software license expen-nology portion of Bpo because it was • software licenses typically represent diture alone is not sufficient. The imple-viewed as a consideration the provider 3% of the cost of a complete Bpo mentation- and upgrade-related costs,is paid to figure out. not paying atten- process in regard to hr outsourcing. plus hardware and operations costs,tion to this detail typically would mani- • other technology costs relate to should also be considered, as wellfest significant conflicts later when the about 15% of Bpo process costs as the impact of standardization andbuyer would end up paying more for with the majority spent on consulting automation on labor costs that benefitthe outsourced processes than antici- services and internal resources for from economies of scale.pated or not receive the expected implementations and upgrades.service quality. For those buyers who Another sizable chunk is the cost ofcared, Bpo vendors would simply point the hardware and the high cost of software licenses • manpower and related administrativeand enterprise resource planning costs such as equipment, utilities,(erp) software. and buildings make up about 80% of the Bpo cost total. This cost is very sensitive to economies of scale. Selected IT solution impacts all cost components. Effects include: • staffing levels required for process execution lowered by process automation • economy of scale benefits enabled by process standardization ~ 65% • more efficient service-level agreement monitoring and governance Typical • reduction of infrastructure and software complexity BPO • efficient implementation and maintenance provider cost base ~ 15% ~ 10% ~ 3% ~ 7% Total Staff/Processes General & Hardware & Software License Software Maintenance & Administrative Operations ImplementationFigure 1: Breakdown of a Typical Business Process Outsourcing Provider’s Cost Structure SAP White Paper – The impact of Technology on Cost in Business process outsourcing 5
  5. 5. especially when it comes to software substantial. These scenarios are highly Another significant focus of concern isimplementation, today’s Bpo custom- common especially in large technology when adjacent technology and process-ers can learn from the experiences of implementations where stakeholders in es are not properly improved, or atsome earlier erp implementations that specific countries or business units least adjusted, to accommodate Bpo.were not successful and led to spiraling have the power to force blueprint even if the cutoff point betweeniT costs and unsatisfied users. By fragmentation. retained and outsourced processes isfollowing established implementation clear and well defined, interdependen-best practices, or at least setting Managing Costs Through cies exist. even worse, the retainedand respecting some ground rules, Technology processes must now accommodatetechnology-related risks (especially what the outsourced processesfinancial ones) can be minimized. At Through optimizing the part of the cus- require. in the case of hr processes,the same time, typical danger points lie tomer’s iT that is included in the scope for example, conventional wisdomin the crude, one-to-one translation of of the Bpo agreement and related cap- maintains that core hr components,preexisting business rules into software ital expenditures, the Bpo provider can such as payroll and master data, can becode and the buildup of related inter- often reduce the complexity of the iT decoupled seamlessly from the rest offaces without taking stock of the trade- landscape and thereby cut costs – if it the hr applications. however, foroffs between customization and cost. is given the mandate and if it has deep those hr organizations that want to knowledge of the technology platform. become strategic, they should useWith modern, well-designed software, Authority and competency are key top- components such as a skills inventorythese pitfalls can be navigated. Based ics that merit discussion between both and leverage organizational data thaton built-in functionality such as configu- buyers and providers during the Bpo spans across the enterprise and bridgeration switches or predetermined blue- sales cycle with the help, if appropriate, the (artificial) process boundary betweenprints called configuration sets, it is of an outsourcing advisor. the Bpo customer and provider topossible today to accommodate a obtain better resource allocation and arange of personalization while substan- however, even when the Bpo provider global view of company performance.tially lowering the cost of implementa- is able to compress and manage thetion and upgrades. implementations technology cost structure of Bpo, Both the impact of technology on thethat bypass this functionality and resort other, even taller orders may lurk ahead. sustainability of savings and the neces-to custom code may be initially easier most important, to sustain savings over sary alignment of outsourced andand faster for inexperienced solution time, the Bpo provider must address retained processes and technologyarchitects or programmers but can be labor costs since they represent the have profound implications for the Bpomore expensive (and sometimes unpre- largest expense. Technology savings industry. Bpo providers must be abledictably so) in the future. likewise, rely- are typically not enough to justify a mul- to articulate the value of standardizeding solely on business considerations tiyear outsourcing agreement’s busi- processes to the buyers, so they canand neglecting the iT impact can lead ness plan, so the Bpo provider must make decisions based on the entireto situations where best-of-breed or standardize processes and automate cost structure – not just on the Bpoproprietary solutions are considered. them. This will help reap the economies contract value. in addition, the cost forThis often results in creating additional of scale that generate savings, enable the rest of the buyer organizationinterfaces whose cost in the short term investment to keep the processes effi- should also be taken into account. The(initial build out) and long term (rebuild cient in the future, and stay ahead of hackett group reports that world-classwhen adjacent systems change) can be the future savings requirements. hr organizations spend 26% less on transactional costs.11. The hackett group, hr executive Advisory program, 2009.6 SAP White Paper – The impact of Technology on Cost in Business process outsourcing
  6. 6. These companies typically haveerp-based, standardized processes. Bpo customers should consider and factor into theirin addition to these challenges, Bpocustomers need to consider the cost of budget some wiggle room for nonfixed costs sucha potential exit scenario. While most as expenses for time and materials, governance,Bpo partnerships are entered in goodfaith, strategy changes. merger and one-off projects, and other incidentals that may addacquisition activities, or a changing substantial costs.project scope, may precipitate a provid-er change or even re-insourcing. Therespective additional cost can easilymount up to the same cost level as the client, they generate a strain on theinitial migration project, or even exceed Bpo provider that ultimately putsit. With the right technology, process pressure on the quality of delivery.configurations, and end-user settings, service-level agreements (slAs)all underlying data can get transferred cannot typically cover all areasmuch more easily and quickly, and the (countries, business units, processes)exit achieved at dramatically lower where quality performance maycosts. decrease. ultimately, Bpo providers operating under duress might ask toCost Control: Shared Responsibil- renegotiate the contract elements suchity of BPO Customer and Provider as price and slAs.instinctively, the option to just pass onresponsibility for the cost structure tothe Bpo provider and work out anyconflicts based on the Bpo gover-nance structure is tempting for a Bpobuyer. however, overall cost structuresare not easy to control and can exceedthe planned levels. Also, part of theprocess cost is generated by theretained organization and not controlledby the Bpo contract. Bpo customersshould thus consider and factor intotheir budget some wiggle room for non-fixed costs such as expenses for timeand materials, governance, one-offprojects, and other incidentals that mayadd substantial costs. even if costs donot get explicitly transferred to the SAP White Paper – The impact of Technology on Cost in Business process outsourcing 7
  7. 7. BPO COST STRUCTUREThe CompleTe piCTureCost reduction is still the main driver customer and cause them to incur sig- Transition of people, processes,behind most Bpo decisions. Closely nificantly higher than expected costs. and iT systemsexamining the cost structure of a Bpo The following section provides a closer A cost-efficient transition toward aengagement first will help better assess look at these cost aspects, grouping steady state of operations can accountthe achievable cost savings and under- them into three categories: the usual for a substantial portion (up to 20%)stand how technology drives that sav- costs, the surprising costs, and the of the Bpo deployment. related costsings. initially, the easiest and most obvi- sneaky costs. occur both for the Bpo provider, whoous approach would be to look at the will normally charge them back as atotal contract value (TCV) of the Bpo The Usual Costs – Costs Normally part of its overall pricing, and the Bposervices as agreed with the Bpo pro- Considered by BPO Customers customer, who incurs charges for exter-vider. however, TCV is hardly a com- nal support such as that provided byprehensive indicator of the overall cost. This group includes the most obvious specialized Bpo advisors and process and easily identified costs. These are consultants.Figure 2 illustrates some of the main usually addressed within the scopecost components that contribute to the of the TCV or acknowledged by Bpotrue full cost of Bpo and need to be customers during their decision-makingconsidered by Bpo customers in their process. Typical cost components inbusiness case building and decision this group include process transition,making as well. Bpo costs manifest process operation, iT, and governancethemselves in several different ways. costs. While these cost items areWhile some costs are expected and well known and understood, dealingconsistently occur, others are less with them still requires care andobvious, and some can even surprise a well-planned process and iT design. Scope creep Complete and so forth cost of BPO Shadow cost (often ~20% Exit up to 50% (option price) more than normally TCO of considered) retained IT Integration Normally considered: total contract value plus governanceFigure 2: Additional Cost Elements Contributing to the Full Cost of Business Process Outsourcing (Illustrative)8 SAP White Paper – The impact of Technology on Cost in Business process outsourcing
  8. 8. Cost items typically considered include today is mostly applied to labor- offshore resources. This situation isthe following: intensive, back-office processes such becoming increasingly relevant to near-• Process implementation – This as finance and accounting, hr, and shore operators as well. As a result, it includes process mapping and iT procurement, the largest cost block to is becoming more important to automate blueprinting and required solution the provider is clearly personnel relat- processes that reduce staffing levels. development (custom code) or ed. Cost items typically considered personalization (in case of an erp include the following: For the Bpo provider, one main optimi- implementation). • labor to run the outsourced process- zation approach is to leverage econo-• Migration of process and staff – es; many Bpo contracts today con- mies of scale by aggregating opera- Costs include physical relocation of tain a clause that provides for a tions, since smaller locations usually assets, such as furniture, computers, reduction of this cost item over the operate on comparably higher cost per and files, as well as those staff duration of the contract transaction. if processes from a num- brought on board by the Bpo provider. • expense to monitor business perfor- ber of these smaller locations can be mance, as well as quality and effi- consolidated into one location, and atother related costs include severance ciency of the employee interaction least a part of the process is bothto all other affected staff, training both • Cost for associated general and centralized and standardized, then theprocess-operations staff and end administration overhead value of that leveraging is greater.users, an often staged solution rolloutto the locations or parts of the organi-zation in scope, and providing first-level process operations account for up to 80% of the Bposupport for the duration of the transition.• Migration of IT – Costs include up- provider’s total cost base. Accordingly, these costs are front software fees, hardware and mainly driven by the provider’s cost of labor and the infrastructure outlay (where neces- sary), physical or technical migration, staffing levels needed to run the processes. As a result, data migration, and solution it is becoming more important to automate processes deployment.• Governance – Costs include expens- that reduce staffing levels. es related to any organization estab- lished to manage both the transition project and more permanent, ongoing including respective general and admin- relationship both on the Bpo custom- istrative charges, process operations er’s and provider’s side. account for up to 80% of the provider’s total cost base (see Figure 1). Accord-process operations ingly, these costs are mainly drivenonce operations have been transferred by the provider’s cost of labor and theto the Bpo provider, the company staffing levels needed to run the pro-takes over complete execution and cesses. providers operating mainlymanagerial responsibilities of the onshore will see proportionatelyrespective processes. since Bpo higher labor costs than those who use SAP White Paper – The impact of Technology on Cost in Business process outsourcing 9
  9. 9. Figure 3 illustrates these scale effects customer. in fact, customers also tute up to 40% of the provider’s costfor two typical Bpo processes and frequently say an expected benefit of base in cases where an erp implemen-indicates how centralization of opera- Bpo is the fact that providers have tation went wrong. By establishing andtions will enable a significant reduction better access to and benefit more from enforcing some ground rules ahead ofin staff required, especially if the pro- investments in new technology. time, technology-related financial riskscesses are also standardized. it should are absolutely manageable. one dan-be noted, however, that complete stan- iT costs typically comprise software gerous practice to be avoided is thedardization may often be impossible license or usage fees, maintenance and crude and direct translation of preexist-due to local regulations such as those upgrade expenses, labor costs relating ing business rules into solution require-imposed on payroll by country-specific to application management, mainte- ments, resulting in the buildup oflegal, tax, and social security regulations. nance and upgrades, integration with numerous interfaces and unmanage- the Bpo customer’s systems, the oper- able custom code. To have a success-information Technology ation of data center and physical equip- ful Bpo engagement, it is essential toin many Bpo deals, a large part of ment (hardware, infrastructure), and all ensure that trade-offs between custom-the iT needed to provide the out- business-critical system performance ization and long-term cost impacts aresourced processes is handled by the monitoring. overall, iT typically repre- well understood up front and factoredBpo provider. since the Bpo provider sents a share of 15% to 20% of the into the overall Bpo decision making.can potentially leverage significant Bpo provider’s cost base. implement-economies of scale, its cost base is ing erp is not a banal exercise, andoften much better than that of the Bpo iT costs have been observed to consti- 8 payroll, Time and Attendance 7 employee information management HR Staff Needed per 1,000 Employees Country 3 6 5 Countries 1, 4 Total cost of running all Some cost advantages of centralized processes countries separately can be realized; parts of the processes still 4 have to be run in country-specific mode, without Country 2 scale effects 3 Centralized and standardized 2 Full effect of shared services can be realized 1 integrated service for all countries 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 number of employees in a CountryFigure 3: Economies of Scale for Selected HR Processes²2. source: sAp analysis of data from Asug, The hackett group, confidential case example (global 500/us$5 billion manufacturing company)10 SAP White Paper – The impact of Technology on Cost in Business process outsourcing
  10. 10. outsourcing governance case and decision making. At first impact of potential exit scenariosBoth on the Bpo customer’s and pro- glance, integration costs appear fully All Bpo contracts are initiated with thevider’s side, a group needs to be estab- covered, but what about the costs intent of establishing a long-lastinglished that manages the ongoing rela- incurred by the Bpo customer itself? partnership between the customer andtionship between the two parties. Also, After all, both the customer and provid- provider. With the sophistication ofthe agreed performance measures er need to maintain their respective both sides growing, most partnershipshave to be tracked, reported, analyzed, sides of any interface, and most chang- today are initially designed with long-and, where necessary, acted upon. es to one end of an interface implicate term perspectives in mind. nonethe-While the Bpo provider’s governance some rework at the other end as well. less, circumstances can change and acost will typically be priced into the maintaining an interface can be an contract might not get renewed even ifoverall TCV, a customer’s governance elaborate affair, and the task gets more the partnership is healthy. For example:cost, which will be in the range of difficult as the number of interfaces • Bpo customer may want to bring3% to 5% of TCV over the life of increases. sAp research suggests outsourced processes back in-housethe contract, must be accounted for that annual maintenance of an average for strategic reasonsseparately. interface in a high-complexity environ- • scale or scope of the outsourcing ment is three times more expensive arrangement changes over time andThe Surprise Costs – Less than in a low-complexity environment moves out of the provider’s sweetObvious, Easily Overlooked (see Figure 4). spot – for example, if the Bpo arrangement is expanded to coun-While costs in this group are not secret The sheer number of interfaces can tries not covered by the providerand should theoretically be included quickly add up and become mind- • partnership could be impacted byduring a diligent Bpo evaluation, they boggling. For example, the sAp® erp a merger or acquisition on eithertend to be less visible than the “usual human Capital management solution the provider or customer side, ascosts” and often overlooked. alone has more than 100 implemented happens when one company merges and predefined integration points, with another and shifts its BpoThese cost items include integration including intra–human capital manage- activities to another vendorexpenditures and the capital outlay ment interfaces as well as interfacesof potential exit scenarios. for cross-hr applications, other erp in any such exit scenario, significant functions, and external systems. if costs will arise, regardless of whetherintegration Costs half of these interfaces, for example, the customer decides to discontinuemost Bpo providers will offer both ini- have to be manually implemented outsourcing the processes or movetial iT integration and ongoing interface and maintained, an extra cost item of them to another provider. severalmaintenance activities as part of their approximately 9% of TCV can be the factors contribute to this situation:service package. The respective costs result. For more details, please referwill be priced into overall TCV and to the subsequent parts of this sApbecome part of the customer’s business white paper series. Integration Complexity Low Moderate High Number of interfaces designed 20 30 45 Total labor hours 7,340 14,790 46,440 Total labor per interface 367 493 1,032 Figure 4: Interface Implementation Effort as a Function of Integration Complexity in HR3 3. sAp white paper, sAp human resources: Tight integration with multiple solutions, 2003. SAP White Paper – The impact of Technology on Cost in Business process outsourcing 11
  11. 11. • Loss of process know-how – during respective data have to be trans- with processes in the rest of the orga- the outsourcing process, the Bpo ferred from one provider to another, nization, which is actually one reason customer can lose most of its as now three constituencies (rather why they are prime outsourcing targets process-specific knowledge. Conse- than two in the initial setup) are in the first place. Bpo customers quently, the customer or the new involved. usually assume, if only implicitly, that Bpo provider will have to build up • New request-for-proposal (RFP) the decision to outsource such pro- the respective skills and potentially process – potentially a complete cesses has minimal, if any, impact rehire new staff. With just minor rFp cycle has to be executed, which on the retained organization. A typical assistance most likely from the for- involves selecting and negotiating example is payroll, which can easily mer provider, serious costs will be with a new provider. be decoupled from other business pro- incurred – potentially even more than cesses, including the rest of hr to the initial transition. According to While many Bpo contracts will get some extent. The integration points can sAp’s Bpo cost model, these costs extended, Bpo customers are well be handled relatively well through inter- can add another 10% to the overall advised to include the potential cost of faces between the respective iT cost of the Bpo engagement. such an exit early in their Bpo assess- systems.• Redesigned processes – out- ment and to consider risk-mitigation sourced processes are redesigned strategies. however, even payroll is not completely and will be well documented during without interdependencies that may the transition phase of a Bpo proj- The Sneaky Costs – Overlooked impact the cost base of the retained ect. however, processes change Costs with Potentially Significant organization. For more integrated busi- over time, especially as the Bpo pro- Impact ness processes, outsourcing will have vider applies optimization efforts on an even greater impact on the quality top of the natural evolution most This group includes cost factors that and speed of retained interdependent business processes undergo. The are difficult to see or predict, but if processes. Consider management of documentation of such changes, noticed too late, they can easily erode overtime (depicted in Figure 5), which however, often does not meet the the expected value of the Bpo engage- is part of the frequently outsourced hr standards set initially. hence a signifi- ment. These “sneaky costs” tend to function of time and attendance man- cant portion (if not all) of the process have a ripple effect if the outsourcing agement, as another specific example. blueprinting and design might have to affects the retained organization’s other be repeated. processes. When determining the ulti- This process has numerous integration• Technology transition – Transitioning mate cost of the Bpo engagement points with the retained organization, the Bpo implementation from the for- deployment, Bpo customers should including other hr processes (compli- mer Bpo provider’s iT systems to also budget in anticipated costs from ance with legal constraints and union the new environment will have to be scope creep or gliding cost paths, which agreements), finance and accounting managed, which can open up a cus- occur when certain cost positions processes (accounts payable for sub- tomer to potentially even more work change over time according to actual contractor payments), and operational and cost than in the original transi- requirements. processes (production planning). tion. This can all be exacerbated if some of the functionality has been effects on the retained organization Cost of errors deployed through custom code imple- many of the processes that are the every error made during an outsourced mentation. Complexity also increases traditional focus of outsourcing engage- process has implications not only for significantly when processes and the ments have limited interdependencies the Bpo provider, who needs to redo12 SAP White Paper – The impact of Technology on Cost in Business process outsourcing
  12. 12. every error made during an outsourced process has incidental expenses may add substantial costs. Also, not all savings are guaran-implications not only for the Bpo provider, who needs to teed. negotiated gliding cost pathsredo the task, but also for the retained organization. if the may be difficult to achieve if the Bpo relationship is not functioning well.number of errors can be reduced through the technology Finally, you need to recognize andon which Bpo is based, both the provider and the retained understand the financial dangers of when cost and complexity start creep-organization can benefit significantly. ing back into the Bpo engagement over time in the form of additional inter- faces, handoffs, and general “shadowthe task, but also for the retained orga- employee satisfaction costs,” as mentioned previously. This isnization. usually, the detection, assess- in a perfect setup, the outsourcing of especially true in Bpo engagementsment, and reporting is handled by an processes will go unnoticed by the where initial process design was mostlyemployee during his or her normal retained organization. unfortunately, left at its pre-Bpo stage because ofworking hours. especially for occasion- this is often not the case. people are reasons such as reduction of blueprintingal users, the individual impact of errors often resistant to change, and some- cost or having to overcome customer-will be small; however, overall it times the perception of change in pro- internal resistance to Bpo.becomes substantial. Consequently, cesses and the people executing themif the number of errors can be reduced can drive down employee satisfactionthrough the technology on which even if there has been a seamless tran-Bpo is based, both the provider and sition. This is especially true throughoutthe retained organization can benefit the transition phase when errors aresignificantly. bound to occur more frequently. Those errors can also receive higher visibilityripple effects in areas such as payroll. The exactCommercial Bpo providers have a nat- magnitude of these costs, such as lostural incentive to optimize their opera- organizational efficiency due to employ-tions over time, and as part of many ee dissatisfaction, is difficult to quanti-Bpo deals they are explicitly required fy. however, well-executed Bpo canto do so. A provider will make constant tangibly help increase employeechanges to the outsourced processes satisfaction.and do so independently from thecustomer’s setup. however, any scope Creep and gliding Cost pathschange in the outsourced processes it is a common misperception that oncewill have an impact on interdependent a Bpo contract is signed, costs are setprocesses – and thus potentially on the in stone. instead, several dangers loomBpo customer’s cost base. For example, that might drive the price of the Bpochanges to the previously mentioned services up over time. For one, not allovertime management process will the outsourced costs are fixed: timeaffect diverse retained processes, such and materials expenses, governanceas the ones provided above. costs, one-off projects, and other SAP White Paper – The impact of Technology on Cost in Business process outsourcing 13
  13. 13. Management of Overtime Process (Outsourced) Examples of Required Integration Other Processes (Retained) • Alignment with production schedule Manage time • Checking need for overtime production planning recording • Feeding approved overtime into production plan View time Employee sheet Need for No need for overtime overtime hr policies Request employee overtime work • Checking for regulatory Approve constraints request for manager • Alignment with union overtime agreements • overtime rates Overtime Overtime Finance & Accounting approved not approved Create Time & leave Inform absence • management of “time administrator employee quota accounts” • Accounts payable (for Overtime example, subcontractors) No overtime • Controlling (activity-based managed costing)Figure 5: Potential Interfaces of Management of Overtime into the Retained Organization44. source: sAp Business Consulting hr process repository14 SAP White Paper – The impact of Technology on Cost in Business process outsourcing
  14. 14. CONCLUSION ANd OUTLOOkConsider All releVAnT CosTsAs previously discussed, companiesconsidering Bpo as a strategic option Technology has a deciding role in reducing andshould carefully consider the completecost picture before embarking on the controlling these Bpo costs, and any respectivejourney. As part of the Bpo evaluation, choices made by the Bpo provider have an impactseveral cost components need to beconsidered that are often forgotten but far beyond the parameters of the agreed totalcan have a significant impact on the contract value.overall profitability of the endeavor.such items include integration costs,costs of a potential exit, several possi-ble types of shadow costs, and costs related sAp white papers address thethat occur during the lifetime due to following aspects:scope creep or gliding cost paths. • how technology impacts all Bpo cost components in detailTechnology has a deciding role in • how the costs of differentreducing and controlling these Bpo Bpo delivery models comparecosts, and any respective choices • how technology impacts the qualitymade by the Bpo provider have an both of the services delivered byimpact far beyond the parameters of the Bpo provider and of retainedthe agreed TCV. in fact, Bpo customers processesshould closely monitor all technology- • how technology can help mitigaterelated decisions, as these directly the risks associated with Bpoimpact their own cost base. in additionto these cost aspects, the impact of For more information about howtechnology choices on the quality of, sAp supports Bpo customersand risk associated with, the Bpo and service providers, visitengagement must also be taken into SAP White Paper – The impact of Technology on Cost in Business process outsourcing 15
  15. 15. 50 080 983 (09/07)©2009 by sAp Ag.All rights reserved. sAp, r/3, sAp netWeaver, duet, partneredge,Bydesign, sAp Business Bydesign, and other sAp products and servicesmentioned herein as well as their respective logos are trademarks orregistered trademarks of sAp Ag in germany and other countries.Business objects and the Business objects logo, Businessobjects,Crystal reports, Crystal decisions, Web intelligence, Xcelsius, and otherBusiness objects products and services mentioned herein as wellas their respective logos are trademarks or registered trademarks ofBusiness objects s.A. in the united states and in other countries.Business objects is an sAp company.All other product and service names mentioned are the trademarks of theirrespective companies. data contained in this document serves informationalpurposes only. national product specifications may vary.These materials are subject to change without notice. These materialsare provided by sAp Ag and its affiliated companies (“sAp group”) forinformational purposes only, without representation or warranty of any kind,and sAp group shall not be liable for errors or omissions with respect tothe materials. The only warranties for sAp group products and services arethose that are set forth in the express warranty statements accompanyingsuch products and services, if any. nothing herein should be construed asconstituting an additional warranty. /contactsap