Business Process Outsourcing Process Strategies And Contracts Pdf

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Business Process Outsourcing Process Strategies And Contracts

Outsourcing is a business practice in which services or job functions are farmed out to a third party. In information technology, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development or QA testing.

Companies may choose to outsource IT services onshore within their own country , nearshore to a neighboring country or one in the same time zone , or offshore to a more distant country. Nearshore and offshore outsourcing have traditionally been pursued to save costs.

The business case for outsourcing varies by situation, but the benefits of outsourcing often include one or more of the following:. Business process outsourcing BPO is an overarching term for the outsourcing of a specific business process task, such as payroll.

BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support. Information technology outsourcing ITO , therefore, is a subset of business process outsourcing. IT outsourcing clearly falls under the domain of the CIO. However, CIOs often will be asked to be involved in — or even oversee — non-ITO business process and knowledge process outsourcing efforts as well.

CIOs are tapped not only because they often have developed skill in outsourcing, but also because business and knowledge process work being outsourced often goes hand in hand with IT systems and support.

For more on the latest trends in outsourcing, see " 7 hot IT outsourcing trends — and 7 going cold. Traditionally, outsourced IT functions have fallen into one of two categories: infrastructure outsourcing and application outsourcing. Infrastructure outsourcing can include service desk capabilities, data center outsourcing, network services, managed security operations, or overall infrastructure management. Application outsourcing may include new application development, legacy system maintenance, testing and QA services, and packaged software implementation and management.

In fact, cloud services account for as much as one third of the outsourcing market, a share that is destined to grow. These services are increasingly offered not only by traditional outsourcing providers but by global and niche software vendors or even industrial companies offering technology-enabled services.

The appropriate model for an IT service is typically determined by the type of service provided. Traditionally, most outsourcing contracts have been billed on a time and materials or fixed price basis. But as outsourcing services have matured from simply basic needs and services to more complex partnerships capable of producing transformation and innovation , contractual approaches have evolved to include managed services and more outcome-based arrangements.

Time and materials: As the name suggests, the clients pays the provider based on the time and material used to complete the work. Historically, this approach has been used in long-term application development and maintenance contracts. This model can be appropriate in situations where scope and specifications are difficult to estimate or needs evolve rapidly.

Pay-per-use pricing can deliver productivity gains from day one and makes component cost analysis and adjustments easy. However, it requires an accurate estimate of the demand volume and a commitment for certain minimum transaction volume. Fixed pricing: The deal price is determined at the start. This model can work well when there are stable and clear requirements, objectives, and scope.

Paying a fixed priced for outsourced services can be appealing because it makes costs predictable. It can work out well, but when market pricing goes down over time as it often does , a fixed price stays fixed. Fixed pricing is also hard on the vendor, which has to meet service levels at a certain price no matter how many resources those services end up requiring. Cost-plus: The contract is written so that the client pays the supplier for its actual costs, plus a predetermined percentage for profit.

Such a pricing plan does not allow for flexibility as business objectives or technologies change, and it provides little incentive for a supplier to perform effectively. Performance-based pricing: The buyer provides financial incentives that encourage the supplier to perform optimally.

Conversely, this type of pricing plan requires suppliers to pay a penalty for unsatisfactory service levels. Performance-based pricing is often used in conjunction with a traditional pricing method, such as time-and-materials or fixed price. This approach can be beneficial when the customers can identify specific investments the vendor could make in order to deliver a higher level of performance.

But the key is to ensure that the delivered outcome creates incremental business value for the customer, otherwise they may end up rewarding their vendors for work they should be doing anyway.

Gain-sharing: Pricing is based on the value delivered by the vendor beyond its typical responsibilities but deriving from its expertise and contribution. For example, an automobile manufacturer may pay a service provider based on the number of cars it produces. With this kind of arrangement, the customer and vendor each have skin in the game. Each has money at risk, and each stands to gain a percentage of profits if the supplier's performance is optimum and meets the buyer's objectives.

This model encourages the provider to come up with ideas to improve the business and spreads the financial risk between both parties. It also mitigates some risks by sharing them with the vendor.

But it requires a greater level of governance to do well. IT organizations are increasingly looking for partners who can work with them as they embrace agile development and devops approaches. The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by those in a heated debate.

But offshoring or, more accurately, offshore outsourcing is a subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, typically to take advantage of lower labor costs. This subject continues to be charged politically because unlike domestic outsourcing, in which employees often have the opportunity to keep their jobs and transfer to the outsourcer, offshore outsourcing is more likely to result in layoffs.

Estimates of jobs displaced or jobs created due to offshoring tend to vary widely due to lack of reliable data, which makes it challenging to assess the net effect on IT jobs.

In some cases, global companies set up their own captive offshore IT service centers to to reduce costs or access skills that may not result in net job loss but will shift jobs to overseas locations. In recent years, IT service providers have begun increasing investments in IT delivery centers in the U. Demand for digital transformation—related technologies specifically is driving interest in certain metropolitan areas.

Offshore outsourcing providers have also increased their hiring of U. IT professionals to gird against potential increased restrictions on the H-1B visas they use to bring offshore workers to the U.

Some industry experts point out that increased automation and robotic capabilities may actually eliminate more IT jobs than offshore outsourcing. Outsourcing is difficult to implement, and the failure rate of outsourcing relationships remains high. Depending on whom you ask, it can be anywhere from 40 to 70 percent. At the heart of the problem is the inherent conflict of interest in any outsourcing arrangement. The client seeks better service, often at lower costs, than it would get doing the work itself.

The vendor, however, wants to make a profit. That tension must be managed closely to ensure a successful outcome for both client and vendor. Another cause of outsourcing failure is the rush to outsource in the absence of a good business case.

Outsourcing pursued as a "quick fix" cost-cutting maneuver rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage is more likely to disappoint.

Generally speaking, risks increase as the boundaries between client and vendor responsibilities blur and the scope of responsibilities expands.

Whatever the type of outsourcing, the relationship will succeed only if both the vendor and the client achieve expected benefits. See also: " 9 IT outsourcing mistakes to avoid " and " 10 early warning signs of IT outsourcing disaster. A service level agreement SLA is a contract between an IT services provider and a customer that specifies, usually in measurable terms, what services the vendor will furnish.

Service levels are determined at the beginning of any outsourcing relationship and are used to measure and monitor a supplier's performance. Often, a customer can charge a vendor a penalty fee if certain SLAs are not met. But no CIO wants to be in the business of penalty-charging and collecting. Bad service from an outsourcing vendor, even at a deep discount, is still bad service, and can lead to greater problems. While the outsourcing industry is not quite as fickle as fashion, the prevailing wisdom about the best length for an outsourcing contract has changed over the years.

When outsourcing first emerged as a viable option, long contracts — as many as 10 years in length — were the norm. As some of those initial deals lost their shine, clients and vendors moved to shorter contracts. While decade-long deals have largely gone by the wayside, a transformational outsourcing deal may require more time to reap benefits for both client and vendor. But when outsourcing desktop maintenance or data center support, a shorter relationship may work better.

Generally speaking, overly long contracts more than seven years should be avoided unless there is a great deal of flexibility built into the contract. For more on outsourcing contracts, see " 11 keys to a successful outsourcing relationship " and " 7 tips for managing an IT outsourcing contract. But wholesale outsourcing has proved difficult to manage for many companies. These days, CIOs have embraced the multi-vendor approach , incorporating services from several best-of-breed vendors to meet IT demands.

Most major IT services players have done their best to adjust to this trend. In fact, some leading CIOs not only work with a cadre of competing outsourcers , but expect them to meet joint deliverables.

Multisourcing, however, is not without great challenges. The customer must have mature governance and vendor management practices in place.

In contract negotiations, CIOs need to spell out that vendors should cooperate and refrain from blaming each other, or else risk losing the job. CIOs need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can manage the outsourcing portfolio.

The rise of digital transformation has initiated a shift not back to megadeals but away from siloed IT services. As companies embrace new development methodologies and infrastructure choices, many standalone IT service areas no longer make sense. Some IT service providers seek to become one-stop shops for clients through brokerage services or partnership agreements, offering clients a full spectrum of services from best-in-class providers.

Selecting a service provider is a difficult decision. But start by realizing that no one outsourcer is going to be an exact fit for your needs. Trade-offs will be necessary. To make an informed decision, articulate what you want from the outsourcing relationship to extract the most important criteria you seek in a service provider.

Traditionally, IT organizations have spent six months to a year or more on the IT outsourcing transaction process, finding the right providers and negotiating a suitable contract. But as IT services — and, increasingly, as-a-service — deals have gotten shorter, that lengthy process may no longer make sense. While the selection process still demands diligence, there are some more iterative transaction processes that can reduce the time required to procure IT services.

Many organizations bring in an outside sourcing consultant or adviser to help figure out requirements and priorities. Some consultants may have a vested interested in getting you to pursue outsourcing rather than helping you figure out if outsourcing is a good option for your business.

A good adviser can help an inexperienced buyer through the vendor-selection process, aiding them in steps like conducting due diligence, choosing providers to participate in the RFP process, creating a model or scoring system for evaluating responses, and making the final decision.

Business Process Outsourcing Process Strategies And Contracts

Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. McIvor Published Business. Introduction 2. The trend towards outsourcing 3. Theoretical influences on outsourcing 4. The outsourcing process: a framework for evaluation and management 5.

Read and Download Business Process Outsourcing: Process, Strategies, and Contracts FUll

Outsourcing is a business practice in which services or job functions are farmed out to a third party. In information technology, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development or QA testing. Companies may choose to outsource IT services onshore within their own country , nearshore to a neighboring country or one in the same time zone , or offshore to a more distant country.

Novel, modern process management techniques can take your business from good to great. One outgrowth of BPM, business process outsourcing BPO , can enable just such a change if enacted in a careful, conscientious manner and with a quality vendor. Along the way, BPO experts weigh in, and we even provide a vendor scorecard template to make that decision easier for you. Business process outsourcing BPO is the practice of contracting a specific work process or processes to an external service provider. The services can include payroll, accounting, telemarketing, data recording, social media marketing, customer support, and more.

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The Outsourcing Process: Strategies for Evaluation and Management

Business Process Outsourcing Process Strategies And Contracts Reviews

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