Facing the BPO Music

Somewhere between price and performance sits the secret to a harmonious outsourcing relationship - if you can convince your partners to sing the same tune.

If Accenture Associate Partner Dr Jane Linder is to be believed, good outsourcing relationships involve a lot of tension, a suggestion of miracles and perhaps a little music.

Linder, from the US-based Accenture Institute for High Performance Business, is one of the authors of the report "Control: Getting it and keeping it in business process outsourcing". Overall, the report suggests that, as the market for business process outsourcing (BPO) grows rapidly, particularly in the Asia Pacific region, relationships and control mechanisms will need to grow concomitantly more sophisticated. The report suggests this means executives will need to:

• cultivate a broad view of control, which means incorporating indirect nurturing mechanisms in addition to traditional direct supervisory controls

• launch broad controls early in the BPO initiative

• use controls dynamically to maintain ongoing BPO momentum, which means "alternating traditional and broader mechanisms to create a healthy tension".

That last word causes problems for some people, and Linder admitted to CIO it might not be the most apposite choice of words, redolent as it is of stress and uncertainty. "Tension is an interesting word. Maybe it's the wrong word," she says, "but balance isn't good enough. It's not balance, because there is tension.

"Think about it personally. Let's say today we're going to have to sit down and hammer out an agreement where I've got to pay you money for something. That's one kind of conversation we're going to have. And by the structure of it we are on opposite sides. The more I pay you, the better off you are and the worse off I am - it's a zero sum game.

"The next day, you and I, the same two people, are in a conversation of how we're going to solve a hard problem in our process together. Now we're on the same side . . . we'd better be on the same side!

"The two people have to be able to switch between those roles, so that's why I talk about tension. There are all sorts of things going on between us that have to be navigated and made to work."

Others with experience in developing such relationships agree. Drawing on comment from three corners of the outsourcing relationship - customer, supplier and legal - Ian Harris, commercial manager for customer operations at Vodafone, calls it "a creative tension"; Scott Petty, COO of Dimension Data, calls it "natural conflicts"; and Nick Abrahams, partner at law firm Deacons, describes it as a "marriage", which is much the same thing.

In other words, tension is a positive force, a kind of potential energy that keeps a relationship strong and innovative. Perhaps "torque" is a more appropriate word.

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Break with Tradition

More than two-thirds of the executives interviewed for the Accenture report described control as a "very important" or "important" obstacle during the outsourcing evaluation phase, so choosing the types and formats of controls and associated metrics is a vital component of ensuring successful outcomes. Traditional authoritarian, policing measures such as service level agreements (SLAs), penalty clauses, key performance indicators and non-discretionary metrics are widely practised and just as widely criticized.

"The difficulty with the authoritarian SLA approach is that the person providing the service only strives to meet the SLA," Petty says. "On the surface this looks like you're going to get what you want, but in reality they probably negotiated very hard in the contract for a series of SLAs that are only base level.

"The other problem with typically authoritarian-type contracts is that, for the outsourcer, they make very little money in the first couple of years. They make all their money in the last couple of years if they can sweat the assets, if they can drive down operating costs, so there's very little incentive for the outsourcer to pass those [cost advantages] back on to the customer. Plus they'll do their best to charge variations because the business is dynamic."

In other words, scope creep, despite protestations, is a good thing for the supplier.

At the same time, the client is bashing the supplier over the head with the contract, and becoming increasingly frustrated when the development of the process and thus their business is repeatedly hampered by restrictions on activities and spiralling costs.

The answer? A more flexible approach, a more nurturing attitude and what Accenture refers to as broad "indirect and enabling" controls. Using Accenture's terminology, these warmer and fuzzier measures fall into six areas.

Strategic attention Rather than assigning BPO to the things-you-don't-want-to-do pile, Accenture claims "leaders forge tight, visible connections between BPO and mission critical priorities, such as globalization or an operational turnaround".

Senior team affiliation "Rather than rely on a schedule of standard meetings, [successful BPO deals] ensure continuous governance by casting their lots together in close affiliations", which also means blurring the lines between client and supplier. As Harris puts it, "it's not standing looking over their shoulder, it's standing beside them and looking at what they're looking at".

Financial upside "Executives who can articulate a broader financial upside can motivate performance improvements across the outsourced organization"; in other words, bonuses rather than penalties, fair and honest negotiations and an appreciation that both sides need to profit out of the relationship. One client quoted by Accenture actually paid their supplier more in the second round negotiations because they felt the supplier had lost money in the first round.

Performance visibility "BPO leaders look for opportunities to make the performance of their BPO initiative visible to the industry, press and other external stakeholders." Which is to say, are you ashamed of your BPO initiatives or are you proud enough of your business efficiency measures to actively promote them? In addition, partners in high-profile relationships do not like to stuff up.

Interface management "Instituting controls at the boundary with the provider . . . carefully monitor and remove bottlenecks from all interfaces that connect the in-house and outsourced organizations - policies, people and process." This may involve "reverse service level agreements and targets that prove [clients] are holding up their end of the bargain".

Employee allegiance Employers "should aim to create a sense of dual citizenship so that employees feel deeply committed to their new 'customer'; and specifically for the provider's employees there should be a sense of 'belonging' through direct links to an organization's culture, including professional parity and social engagement".

Such measures are intrinsically subjective, and not as tangible or quantifiable as hard-as-nails SLAs, but Abrahams says that you can draft-in such measures into a contract. "It's not simple [to incorporate flexibility] and you don't have unlimited flexibility, but you can do it so that both sides are comfortable."

There is a need for intellectual honesty, Abrahams says, and provided everyone feels free to raise the issue of risk and work collaboratively, then it should work out. "There are still times when parties are bashing each other with the contract, but increasingly aware of the need to win-win . . . You don't want bad blood at the start of the deal, and you should note that the contract is out of date the day it is signed."

Nevertheless, some form of metrics is vital to any relationship.

"You need the metrics," insists Harris. "If you can't measure the performance of a particular piece of IT infrastructure and you don't know how it's going, all you know is a customer is coming in one end and the light's not blinking; you don't know how to fix it."

Harris, who is responsible for Vodafone's customer contact infrastructure and an outsourcing relationship with Dimension Data (the company has others with IBM for applications and HP for infrastructure), says that the majority of the metrics he uses are forward-looking lead indicators rather than backward-looking lag indicators.

"The lag measures need to be there to provide balance. [But] if you get the lead measures right, the lag measures will follow."

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Good Cop, Bad Cop

It is this sense of playing one set of measures off against another where our commentators differ from Accenture's suggestion of alternating measures to create tension. Abrahams, Harris and Petty all agree that both sets of measures are important, but that they should be run simultaneously rather than alternating between a contract basher and nurturing partner.

"Good cop, bad cop, is not a good management tool," Abrahams says. "Every step is a learning process."

Harris says that at Vodafone they talk about a soft approach and a hard approach, with the preferred on-target approach being in the middle. "There is absolutely a creative tension that comes from playing off cooperation and obligation," he says, "but it comes from you both having your own business objectives. It works both ways."

Petty refers to the three levels of outsourcing relationships: utility - cost-fixed infrastructural; value-add - some innovation and shared risk; and transformational - partnerships with greater risk. (Gartner uses the terms "utility", "enhancement" and "transformation"; Meta Group has only two levels - "commodity" and "transformational"; while Accenture prefers the more alliterative "contractual", "cooperative" and "committed".)

"It's always a blend of all three," Petty says. "To build just a transformational contract is impossible, because a lot of what IT does is utility. You can't do the top of the pyramid until you do the bottom."

Linder does not totally agree. "If I contract someone to mow my lawn, I don't need a relationship. I can specify, I know what it has to be; I can measure it, that's fine, it's not going to change a lot." But when it comes to more complex relationships she admits there's a problem if the balance swings too strongly one way or the other.

"If we just wallow around in the sweetness and light and go out holding hands together, and saying everything's great, it doesn't work as well. The price isn't quite as sharp, the expectations aren't quite as demanding, and we don't do as well. People have told me in interviews: 'Ah, I was too nice. I didn't really get everything I could have got. We were very cooperative, there was a lot of trust, but I think I overpaid.'"

And on the other side it's just as bad, she says. "I've heard: 'I got the absolute best price deal, but I didn't get my outcomes. I strangled them, they got no latitude, I got no new ideas, I didn't get their A team, no one wanted to work on my account, so I got their second-rate people.'

"So somewhere in between those two," Linder maintains.

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The Music of Management

"I've been playing with the idea about the metaphors that we use to manage information technology," Linder explains. "If you hear the way we talk about it, it's almost always a manufacturing metaphor. We inventory the data, we have warehouses, we process it, report it, we have architecture . . . it's all mechanistic. We're thinking about it as all of these itty-bitty things; you put these two bits of data together and you get one larger more important thing.

"But that's not it. Or maybe it is but only on one level.

"I think about a metaphor of music. Information is the notes on the page, but that's not really what you're after. You're after what it evokes - the interpretation, which could be the same today or tomorrow, or it could be different today and tomorrow from the same piece of music. It works because we get onto the same wavelength.

"When I hand you a piece of sheet music, that's worthless, but when we hear the music and discuss it together, that's when we're starting to talk about information."

Linder admits that her musical thesis is still in the formative stages; it doesn't have everything, but it has some interesting ways to think about it, she feels. The application of her metaphor lies more in the upper echelons of outsourcing relationships than at the utility level.

"In the contractual view, I get my report, I beat you over the head if you haven't mown the lawn enough times this month and we have penalties and so forth, because I can easily tell what you did. But the minute you're getting into something that is a little more intimately related with your business, where it is going to change, where you can't specify it, now we need to have a little music, because we're going to have to work together. And when we're utterly dependent on each other, which you get at the other transformational or committed end, we'd better be both singing in sync."

Her message rings a chord with our commentators.

Petty agrees. "Absolutely. Any process involving people is not black and white. If you judge music, you always look at it technically: Did they play it right? - which is the metrics. Then there is: Did I actually like it? As long as you provide a basis for getting the scoring banding right, then the subjectivity - the humanist part - definitely plays a key role. You can say why you didn't like it.

"The biggest reason for failure in most IT projects is lack of communication. When I look at an [IT] project the first thing I want to see is the communications plan, and people look at you like you're insane. Surely you want to look at a project plan? Surely you want to look at the financials? Not me, I want to understand who you've spoken to, how you're talking to them, how you're getting feedback. That is a concept that is very unusual from an IT point of view.

"Most IT departments in my view are isolationist. They've built big walls and they're very good at explaining why it's someone else's fault when something went wrong," Petty says.

"If that's the situation for your IT team, the best way to get some alignment to the business is to go and focus on processes within the business that you think you can improve, working with them and helping them to build up. That will cause a few things to happen. One, you'll have to talk to the business; two you'll build up an understanding that business processes change and they morph, and hopefully you'll build up skill sets in business management that, working with those processes and automating and optimizing those processes, you'll realize that a lot about process change is more about optimization of people than it is about systems."

Abrahams agrees. "At the end of the day, it's people. Every step is a learning process; this is a marriage." Or perhaps a parent-child relationship, he says, based on nurture, flexibility, some discipline and open expectations. "But sometimes it's the vendor who is the parent, who needs to bring the customer to the market."

Harris takes the music thread one step further to its ultimate harmonic convergence. "The analogy I get is when you bang two tuning forks together. What happens when they come together and they're in time, the tines start to pulse; they are exactly in time and they are exactly sounding the same. That's what this is about, trying to create something like that," he says.

If you've got the music in you, then perhaps a splendid time is guaranteed for all.

SIDEBAR: The Miracle Syndrome

You can't outsource responsibility

Jane Linder, Accenture associate partner and one of the authors of "Control: Getting it and keeping it in business process outsourcing", stresses that with business process outsourcing, direct controls place emphasis on the provider; indirect controls require a greater effort on the part of the client.

"Taking a dynamic approach to BPO control requires that executives invest more time and thought in managing their provider than they may have anticipated," the report states.

This means you cannot outsource responsibility.

"If there is one single biggest error executives make when they undertake outsourcing, it's believing that they don't have to manage it any more," Linder says. "I call this the miracle syndrome: 'I've got a process, I don't like it, I'm not particularly good at it, I haven't allocated any capital to it. Now I'm going to outsource it to you and now I want miracles . . . Why haven't you fixed it overnight?'

"They [executives] should outsource because they want some other benefits and they don't want to manage detailed task design or hiring and firing or whatever it takes to get the people to do the function. But you can't give up responsibility for managing something that is critical to the business," Linder says.

"Even if it's finance and accounting or HR, people say that's not core, that's not strategic. Well, I'm sorry, that's still important for your business to operate. You still own accountability for it."

SIDEBAR: BPO: The Surprise Benefits

Want to see the whole picture? Step outside the frame

The Accenture report "Control: Getting it and keeping it in business process outsourcing" cites again and again examples of organizations getting a greater range, quality and depth of information on their own performance via the outsourced relationship than they ever had when the processes were undertaken in-house.

A European communications company: "BPO enabled us to get reliable company-wide financial information for the first time."

The CFO of a large division of a US-based real property company: "After outsourcing, we have more accurate transactions, including margins."

Bill Pahl, COO of the Australian Department of Agriculture, Fisheries and Forestry: "Prior to [evaluating outsourcing] there was a reluctance to invest the necessary time and effort in measuring the cost [of services]."

Other observations range from: "brought the company face-to-face with comprehensive and reliable management information for the first time" to "processes that were once full of workarounds, overlapping accountability and fuzzy hand-offs became crisp, clean and open".

This makes you wonder how these organizations ever operated efficiently (if, in fact, they did) prior to outsourcing. Surely they should have had this information before.

"It's actually more common than not," Linder says.

"Companies are worried about growth," she says. "They're merging, they're acquiring, they've got operations sprinkled all over the place. The CFO or IT infrastructure might not have come up to the point where it's all standardized - you've got one system, I've got another. Or we may have the same system, but you report things differently or add them up in a different way.

"When you outsource, you give the job of standardising and adding discipline to your outsourcing provider; you have to specifically give that job to them and manage your own organization to make that happen. If you simply expect it of them without doing your part it's not going to happen either. But if that's part of the deal to consolidate things, the quality of information that results can be fabulous."

Lots of people say they could or should do that themselves.

"Yes, you could," Linder says, "but it would require you to focus on that, the energy, the capital, the management bandwidth. Is that what's going to pay off for you? When you're sitting at the top spot and you're trying to figure out what am I going to do about this hard problem, frequently the data you have, even if it's completely tight in your data warehouse, isn't the data you need to answer those questions. It's not your competitive intelligence, it doesn't have that smell that you have for how things are going in the market."

Of course, this might be a self-fulfilling situation, that the companies who do not have relevant information are the ones that need outsourcing, and if you have got the information, it means you've got the internal discipline and focus, so you do not need outsourcing. Nevertheless, it makes for an interesting bullet point on your evaluation list.