1 Introduction to Outsourcing and BPO

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1 1 Introduction to Outsourcing and BPO Summary Learning Objectives: Internet ISP and its types. Concept of Make or Buy and Outsourcing. Reasons for outsourcing. Concept of a virtual organization. Business Process Outsourcing (BPO) Driving factors for BPO BPO Traits Internet: Internet has transformed the physically separated world into a seamlessly connected one. It is the backbone for worldwide communication and has changed the way business used to run traditionally. Internet is derived from the technical term internetwork (interconnecting computer networks) and uses the standard TCP/IP protocol suite for communication. The Web, , VoIP, Blogging, chats are examples of services using internet as the backbone. The web is one of the services communicated via the Internet and was invented by Tim Berners Lee in ISP and its types: Internet Service Provider (ISP) is a term used for companies providing Internet access. They are categorised as 1) Access ISP providing direct access to the customers. 2) Hosting ISP lease server space and other services Imtiaz Surve 1

2 3) Transit ISP provide large channels for connecting hosting ISPs to access ISPs. ISPs can also be grouped as: 1) Backbone Provider control Internet routing. 2) National Provider buy capacities from backbone providers and run points of presence across the country. Generally resellers of bandwidth. 3) Local Provider smaller scale providers who operate in limited geographical areas. Home users typically connect over Broadband, Cable Internet, Dial-up, DSL, FTTH or wireless connectivity. Business users connect over DSL, Metro Ethernet technology, Leased Line or SHDSL links. TATA Communications, BSNL and Reliance are some prominent ISPs in India. Concept of Make-or-Buy and Outsourcing: Outsourcing is defined as the market procurement of formerly in-house purchased goods and services from legally independent supplier firms. Outsourcing derives its root from the traditional make-or-buy concept. Organizations generally balance between procurement of certain services/products and doing the same in-house. This is referred to as the Make or Buy decision. These decisions were primarily based on cost savings but other factors of time and quality have started influencing such decisions. Volume plays a key role in bringing down the cost for procured services/products. The supplier often has a core competence in his service offerings and this is a key factor of consideration for the outsourcing company. The supplier also utilises his learning s on the offerings to make them cheaper and of better quality. Some organizations are not self-sufficient in carrying out certain functions and resort to outsourcing as a business strategy. Functions like House-keeping, Security, Data processing, Help-desk are outsourced on a large scale. Imtiaz Surve 2

3 Reasons for Outsourcing: Outsourcing is an economic decision since it does bring about huge cost-savings if done in a proper manner. A heavily outsourced company is referred to as hollow and these are at a high risk given their dependency/reliability on service providers. Outsourcing is done for a number of reasons based on the benefits that can be derived from such engagement. Some of the key reasons for outsourcing are: 1) Long term cost saving Companies may want to reduce Capex and control cash flow. 2) Space management Companies may not prefer to invest in Assets for Offices and Staff. 3) Focus on core business Companies can focus on their core businesses by utilising time saved on the process outsourced. 4) Improve quality Companies can offer better quality by choosing engaging with a skilled vendor. 5) Cost restructuring Companies can restructure their costing plan to provide for lesser investment and outflow. 6) Scalability Outsourcing helps companies to focus on core business and scale up. 7) Risk management Outsourcing helps in better management of risks. Concept of a Virtual Organization: A Virtual organization refers to the concept of having all organization required functions without the need to account physically for it. Owning the assets or employees is not essential in providing value to the end customer. Publishers are a good example of firms running virtual organizations. Business Process Outsourcing: Business process outsourcing refers to outsourcing of a business process. The responsibility for carrying out the process is handed over to a third party at an agreed cost. Earlier Application service providers used to cater to multiple clients for offering technical services. Business process outsourcing is dependent on information Imtiaz Surve 3

4 technology and hence also referred as Information technology enabled Services (ITeS). BPO has branched into several variants like Knowledge process outsourcing, Legal process outsourcing and Medical process outsourcing. Driving factors for BPO: Key factors driving business process outsourcing are: 1) Broadband Internet: High speed internet access helps in faster access and sharing of data internationally. 2) Abundant Data Storage: Physical storage of files has been replaced with digital storage in the form of specialized storage boxes. Technology has helped in storage of huge amounts of data in the smallest size equipments and at a reduced cost. 3) Analytic Software: Analytical software has become a big facilitator of business in the form of Decision support system and artificial intelligence. Online analytical processing (OLAP) has provided for new possibilities in the workplace structure. Robust analytic software can help eliminate high-cost labour. 4) Internet Security: A secure connectivity helps overcome fear of leakage and data tampering. Data integrity is important in outsourcing since the entire exchange of data is over the internet given the physically distant geographies. Kerberos technology helps use of digital certificates for authentication within their transactions. Devices like firewalls, proxy servers, and secure VPN connectivity assist in the internet security. BPO service providers comply to international benchmarks and standards like: BS 7799 comprehensive set of controls comprising best practices in information security. ISO internationally recognized information security management standard. HIPAA Health Insurance portability and Accountability establishes standards for secure electronic exchange of health data. Imtiaz Surve 4

5 5) Business Specialization: This revolves round companies working on their core competency. Providers develop a portfolio of core competencies around the customers they serve. 6) Educational Attainment: Advancement in technology and communications makes it important for the resources to be skilled. Growing level of education helps in facilitating this making it easier to use new technology and processes. BPO Traits: 1) A Revolution: Global communication and information infrastructure has brought a revolution in the BPO sector. The remotest of the locations are capable of being connected. This global telecommunications infrastructure has made it possible to shift work to international BPO service providers. Five of the international hotspots are: a. India Engineering and Technical b. China Manufacturing and Technical c. Mexico Manufacturing d. United States Analysis and Creative e. Philippines- Administrative Most of the international locations like China, India and the Philippines make available labour which is highly skilled and inexpensive. 2) A Socio Technical Innovation: Early adopters of outsourcing came from the need for software development expertise. Such talent was scare and firms started to look beyond physical boundaries for such personnel. These organizations were successful in hiring skilled technical workers at a lower cost in the international labour markets. BPO is a socio technical innovation that provides a rich source of competitive advantage. It requires tactful management of people and technology and is one of those interdisciplinary workplace innovations requiring a diverse set of skills for success. People issues range from recruitment, training, development, motivation and setting the staff in the organisational culture. Imtiaz Surve 5

6 Technology issues range from security of data and systems, backups, recovery processes and procedures, knowledge management and database compatibility. 3) A Strategic Decision: A fundamental proposition on outsourcing is for organizations to focus on their core business. BPO is a business strategy and the decision to outsource is a strategic decision and the decision to outsource should be to enhance the organizations performance in critical areas. Strategic benefits of outsourcing are visible in the most mundane business processes. Imtiaz Surve 6