The Locus of Monitoring
Transcript of The Locus of Monitoring
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BPO Metrics
Road Map
• The Governance Spectrum– Structures
• Metrics– Carry-Forward and Direct Errors – Function Value Analysis– Secondary Monitoring
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Indirect Procurement
Other Business Administration
Supply Chain Management
Sales, Marketing and Customer Care
Finance and Accounting
Human Resources
Currently Planning
Source: 150 respondents — June 2002
Compared to 2001Human ResourcesSales, Marketing, CCFinance and Accounting Supply Chain
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2002 2003
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Top Processes Outsourced 2002
What Processes Are Being Relocated?
Gartner Survey 2002
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Critical Vs. Core
• There may be some functions that are at the core of the firm – these may be supported by some critical functions – these in turn may draw from the information feeds of high volume low impact activities.
• Similarly in HR – employee retention, recognition, training, team building and monitoring corporate culture could be critical functions.
• Payroll and benefits administration, 401(k) and transacting with external providers are high volume, low impact activities.
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The Threshold Volume of Criticality
• Some processes are critical in the aggregate:– The end result of several repeated executions of
the same process is critical to the firm – An individual execution of the process is of very
little consequence. These processes are said to have a High Critical Threshold. Some examples of such processes are:
• Transaction Processing, Accounts Payable/Receivable
• Customer Contact – Outbound Calls
• Customer Contact – Inbound Calls
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The Threshold Volume of Criticality
• There are processes where even a single execution of the process has significant risk and/or opportunity cost implications for the firm. These processes we term as having a Low Critical Threshold. Some examples of such processes are:– Customer Data Analytics & Risk Analysis (insurance)– Equity research and Asset Pricing Modeling– MIS reporting
• Processes with High Critical Threshold are immediate candidates for outsourcing, while Low Critical Threshold processes may best be migrated.
• Which leads us to the question of Governance.
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Captive Service Center
(Hierarchy)
Joint
Venture
Operate to In-source
Build to
Transfer
Third Party Service Provider (Market Solution)
Hierarchy Market
The Governance Spectrum
Spans the gamut of possibilities from an Organizational Hierarchy to a Market
Solution with a variety of hybrid forms that fall between the two ends.
Extended Organizational Form
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Two Types of Execution Failures• An error (failure) in the execution of an outsourced
process, can result in two kinds of impact. – Sub-optimal decisions may be made based on the inaccurate
information that results from an error. This kind of error does not lead to a loss of revenue (or incremental costs) if it is not factored into one or more decisions.
– However, when decisions or made based on the information that contains this error - the error is carried forward into the decision making process which results in inaccuracies.
– This is termed as a carry-forward error.
• Examples of Carry-Forward error include:• Mistakes in yield analysis.• Errors made in customer data analytics.• UpSell/Cross-Sell opportunities lost due to poor data aggregation.
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Direct and Carry-Forward Errors• Direct Errors: An execution error that results in
a loss of revenue or incremental costs (or both) and has a direct bottom line impact. In this case the costs irrespective of how the information is used (or not used) later.– Examples: Incorrectly classifying an accounts
receivable item as paid.– Double payment of an accounts payable item.– Unverified submission of Regulatory
Documentation in the Bio-Tech industry.
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Errors and Process Types• Strategic Processes have far greater Carry-
Forward errors than Direct errors. Examples:– Inaccurate yield analysis can prolong the life of
unprofitable products or limit the profits from profitable ones.
– Bad customer data analytics can result in imprecise customer segmentation and (therefore) lost revenues.
• Operational Processes have more Direct errors. Examples:– Loss of revenue (inaccurate collection follow-up) and
increased costs/expenses (over payment of A/c payable items) result as a direct consequence.
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Cost of Tracing Errors• There is often a time lag between the
discovery of a Carry-Forward Error and the instant when it was committed.
• Tracing the locus of responsibility and the origin of the error in the case of Carry-Forward errors is costly and sometimes not feasible.
• In the case of Direct errors it is both possible and necessary to trace the source and cause of the error.
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Metrics for Direct Errors
• Tracing the origin and the locus of responsibility of a Direct Error is comparatively less costly.
• Direct Errors are minimized by two measures – measuring the execution failures after they arise and through preemptive measurement (aka Sampling).
• A Technique that is used for measuring execution failure (preemptive and post occurrence) is called The Function Value Analysis Technique (FVAT).
• This technique allows users to anchor vendor payments to delivery quality levels.
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The Function Value Analysis Technique
• A set of outsourced process consists of several tasks which constitute functions.– Examples of functions include, A/R & A/P
reconciliation.
– Telemarketing and Conflict resolution
• The value to the user (client-firm) of the outsourced process is usually driven by one or two functions within the functional mix.– Examples: TPS, HR, Marketing
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Transaction Processing: Function Value Decomposition
36%
13%34%
6%11%
A/R & A/P - Timeliness MIS Accuracy
Accuracy of A/R and A/P Attrition
Accuracy of Cash Flow Projection
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HR: Function Value Decomposition
31%
12%37%
14%6%
Time to hire Per hire Cost Quarter - I Turnover
Quality of hire Depth of Reach
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Customer Contact Center: Function Value Decomposition
5%
11%
39%
10%
12%
23%
Market Segmentation Prospect Identification & Analysis
Data Integration Accuracy & Latency Upsell Conversion Factor
Cross-Sell Conversion Factor Inquiry & Problem Resolution
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Function Value Analysis Metrics• Measure service quality delivery both preemptively and
after failures (errors) are surfaced.• Pre-emptive measurement:
– For each set of processes outsourced, perform the FVA and identify the key driver of value.
– Tie the sampling rate to the failure rate (of the vendor) and inform the vendor of the sampling system. The SLA’s should include the sample rate and the failure rate.
– Sampling and failure rates should both fall to stable levels as business volumes and practices stabilize over time.
– There is no such thing as a “best practices” sampling rate.
– Sample rate is a function of failure rate, cost of sampling and the relative importance of functional value drivers.
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Sampling Rate and Vendor’s Failure Rates
0.00%
1.00%
2.00%
3.00%
4.00%
1 3 5 7 9 11 13 15 17 19 21 23
Months Lapsed Since Migration of Processes
Provider's Failure Rate User's Failure Rate Sampling Rate
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Carry-Forward Errors• High-end, strategic processes are characterized by
Carry-Forward errors.• It is difficult to trace Carry-Forward errors to their
source or identify the process managers responsible for the error.
• Firms that have outsourced (migrated) processes to captive centers have developed expertise in dealing with these execution failures.
• To minimize these errors firms may often have to resort to second order monitoring (we will come back to this idea).
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Pivot Element Failure Analysis
• With Carry-Forward errors, these are disproportionately located in one or two tasks within the outsourced process.
• This is an artifact of the tasks within a process being located at different points along the knowledge continuum.
• The task(s) within a process that drives most of the errors is termed as the Pivot Failure Element.
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Examples of Pivot Elements Within Processes
0%
10%
20%
30%
40%
Asset A/c Maintentance TPS - Cards Marketing Support HR
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Second Order Monitoring• Captive centers often monitor the Pivot Failure Element
at two levels.• One or more information workers execute a process.
Their output is selectively examined by another worker who scans the pivot elements for any errors in execution.
• The error trapping rate (or the scanning rate) is monitored by a manager who calibrates it increases/decreases the extent of monitoring based on the output quality.
• User firms can monitor the managerial controls within the provider firms by monitoring the manager responsible for process quality delivery. This is called secondary monitoring.
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Second Order Monitoring
• Secondary Monitoring Works as follows:• The user and provider firms determine an error
trapping rate.• The manager (in the provider firm) who is responsible
for process quality “reports” to a user firm’s manager (recall the Extended Organizational Form).
• Depending on the quality delivered by the provider firm the user firm’s manger asks the provider firm to increase or decrease error trapping.
• The SLAs include explicit clauses specifying who pays for the additional cost of monitoring.
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Key Takeaways
• The Governance Spectrum
• Value Hierarchy of Processes and Cost Hierarchy of Processes
• Execution Failures– Carry-Forward Errors– Direct Errors
• The Function Value Analysis Technique
• Pivot Element Failure Analysis
• Secondary Monitoring