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UNIT 1 PROCESSES THAT ARE OUTSOURCED

STRUCTURE

1.1 Objectives1.2 What to outsource?1.3 Process of Outsourcing1.4 Check your progress1.5 Horizontal classification of processes1.6 Vertical classification1.7 Check your progress1.8 Exercises

1.1 OBJECTIVES

At the end of this Unit, you should be able to explain : the logic behind outsourcing the distinction between processes that can be outsourced and why the horizontal classification of processes that are outsourced the different Verticals of the BPO-ITES Sector

.

1.2 WHAT TO OUTSOURCE

Processes in any business are mainly of two kinds, core processes and non-coreprocesses.Core processes are those that the company has a competitive advantage in producingcompared to its rivals in the business. The company is a specialist in that particularprocess or operation. They probably take pride in the quality of their service particularlyof that process. If you recollect, we discussed in Unit 1, the case of a restaurant ownerwho outsources sweet-making to a mithaiwala. The speciality of the restaurant owner isthe meal that is served at his outlet and not the sweet.A similar example is the case of an Airlines Company in lets say the USA. What doessuch a Company specialize in? It flies people between countries and states. It performsthis job very well. It is reputed for its punctuality, its frequency of flights, the routes itcovers and the service it offers on board the aircraft to its customers. Thus, we may say,the Airlines Companys core competency is flying people. The term corecompetency is often heard being used in the IT-BPO Sectors. Every company in anybusiness is bound to have some core competency or the other.

Having seen what a core process of a company is, it is not too difficult to identify what isnon-core to the company. There are several processes that are not really the mainservices that the company specializes in. These processes maybe either critical or noncritical.

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Let us see this in simpler terms. A critical process decides the fate of the business. It isnecessary for the existence of the business and hence is very important. It is time-sensitive and it has to be done within a specific time. If not done on time, the entirebusiness chain may get affected.For instance, transport may not be core to a business but it certainly is CRITICAL.If transport does not function on time, either material or manpower may not reach the

work place in time and a series of problems may arise.

JUST TAKE A LOOK AT HER!

Whereas the non critical processes are those that will be needed , the survival of thebusiness does not depend on these processes.For example running a cafeteria in the case of the Airlines Company is a non criticalfunction.

Core and non core processes can be both critical and non critical .Thus there are:

i) Core-critical processesii) Core non-critical processesiii) Non core-critical processesiv) Non core-non critical processes.

In order to save time and costs, companies started outsourcing some of their processes.Now, it is obvious which processes they started outsourcing first.

First the non core non-critical processes started getting outsourced. Slowly even the non core-critical processes started moving out. As telecommunications, internet services or IT services started improving, it

became extremely easy to transfer data across nations. Thus, even core but non-critical processes started getting outsourced.

Finally, it was found that the only processes that could not be or should not be outsourcedwere the Core-critical processes . All others were best outsourced! In short, companiesglobally were getting into the practice of making only what they were best at making. Itmade tremendous business sense to outsource practically everything else.

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INFACT LOOK AT WHAT PEOPLE ARE SAYING!

Source : www.bpotiger.com

Let us understand this better with the help of an example:Taking the example of the Airlines Company we discussed earlier, we can identifyprocesses that fall under each of the above mentioned categories. These are shown in the

respective boxes below.2 Non core-cr i t i ca l 4 Core-cr i t ica l

R e c r u i t m e n t & t r a i n i n g R u n ni n g t h e A i r l i n e sCustomer service Image bui ld ingTi c k e t i n g B u s i n e s s d e v e l o pm e n tTranspor t /Logis t icsS e c u r i t y

1 Non-core non cr i t ica l 3 Core-non-cr i t ic a l

Cafe ter ia / Food service Adver t i s i ng and mark et ingHousekeeping Transact ion processes

C o m m e r c i a l s

CRITICAL

CORE

The US based Airlines Company could conveniently outsource all the processes in BoxNo. 1. For instance cafeteria or food service on the flight are neither core, nor critical forrunning the Airlines. By choosing a caterer with a sound reputation, the Airlinescompany can completely move their focus away from this service. This way, they canoutsource non core, non critical services and focus on core areas.

The most popular processes that fall under the category of the BPO and ITeS that wehave been discussing are in Box 2 and 3.

For instance, take the case of security service for the Airlines Company. Security iscertainly very important but it is a support service .Hence, it can easily be outsourced.The challenge to the Airlines Company is to identify the best security service provider intown. Most of the processes of Box 1 and 2 are usually outsourced physically and are notIT enabled.

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In this case, most processes that fall under Box 3 are IT enabled and can be outsourcedregularly.Finally, all processes identified as core and critical fall under Box 4 and organizations donot outsource them.

Now, let us examine the logic behind outsourcing - The use of computers for data storage has become very common across the

globe Through the internet, data can be passed on, computed, stored or processed

anywhere in the world between two destinations. Some countries in the world face a shortage of manpower and hence

experience rising wages. At such a time, if someone sitting somewhere in the world on a PC is willing

to do this better and at a cheaper rate, these processes are worth outsourcing!

By outsourcing business processes to destinations where labour is abundant and hencecheaper, companies in Western countries have saved costs from 40 % to as much as 80%at times. In the BPO Sector, this is known as cost arbitrage. (Refer back to the Chart

on Direct cost savings in section 1.7 of Unit 1 of Block 1) However, cost was not the only criteria as quality also mattered.Over the years, BPO service providers have started maturing and offering better qualityof services. It is a well known fact that any work that is done repetitively will lead tospecialization. Specialization in turn will improve productivity. In this entire BPOarrangement, the outcome is a win-win situation .

i) Outsourcing companies can focus on their core competencies .ii) Costs are cut and quality improves.

iii) Company shareholders benefit as profits rise.iv) BPO service providers get more business.v) Outsourcing destinations benefit with job opportunities and revenue earnings.

The list of benefits is long. The main benefits of outsourcing can be captured in thefollowing model, called the Cost-Quality-Time Model:

Cost

TimeQuality

BPO-CostQualityModel

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1.3 THE PROCESS OF OUTSOURCING

Organisation

Non-Core Processes Core Processes

HRServices

CustomerService

Logistics

OUTSOURCE

BPO Service ProvidersCore Processes

In-House

As is seen in the chart an organization identifies all its non core processes and slowlyoutsources all such processes to a service provider/BPO. The organisation thenfocuses on its core critical functions where it tries to gain competitive advantage overits rivals. We can see here that the non-core processes that are outsourced turn out tobe the core processes for the BPO unit.

One can evaluate the spread effect of the benefits from several dimensions. However,it is clear that Outsourcing or the BPO business makes tremendous business sense.That is why in recent times, Business Process Outsourcing has become such animportant component of the business strategy of many organizations all over theworld.

Incidentally, one of the earliest Companies to identify India as a profitableoutsourcing destination was an Airlines Company. British Airlines set up their Officein Mumbai in the early 90s and transferred a number of their processes to their IndianUnit. The other Companies that took the lead were General Electricals, AmericaOnline, Hewlett Packard and many more.

1.4 CHECK YOUR PROGRESS Answer the following questions briefly: Can you explain how an organisation distinguishes its core processes from its

non-core processes? Do you know how a critical process is different from a non-critical process? Explain the logic of BPO model?

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1.5 HORIZONTAL CLASSIFICATION OF PROCESSES

BPO services started initially with outsourcing of medical transcription work andcustomer care in various areas of work. Slowly the types and number of processes beingoutsourced expanded to cover a wide range of services. Let us see what key services areoutsourced and how they can be classified.The classification can be understood horizontally or vertically.Let us take the horizontal classification. A horizontal classification refers to categories

of services that may be used in all industries (or Verticals) and not any specific one .The major services that BPOs offer are :

Typically any service that is outsourced usually falls into one of these categories. This listmay widen to include still more services as the BPO sector is growing. New serviceproviders enter the market to offer new services and thus the list expands.Let us take a closer look at these service categories.

Major services that are outsourced :

1) Customer Interaction Service This is done through Call Centres or ContactCentres. These may be voice based or web based( non-voice). It includesCustomer Service, Customer help desk, telemarketing, customer feedback etc.The typical examples are attending to customer questions related to bank account,credit card or product information.

2) Back office Transaction Processes Most organizations have a number of processes that are carried on without direct interaction with customers. Thesebroadly fall under the category of back office operations. Such transactionsinclude data entry, processing applications and other non voice customer relatedoperations. This relates to cases such as credit card application, loan applicationsetc.

3) IT/Software Operations There are some IT applications that are widely used byvarious industries. The process of implementing such applications includescustomizing, training and maintenance which are often outsourced to serviceproviders. For example, applying Oracle software to an Automobile Companylike Maruti Udyog Ltd.

4) Finance and Accounting Services: These processes are common to almost allorganizations. They include financial accounting, general ledger, balance sheetaccounts payable and receivable, loan administration etc. These are also non-voice services.

HORIZONTAL

CLASSIFICATION

CUSTOMERINTERACTION SERVICE

BACK-OFFICETRANSACTI

ONPROCESSES

IT SUPPORT /SOFTWAREOPERATIONS

KNOWLEDGE SERVICESHRSERVICES

FINANCE /ACCOUNTING SERVICES

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5) HR Services-This includes several processes relating to Human ResourceManagement starting from recruitment till the exit formalities. This coverstraining, payroll services, employee benefits management, etc. HR Services havebeen popular in the outsourcing business.

6) Knowledge Process When the outsourcing activity becomes high endrequiring very specialized skills and is analytical in nature, it takes the form of Knowledge Process Outsourcing. As this area is gaining a lot of importance thesedays, this is dealt with in greater detail in a later Unit.Apart from the above categories mentioned, there are several processes such asProcurement, Transport Management, Inventory Management and other LogisticServices that are also gaining popularity among BPOs.

As seen in Unit 1, BPO is the most important part of the ITES Sector. When we club anduse the term BPO-ITES, or ITES-BPO, it covers a whole range of services from severalspheres. All these services come under the broad head of tertiary sector activities. Thereare some tertiary sector (also called service sector) activities which may or may not be ITenabled. Similarly there are a few IT enabled services that may or may not be outsourced.However, In todays modern world, several Services that are IT enabled are alsooutsourced. That is why these two terms ITeS and BPO are often used interchangeably.We have just understood how many different types of services are outsourced underdifferent categories.Let us see which segment of the service sector outsources its processes.

1.6 VERTICAL CLASSIFICATION

BPO activities are spread across several types of services.Thus when we divide BPO-ITeS from a broader framework, it becomes a Vertical basedclassification. The nature of the activity in one Vertical may be very different from that inanother and thus each type is called a different Vertical.

A vertical is a group of similar businesses which engage in trade based on specificand specialized needs.These Verticals maybe Banking, Healthcare or Telecom Services. As in the case of thehorizontals, here also it is seen that new areas of services start using outsourcing as a veryeffective business strategy. As a result this classification may also expand as time moveson.

Let us understand these Verticals from a practical example :Will you agree that the types of business processes in the banking sector are totallydifferent from that in the healthcare sector ?

However, even though the Verticals are very different from one another, the nature of certain specific processes may have a lot of similarities. You may wonder how ! Take alook here :Mr Peter of London calls the toll free number of his bank for some information onMonday. The information he needs is to know his bank balance and to check if aparticular amount has been credited to his account.

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Similarly, on Tuesday, Mr. Peter again calls another toll free number. This is the toll freenumber of St Marthas Hospital. This time it is for taking an appointment at his Hospitalfor a Medical Checkup in the following week.

Both calls relate to organizations in London, one is a bank and the other a hospital. Thecalls reach different contact centres in India. We will understand about how a contactcentre functions in greater detail in Unit 5. One is a bank which has outsourced some of its processes to a Chennai based BPO Unit in India. The other is a reputed hospital in UKwhich has outsourced its work to a Pune based BPO Unit in India.

The information exchanged may be different. Here you may note that the manner inwhich the two BPO Centres function are nevertheless very similar. In both cases theoperations fall under customer services . But one belongs to the banking Vertical andthe other to the health care Vertical.

Thus we may see that various services identified under the horizontal classification such as Customer Care, HR Services, Finance & Accounting, etc., can be outsourced from any /all of the verticals such as Banking & Insurance, Telecom Sector or any other vertical.Take a look at the following chart. It gives an idea about some of the major Verticalswhich comprise the BPO-ITeS Sector in India.

VERTICALCLASSIFICA

TION

BANKING /

FINANCE

HEALTHCARE

RETAILINSURANCE TRANSPORT/ AIRLINES

MEDIA ANDENTERTAIN

MENT

TELECOM

Each Vertical includes a range of processes that are outsourced mainly because they areIT enabled. Before the use of computers on a large scale, most of these sectors needed torecruit employees, train them with the details of their sector and familiarize employeeswith their Sector specific processes. As outsourcing gained popularity, these sectors left itto the BPO units to appoint and train employees to carry on their operations. Certaincommon characteristics in operations between Verticals have been identified by serviceproviders. They then engage professional trainers to train newly appointed staff to facethe demands of the job. In fact, in the BPO-ITeS business, recruitment and trainingoccupies a very special place. This is because human resource is the backbone of thissector. The same is true of other related services or activity that is part of the tertiarysector.

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Now let us see what some of these Verticals cover.

1) BANKING, FINANCE SERVICES AND INSURANCE (BFSI)This is one segment of the service sector which has found outsourcing of its servicesvery profitable. This is mainly because, the nature of work in BFSI is quite repetitiveand requires only brief training. Moreover, as the operations involve transfer of a lotof data, these are easily done through the computer and the internet. BFSI relatedwork involves innumerable transactions and hence transaction processing easilybecomes an important part of BPOs work for this segment. Under this category, thefollowing processes are commonly outsourced :Banking, Financial Services includes :

Net banking processes including payments, account status verification andother transactions.

Loan transaction including application processing, delivery and collection Credit card services including Application processing, bill generation,

collection of payments ,credit card loans, marketing of products linked tocredit card . Apart from all these, one of the most popular Credit cardservice outsourced is customer care. You will understand this better afteryou see how the typical Call Centre works in Unit 5.

Mortgage processing is also an important Financial Sector serviceoutsourced.

Similarly, the insurance services that are typically outsourced include : Application form processing Policy administration Claims processing Medical Insurance / mediclaim Settlements

Apart from these functions there are several other processes related to foreign exchange,NRI banking, banking transfers etc in this Vertical. As these are treated as core andcritical, they are usually done in-house. In some rare cases when these processes are

outsourced, the banks open a captive unit in a low cost country and employ localmanpower to do the work cheaply .This pattern of ownership of the BPO Unit is calledcaptive BPO . In fact this is the pattern that was seen when outsourcing started in theService Sector. Slowly this was followed by the alternative pattern of Domestic BPOUnits also called Third Party BPOs. However, for now, we will not go into the detaileddiscussion on these two patterns of ownership.

2) HEALTHCARE: - Healthcare is provided by hospitals, private doctors andmedical shops. Between these three, all the needs of any patient in any corner of the world are taken care of. There is one more organization playing an importantrole, particularly in the Western countries. These are Insurance companies .For

instance when a person falls sick in the USA, a lot of personal and medicaldetails of the person have to be exchanged between the patients InsuranceCompany, the hospital and the pharmacy before the treatment actually starts. Thiscreated various processes such as medical transcription , medical billing, medicalcoding, forms processing and so on. Medical history and other details of thepatient would have to be stored in documents. As medical insurance has been verycommon in the US and other advanced countries, doctors have always had to takeutmost precaution in treating. Even a minor mistake could cost the doctors and theinsurance companies heavily. Moreover there is strict Government regulation on

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these matters (1). There was an urgent need to cut costs and thus begunoutsourcing in the healthcare industry.

Unit on Career prospects will give you an idea about the types of opportunities this Vertical has created in the job market.

The Case of Outsourcing in Healthcare

HealthcareProvider/Doctors, Clinicsand hospitals

Healthcarepayers

/InsuranceCompany

ealthcareseratient

HealthcareService providers/ BPO

Thus, Healthcare Services have been getting outsourced in a big way for a long time now.This resulted in a number of youngsters having to learn the medical terminology and thetypical processes. BPO services in this Vertical underwent a slow down but business isonce again picking up. In fact now, healthcare services have entered into very specializedareas involving high degree of subject knowledge about medical radiology and bio-medical research etc. We will see more of this in Unit 3 of Block-2 on KnowledgeProcess Outsourcing.

3) RETAIL SECTOR The Retail Sector is one of the fastest growing sectors in the world particularly in theAsian economies like India, China and the Philippines etc . Multi-nationalcorporations also called MNCs from all the developed countries have entered intoretail business in a big way . The main attraction is the growth in purchasing power orimprovement in income levels in the countries and hence the growth in demand . Theretail sector includes outlets for apparels, departmental stores, malls and all the newstores that cater to consumer needs directly. This is nothing but trading of manufactured goods through modern outlets which use the pick and chooseapproach for sales. The retail sector has plenty of back office operations whichincludes supply chain management, procurement, administration, financial services,advertisement etc. Apart from this customer service plays a very important role in thissector. Global Retail chains like McDonalds, Marks & Spencer, Wal-Mart etc.outsource these back office operations to low cost destinations like India and China.In India, domestic chains have also entered the retail market. The growth of demandhas expanded the revenues of these retail chains and the competition is heating up.

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Cost cutting measures in such circumstances makes outsourcing a profitable businessstrategy.

1.7 CHECK YOUR PROGRESS

i) Find out exactly what processes are outsourced by companies in the remainingsectors listed above....................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

ii) Review your understanding of this unit. What is the difference between horizontal and vertical classification of BPOs? Can you distinguish between customer care and financial services that are

outsourced? How are the different verticals classified?

What functions are included in the BFSI verticals?

CLASSIFICATION OF BPO-IT ENABLED SERVICES - A SNAPSHOT

Banking/Financeand InsuranceServices

Healthcare Retail Transport/ Airlines

Media andEntertainment

Telecom Manufacturing

Customer Interaction Service

Back Office Transaction Processes

IT Support

Finance/Accounting Services

HR Services

Knowledge Services

HorizontalBPO KPO

(Low end) (High end)

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1) Note: For more on this read about The Health Insurance Portability & AccountabilityAct of 1996, better known as HIPAA at :i) en.wikipedia.org/wiki/Health_Insurance_Portability_and_Accountability_Act -

ii)www.hipaa.org iii) www.cms.hhs.gov/ hipaa GenInfo

SHARE OF DIFFERENT VERTICALS IN THE BPO-ITeS BUSINESS(Financial Year 2006)

FY 2006

38.1%

19.8%

12.9%

7.6%

4.2%

4.0%

3.0%

2.1%

8.4%

B F SI H i-T ech / T e leco m

M anufac turing R e ta ilM ed ia , Pub l ish ing & Ente r t a inment Cons t ruc t ion & Ut i li t ie sH ea lthca re A irlines & T ranspo rta t io n

Others

Source : Nasscom Strategic Review 2006.

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1.8 EXERCISE

1) List down the major processes that exist in a bank.2) Insert the business processes in the appropriate boxes given below:

2 Non core-cri t ic al 4 Core-cri t ic al

1 Non-core non cri t ical 3 Core-non-cri t ical