Dependencies between Business Process Outsourcing partners in the Dutch Financial Markets

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Dependencies between

Business Process Outsourcing partners

in the Dutch Financial Markets

Master Thesis

Program: Master of Science in Business Administration Business Processes & ICT

Author: Franc Linders Student#: 1585258

E-mail: f.linders@hetnet.nl

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Key words that relay to the subjects of this research: o Business process outsourcing

o Business process servicing o Inter company dependencies o Inter company lock-in

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Acknowledgements

In my professional experiences as business consultant and information architect in several companies, I observed and participated in a number of business process outsourcing operations in various environments. It intrigued me that service providers gave little attention to the retention of clients. I remember discussing client complaints on operational and change issues with senior management and consultants from a service provider. The client had hinted that it would end the outsourcing agreement. Remarkably, between us we found it difficult to figure out just how dependent the client was on us, the service provider. This discussion triggered my special interest in the subject of dependencies between partners in business process outsourcing and it eventually lead to this research.

This research finalises my master’s study in Business Administration, specialising in Business and ICT. In my years of study I also worked a demanding full time job. Switching jobs twice and special projects did not help to progress swiftly, but with help and support of family, friends, tutors and colleagues I finalised my study.

I thank my wife Tanja, who had to spend numerous evenings and weekends without me, for her support an patience. I thank my family and friends for the motivating interest they put into my study. Thanks to my colleagues who discussed my findings and conclusions with me and implicitly contributed to this study. Thanks to my subsequent employers (Getronics PinkRoccade, Stater and Ordina) for their inspiration, motivation and time.

I especially want to thank Professor Egon Berghout for is support,

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Abstract

Over the last decades financial institutions in the Dutch financial services market, outsourced more and more of their primary business processes. The motivations varied from reducing costs to focus on core business. The

problems in information technology that came with the turn of the century and the introduction of the euro pushed many companies to business process outsourcing.

Although business process outsourcing nowadays is commonly accepted in business organisations, there is little known about the dependencies between partners in business process outsourcing: the outsourcing company and the service provider. What are these dependencies and how strong are these. This contemplation leads to the main research question:

How can the understanding of the dependencies between business process outsourcing partners in Dutch financial services markets be increased? Literature survey and analysis from business processes in reference of the value chain theory, BPO motives and cases identify eight areas of

dependencies between BPO partners. Based on their interrelations the dependency areas BPO Dependency Model is derived addressing content, conditional, external focus dependencies and exit / switch. The areas of dependency are discussed and conclusions on the dependency between the BPO partners are drawn. Two additional topics that influence the dependency indirectly were discussed. The research was completed with the conclusions and recommendations based on literature study.

Business processes are the subject of outsourcing. Without knowledge and skills no process can be executed. In Dutch financial services markets processes are highly automated. Governance, with both BPO partners, manages the relation and the strategic goals from outsourcing. The content dependencies in business process outsourcing that were defined are:

1. process and organisation, 2. knowledge and skills, 3. information technology, 4. governance.

Financial aspects cover the retribution for services delivered, implying a pricing level and structure. When advantageous to the outsourcing company compared to alternate solutions this is a strong dependency. Avoiding large investments is associated to the financial dependency; many financial

institutions do not have the economies of scale that the service provider can offer.

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aspects have not a strong dependency. The conditional dependencies are unavoidable in any business agreement:

5. financial aspects, 6. legal aspects.

Strategic marketing represents the external focus from business process outsouring. The other dependencies acumulate in it.It is the motive for. The external focus dependency is:

7. Strategic marketing.

None of the exit strategies are desirable. A fast exit has many risks, a careful exit requires cooperation from the service provider and patience. Switching costs also limit the options for the outsourcing company significantly.

Switching between service provides or retransition, is a complex and

expensive operation. Exit from a BPO or switch to another service provider are high thresholds to cross. The final dependency is:

8. Exit / Switch

The volume of processing is the relevant dependency for the service

provider. The economies of scale are essential to offer complete and efficient operations at a competitive price.

The conclusion must be that the dependencies in a full operational business process outsourcing are strong and make it difficult for the outsourcing company to end the cooperation.

The BPO dependency model identifies eight areas of dependency in BPO relations. Outsourcing includes processes and organisation, information technology, knowledge and skills and governance as indissoluble areas of dependency. Financial aspects close the value circle. Legal aspects define the formal agreement between parties. All these dependencies accumulate into strategic marketing: the ultimate business goal. A special dependency is identified in the (high) threshold that must be taken to exit a BPO relation or to switch to another service provider.

The research provides a model for understanding the relation between the outsourcing company and the service supplier. It is an instrument to evaluate planned and operational outsourcing. It helps to explain the company’s

position and actions.

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1 Introduction

In the financial industry there is a tendency to outsource primary business processes to specialised service providers. The products involved are often complex financial services like mortgages and universal life insurances. There are several reasons for outsourcing these processes. The main reasons are [Quélin 2003]:

 Reduction of operating costs;

 Concentration on core competences;  Reduction of capital investments;

 Improvement from measurability of costs;

 Access to external competences and quality improvement;  Replacement from fixed costs by variable costs;

 Improvement from control over internal departments.

Once a company has outsourced (a part) of its business processes to a

service provider there are many relations between these two parties. Besides the legal links the organisations and processes are interlinked: detailed

working agreements are made. This includes assignment of tasks and responsibilities and delegation of powers. Data on products, process management and reporting is exchanged and there will be a common infrastructure. So, in business process outsourcing (BPO) the outsourcing company and its BPO service provider obviously become very much depending on each other. This research will identify and analyse the dependencies that bind the BPO partners, once a business process is outsourced.

1.1 Initial motive

Companies put significant effort in the evaluation from the strategic and financial implications of BPO deals. Lead-times from more than one year are no exceptions. Many aspects of BPO deals are weighted and balanced. BPO implies that processes, organisation and information services become interwoven.

The relation between the BPO partners has many parallels with the relation between partners in marriage. Like in marriage, there must be trust between the BPO partners and they must have a strong commitment to make the relation work. Especially in the beginning when both partners are adapting to the new situation. Once a BPO is operational, the partners are strongly

connected. They will put effort in continuing and improving the relation. Good BPO relations will prove to be the most productive BPO’s.

Few BPO partners will consider the consequences of braking-up when they sign the contract. Still, literature [Symons, 2005] indicates that 50% to 70% of all BPO relations do not reach the targets that where set. 25% of the BPO relations are ended with reasons like bad plans, bad planning, wrong

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A survey on outsourcing performance by Morgan Chambers & Giarte Media Group reports that an average 12.2% of the outsourcing companies will probably not prolong their outsourcing contract. Furthermore, 56.7% will possibly prolong and only 34.4% will probably prolong the contract to the same service provider [Morgan Chambers 2006]. In this investigation the service providers were evaluated on the key performance indicators (kpi’s) that influenced the contentedness. In sequence of importance these were: quality, relationship, innovation, partnership (share of risks), price and costs savings. It strikes that the most important kpi’s are also the most difficult to measure. This is consistent with the opinion (a common belief from the consulted experts) that ending an outsourcing contract is an emotional decision, rather than a rational evaluation from various indicators.

These statistics indicate that business process outsourcing relationships may end. The ‘divorce’ is not only a legal and financial issue. For both partners, it is important to understand the impact from breaking-up. For the outsourcing company it is important to know what it will cost to end the BPO relation. In the context of this research, ‘costs’ do not only apply to monetary units. It also applies to the energy, time and risks involved. Also, an acceptable alternative for the existing service provider must be available.

The service provider has other worries when the relation is ended. The loss of turn-over is important and damage to the reputation may be a serious issue. With the loss of a large client it may even lose the advantage of economies of scale.

For both parties involved it is evidently important to understand how strong their (inter-) dependency is, what this embrace exists of (what areas of dependency are involved) and what it would cost to end it. Switch to another service provider or retransition should be part of it. Understanding the

alternatives and limitations of strongly interwoven BPO relations are evidently important for strategic planning from either partner.

Literature survey learned that there is relatively little literature on the

dependencies between the outsourcing company and the service provider in BPO. This research will add to the body of knowledge on this subject.

1.2 Problem statement

The research question and its questions are stated in the following sub-paragraphs with their context and limits.

Main research question

As explained afore, once partners have chosen to work together in business process outsourcing, they become increasingly entangled. For the

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their interdependencies, to really understand their relationship in all its aspects.

Therefore the main research question is:

How can the understanding of the dependencies between business process outsourcing partners in Dutch financial services markets be increased? Literature shows little evidence of knowledge and understanding about the strength of the dependencies between BPO partners. This research aims to identify the areas of the dependencies and the issues that may determine the strength of the interdependencies in the identified areas. The scope of the research will be limited to the Dutch financial services market. Several reasons support this limitation. To start with, financial services are primary processes that contribute to the successes of companies. Therefore,

outsourcing primairy processes are strategic decisions that are of great importance to the outsourcing company. A second reason lies in the fact that the outsourcing of financial services is a relatively mature business. In the Netherlands, dozens of financial institutions outsourced the servicing of

insurances, mortgages, pensions, and more. So, data is available. Finally, the limitation to the Dutch financial markets is chosen because many financial services, like mortgages and pensions, are largely based on local fiscal rules and therefore limited to the local market. The Dutch market is a known market and of a size that can be surveyed.

Outsourcing to BPO partners in another country, also described as off-shoring or near-shoring, is excluded from this research by limiting the research area to the Dutch financial market. The additional aspects from this kind of

outsourcing (distance, time-zones, language and culture) are well

documented in the recent flood of publications on this subject. Because these are additional aspects, the results from this study will most likely apply to these kinds of outsourcing as well. Additional study is required for

confirmation.

Research sub-questions

The following describes the sub-questions to this research. The sub-question argumentations imply the directions of answering.

The main research question will be answered by a literature survey and

analysing the relation between the BPO partners in relation to the value chain theory [Porter 1985] to identify dependencies. The dependencies are created into a model that is tested against two cases. Alle dependencies are

discussed in depth. The research will answer the sequence of sub-questions that are explained in the following paragraphs. The last step of the research is to discuss the results from the research with an evaluation from the analyses of previous steps in the research.

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Definition of BPO and other concepts

The context of this research is defined by the definition of BPO and other concepts. The relevant sub-questions are:

1. What are the characteristics of BPO? a) What are business processes?

b) What are the characteristics of outsourcing?

c) How does outsourcing relate to concepts like in-sourcing and co-sourcing?

d) How does outsourcing relate to off-shoring and near-shoring? e) What differs the outsourcing from business processes to the

outsourcing from IT? What are the similarities? 2. What are characteristics of BPO partners?

a) What is the position of the outsourcing company? b) What is the position of the service provider?

c) How is the Dutch financial services market defined? d) What are financial services?

3. What defines the Dutch market (in relation to BPO)? Analysis

The dependencies between the outsourcing company and the service provider (the BPO partners) are identified in the content, relation and the external focus of its relationship. The relevant sub-questions are:

1. What defines the relation in Business Process Outsourcing?

a) What are the areas that define the dependencies in the Business Process Outsourcing relation?

2. How relevant are these areas of dependency?

a) How do the areas of dependency relate to the motives for outsourcing? b) Are these areas of dependency recognized in practice (life cases)? c) What is the importance of the dependency from both perspectives

(from the outsourcing company and from the service provider)? Dependencies

The dependencies and the strength of the dependencies are discussed in theory and in practice. The relevant sub-questions are:

1. What are the aspects that define the dependencies? a) What theories define the dependencies?

b) How do these theories manifest in practice (cases)? Exit / switch

The exit strategies are very much depending on the motivation and situation of the exit. Relevant research questions are:

1. Are BPO exit and service provider switch dependencies? 2. What exit strategies can be deployed?

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4. How can the exit process be managed and managed?

5. What factors decide the availability of (alternate) service providers? 6. Are there dependencies related to the exit strategies?

After evaluating the preceding aspects of the BPO dependencies, the feasibility of switching is investigated. The switching costs are, for a large part, an accumulation from the preceding aspects of the BPO dependencies. The switching itself implies specific costs that may imply dependencies. Some of these costs can be calculated and expressed in euros. Other costs cannot. The relevant sub-questions are:

7. What are switching costs?

a) What are the costs for selecting and contracting another BPO partner? b) What are the costs for adjustment of processes, organisation and

information services?

c) Are there any disinvestments that must be taken into account? d) Are the program issues covered: manpower, time and budget? Conclusions

1) What conclusions can be drawn from this research? Results

In conclusion of the research the results will be assessed on their usefulness. The relevant sub-questions are:

1. How can the results of this research be used in decisions related to the BPO dependencies?

a) Do the results provide a basis for analysing the BPO dependencies? 2. What is the added value of the model?

a) Who can benefit from this research?

b) How can the results of this research be used?

c) What does this paper add to the body of knowledge on business process outsourcing?

1.3 Research method

The research will be based on literature research and case study. The initial motive explains the relevance of this research. It gives the context for the defined problem statement and research questions.

The research itself starts with defining business process outsourcing and other relevant concepts. Available literature databases are searched for titles that discuss dependencies in BPO. In reference of Porter’s value chain theory, the relations between the outsourcing company and the service provider (the BPO partners) are analysed. The results from the literature survey and the analysis are worked into a model on business process outsourcing

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The model connects the dependencies and gives insight in the relations between the dependencies. Information from the practice of outsourcing is found in BPO cases that are studied.

Two cases are discussed to test the BPO dependency model. One case will have the viewpoint from the outsourcing company. The other case will have the viewpoint from the service provider. Conclusions will be drawn and the results will be discussed to finalise the research.

The cases were entered by two experts in BPO outsourcing in the Dutch financial market. Draft versions from the case descriptions were presented to them and their comments were worked into the final descriptions.

The cases were made unanimous to protect the companies involved. The analysis and its results were reviewed and discussed with afore

mentioned experts. Their contributions and comments were worked into this paper. Initial motive Problem statement and research questions Defenitions and concepts

Literature search Process Analysis

Model

Cases

Discussion

Conxclusions

Results

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1.4 Contribution

This research contributes a BPO dependency model to the body of knowledge on business process outsourcing. BPO dependency is a relatively unexplored subject in scientific literature.

The research contributes a set of identified dependencies in business process outsourcing that can be used as an instrument to understand, monitor and manage the relation between BPO partners. The results of this paper will be useful in the governance of the processes that were outsourced. The topics that need attention are discussed in the identified areas of dependency. This research will contribute to the understanding from the relation between BPO partners. Companies that outsourced business processes or consider outsourcing business processes can use the BPO dependency model to evaluate their (future) dependency from the service provider.

Outsourcing companies will find a valid summery of the aspects that need to be addressed in assessing candidate service provider and in negotiating BPO agreements. More specific and reliable calculations on costs and profits can be made on material and immaterial costs.

Service providers can use the results to understand their clients’ choices and behaviour. The identified dependencies are an indication to the area’s of interest for the outsourcing company that can be used by service providers to optimise their products.

The outsourcing company and the service provider can use the areas of dependency to regularly evaluate their cooperation en design actions for improvement.

1.5 Definitions of BPO and other concepts

The concepts of this research are defined to support a correct interpretation of this paper. The key-concepts are discussed; they implicitly define the context of this research.

Business Process Outsourcing

The term ‘business process’ is defined in many different descriptions. Harmon, for instance, gives a practical definition: “At its most generic, any

set of activities performed by a business that is initiated by an event, transforms information, materials or business commitments, and produces output. Value chains and large-scale business processes produce outputs that are valued by customers. Other processes generate outputs that are valued by other processes.” [Harmon 2003].

Davenport and Thomas introduce the process-focus as a viewpoint to the definition. They give clear boundaries to business processes. They describe a business process as: ”… a structured, measured set of activities designed to

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product focus’s emphasis on what work is done. A process is thus a specific ordering of work activities across time and space, with a beginning and an end, and clearly defined inputs and outputs: a structure for action.”

[Davenport 1993]

Delen describes outsourcing as “… the transfer of specific business processes,

including the related means of production and employees, to an external provider and subsequent receive services in return, that are based on processes with defined results over a number of years.” [Delen 2005]

Regulatory institutions for the Dutch financial markets defined outsourcing in elements:

 The delivery of services, commodities or facilities as a part of (a) banking business processes or (b) to the delivery of insurance services related business processes or (c) to the execution of pension schemas related business processes or supporting business processes;

 on a structural basis;

 by another entity within the group or independent third party;  with exception of procurement . [Moerel 2006]

From these definitions the following characteristics are derived that define the concept of business process outsourcing:

 a set of activities (structured, measured)  initiated by an event

 transformation of inputs in (clearly defined) outputs

 production of outputs that have added value for customer or market  processes need an organisation to make them work

 specific arrangement across time and space with a beginning and an end  transfer from business processes to an external provider

 transfer from means of production and employees  (pre-)defined results

 over a number of years

‘In-sourcing’ and ‘out-sourcing’ are the flipsides of the same coin. A company outsources business processes to an external provider (a service provider). These processes are in-sourced by the service provider.

The term ‘co-sourcing’ is used for partial outsourcing, where the ‘cut’ in the business processes is intentionally not very explicit; BPO partners have a shared responsibility.

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Many publications relay implicitly to outsourcing IT when outsourcing of business processes is discussed. This is due to the attention that this type of outsourcing is given because IT is very capital and knowledge intensive and is therefore very much suitable for outsourcing. Although it is often

considered of strategic importance, IT development never is a core business process for financial institutions. To them IT development is the development of means of production and therefore supporting processes, however

important they may be for the outsourcing company.

Although it must be possible to outsource every business function [Engardio 2006], the bulk of publications refer to outsourcing IT. Delen states that IT outsourcing and Business Process Outsourcing will converge due to the increasing role of IT in business processes [Delen 2005] [Rijsenbrij 2003]. With this statement Delen overlooks an essential aspect of outsourcing. IT outsourcing is about the development and maintenance of IT. IT is, by definition, a tool that enables one or more processes and therefore a production factor. IT development and maintenance is never a primary process, but part of the financial institutions infrastructure. Business Process Outsourcing refers to any kind of process that may be outsourced. Business process outsourcing is valued on the output of the process; IT outsourcing is valued on the output of IT. Financial services, as in the context to this

research, are primary business processes. These processes may rely heavily on information technology.

BPO Partners

The BPO partners are the companies that are involved in the outsourcing deal. On one side there is the outsourcing company that transfers parts of its activities to the service provider. This is the client of the service provider. On the other side, the service provider will perform the business processes and manage these on behalf of the outsourcing company. This implies that the service provider is authorised to act and make decisions on behalf of the outsourcing company within strict limits as defined in the contract.

Qualifications/authorisations and responsibilities from both parties should be defined clearly.

The Dutch Financial Services Markets

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Financial services are information intensive products. They are promises and trusts: the only physical thing about them is the paper that the contract and conditions are printed on. In the context of this research the focus lies with consumer products.

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2 Analysis

To identify the areas of dependency this research studies the content from business process outsourcing, the conditional relation between the BPO partners and their business goals. The BPO dependencies will be identified by a literature survey for titles that address dependencies in BPO and by

analysing relations between BPO partners in reference of the value chain theory [Porter 1985].

2.1 Literature survey

The literature survey targeted on finding literature that identified the dependencies between the BPO partners, the basis of this research. The literature databases from university library were accessed to find relevant publications. Literature search Catalogue University of Groningen ‘outsourcing’ (143) information technology (6) economy (14) business administration (59) other (64) PiCarta ‘outsourcing’ (20397) ‘outsourcing’ AND ‘dependent’ (81)

Platform Outsourcing Nederland

(website)

The Outsourcing Project

(website) No specific dependencies 11 themes No specific dependencies 11 themes No specific dependencies 8 themes No specific dependencies 11 themes

Figure 2: Literature survey schema

The Catalogue from the University of Groningen was searched with various terms. It came up with no hits on an ‘all words’-search on the words

‘outsource’ or ‘outsourcing’ or BPO in combination with ‘afhankelijk’, ‘afhankelijkheid’, ‘depend’, ‘dependent’, ‘dependency’, ‘interdependent’, ‘interdependency’, ‘reliant’ or ‘riliance’. The simplified search on the word ‘outsourcing’ resulted in 143 hits. A sort on category showed a variety of subjects from pharmacy to civil engineering and law. The titles in the categories ‘information technology’ (6 hits) and economy (14 hits) were examined, but did not relay to the subject. The category business

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discussed. There were titles on outsourcing in a number of branches (like IT, facility management and manufacturing), on outsourcing decision models, on strategic aspects, on governance and more. However, none of the titles promised to reveal the areas of dependency in BPO. Neither did a search on the words ‘BPO’ (2 hits) and ‘outsource’ (2 hits) result in relevant titles. The PiCarta database was searched with various combinations of the afore mentioned words; all with no results. A search on the word ‘outsourcing’ resulted in 20397 hits. A second search was done using the words

‘outsourcing’ and ‘dependent’ resulting in 81 hits. The search option ‘approximate search’ was on, so words like ‘contracting’, ‘outsource’, and ‘dependency’ were included in the search. All 81 titles were examined, without results again.

The Outsourcing Project is a web magazine on outsourcing, published by CxO Research Ltd. Platform Outsourcing Nederland is a cooperation of interested private, public and scientific institutions and companies that stimulates ongoing development and professionalization from outsourcing in the Netherlands. Examining the titles on the websites from ‘The Outsourcing Project’ and ‘Platform Outsourcing Nederland’ resulted in a number of interesting titles but not one that revealed a list of dependencies in BPO. This research did used some of the titles from the literature survey because the themes they discuss apply to outsourcing financial services. [Beulen 1994][Beulen 2002][Delen 2004][Delen 2005][Grijpink 2002][E.Graaf 2006][Looff 1996][Parker 1988][Pols 2005][Rijsenbrij 2003][Rijsenbrij 2004][Rijsenbrij 2008][Zee 1997].

2.2 Recurring themes

The literature survey did not surface a conclusive list of dependencies

between BPO partners. A number of themes, however, recurred prominently in the titles. They are candidate to be identified as dependencies in BPO. These themes are included in the analysis. Prominent recurring themes are: business processes, information technology, off shoring, finance, governance, legal aspects, transition, human resorces, strategy, knowledhe and skills, exit and switch. Every theme is discussed:

Business Processes

Business processes are subject in every title for they are the subject from outsourcing. The kind of business processes can vary from IT to human resources or household support, but in BPO it is always the business process that is transferred from the outsourcing company to the service supplier. Business processes are a dependency between BPO partners.

Information Technology

Literature shows a large variety in the outsourced business processes. An estimated 50% of the titles that were examined in the literature survey subjected IT outsourcing. In the context of these titles, IT is the outsourced business process; it is the subject of outsourcing and as such not a

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cannot be identified as a dependency between BPO partners1. Off shoring business processes

The ‘off shoring’-theme was referred to in many titles, in most cases related to information technology. This subject however refers to a specific type of outsourcing. It does not address dependencies between BPO partners. Titles on this theme were also disregarded because it is out of scope for this

research. Finance

Almost every title refers to the financial aspects from BPO in one way or another. All refer to the reduction of costs and to the measurability / controllability of costs (eg Quélin and Duhamel [Quélin 2003], Schootte

[Schootte 2006], Rijsenbrij [Rijsenbrij 2008] and Moeren and Reeken [Moerel 2006]). In addition, Quélin and Duhamel state that reduction of capital

investments are a major consideration for outsourcing, along with the replacement from fixed costs by variable costs.

Low costs are essential to keep up the profit margins. Investments put long term pressure on the margins. So, low costs and avoiding investments improve market competitiveness. Outsourcing companies rely on the service provider and its economies of scale to process at low costs and to carry investments to the benefit of all or most of its clients. Restructuring the cost model by replacing fixed by variable costs moves a part of the risks to the service provider and can be profitable when low production volumes are expected. The measurability of costs serves management. Koevoets, Staal and Snijders apply the transaction costs theory [Williamson 1981] to estimate the chances on success in BPO [Koevoets 2008].

Financial aspects are an indissoluble part of BPO and are identified to be a BPO dependency.

Governance

Governance is addressed as a topic of special attention in various titles. It is a main theme in three of the five volumes that were published by The

Outsourcing Project [CxO 2008]. Beulen sees the BPO contract as a reference for management from the relation between BPO partners [Beulen 2002]. Delen identifies good governance as one of the key factors for successful outsourcing [Delen 2004][Delen 2005]. Schootte discusses in a dedicated chapter all levels of BPO management [Schootte 2006]. Rijsenbrij states that “You cannot manage what you cannot control”. With this statement he refers to the necessity of governance [Rijsenbrij 2008]. Vander Zee emphasises the power balance between BPO partners and advises “to keep in control:

adequate management of the sourcing relationship life cycle, and managing the whole set of relations as a well-balanced portfolio.”[Zee 2004]. Symons,

Van Ingen and Hoogeveen dedicate one step in their BPO strategic trajectory framework to the analysis form process governance [Symons 2003].

1

In the business process analysis information technology is recognised as an

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Governance manages the relation between the outsourcing company and the service provider. Governance is a dependency between BPO partners.

Legal aspects

The legal aspects from BPO are addressed more than once. A Dutch platform for BPO, Platform Outsourcing Nederland2, pays attention to the subject with a dedicated working group and published various titles [PON 2006]. Delen identifies inflexible legal contracts as a source for failure in BPO [Delen 2004]. Beulen wrote an article on it [Beulen 2002] and dedicated a paragraph on the subject in his book on make-or-buy decisions in IT

outsourcing [Beulen 1994]. Moerel and Van Reeken [Moerel 2006] wrote a book specifically on the legal aspects of BPO.

Beulen as well as Moerel and Van Reeken elaborate on the subjects that should be included in the contracts. It should stipulate all aspects from the agreement and the conditions that activate specific paragraphs. A specific description of the services that should be delivered (usually in the form of a service level agreement) should be the main part of the contract. The fee for delivered services and penalties for non performance are a also significant part of the contract. Other aspects that are advised by the authors are, among others, the transfer of human resources, penalty clauses and to include an exit paragraph3. In their vision the BPO contract regulates the relation between the BPO partners.

Like any agreement, a BPO agreement has legal consequences for both parties. BPO is an agreement between independent companies. Whenever companies make agreements, it has legal consequences. They make promises to one another that are laid down in legal contracts, stating the rights and obligations. The characteristics from BPO refer to the transfer of business processes (and sometimes means of production) to an external service provider over a number of years. In return the service provider will be compensated for the delivery of its services.

This kind of complex, high value, long term agreements will have a legal context. The agreement will undoubtedly be defined into detail in legal documents (contracts). This leads to the conclusion that legal aspects are a BPO dependency.

Transition

Many titles focus on the process of transition or the process of outsourcing business processes. They refer to this BPO preparation phase extensively and imply the transition from the outsourcing companies own operations to the operations from the service provider. Not many companies regularly

outsource business processes and the aspects that must be attended are many. [Beulen 1994][Delen 2004][Delen 2005][E.Graaf 2006][Koevoets

2

Website: www.platformoutsourcing.nl

3

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2008][Looff 1996][Moerel 2006][PON 2005][Rijsenbrij 2004][Symons 2003][Zee 1997]. Transition often includes human resources and / or production materials (these are investment goods like IT equipment); the employees and materials ‘follow work’ to the service provider. This transition, which is actually the preparation and starting phase, is by definition an

activity with a limited time span that preludes the actual BPO. In the context from this research the transition is not regarded to be a BPO dependency. Human resources

The transition of human resources will have a social impact on both the outsourcing company and on the service provider and is probably the most complex part from the BPO transition to manage. The transfer of human resources is one aspect from of the transition and is, as explained above, not a dependency.

Strategy

Strategy is a recurring theme in every volume that was published by The Outsourcing Project [CxO 2008]. It is a main topic in many titles that are used in this research [Beulen 1994][Delen 2005][Engardio 2006][Hamel 1995][Koevoets 2008][Quélin 2003][Riches 2004][Rijsenbrij 2004][Rijsenbrij 2008][Schootte 2006][Symons 2003][Zee 1997]. All titles agree on the strategic aspect of BPO. Outsourcing business processes has a large impact on a companies organisation and makes it dependent from the service provider. Strategy is identified to be a dependency in BPO.

Knowledge and skills

Access to external competences and improvement from innovative power is a strong motive for outsourcing business processes [Quélin 2003][Schootte 2006][Rijsenbrij 2008]. Haffmans explains how a company can gain access to a network of companies by outsourcing and can benefit from their

accumulative innovations [Haffmans 2004]. The outsourcing companies are depending on the knowledge and skills from these companies for the

development of their products. Knowledge and skills are a BPO dependency. Exit and switch

Any BPO can end for various reasons: the agreement end date is reached, for strategic motives, dissatisfying quality of service or non-payment. Ending a BPO leaves the outsourcing company with three options:

1. to switch to another service provider;

2. to retransit the business processes back into the own organisation (which is actually a special for of switch);

3. to end the activities related to the outsourced processes all together. All options include an exit from the BPO relation.

Moerel and Van Reeken, Delen and Beulen all advise to include a paragraph on the subject in the outsourcing contract [Moerel 2006] [Delen

2004][Beulen 1994][Beulen 2002]. The PON working group on retransition published a code of conduct [PON 2005]. The Dutch Pensioen- &

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regulations on exit and retransition from BPO to guarantee process continuity [Staatscourant 2004]. Rijsenbrij warns the outsourcing company for

dependency from the service provider and to make sure that switching providers is always an option [Rijsenbrij 2008].

BPO exit and switch are complex and expensive operations. They can be a major obstacle for an outsourcing company. It can limit its options and therefore increase its dependency from the service provider.

2.3 Motives

Literature on BPO provides numerous different lists of motives. The lists have different choices of words, they order the motives in (slightly) different ways and they (sometimes) stress different aspects. Only a few authors bother to motivate their list of motives.

Quelin and Duhamel [Quélin 2003] documented the motives thoroughly with references. One of their striking conclusions is that management considers outsourcing when it is confronted with high investments. Schootte’s list of motives [Schootte, 2006] is comprehensive and views upon the subject from various angles. He uses Van der Zee’s classification: economic, operational, strategic and emotional motives [Zee, 1997]. Rijsenbrij drew his list in a public debate that started when he encouraged his readers to comment on an article that he published on his website [Rijsenbrij 2008]. Moerel and Reeken identify only three major motives; these comprehend the advantages that other authors identified as motives for outsourcing. [Moerel 2006]. The four enumerations of motives for outsourcing business processes may be regarded to be representative for all enumerations of motives. The table shows the overlap in motives.

The motives for outsourcing support the dependencies processes and

organisation, knowledge and skills, information technology, financial aspects and governance. Strategic marketing, although it is only identified by

Rijsenbrij, is regarded a valid dependency because it contributes the ‘outside’ view from BPO. Legal aspects are not identified as a motive for outsourcing but cannot be avoided as they document the agreement including the

dependencies. [Quélin 2003][Schootte 2006][Rijsenbrij 2008][Moerel 2006]. Exit / switch was not identified as dependencies because ending a BPO

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Quélin and Duhamel

Schootte Rijsenbrij Moerel and Van

Reeken Concentrate on core competences Improve control over internal departments Focus on key competences Focus on core competences Improve quality of service Improve level of service Improvement of services Improve agility / adaptivety Improve agility / adaptivity (In)ability to recruit / retain competent staff Provide career to employees Improve measurability of costs

Replace fixed costs by variable costs

Improve

measurability of costs

Controllable costs4 _{More flexible} structure of costs Reduce operating costs Reduce capital investments Reduce operating costs Reduce capital investments Lower costs Investments will be done by the service provider / costs will be shared

Leverage: do more with less resources

Reduction of costs5 Access to external competences and quality improvement Improve innovative power Renewal; access to innovation power Mo tiv e s fo r o u ts o u r c in g b u s in e s s p r o c e s s e s

Copy strategy from competition

Strategic growth (enable large scale activities)

Figure 3: Table with motives for BPO

In business process outsourcing programs employees often transfer from the outsourcing company to the service provider. The employees follow their work for practical reasons: they know their dossiers and have the required competences. In the context of this research ‘employees’ are not identified as a separate dependency. The dependency would lie in the employees’

competences and these are sufficiently covered by the dependency

knowledge and skills which views upon the subject with a more general level.

2.4 Business process analysis

The literature survey did not result in a conclusive list of dependencies between outsourcing companies and service providers in BPO although

4

Rijsenbrij mentions controllable and lower costs in one motive.

5

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several areas of dependency were revealed. In a different approach, the business process outsourcing value chain is analysed to identify the

dependencies. Michael Porter’s value chain theory [Porter 1985] discusses primary activities and support activities and it explains that profit margins can be made by managing the links between the activities. In Porter’s theory, outsourcing is a reconfiguration from the value chain. It also relates to the classic motive for outsourcing: saving costs. Business process outsourcing is discussed using this theory as a reference. Analysis from the activities and the connections between them will reveal the dependencies in BPO since the outsourced processes are part of the outsourcing companies’ value chain.

Primary activities

Porter identifies five primary activities: incoming logistics, operations,

outgoing logistics, marketing & sales and service. First, operations, inbound logistics and outbound logistics are analysed. Next, marketing and sales are discussed. Service is the last activity to be analysed.

In financial services, the outsourcing companies outsource primary processes. The transfer of processes is the essence of BPO. The

characteristics from BPO, as defined in the first chapter, recognise the processes that transform inputs in clearly defined outputs that have added value for the customer or market and the organisation that make the organisation work. To the outsourcing company, BPO is the transfer of business processes to an external provider. These outsourced processes however remain an essential part in the value chain from the outsourcing company. It will continue to present inputs to the processes (for instance applications for loans or insurances) and collect the outcomes from the processes (for instance insurance prolongations or loan interests).

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To the service provider, these processes and organisation are the core business. It is their business to execute the processes that they were entrusted with by the outsourcing company.

The production volumes from specific products may be to small to run an efficient operation and to adapt to the continuous changes in the markets and regulations. It depends on the economies or scale. In the relatively small Dutch financial markets this is not a rarity. Still, the outsourcing company may need the product in its portfolio for cross selling opportunities, client retention or other reasons. Related motives for outsourcing are:

- improvement from control over internal departments; - concentration on core competences;

- improvement from quality of services;

- improvement from agility / adaptivity from the business processes [Quélin 2003][Schootte 2006][Rijsenbrij 2008][Moerel 2006].

Its ability to recognise the corresponding aspects in product varieties and to standardise the connected operations are essential to the service provider to realise economies of scale. Outsourcing companies will have specific

requirements in relation to the levels of services in operational processes and change processes. These service levels are defined in service level

agreements, documents with legal statuses. To monitor the service providers performances in relation to the service levels, regular reports are delivered. Operational and logistic activities need coordination. They must be organised and managed on operational, tactical and strategic level. In outsourced processes, the service provider is responsible for operational management. It is responsible for the performance of operations. On a tactical level process management involves solving problems that could not be solved on

operational level, mid-term production planning and product development. On a strategic level management concentrates on product and market strategy and on development from the relation between the BPO partners. Operational and tactical management are an inseparable part of the business processes. They coordinate the day-to-day activities across companies and solve the more practical issues that may arise. Especially in BPO the process management is what makes the cooperation successful. Strategic

management is discussed under the subject of firm infrastructure.

Financial products are, like any production process, produced in a chain of processes. These processes have several links to exchange half-finished products and process management information. The processes must be organised and managed across processes. Outsourcing companies rely on the service provider’s abilities to operate the business processes effectively, efficiency and on a required quality level. They also rely on its ability to adapt the processes to the changes in the market and regulations within an

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Financial services are information intensive products. They are not tangible products made of plastics, brick or iron, but they exist of data. Incoming and outgoing logistics consists of data and the occasional paper document. With modern IT infrastructure the production location has become irrelevant and logistics are limited to the definition of IT interfaces. These interfaces are the more tangible connection between the outsourcing company and the service provider. In the context of this research, the incoming and outgoing logistics are part of the processes and organisation dependency.

Several motives for outsourcing relay to marketing and sales: economies of scale must enable an (at least) acceptable price level, the innovative power must help to give a competitive edge and the agility from processes must shorten the time-to-market for new or changed products. BPO is a strategic issue from a marketing perspective. Strategic marketing addresses the long term market positioning and commercial ambitions from the outsourcing company. Rijsenbrij identifies outsourcing to be an enabler for strategic growth [Rijsenbrij 2008]. In this context, the outsourcing from primary business processes, as financial services are, must enable or contribute to these long term targets with the support from the afore mentioned motives. The service provider’s capabilities make the outsourcing company dependant. A more negative view learns that a failing business process outsourcing may become a serious disabler for the outsourcing company to reach its targets. Strategic marketing is a dependency with market focus.

Financial services are not a one-off sale. Insurance contracts always cover a certain time span. Health insurances have a legal duration from one year, saving contracts usually have no end date, and mortgage loans can have durations of twenty years or more. All this time operations must execute transactions like collecting payments, payments for indemnities, pay pensions, and more. Until the financial product contract is terminated or ended, regular and incidental services must be provided to the client. In this aspect the service for financial products differs from the service for tangible products as described in the value chain theory [Porter 1985]. Service and primary processes are one, so there are no additional dependencies from the service activities in the context of this research.

Support activities

Four secondary activities are identified by Porter: the firm infrastructure, human resources management, technology development and procurement. The firm infrastructure refers to the firm’s organisational structure, its control systems and company culture. The dependencies on operational and tactical organisational (management) level were already discussed as an inseparable part of the processes and organisation dependency. Dependencies on

strategic level are discussed below. In the area of company culture no dependencies between BPO partners are recognised.

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variable costs [Quélin 2003] to focus on key competences [Schootte 2006] [Rijsenbrij 2008]. Although the execution of the processes is left to the service provider, these processes still play an important part in the strategic goals from the outsourcing company. The outsourcing company will need strategic and tactical management to ensure that the processes are effective and in line with the strategic goals. As discussed in concepts and definitions, governance aims for these goals. Governance covers strategic and tactical management.

The service providers services one or (usually) more outsourcing companies. It will not only manage the operations to be efficient and compliant to the agreed service levels. It will also manage the demands and requirements from the outsourcing companies to keep them in line with her strategic goals. The governance of the processes will reach into the organisation from the outsourcing companies. Therefore governance is identified as a separate dependency.

Human resource management covers areas like employee recruiting, hiring, training, development and compensation. Being separate companies, the outsourcing company and the service provider will have human resource management implemented independently. In the transition phase, while preparing the outsourcing from the outsourcing company to the service provider, often arrangements are made to transfer (some of) the employees that are involved in operating and management from the services that are outsourced. A reason for the transfer of these employees is the surplus of processing capacity with the outsourcing company and the increased need for processing capacity with the service provider. Employees follow work. Once the transfer is completed, the employees are incorporated in the service provider’s organisation. Given the temporary character of this aspect, it is not recognised as a dependency.

Another aspect of the transfer from employee is the implicit transfer from knowledge and skills. The employees that are transferred in the transition process do not only represent a production capacity; they hold detailed and valuable knowledge from the outsourced business processes. With the transfer of the employees, the knowledge and skills that these employees have transfers also. Business processes need this knowledge and skills to operate; no process can be executed without them. The operations from processing financial products are complex. The number of characteristics from one single financial product may be more than one hundred. Service providers service a range of products for each of its customers, so they often deal with hundreds of varieties.

Financial products are not static. Competition and regulatory changes force the financial institutions to adapt their products continuously. The

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Product knowledge is required to communicate on an equal level with the outsourcing company. The outsourcing company will only have confidence in the service provider’s performance if it trusts its competence to operate the processes. Market knowledge is required to anticipate on changes and by adapting operations. Because service providers usually work with several financial institutions, they can add extra value to their proposition. Because they can tap more sources, service providers can have a better

understanding of market developments and because of their economies of scale they can afford to employ specialist on specific product or market aspects. The knowledge development from the service provider enables the outsourcing company to concentrate on its core competences and to rely on the service provider for its innovative power; both important motives for outsourcing.

Statements and organisation structures from BPO organisations [Ordina 2008] [Uniserv 2008] [Stater 2008] identify IT and quality of staff / knowledge and skills as parts from BPO. Stater NV (mortgages service

provider) for instance states that it can play its part in the mortgage market, based on the “synthesis from high level technology and human knowledge” and it regards the quality of its staff to be the key to her success. Knowledge and skills are not only needed for the day-to-day operation. The service provider will exploit them for its innovative power, an important motive for outsourcing business processes. Knowledge and skills are identified as a dependency.

Technology development activities refer to the support of value creating activities. The outsourced processes are highly automated. Processing business processes for financial services can hardly be imagined without large scale use of information technology. Consumers communicate with their banks and insurance companies through the internet. Payment systems like SWIFT6 transfer money between financial institutions within milliseconds. Information systems handle the larger part of any insurance or banking transaction; employees only handle exceptions. Banks were among the first private companies to make use of computers on a large scale in the 1960’s. A company like Stater NV, processing mortgages for more than twenty

companies and the largest service provider in the European financial market, originated from a mortgage company that decided to exploit its IT systems commercially for other mortgage companies.

Avoiding large investments is the main motive for outsourcing business processes [Quélin 2009]. IT systems require huge initial investments (often tens of millions of euros) and a continuous flow of cash for maintenance, for investments in appliance to market and regulatory changes and for

investment in innovations. A number of motives for outsourcing are related to IT: systems that are near to (or have crossed) their end of life-cycle do not have the agility to adapt to market changes, have a poor quality of service, are expensive in maintenance and make product innovation difficult [Quélin 2003][Schootte 2006][Rijsenbrij 2008][Moerel 2006].

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IT is the key to efficiency and performance for any service provider in the financial markets. Outsourcing companies profit from the service providers IT systems as they are an essential part of the BPO. IT is a dependency

In financial services process outsourcing procurement remains with the outsourcing company. Because all interactions between parties involved are digitised, they are usually purchased by the outsourcing company and made available to the service provider. There is no separate dependency in

procurement. Margin

The value chain theory is designed for cost analysis. Porter identified ten cost drivers in relation to the value chain activities. Reconstructing the value chain by outsourcing business processes should generate cost benefits. In relation to BPO some of the cost drivers are productive, some are

questionable and some are counter productive:

1. Economies of scale: the lack of economies of scale leads to a high level of costs and pushes towards outsourcing. The service provider can work cost efficient because of its economies of scale.

2. Learning: knowledge and skills will reduce by outsourcing business processes. The service provider is able to arrange knowledge and skills more efficiently.

3. Capacity utilisation depends on the original organisation. Outsourcing may leave the outsourcing company with unused capacity.

4. Linkage among activities is more complicated in outsourcing; they cross independent companies.

5. Interrelationships between business units are more complicated; they also cross independent companies.

6. The degree of vertical integration is reduced by BPO.

7. The timing of market entry can be improved if the service provider has adequate change processes in place.

8. The firms policy on cost or differentiation is influenced by BPO, but it is positive or negative depends on the specific situation

9. The geographic location is relatively unimportant for financial services 10.Institutional factors can often be solved more efficient by the service

provider.

There are a number of finance related motives for outsourcing like reduction of operating costs, reduction of capital investments, improved measurability of costs and replacement from fixed by variable costs [Quélin 2003][Schootte 2006][Rijsenbrij 2008][Moerel 2006].

The financial dependency between the BPO partners is twofold. The service provider delivers services to the outsourcing company and it will be

compensated financially for these services; it’s the service providers

business. The outsourcing company will pay a compensation for the services it receives, so there is a cash flow between the BPO partners.

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level of costs is often essential to the outsourcing company to be able to compete in its market.

Financial aspects in costs and investments are a dependency.

2.5 Conclusions

The literature survey learned that there is hardly literature that specifies the dependencies between BPO partners conclusively. BPO dependencies are an unexplored area in business sciences. The survey did show a number of recurring themes; seven of them were identified as BPO dependencies:

 business processes;  financial aspects;  governance;  legal aspects;  strategy;

 knowledge and skills;  exit and switching.

In a different approach the business process value chain was analysed to identify BPO dependencies. Dependencies were identified in the areas from processes and organisation and from governance in the supply chain

activities for the incoming logistics, operations, and outgoing logistics. In the activities for marketing and sales, the dependency for strategic marketing was recognised. No dependency was found in the service activities as a result of its position to the operations activities in financial markets. Analysis from the support activities revealed dependencies in the area from knowledge and skills and in the area from information technology. Analysis from the cost drivers (in relation to the margin) addressed the dependency on financial aspects. The value chain analysis identified six area’s of BPO dependency:

 processes and organisation;  information technology;  knowledge and skills;  financial aspects;  governance;

 strategic marketing.

Business processes, knowledge and skills financial aspects, governance and strategic marketing (with a slightly different undertone) are identified in the literature survey as well as in the value chain analysis.

Discussing business processes made clear that organisation is indissoluble from processes. To cover the operational processes and the organisation of these processes, the term ‘processes and organisation’ is used to address this dependency. Governance covers the tactical and strategic organisational aspects.

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were not identified in the value chain analysis because they occur where the business process in its current form ends. It is out of the scope from the value chain.

Information technology was not an identified dependency in the literature survey because in fact it is an asset, a means of production. Nevertheless it holds a lot of knowledge, enables fast large volume processing, largely decides the quality of service and the service supplier’s performance and represents huge investments.

Every decision to outsource (or not) is regarded to be a strategic decision. They are decisions to set long term goals, to stipulate the way to achieve them and to allocate the necessary resources. Strategy always has an external orientation: strategic decisions are made to move the company forward. This means acting in a developing market. This marketing aspect from strategy (strategic marketing) came forward explicitly in the value chain analysis. For this reason the more specific area of strategic marketing is identified as a dependency.

Literature survey and analysis from the business process value chain result in the following dependencies:

1. processes and organisation 2. knowledge and skills

3. information technology 4. governance

5. financial aspects 6. legal aspects

7. strategic marketing 8. exit and switch.

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3 Model

This chapter describes the BPO dependency model. It discusses the

interrelations between the BPO dependencies and focuses on the content of each dependency.

1.1 Dependency interrelations

The literature survey and the value chain analysis identified eight

dependencies between the outsourcing company and the service provider in BPO:

1. processes and organisation 2. knowledge and skills

3. information technology 4. governance

5. strategic marketing 6. financial aspects 7. legal aspects 8. exit and switch

These dependencies cannot be seen as solitude aspects from BPO. Some dependency areas interrelate stronger than other. The interrelations are discussed in this paragraph. It is the basis for the BPO dependency model. At the core of any outsourcing is the business process. Financial services are complex processes with many varieties and variables. People’s current and future financial position is covered by these products. Another aspect is the strong competition between financial institutions, forcing to improve the quality of service and speed of transactions. This creates high demands on business processes: they should be complete, well documented, flawless and immediate. Customers go for nothing less.

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Organisational structures from outsourcing companies like Stater (mortgages service provider) and Uniserv (insurances service provider) supports the identification from processes and organisation, knowledge and skills and information technology as the core from business process outsourcing. In its annual report, Ordina BPO (banking service provider) addresses the

availability of knowledge and capacity for processes and IT and the need for innovation as drivers for outsourcing business processes.

Any process needs attention, guidance and coordination on operational, tactical and strategic level. With processes that involve different companies like in BPO, this needs even more attention. Processes from the outsourcing company and the service provider are interlinked on operational level (input, output, management on performance and quality of service, solving

operational issues), on tactical level (improvement of performance and quality of service, handling of escalated operational issues) and on strategic level (manage over-all relationship, high impact decisions on outsourcing processes and product portfolio’s).

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Processes and organisation, knowledge, information technology and

governance are interwoven into a four-unity; together they are the content of BPO.

The financial aspects represent cash flow and investments. The cash flow is formed by the fees that are paid for services delivered. They are costs for the outsourcing company and turnover for the service provider. The cash flow closes the value chain circle. The investment aspect is in fact a make-or-buy decision. The decision to outsource (to buy) replaces investments with

regular payments of fees (cash flow). Without the cash flow, the service provider will soon stop servicing. It is a conditional area of dependency. The legal aspects are another conditional area of dependency. No BPO agreement will go without a formal contract that stipulates the services, the service levels, the level and frequency from payments and other relevant issues.

Strategic marketing links the BPO to the long term goals from the

outsourcing company and sets performance demands to the service provider:  the ability to process at low price of operations and changes;

 to process at the agreed level of service;

 the ability to process large transaction volumes and to handle large changes in transaction volumes;

 the competence to adapt processes and IT to ever changing rules and regulations;

 the competence to anticipate on market trends and changes;  the competence to quickly implement client specific changes;  to inform outsourcing companies on market developments;  to advice the outsourcing company on product development.

The outsourcing company will exploit these competences to develop its market position. It will expect the service provider to perform better than would be able to itself.

Strategic marketing is the only dependency with an external focus; the content and conditional dependency areas accumulate in the marketing opportunities that (in positive cases) are generated or improved by outsourcing business processes.

Exit and switch are in a somewhat different position as a dependency area. They are dependencies for their negative aspects. The avoidance of complex program management, the high costs, the long program time span, the high risks and other aspects together form this dependency.

The figure shows a graphical representation from the BPO dependency model that arises from this analysis.

Dependencies between Business Process Outsourcing partners in the Dutch Financial Markets