Business Process Outsourcing – Implications for e-Government
Johan Magnusson
Magnus Eriksson
Centre for Business Solutions
School of Business, Economics and Law
Göteborg University
www.handels.gu.se/cfa
Department of Technology, Management and Economics
Chalmers University of Technology
www.chalmers.se/tme
General outline
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Background to Outsourcing
Effects on IT Governance
Business Process Outsourcing
Offshore Outsourcing
The Gospel of Standardization
Lessons from Industry – BPO at IFS
Lessons from Industry – Process Industrialization
at Volvo
8. Implications for e-Government
Outsourcing…
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”A world on-demand”
Function, technology or process
Between Lego and Sandviken
From make/buy to make/buy/share
Easy does it… Multisourcing…
Financial Motives
Managerial
Motives
Periodic costing
Free liquidity
Reduce costs
Streamline management
agenda
Focus on core-business
Motives for
Outsourcing
Enhance IS quality
Increase staff competence
Economics of Scale
Miscontent with IT-department
Trends
View of IT as support-function
Technical Motives
Political Motives
Inspired by Bhattacharaya et al, 2003
Effects on IT Governance
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New models of governance are
needed
Portfolio management becomes
imperative
Need for consensus on definition
of atoms
Enterprise
Architecture
Business
Architecture
Constrain
Investment
Portfolios
Business Initiatives
Technology
Architecture
IT Investment
Information
Architecture
Projects and
Support
Change
Existing
Systems
Business
Processes
Application
Inventory
Resources and
infrastructure
Source: Gartner Group, 2005
Business Process Outsourcing
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”the delegation of one or more it-intensive business
processes to an external provider that, in turn,
owns, administers and manages the selected
processes based on defined and measurable
performance metrics.”
HR, Finance & Accounting, Sales & Marketing and
Supply Chain Management
Range from Discrete to Utility BPO
Whirlpool & Dupont (10-13 years) Megadeals
Technological developments
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Increase in integration cost, complexity and
multiplicity during the 1990s
Open standards!
Decrease in integration cost, complexity and
multiplicity during the 2000s
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Standardized Enterprise systems
Commercial Off-The Shelf software
Service Oriented Architecture
UDDI
2. Register
3. Search
1. Create
4. Use
Web-client
WSDL
Web Service
Offshore outsourcing is a global trend
“Offshore outsourcing will continue to rise at
an estimated annual rate of 65 percent within
the next few years, and will reach $147
billion by 2008” (McKinsey & Co)
When it all ads up…
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Process Orientation as a new Lingua Franca
and highly formalized process descriptions
IT-based platforms facilitating full
transparency and control over flows
Total interoperability on both technical- and
process levels
Standardization as the final level of process
maturity
Heightened steerability regarding both
operations and sourcing
”It is important to have the guts to
standardize one hundred percent,
otherwise you will not get the full
benefits of outsourcing.”
Global HR Manager Sandvik
Case 1 – Business Process Outsourcing at IFS
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“one of the world’s leading providers of component-based business software
developed using open standards”
Founded 1983
Number of customers 2,200
Number of employees 2,600
Net revenue, 2005 SEK 2,149 million
Experienced different ‘business models’ during its life-time
Case 1 – The challenge in the expansion phase
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Until mid 1990s, IFS could easy recruit employees in Sweden, the production
operations took place in Sweden, and IFS could expand with own financial resources
The business model was to grow rapidly during the 1990s: The Expansion period
However, in the late 1990s the present business model could not meet an increased
demand from customers and an increased competition from competitors
To expand, and more essential to survive, the company needed to
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raise new capital: IPO
continue to recruit high-skilled employees: development office established in Asia
Case 1 – From Expansion to Consolidation
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But in 2000, the stock market bubble hit the company
There was a need to change the business model: The Consolidation period
What was this strategic change really about?
Case 1 – The Solution: Business Process Outsourcing
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The firm could still expand and develop its business by establishing production
operations offshore at their already established office in Asia
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Advantages
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Lower costs
Shorter development time, optimizing
workload design
Access to a large amount of skilled
labour
Closer to more markets, and new,
emerging markets
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Challenges
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Communication and cultural
differences
Local infrastructure such as broadband
and information technology
Lack of domain knowledge, i.e.
industrial expertise
Knowledge transfer between Swedish’
employees and Asian’ employees
Case 1 – Implications
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Success factors
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The company established an office in Asia already in the late 1990s
The company transferred needed competence and knowledge gradually
The company has very good relations with the local community
The development process is now production-oriented and is relative cost efficient
Significant reduced development cost and development time & increased productivity
Increased license revenues in emerging markets from 7% (1998) to 23% (2005)
The company still exist and are now becoming profitable
In conclusion, offshore outsourcing has been one viable part of the firm’s business
model in an increasingly competitive and rapidly changing world
Case 2 – Process Industrialization at Volvo Business Services
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Volvo Business Services – Shared Service
Organization, NOT centralized Economic
Department
”to provide rational, cost-efficient and high
quality services in the financial
administration area for the Volvo Group
companies”
Formed 1998
600 employees in four general processes
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A/R, A/P, FR and recently HR
Case 2 – Shared Service Centres
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Business Administrative Services
Grasp throughout the entire value-chain
Roll out strategy
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Platform
Standardize
Optimize
Strive towards efficiency, quality and
customer influence
PPM from IDS Scheer links SAP reference
model to management dashboard
”As long as you work from a customerunique perspective, it is hard to
standardize.”
You often choose to move
geographically, hardly to focus on
business value.”
Process Manager VBS
Case 2 – Lessons learned
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Managers want to outsource, regardless if this
is the best alternative or not
Shared Services should be everything but
unique for the specific customer
100-300 is the best number of employees per
site
Strive for designing the workload for
continuous process improvement
Secure traceability via Business Activity
Monitoring
Implications for e-Government
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Process overview BEFORE sourcing decision
Know at least some of the”WHY’s”
Consider the whole life-cycle of the potential
outsourcing
Retain personnel with development and
integration competence
Strive for SOA-based architecture, usage of
open standards and interfaces and process
management methodology
Be careful with the outsourcing of e-services
Don’t fall for the mega deals!