Business Process Outsourcing – Implications for e-Government

1. Business Process Outsourcing – Implications for e-Government Johan Magnusson Centre for Business Solutions School of Business, Economics and Law Göteborg University www.handels.gu.se/cfa Magnus Eriksson Department of Technology, Management and Economics Chalmers University of Technology www.chalmers.se/tme

2. General outline • 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 • Implications for e-Government

3. Outsourcing… • ”A world on-demand” • Function, technology or process • Between Lego and Sandviken • From make/buy to make/buy/share • Easy does it… Multisourcing… Inspired by Bhattacharaya et al, 2003

4. Effects on IT Governance • New models of governance are needed • Portfolio management becomes imperative • Need for consensus on definition of atoms Source: Gartner Group, 2005

5. Business Process Outsourcing • ”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

6. Technological developments • Increase in integration cost, complexity and multiplicity during the 1990s • Open standards! • Decrease in integration cost, complexity and multiplicity during the 2000s • Standardized Enterprise systems • Commercial Off-The Shelf software • Service Oriented Architecture

7. 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)

8. When it all ads up… • 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

9. Case 1 – Business Process Outsourcing at IFS • “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

10. Case 1 – The challenge in the expansion phase • 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 • raise new capital: IPO • continue to recruit high-skilled employees: development office established in Asia

11. Case 1 – From Expansion to Consolidation • 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?

12. Case 1 – The Solution: Business Process Outsourcing • The firm could still expand and develop its business by establishing production operations offshore at their already established office in Asia • Advantages • Lower costs • Shorter development time, optimizing workload design • Access to a large amount of skilled labour • Closer to more markets, and new, emerging markets • Challenges • 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

13. Case 1 – Implications • Success factors • 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

14. Case 2 – Process Industrialization at Volvo Business Services • 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 • A/R, A/P, FR and recently HR

15. Case 2 – Shared Service Centres • Business Administrative Services • Grasp throughout the entire value-chain • Roll out strategy • 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 customer-unique perspective, it is hard to standardize.” You often choose to move geographically, hardly to focus on business value.” Process Manager VBS

16. Case 2 – Lessons learned • 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

17. Implications for e-Government • 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!