Business Process Outsourcing

1. Business Process Outsourcing Mary C. Lacity “In the Mountains,” 1867, Albert Bierstadt 1830-1903

2. Readings • Lacity, M., Feeny, D., and Willcocks, L., "Transforming a Back Office Function: Lesson from BAE Systems' Experience with an Enterprise Partnership," MIS Quarterly Executive, Vol. 2, 2, September 2003, pp. 86-103. • Feeny, D., Lacity, M., and Willcocks, L., "Taking the Measure of Outsourcing Providers," Sloan Management Review, Vol. 46, 3, Spring 2005, pp. 41-48.

3. One-to-Many Business Models(merges to one-to-one) The Netsourcing Service Stack

4. What Customers Want FromBack Office Transformation Lower costs Better service Variable costs Scalability Flexibility Trust • Back Offices: • Human Resource Management • Procurement • Finance • Accounting • Etc…

5. Capabilities Needed For Back Office Transformation Governance Service Excellence Process Improvement People Empowerment Technology Enablement Lower costs Better service Variable costs Scalability Flexibility Trust Project Management Change Management

6. Sourcing Options for Back Office Transformation • Do It Yourself (Insourcing) • Management Consultancy (Time & Materials) • Business Process outsourcing (Fee for service) • Equity Swap • Joint Ventures • Enterprise Partnership

7. Business Process Outsouring With BPO, the supplier owns and operates the resources, including infrastructure, applications, and people, to deliver a business process as a service to customers. This a fee-for-service business model.

8. BPO Survey: Size of Marketn = 120 Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Orlando Florida, 2002.

9. Enterprise Partnerships • New business model • Most of our research is based on Xchanging • Customers will be very interested in this model • “An enterprise partnership is a business model that creates • A 50%-50% enterprise between the customer and supplier whose • primary mission is to share the cost savings generated from the • supplier’s transformation of the customer’s back office operations. • A secondary mission is to generate and share revenues from • external sales to other customers after the transformation is • complete.”

10. Enterprise Partnerships Customer Spends ~$100 million A year Supplier takes over Resources & staff, Transforms function, and shares in savings.

11. Enterprise Partnerships $110 million transfers Customer Spends ~$100 million A year Supplier takes over Resources & staff, Transforms function, and shares in savings. Supplier rebates say 15% = $16.5 million Any extra savings are the supplier’s revenues. Thus if the supplier can deliver the baseline services for $80 million, they would earn $13.5 million

12. How Joint Ventures differfrom Enterprise Partnerships • Purpose of the Joining • Division of Risk • Management Responsibility • Asset Base

13. Xchanging Human Resource Services (XHRS) Xchanging Procurement Services (XPS) Xchanging Insurance Services (XIS) Xchanging Claims Services (XCS)

14. Transforming Back Office to Front Office:and Enterprise Partnership for Human Resource Management Mary Lacity David Feeny Leslie Willcocks

15. Xchanging Human Resource Services (XHRS) 10 year, £250million deal • Benefits to BAE after 20 months: • Promised cost savings on baseline services delivered • 400 HR services levels have stay same or improved • Web-enabled HR system rolled out to 40,000 BAE users • 462 HR staff transferred to XHRS have been re-oriented • New HR facility built and occupied • Remaining HR staff focus on strategic HR activities

16. Research Method Face-to-face interviews with 15 people including: HR Director, BAE SYSTEMS Enterprise Relationship Director, BAE SYSTEMS SBU HR Director, BAE SYSTEMS CEO of Xchanging Member, BOD, Xchanging Managing Director, XHRS 3 transferred BAE managers, now: CFO, XCS Head of Service, XCS Head of Resources, XCS 6 practice directors (Service, Process, Technology, Environment, People, Implementation) Documentations such as financial reports, practice manuals, performance assessments, annual reports, memos.

17. About Xchanging Xchanging provides human resources, procurement, customer administration and accounting services to over 200 customers including BAE Systems, Lloyd's and the London Insurance Market. Xchanging employs over 1,100 people. Xchanging takes responsibility for the entire back office, specific functions or a particular business process and transforms them into fit for purpose services. In short, Xchanging cost for profit. Founded by David Andrews in 1999

18. About BAE SYSTEMS Prime contractor and systems integrator in the air, land, sea, space, and command and control market sectors. Defense, commercial, civil markets World-class capabilities in naval platforms, military aircraft, electronics, systems integration and other technologies. Astute Destroyer Eurofighter

19. About BAE SYSTEMS January 1999, British Aerospace announced merger with Marconi to create BAE SYSTEMS Investors promised £275 million in annual cost savings within 3 years "The proposed merger with Marconi Electronic Systems is an important step in the consolidation of the industry in Europe and creates a strong and highly capable business with significant cost benefits." -- Sir Richard Evans, Chairman of the Board, BAE SYSTEMS  

20. BAE SYSTEMS’ HR In 1999, Terry Morgan, Group HR Director charged with delivering 15% to 40% cost savings on annual HR spend of £25 million Group HR was small, focusing on senior pay & benefits, senior level development, organizational design 700 HR professionals in SBUs at 70 sites doing transactional activities such as payroll, benefits, recruiting, training, HR procurement Shared Services as solution to cost reduction…

21. FROM DECENTRALIZED: Head Office SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director Group HR SBU HR Director SBU HR Director SBU HR Director SBU HR Director SBU HR Director Transactional Activity/ Professional Services Transactional/ Professional Transactional/ Professional Transactional/ Professional Transactional/ Professional Head Office TO SHARED SERVICES: SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director Group HR Transactional Activity/ Professional Services SBU HR Director SBU HR Director SBU HR Director SBU HR Director SBU HR Director

22. Sourcing Options Considered • Do It Yourself (Insourcing) • Management Consultancy (Time & Materials) • Business Process outsourcing (Fee for service) • Enterprise Partnership

23. BAE/Xchanging Timeline January 2000: David Andrews proposes enterprise partnership Spring 2000: Invitation to bid June 2000: Letter of Intent signed with Xchanging June 2000 to February 2001 Contract Negotiations May 1, 2001 Go Live

24. ? Enterprise Partnership Because, against their normal practice, BAE SYSTEMS did not do a formal request for proposal, the HR team wanted to step back and invite Xchanging and another supplier to compete. At this stage in April 2000, Xchanging's team was devastated:. "When we told Xchanging that we were going to do a beauty parade with Xchanging and another BPO supplier, I have to say I have never seen David Andrews so shell-shocked." -- Chris Dickson, Relationship Director, BAE SYSTEMS

25. ? May 2000 Enterprise Partnership Would accept BAE transfers -- Use Exult’s existing staff Complete attention to BAE -- Just signed other megadeals Take service as-is -- BAE to clean up mess first

26. BAE/Xchanging NegotiationsJune 2000 – February 2001 Scope Reduction: Eliminate North America Only 462 UK people to transfer rather than 560 "It is my perspective and obviously it is not perfect information but certainly I had a very, very strong view that there were some people in BAE SYSTEMS that had decided to de-scope the deal; who never really knew what the scope was but decided what scope they would find politically acceptable and that was it, that was the deal they wanted" - David Bauernfeind, CFO "So we ended up drawing a line in slightly the wrong place, in my view, so we still had some people in BAE SYSTEMS’ retained HR who were never going to play the strategic role as designed." – Steve Hodgson, Head of Resources, XHRS

27. BAE/Xchanging NegotiationsJune 2000 – February 2001 50%/50% Joint Ownership 50%/50% split in cost savings, estimated baseline £25m/year: YEAR 2001 2002 2003 2004 2005 Percent 10% 15% 15% 15% 15% Delivered as a rebate, if £25million costs transferred, Xchanging would only charge £22.5million 50%/50% split on new revenue generation from external sales

28. BAE/Xchanging NegotiationsJune 2000 – February 2001 Services:As-is measured within 6 months By year 5, improvement to upper quartile Governance: Joint Board of Directors: CEO of Xchanging and Group HR Head BAE 3 Xchanging execs & 2 BAEs non-execs Purpose: Protect the Rights of Shareholders Service Review Board:3 members from BAE, 3 members from Xchanging Service specifications, price approval Purpose: Service performance monitoring Technology Review Board: Joint board to ensure £20 million investment

29. Contract in Effect in May 2001

30. How Did Xchanging Complete the Transformation? Xchanging’s management believes that the capabilities required to transform a back office to a front office requires 7generic business competencies rather than domain specific knowledge…

31. Set-Up Service People Process Technology Environment Sourcing Transformation is Implemented in Four Phases Preparation Streamlining Realignment Continuous Improvement 2-3mths 3-6mths 6-9mths Operational Critical activity Preparation

32. People Competency People Competency builds champion teams from transferred employees by unlocking their talent and energy, primarily through extensive training programs and direct contact with Xchanging’s senior management: -- Induction Programs to 430 transfers within 6 weeks -- Management training -- New job descriptions -- New Customer-focused culture

33. People Competency Continuous Improvement Streamlining Preparation Re-alignment Mourning Forming Storming Norming Performing • Mechanisms • Deliverables • Measures • Benchmarks • Gate • Mechanisms • Deliverables • Measures • Benchmarks • Gate • Mechanisms • Deliverables • Measures • Benchmarks • Gate • Mechanisms • Deliverables • Measures • Benchmarks • Gate

34. Service Competency Define the as-is service, measures service, and agrees to service targets through a disciplined methodology called Service1st The goal is to provide the same levels of service during transition then move to customer-negotiated service levels based on individual customer needs.

35. Service Competency Customer Type Service Class • Customer Service • Metrics e.g. • • accuracy • cycle time • • frequency • • quality • volume • & Standards Customer Service Item Service Objective Service Specification & Reports

36. Service Competency

37. Service Competency XCS Service Team: As-Is Service: 400 service levels drafted Service Review Board approved in October 2001 But an extra £80 million a year in indirect procurement spend Was uncovered for fleet, contract labor, recruiting, stationary, And travel! HR was buying services from over 200 suppliers, All in decentralized budgets.

38. Sourcing Competency Xchanging Procurement Services (XPS) Separate Enterprise Partnership signed November 2001 Worth £800 million over 10 years

39. Sourcing Competency Car Fleets Non-technical contract labor Learning & Development Health Care Recruitment Renumeration & Benefits Stationary £80 million

40. Sourcing Competency

41. Example of ‘Un-bundling’ Key Cost Elements of Car Leasing

42. Outcomes First Year on XPS • It took 8 months, not 2, to transfer spend • Only £35 million in 7 categories was transferred • To make up difference, BAE transferred 8 more categories: • Travel, Printing, Office Furniture, Computer Consumables, • Mobile Phones • On average, 12% savings delivered on categories transferred • Margins range from 5% to 45% depending on category

43. Environment Competency Goal: create modern and well-branded physical spaces to build a visible front office for customers. Physical spaces also foster a front office mentality Xchanging built, bought furniture, and decorated new facility By February 2002 Occupancy held up by IT contract with CSC

44. Environment Competency Preston

45. Environment Competency • Preston Ready!

46. Preston Ready!

47. Environment Competency "Space has a big impact on people's morale and the perception of their value-- Mike Margetts, Implementation Practice Director, Xchanging

48. Process Competency Goal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvement discipline. s DPMO % ProcessCapability Defects Per Million Yield Opportunities 6 3.4 99.99966% 5 233 99.9770% 4 6,210 99.37% 3 66,807 93.3% 2 308,000 69.2%

49. Process Head & Master Black Belt: Mentors Black Belts: Full Time Green Belts: Part-time Process Competency

50. Process Competency Redesigning Processes such as Senior Leader Peer Review Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel New process: e-hr online peer review "What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done." -- Mike Margetts, Head of Implementation, Xchanging HR Services