1. BPO Metrics Road Map The Governance Spectrum –Structures Metrics –Carry-Forward and Direct Errors –Function Value Analysis –Secondary Monitoring

2. Source: 150 respondents — June 2002 Compared to 2001 Human Resources Sales, Marketing, CC Finance and Accounting Supply Chain ++ = 2002 2003 = = + + Top Processes Outsourced 2002 What Processes Are Being Relocated? Gartner Survey 2002

3. Critical Vs. Core There may be some functions that are at the core of the firm – these may be supported by some critical functions – these in turn may draw from the information feeds of high volume low impact activities. Similarly in HR – employee retention, recognition, training, team building and monitoring corporate culture could be critical functions. Payroll and benefits administration, 401(k) and transacting with external providers are high volume, low impact activities.

4. The Threshold Volume of Criticality Some processes are critical in the aggregate: –The end result of several repeated executions of the same process is critical to the firm –An individual execution of the process is of very little consequence. These processes are said to have a High Critical Threshold. Some examples of such processes are: Transaction Processing, Accounts Payable/Receivable Customer Contact – Outbound Calls Customer Contact – Inbound Calls

5. The Threshold Volume of Criticality There are processes where even a single execution of the process has significant risk and/or opportunity cost implications for the firm. These processes we term as having a Low Critical Threshold. Some examples of such processes are: –Customer Data Analytics & Risk Analysis (insurance) –Equity research and Asset Pricing Modeling –MIS reporting Processes with High Critical Threshold are immediate candidates for outsourcing, while Low Critical Threshold processes may best be migrated. Which leads us to the question of Governance.

6. Captive Service Center (Hierarchy) Joint Venture Operate to In-source Build to Transfer Third Party Service Provider (Market Solution) Hierarchy Market The Governance Spectrum Spans the gamut of possibilities from an Organizational Hierarchy to a Market Solution with a variety of hybrid forms that fall between the two ends. Extended Organizational Form

7. Two Types of Execution Failures An error (failure) in the execution of an outsourced process, can result in two kinds of impact. –Sub-optimal decisions may be made based on the inaccurate information that results from an error. This kind of error does not lead to a loss of revenue (or incremental costs) if it is not factored into one or more decisions. –However, when decisions or made based on the information that contains this error - the error is carried forward into the decision making process which results in inaccuracies. –This is termed as a carry-forward error. Examples of Carry-Forward error include: Mistakes in yield analysis. Errors made in customer data analytics. UpSell/Cross-Sell opportunities lost due to poor data aggregation.

8. Direct and Carry-Forward Errors Direct Errors: An execution error that results in a loss of revenue or incremental costs (or both) and has a direct bottom line impact. In this case the costs irrespective of how the information is used (or not used) later. –Examples: Incorrectly classifying an accounts receivable item as paid. –Double payment of an accounts payable item. –Unverified submission of Regulatory Documentation in the Bio-Tech industry.

9. Errors and Process Types Strategic Processes have far greater Carry- Forward errors than Direct errors. Examples: –Inaccurate yield analysis can prolong the life of unprofitable products or limit the profits from profitable ones. –Bad customer data analytics can result in imprecise customer segmentation and (therefore) lost revenues. Operational Processes have more Direct errors. Examples: –Loss of revenue (inaccurate collection follow-up) and increased costs/expenses (over payment of A/c payable items) result as a direct consequence.

10. Cost of Tracing Errors There is often a time lag between the discovery of a Carry-Forward Error and the instant when it was committed. Tracing the locus of responsibility and the origin of the error in the case of Carry- Forward errors is costly and sometimes not feasible. In the case of Direct errors it is both possible and necessary to trace the source and cause of the error.

11. Metrics for Direct Errors Tracing the origin and the locus of responsibility of a Direct Error is comparatively less costly. Direct Errors are minimized by two measures – measuring the execution failures after they arise and through preemptive measurement (aka Sampling). A Technique that is used for measuring execution failure (preemptive and post occurrence) is called The Function Value Analysis Technique (FVAT). This technique allows users to anchor vendor payments to delivery quality levels.

12. The Function Value Analysis Technique A set of outsourced process consists of several tasks which constitute functions. –Examples of functions include, A/R & A/P reconciliation. –Telemarketing and Conflict resolution The value to the user (client-firm) of the outsourced process is usually driven by one or two functions within the functional mix. –Examples: TPS, HR, Marketing

13. Transaction Processing: Function Value Decomposition

14. HR: Function Value Decomposition

15. Customer Contact Center: Function Value Decomposition

16. Function Value Analysis Metrics Measure service quality delivery both preemptively and after failures (errors) are surfaced. Pre-emptive measurement: –For each set of processes outsourced, perform the FVA and identify the key driver of value. –Tie the sampling rate to the failure rate (of the vendor) and inform the vendor of the sampling system. The SLA’s should include the sample rate and the failure rate. –Sampling and failure rates should both fall to stable levels as business volumes and practices stabilize over time. –There is no such thing as a “best practices” sampling rate. –Sample rate is a function of failure rate, cost of sampling and the relative importance of functional value drivers.

17. Sampling Rate and Vendor’s Failure Rates

18. Carry-Forward Errors High-end, strategic processes are characterized by Carry-Forward errors. It is difficult to trace Carry-Forward errors to their source or identify the process managers responsible for the error. Firms that have outsourced (migrated) processes to captive centers have developed expertise in dealing with these execution failures. To minimize these errors firms may often have to resort to second order monitoring (we will come back to this idea).

19. Pivot Element Failure Analysis With Carry-Forward errors, these are disproportionately located in one or two tasks within the outsourced process. This is an artifact of the tasks within a process being located at different points along the knowledge continuum. The task(s) within a process that drives most of the errors is termed as the Pivot Failure Element.

20. Examples of Pivot Elements Within Processes

21. Second Order Monitoring Captive centers often monitor the Pivot Failure Element at two levels. One or more information workers execute a process. Their output is selectively examined by another worker who scans the pivot elements for any errors in execution. The error trapping rate (or the scanning rate) is monitored by a manager who calibrates it increases/decreases the extent of monitoring based on the output quality. User firms can monitor the managerial controls within the provider firms by monitoring the manager responsible for process quality delivery. This is called secondary monitoring.

22. Second Order Monitoring Secondary Monitoring Works as follows: The user and provider firms determine an error trapping rate. The manager (in the provider firm) who is responsible for process quality “reports” to a user firm’s manager (recall the Extended Organizational Form). Depending on the quality delivered by the provider firm the user firm’s manger asks the provider firm to increase or decrease error trapping. The SLAs include explicit clauses specifying who pays for the additional cost of monitoring.

23. Key Takeaways The Governance Spectrum Value Hierarchy of Processes and Cost Hierarchy of Processes Execution Failures –Carry-Forward Errors –Direct Errors The Function Value Analysis Technique Pivot Element Failure Analysis Secondary Monitoring