How to Build a Business Rationale for BPM Sourcing

By Bill Huber

Cost reduction has traditionally been the primary motivation behind and justification for outsourcing initiatives within the business process management (BPM) space.  That narrow perspective is changing, as increasingly mature enterprises focus on leveraging outsourcing to add value and achieve benefits beyond a basic take-out of cost.

This more expansive view is being driven in large part by service providers seeking to add value to clients by de-commoditizing their offerings and demonstrating industry-specific expertise.  Moreover, emerging technology platforms, such as business process as a service (BPaaS), cloud, analytics and robotics, enable providers to challenge established sourcing paradigms and expand the horizons of the art of the possible.  In this environment, enterprises are seizing opportunities to realign their BPM relationships to achieve a higher and more strategic level of benefit.

The business side is becoming more fluent in talking the talk of value-based sourcing. Walking the walk, however, continues to present a challenge, as CXOs and business-line executives often struggle to quantify and demonstrate benefits beyond cost savings.

The problem lies partly in a reluctance to discard full-time equivalent (FTE)-based structures in favor of outcome-based models and partly in a lack of industry standards and accepted approaches to calculating the total economic impact of an innovative BPM initiative. Absent such standards, client-side BPM sponsors often revert to traditional narrow cost-based business cases to justify their projects. As a result, they often fail to convey the full breadth and scale of the potential benefits that can be achieved.

To bridge this gap between interest in the benefits of value-added sourcing and the ability to credibly demonstrate those benefits to the CFO, enterprises need a better understanding of the specific characteristics of emerging sourcing models. Also needed are better tools and formulas that capture, calculate and quantify the impact of value-based initiatives over the long term. 

Value-based sourcing relies heavily on analytics and automation, with an expectation of increasing automation over the life of the contract. This combination enables continual improvement in the quality of data captured. That, in turn, drives continual improvement in analytics, resulting in a virtuous cycle that delivers increasingly actionable insights that management can use in decision making.

Benefits from BPM initiatives may occur “downstream” or “upstream” from the in-scope process.  For example, applying more effective controls to inventory management and back-end product support can result in a reduction of necessary inventory levels (downstream), as well as provide better and faster capture of product failure data to feed back to manufacturing and design (upstream).

Improved tracking and analysis also mitigates risk and enhances regulatory compliance, by delivering better and more timely data on incidents, thereby enabling root cause analysis, corrective action and proactive prevention of future incidents. Additional value is derived from marketing effectiveness data, as more timely adjustments to marketing and product strategies can improve revenue.

Dealing With Challenges

While these benefits are significant, the nature of value-based BPM sourcing poses some challenges for executives building a business case.  For one thing, the value delivered by an initiative may not lend itself to a direct cost reduction/revenue enhancement formula, and may be difficult to quantify through a direct cause-and-effect correlation. 

Moreover, the cost of a BPM outsourcing project may exceed what the enterprise is currently spending. So the challenge becomes to go beyond a simple cost calculation and to demonstrate the new capability that the project will deliver, along with the value to be derived from that new capability.

Finally, BPM initiatives often require a more holistic governance approach, as vendor management is not sufficient to drive necessary actions within the client organization. This can make the initiative a difficult sell from the outset, since it requires investment and additional management resources.

To address these challenges, an effective business case must be based on metrics that quantify the impact of a BPM initiative throughout the value chain. Risk mitigation benefits can be assessed through assumptions and forecasts that calculate the probability of risk before and after the initiative, and by dollar impact, as savings that result from a reduced probability of risk and the cost of absorbing that risk. 

While calculating revenue enhancement is more complex, assumptions and projections can be similarly applied to metrics, such as the impact of reduced product defects on customer satisfaction and repeat sales.

While benefits based on projections and assumptions are necessary, they should be applied conservatively to maintain integrity and credibility.  Over-promising and then failing to deliver sets a precedent that can’t be reversed. 

Similarly, if value realizations are dependent on business actions or additional governance mechanisms to respond to information and insights provided by the BPM initiative, these requirements should be explicitly stated. Put differently, the business case must work politically as well as mathematically.

Bill Huber is a managing director at Alsbridge, which provides sourcing advisory and benchmarking services.