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Business process outsourcing (BPO) -- 2003 style -- has three levers that work to create value. In August I talked about transaction engines and how they produce value through economies of scale. Last month I discussed the benefits of labor arbitrage and how using offshore labor produces significant savings. The final lever in the trio is business process transformation, this month's topic.

Business transformation works its magic on business processes that need rationalization, standardization, or centralization. A diversity of solutions around one process is common when a company has acquired others. Eventually each subsidiary is doing that process its way, to paraphrase a great Frank Sinatra song.

Service providers can transform a business process two ways:

• Using technology. Human resources (HR) and finance and accounting (F&A) are two processes that rely heavily on technology to rationalize the process.
• Changing the process. For example, companies have been able to revamp their supply chain process by applying best practices.

The Need for Less Working Capital

One of Everest's client's, which built a NYSE-traded company through a series of acquisitions, outsourced its finance and accounting. The service provider consolidated the disparate processes from each division into a single shared services center, which utilized the newest technology and implemented best practices. The F&A payroll shrank from 300 to 90.

A year later, the company calculated its savings. It needed $30 million less in working capital after its outsourcing initiative. Better information led to better cash management.

We've noticed clients who venture into new areas of business experience even larger gains. A large insurance company wanted to enter the high-end market - selling life insurance policies of $1 million or more to high-end individuals. One of the big hang-ups was the medical lab. Each insured had to pass a physical exam and have lab tests before the insurance company could issue the policy. Its lab needed 45 days before it could deliver the test results needed to write the policy.

The insurance company and its service provider completely redesigned the process so the lab could deliver results in just 10 days. At the same time, the lab was able to deliver this speedier service at 30 percent less cost. And the customer experience improved because the potential policy holders didn't have to wait forever for their test results.

The Power of Transforming the Process

Shortening the underwriting time allowed this insurance company to grow its market share. Transforming the process made it more responsive to its customers than its competitors.

Transforming the process actually allowed the insurance company to increase its price. Instead of having to automatically reject certain candidates, it could write them policies at a higher price since it now had more data to make such decisions. This allowed the company to increase its revenue without raising its risk.

Suddenly the results of this business transformation outsourcing were more than cutting cost. The new process improved the company's market position; achieving strategic results is the goal of BTO.

Lessons from the Outsourcing Journal:

• Business transformation outsourcing works well when a process needs to be rationalized. Disparate processes happen when companies acquire others and allow them to continue to operate with their prior processes.
• Transforming a process can make a tactical process strategic.
• BTO can reduce risk, improve market share, and provide a better customer experience.

Publish Date: October 2003

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Copyright © 2003 - Everest Partners, L.P.

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