1. business and industrial

How to Develop Business Cases
for Potential BPO Projects
Hints and tips for experienced sourcing
practitioners in buy-side organizations
Howard Spode
(www.bpopronet.com)
(Written when Howard was Managing Director, Advisory
Services, at NelsonHall, and extracted from his NelsonHall
publication Developing BPO Strategies)
NelsonHall Ltd.
Atrium Court
The Ring
Bracknell
Berkshire
England
RG12 1BW
+44(0)8707705967
www.nelson-hall.com
INTRODUCTION
It is now well-proven that business process outsourcing (BPO) and offshoring can be extremely powerful
interventions that can deliver significant gains in organizational effectiveness and/or efficiency. However,
they are not “cures for all ills” – mistakes happen and when they do they can be costly. A well-founded
evaluation of the potential change, evolving, if appropriate, into a strong justification for that change, is
essential for success.
We use the term “sourcing” to cover BPO and/or offshoring. To us, the scope of BPO is limited to the
“business support services” – ie front-office (eg contact centre), “middle-office” (ie industry-specific
operations, such as check clearing in a bank) and “back office” (eg accounting, HR, IT, etc). We call the
evaluation/justification of a potential sourcing proposition a “sourcing business case”.
This document presents our advice (in summary form) on how to develop a sourcing business case. The
contents are extracted from the NelsonHall publication “Developing BPO Strategies”, a practitioner guide
which covers both sourcing business cases and “sourcing strategy” (ie corporate-level sourcing
principles, policies and parameters). Developing BPO Strategies is a substantial piece of work which
combines theory, research and case-study experience to clarify the key concepts, introduce powerful
methodologies and identify best practices and lessons learned. We are anticipating that it will become a
key resource in an industry where there is a lack of consistency over approaches and terminology and
where poor decision-making is still all-too-common.
This How to Develop Business Cases for Potential Sourcing Projects does not include background theory
or case studies. Its purpose is to be a source of handy hints and tips for experienced sourcing
practitioners in buy-side organizations and it simply:
• Introduces our business case methodology (Section 1)
• Explores key lessons learned at each stage of the methodology (Section 2).
• Describes how to get further support from us (Section 3)
2
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
1.0 INTRODUCTION TO NELSONHALL’S BUSINESS CASE DEVELOPMENT METHODOLOGY
The methodology we use describes the component parts of a business case, which are addressed in
sequence as the business case is developed.
The methodology has been proven in dozens of projects. Graphically, it is represented as below.
The logical flow of the methodology is as follows:
• Interpret and reflect top-level strategy. Ultimately, all proposed organizational change should be
evaluated in the light of the organization’s mission, vision, values and strategic objectives.
• Interpret and reflect “functional strategy”. Top-level strategy flows down into the organization in
two ways relevant to sourcing. The first is functional strategy – ie the strategy of the Finance
function, for example, or IT, or HR. Such strategy includes the vision for the function’s influence of
the organization as a whole, the vision and mission for the function itself and, often directly relevant
to sourcing, the intentions for optimizing the effectiveness and efficiency of functional operations.
• Interpret and reflect “sourcing strategy”. The other way that top-level strategy flows down into the
organization is through “sourcing strategy” – the high-level principles, policies and parameters for
sourcing in the organization
• Assess “current operations”. Once strategic context is clear, a critical assessment of the
effectiveness and efficiency of current operations needs to be undertaken. This is carried out in
terms of process, technology, organization, physical infrastructure and people.
• Specify the “need for change”. This is not the solution at this stage, but a statement of the criteria
and parameters that possible futures will have to adhere to.
• Undertake a “review of the external world”, in terms of external trends and best practices (ie “the
art of the possible”).
• Envision to-be models, comprising: “operational model” (“how would the service work?”),
“commercial model” (“who would be responsible for what?”) and “transition approach” (“how
would we move from the as-is to the to-be?”).
3
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
• Identify the “risks” associated with the to-be models and develop risk management actions.
• Draw the “conclusions” by comparing as-is with to-be in order to determine whether there is a
business case.
• If appropriate (ie if there is a positive case for change), lay out the “implementation route map”
for the selected option (“how would we make it all happen?”).
4
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
2.0 KEY LESSONS LEARNED AT EACH STAGE OF THE METHODOLOGY
As we said in Section 1, we have supported dozens of business case projects. From these we can
identify a long list of lessons learned. For the purposes of this paper, we shall share one key lesson from
each stage of the methodology, couched in terms of a pitfall to avoid, with a short explanation of the
problem and a description of the recommended course of action.
The list of items we cover is as follows:
• Insufficient link to top-level strategy
• Lack of clarity around functional strategy
• Lack of clarity around sourcing strategy
• Inappropriate level(s) of detail in review of current operations
• Solution designed without the need for change being clearly articulated
• Failure to consider inputs from review of external world
• Design of to-be not undertaken systematically (operations and/or commercial and/or transition)
• Inappropriate level of attention on risk management
• Conclusions not based on holistic view
• Implementation route-map not taking sufficient account of change management considerations
We cover each of these in the sections below.
2.1 Insufficient link to top-level strategy
Other than those of particularly small scale, sourcing projects carry potential benefits and risks significant
enough to be judged in terms of whether they contribute positively or negatively to the overall vision,
mission, values and strategic objectives of the organization. For instance, we worked with a highlysuccessful organization that had grown very quickly to dominate its traditional market segment. The need
for further growth demanded entry into a new segment with significant new business challenges. Top
management felt that the management style in the organization needed to be “professionalized”. This
major culture change became a key goal for the HR function and, in turn, led that function to decide that it
needed to re-balance its activities to focus more on working on this goal and less on routine
administration. This was the strategic context for a business case project to investigate the outsourcing of
HR administration.
Ideally, functional and sourcing strategy will be present to provide the link between top-level strategy and
a business case for a particular sourcing proposition, as shown in the following graphic:
5
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
However, as we shall see below, in many cases functional strategy and/or sourcing strategy is not in
place. Indeed, in some cases, even top-level strategy is not clearly articulated in a formal manner. In such
cases, it is beholden on the team producing the business case to summarize the strategic context for the
sourcing proposition. This does not have to be a weighty piece of work, but should be an insightful one.
Those reviewing the business case can then review and judge this link as a key element of the evaluation
process.
2.2 Lack of clarity around functional strategy
Often, business support functions do not have formal strategies describing the contribution of the function
to the organization (in the light of top-level strategy) and the planned development of that function. Taking
a Finance scenario for illustration, we have often seen cases where, although there is a sophisticated
“financial environment” in place across the organization as a whole (ie budgets, control mechanisms,
statutory accounts, etc), with the Finance function wielding significant influence, and although the day-today working of the Finance Department is well-managed (eg staff utilization, process efficiency, etc),
senior functional management does not find it easy to respond when asked to articulate what “Finance
Strategy” is.
We continue to be surprised by this, but it is beyond the remit of this paper to discuss the whys and
wherefores of this phenomenon. The point is that functional strategy is essential in shaping and
evaluating a sourcing proposition and, therefore, if the functional strategy does not exist prior to the
sourcing business case, the team producing the latter will have to articulate what they see as the relevant
elements of the functional strategy. Again, this does not have to be a weighty piece of work, but it should
be an insightful one.
2.3 Lack of clarity around sourcing strategy
Sourcing strategy operates “horizontally” across the organization, setting objectives and policies to
optimize the organization’s use of the appropriate sourcing models. It is driven by driven by top-level
strategy and interacts with “vertical” functional strategy.
A well-thought-out and well-articulated sourcing strategy provides the perfect backcloth for the
development of a business case for a particular sourcing proposition. So, ideally, the development of
sourcing strategy precedes the development of business cases for particular sourcing propositions.
However, many organizations do not have a sourcing strategy prior to investigating their first (or first few)
6
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
specific sourcing propositions. Although not an ideal state of affairs, this is a quite natural occurrence.
The requirement for having a high-level sourcing strategy at all might not be obvious before actual
sourcing projects have been investigated and/or implemented. Even if the logic is accepted, this might not
prove enough of a justification for making the investment and incurring the elapsed time required by the
process of developing the sourcing strategy.
Where the business case of the first specific sourcing proposition (or the business cases of the early few
sourcing propositions) does precede the development of a formal sourcing strategy, the business case(s)
should seek to establish general sourcing principles as a context for the particular sourcing business
case, to be reviewed and validated by the powers-that-be. So the business case for a particular
proposition should “fill the gap” caused by the absence of a formal sourcing strategy (just as it should fill
the gap in the absence of functional strategy and/or top-level strategy, as described in the sections
above). Otherwise, there is a real danger of multiple specific deals being done on a piecemeal basis,
which would lead, at best, to the establishment of a management infrastructure that is more costly than
necessary (given different commercial terms, different monitoring mechanisms, etc) and, at worst, some
deals being out of line with top-level strategy and therefore value-destroying in a very real sense.
Many forward-thinking organizations are now establishing sourcing teams to work with the relevant
vertical functions to develop and execute sourcing strategy.
2.4 Inappropriate level(s) of detail in review of current operations
If one wants to plan one’s route to Brussels, it makes a real difference whether one is setting out from
Bristol or Baltimore. This may seem too obvious to mention, but we have come across situations where
senior managers have said words to the effect “we only care about the future, there is no need to spend
time understanding the current position”. This is a mistake – how can the feasibility of the to-be state be
determined unless in reference to current realities? Similarly, how can a sound contract be entered into
with an external provider in the absence of baseline information?
Perhaps this view is a reaction to previous experiences where there was over-emphasis on analyzing the
as-is state. We have seen this to, with, in one case, a multi-million Euro project devoted to an
unnecessary level of detail in mapping as-is processes.
Thirdly, we often see the situation where there is too much detail in some areas (where data is easy to
get hold of for one reason or another) and not enough in others.
The need is to obtain a meaningful level of data in a number of key areas. Our Developing BPO
Strategies describes the following framework for use in high-level business cases to show what
information is required:
• What? What services are provided?
• Why? Why are they provided – what is their value?
• How? How are they provided (Process, Technology, Organization, Infrastructure, People)
• How many? What are the key volumetrics?
• How well? What are the key performance metrics?
• How much? What are the costs?
2.5 Solution designed without the need for change being clearly articulated
The need for change is a specification for the to-be state, not the description of the to-be state itself. As
such, the need for change is an extremely important input to envisioning possible future states, choosing
7
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
between them and, ultimately, concluding whether there is a positive case for change. Without this input
the quality of the shaping and evaluation of the to-be is seriously compromised.
The team producing the business case needs to have the patience to articulate the need for change
before to-be envisioning is commenced, and the strength of will to resist whatever pressures there may
be to adopt pre- suppositions on what the future state needs to be like.
2.6 Failure to consider inputs from review of external world
The sourcing industry is complex, fast-moving and heterogeneous. For example, there are well over 300
outsourcing suppliers tracked by NelsonHall, and the total contract value of new outsourcing contracts in
2007-2008 was almost $72bn. There is a constant stream of developments in terms of solution and
commercial models adopted, supplier strategies and capabilities, and lessons learned from projects
undertaken.
In such circumstances, it is often not enough to rely on the knowledge of team members within the
organization, or their ad hoc research capabilities or those of the Procurement Department.
Any organization anticipating running sourcing projects on any significant scale should consider
accessing the insight of a specialist analyst company. NelsonHall’s services in this regard are described
in Section 3 of this document. In addition, an organization might seek to network with other organizations
with relevant experience, visit relevant operational centers, etc. Outsourcing advisory (as opposed to
analyst) firms can provide effective support for the implementation of sourcing projects, but they do not
focus on gathering fact-based insight on the items described above – indeed, some of them have
knowledge (albeit well-developed) on only a handful of suppliers that they deal with repeatedly.
2.7 Design of to-be not undertaken systematically
As described in Section 1, the to-be model consists of three elements – the operational model, the
commercial model and the transition approach. Beneath each of these three components, there is a set of
sub-components that need to be addressed. However, we often see one or more sub-components
missed out altogether, or certain key decisions around sub-components not made in a systematic
manner. For instance:
• The scope of the sourcing activity is often reduced during the envisioning process, sometimes
through the influence of stakeholders with vested interests. “Scope” in this sense might mean the
sub-components of the operational solution that we call “macro-scope” which refers what business
units/geographies are included, or “micro-scope”, otherwise known as “process boundaries” which
refers to which specific activities within a process area to be subject to sourcing change. Scope in
both senses is extremely important to the viability of the operational model (ie are there synergies
between activities?) and of the financial aspects of the business case (ie can economies of scale
be achieved?). Therefore, the “erosion” of scope by any mechanism other than, rational, systematic
decision-making can be a serious problem.
• The “ownership” of the delivery of the in-scope activities is a key sub-component of the commercial
model – should the responsibility be outsourced, maintained within the client-organization, run by a
joint venture vehicle part-owned by the client-organization, etc. However, we often see the adoption
of one model or another made on a less than rational basis. Most often (but not exclusively), this
involves the adoption of the “internal” model - ie where responsibility in retained by the clientorganization. It is as if other models are removed from the agenda at too early a stage of the
process or paid lip-service to throughout the process. Our point is not that any one ownership
model is necessarily better than any other in all circumstances, but that the appropriate model for
the circumstances should be determined on a systematic basis.
• One sub-element of the Transition Approach concerns the “resourcing” of the transition effort.
Organizations often fail to anticipate the need for enough capable people to manage the transition
8
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
process. Even in an outsourcing deal where the supplier will manage deploy experienced people to
many elements of the process, the client-organization will still need to mobilize people to
Our Developing BPO Strategies identifies all the sub-components and therefore provides a checklist for
ensuring that all aspects of to-be design are addressed. We also possess a range of tools for facilitating
the decision-making around each sub-component.
2.8 Inappropriate level of attention on risk management
Here, as in some of the other areas described above, the problem can be one of “too little” or “too much”.
Sometimes risk management is paid lip service too, in the enthusiasm to embrace the proposed change.
There are some significant risks generated by sourcing change. These need to be identified and
evaluated, and appropriate risk management actions planned. Conversely, we sometimes see risk
management becoming an “industry in its own right” – with cumbersome risk management procedures
and/or an over-estimation of the risk associated with the proposed change.
We find that it is useful to get the key stakeholders to collaborate in identifying risks and risk management
actions. This can best be done in an interactive workshop (Developing BPO Strategies includes a
suggested format). Thereafter, in order to manage risks on an ongoing basis, various risk management
processes are available from generic project management approaches, and there is no reason why these
cannot be used in sourcing projects, always bearing in mind that the level of detail of the risk
management regime should match the level of detail of the business case.
2.9 Conclusions not based on holistic view
We see scenarios where there is over-emphasis on the financial aspects of the business case, and where
there is over-emphasis on the qualitative aspects (ie where financial and other quantitative elements are
missing or poorly represented).
XXXXX
2.10 Implementation route-map not taking sufficient account of change management
The Implementation Route Map encompasses all the activities necessary to progress the sourcing
initiative from the discovery of a positive business case for change through to the launching of to-be
operations. Components will include detailed solution design, supplier selection, contracting and
transition. In addition to the technical and project management activities required, a focus on change
management is essential. By “change management” we mean the management of the people-related
elements of the process of change in order to maximize good will towards the change amongst the
relevant stakeholders and to minimize and/or mitigate any ill-effects in this regard.
We often see an insufficient level of attention placed on these activities. Often, there is a “tick in the box”
attitude, with certain change management activities undertaken (for example a stakeholder mapping, or a
communication plan), but with these activities having no real “bite” and no real connection with the other
elements of the change program.
9
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.
3.0 WHERE TO GET FURTHER HELP
NelsonHall helps organizations make better decisions about BPO. We do this be providing cost-effective
access to our research-based insight - we are the world’s leading BPO analyst firm. We are not BPO
suppliers, nor do we actively promote BPO in all cases - we simply provide independent, objective and
unbiased information to empower our clients’ decision-making processes.
There is a huge amount of activity taking place in BPO, but, whilst it can be an extremely powerful
proposition, it is certainly not a cure for all ills. Mistakes happen and they can be costly. Decision-making
therefore always needs to be based on rational analysis by informed executives. However, it is extremely
difficult for in-house teams to access the valid information they need - the industry is complex and fastmoving, suppliers (and consultants) have vested interests and the various would-be advisors charge high
fees.
Our service overcomes all these challenges. Each of our global team of researchers is hard-wired into a
key area of BPO. They possess a complete picture of what is feasible in terms of operational solutions,
what is reasonable in terms of commercial models and who-can-do-what in terms of supplier capabilities.
Our service-package consists of:
•
On-demand (web-based) access to our extensive and constantly-growing library of written
research
•
An unmetered hotline to our analysts for interpretation and advice
•
Free support for mini-projects that would be charged for by other companies (eg compilation of
shortlists of potential suppliers)
No other source of information can match the rigour or value-for-money that we provide. Right now we
are helping executives across the globe to unravel the complexities of the industry, base their decisionmaking on reality and, where appropriate, engage with the market from a position of strength.
For more details and for feedback on and/or discussion about this Practitioner Guide, please contact us:
NelsonHall Ltd
Atrium Court
The Ring
Bracknell
Berkshire
England
RG12 1BW
+44(0)8707705967
www.nelson-hall.com
NB: We also provide some of our insight for free – in the form of a monthly newsletter and regular public
webcasts on specific topics. Please see our website for details and feel free to register.
10
 NelsonHall. For information only.
Not to be distributed or used for any other purpose without prior written permission.