it-outsourcing vs. business process outsourcing …business process outsourcing (bpo) outsourcing...
TRANSCRIPT
1
IT-Outsourcing vs. Business Process OutsourcingSame Risky Business?
Heiko Gewald and Jochen Franke
E-Finance LabUniversity of Frankfurt
2
3
Agenda
• Motivation• Outsourcing and Operational Risk• Research Methodology• Results• Next Steps
4
Motivation: Analyze the new risk structure caused bythe outsourcing of business processes
+ (increased)
- (decreased)
= (unchanged)
Bank Service ProviderLe
vel o
fO
pera
tiona
l Ris
k
BPO
?
Risk Structure (Bank) in t Risk Structure (Bank) in t +1
Pre-Deal Phase ("Make") Delivery Phase ("Buy")
5
Agenda
• Motivation• Operational Risk and Outsourcing• Research Methodology• Results• Next Steps
6
Risk and Operational Risk
Risk is the measurable probability of the negative deviation of a target value from a reference value
[extending Jorion and Khoury 1996]
Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events
[Basel Committee on Banking Supervision 2004]
7
Outsourcing Types
IT Infrastructure Outsourcing (ITO)Outsourcing hardware-orientated IT activities such as data centre operations (e.g. helpdesk services, network management etc.)
Application Service Providing (ASP)Managing and delivering application capabilities to multiple entities from a data centre across a wide area network
Business Process Outsourcing (BPO)Outsourcing one or more specific business processes together with the IT that supports them
8
Outsourcing History
• In 1963 EDS was the first company to take over the entire data processing for Blue Cross of Pennsylvania
• 'Modern' outsourcing has been conducted since 1989 - Kodak deal
• Outsourcing extends industrialization by specialization of organisations
9
Maturity of Different Types of Outsourcing
IT Infrastructure Outsourcing (ITO)
Application Service Providing(ASP)
Business Process Outsourcing (BPO)
com
plex
ity
mat
urity
, exp
erie
nce
Business Functionality
Applications
Hardware/Software
evol
utio
nov
ertim
e
1970
1980
1990
2000
1960
10
Phases of an Outsourcing Engagement
Pre-DealPhase
ContractualPhase
TransitionPhase
Delivery Phase
project management
processes, systems and people are handed over
business process provided by outside resources
ExitPhase
un-bundeling
hand-over to new provider (internal or external)
vendor selection
contract negotiation
service levelagreements
core competency examination
critical success factor analysis
business case calculation
Focus on Delivery Phase
11
Agenda
• Motivation• Outsourcing and Operational Risk• Research Methodology• Results• Next Steps
12
Research Methodology
• Focus on delivery phase of outsourcing• Focus on the financial sector (banks in Germany)
• Identify risks in ITO literature• Conduct semi-structured interviews with outsourcing
experts• Compare BPO risks with ITO risks• Provide reasoning based on experts assessments of
risks
13
Interviews
• Interviews took place in summer 2004• 7 interviews were conducted
– 3 banks that outsourced specific business processes – 2 outsourcing service providers– 1 consulting firm
• Interviewees were operational risk experts or management in charge of a specific BPO-deal
• Interviewees were presented the risks derived from literature
• Reasoning concerning individual risk tendency compared to ITO were gathered
14
Operational Risk in BPO – Four key risk areas
Operational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Communicationmismatch
Failing interfaces Vendor exploitation of customer expertise
Security breaches
Measurementproblems
Incapable vendorresources Lock-in situation Misuse of trust
Default of vendor Loss of strategicbusiness flexibility
Inexperienced customeror vendor Loss of competences
Loss of cross-functional skills
Not achieving plannedbenefits
Service debasement
15
Agenda
• Motivation• Outsourcing and Operational Risk• Research Methodology• Results• Next Steps
16
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same to higher
- depending on system/application landscape related to the process
- especially, if just a part of the system functionality is outsourced and system does not protect data on transaction level
17
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same to higher
- depending on complexity of process- 'same' for low complexity (e.g. basic
call centre services)- 'higher' for high complexity (e.g.
processing of international tax requests for mutual funds)
18
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same to higher
- basically the same as with ITO- exception if service is offered (only)
by small/new company
19
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: higher
- BPO least mature outsourcing service in the market
- learning curve experience needs to be managed
20
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: higher to same
- also matter of learning curve- for the first engagements, usually
more effort than anticipated needs to be put in, thus spoiling the anticipated benefits
21
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same to lower
- basically same as ITO- possibly more vendor efforts during
the 'start up' of the market
22
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Communicationmismatch
Failing interfaces Vendor exploitation of customer expertise
Security breaches
Measurementproblems
Incapable vendorresources Lock-in situation Misuse of trust
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: lower
- higher level of documentation for processes compared to IT- mainly driven by banking regulation
23
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Communicationmismatch
Failing interfaces Vendor exploitation of customer expertise
Security breaches
Measurementproblems
Incapable vendorresources Lock-in situation Misuse of trust
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same to higher
- depending on the standardization and complexity of the process- also depending on the level of market maturity
24
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Communicationmismatch
Failing interfaces Vendor exploitation of customer expertise
Security breaches
Measurementproblems
Incapable vendorresources Lock-in situation Misuse of trust
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: higher
- higher level of intra-personal interaction (communication)- therefore chance of failing interfaces is higher thus more control
resources necessary
25
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Communicationmismatch
Failing interfaces Vendor exploitation of customer expertise
Security breaches
Measurementproblems
Incapable vendorresources Lock-in situation Misuse of trust
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same to higher
- generally the same, but higher if complex processes involved- very difficult if 'quality' is a measure
26
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same
- no significant difference has been reported
27
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: higher
- risk is regarded to be higher compared to ITO, as it is (usually) necessary for the service provider to assess the client data directly (non-encrypted, not on machine level)
28
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: higher
- assumed to be higher, as driver for flexibility and innovation are assumed to be business processes (not hard- and software)
- lack of flexibility due to one-to-many business models of vendors (standardisation etc.)
29
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: higher
- this risk is assumed to be higher for BPO compared to ITO, if the process is closely related to the core (banking) business
30
Operational Risk in BPO compared to ITOOperational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Security breaches
Incapable vendorresources
Default of vendor
Inexperienced customeror vendor
Not achieving plannedbenefits
Service debasement
Communicationmismatch
Lock-in situation
Failing interfaces
Measurementproblems
Vendor exploitation of customer expertise
Misuse of trust
Loss of strategicbusiness flexibility
Loss of competences
Loss of cross-functional skills
Tendency: same
- loss of personnel with broader view (e.g. IT and business, cross-process know-how) is regarded to be same as with ITO
31
Operational Risks of the delivery phasein BPO compared to ITO
Operational Risk in BPO
Maturity of BPO market
Processcomplexity
Extent of human interaction
Competitivenessand specifity
Communicationmismatch
Failing interfaces Vendor exploitation of customer expertise
Security breaches
Measurementproblems
Incapable vendorresources Lock-in situation Misuse of trust
Default of vendor Loss of strategicbusiness flexibility
TendencylowerInexperienced customer
or vendor Loss of competencessame to lowersame
Loss of cross-functional skills
Not achieving plannedbenefits same to higher
higher to sameService debasement higher
32
Graphical Display of Results
33
Agenda
• Motivation• Outsourcing and Operational Risk• Research Methodology• Results• Next Steps
34
Further Research
• Compile factor model of operational risks in BPO
• Empirical study within the German banking sector– Payments– Securities settlement
• Extend to a quantitative approach to asses operational risk in BPO
35
Contact:
Heiko Gewald Jochen [email protected] [email protected]
E-Finance LabInstitut für Wirtschaftsinformatik
Johann Wolfgang Goethe-Universität Frankfurt am Main