FUNDAMENTALS OF BUSINESS OUTSOURCING 1

SGM3 – Study Guide for Module 3

Client company is concerned with:

Quality transition of processes

Efficient operation of business functions that were once handled in-house

Service provider company is concerned with:

 Scope of service
 Performance measures
 Benchmarks to ensure objective standards in assessing work quality

Therefore, as a result of these relationship attributes, the IT-BPM contract is a unique,“tailor-fit”

agreement captured in a document that resembles a performance contract.

The IT-BPM Contract

A business process management(IT-BPM) contract is a formal agreement between a client and a

service provider to take over a “pre-agreed portion” of the client's business operations.

This “pre-agreed portion” is documented in the contract as the scope of work (SOW).

The IT-BPM contract, with all its attachments, assumptions, and documented agreements, is referred
to as the master services agreement (MSA).

The IT-BPM Contract:

Master Services Agreement

Definition: Covering agreement that summarizes terms applicable to every job-order with the service
provider

Main elements:

 Service to be provided
 Performance management, issues, change management
 Country laws
Groups (A) and (B) are the “operational” elements, used day to day. Group (C) generally “just-in-
case” terms.

The IT-BPM Contract:

Scope of Work

Definition: Describes specific work to be delivered, by when, at what cost

Considerations:

 Can be similar to a “job order”

 Is generally an attachment/addendum to a Master Agreement, points to covering terms
 May state that in case of terms inconsistency, the SOW or Master Agreement supersedes

The IT-BPM Contract: Core Elements

 Service to be rendered or provided as documented in theScope of Work (SOW)

 Performance standards expected from the service provider; Service Level Agreements (SLA),
and, Key Performance Indicators (KPI)
 Timeline of the contract; start date (“go live”), and, duration
 Costs to the client
 Other Specific Operational Requirements

1. Service to be rendered or provided as documented in the Scope of Work (SOW)

 Out-bound sales calls

 In-bound inquiries or subscriptions
 Delivering food or flowers or mail

2. Performance standards expected from the service provider; Service Level Agreements
(SLA), and, Key Performance Indicators (KPI)

 “Handle Time” and “Average Handle Time”

 Sales attainment
 Customer satisfaction rating

3. Timeline of the contract; start dates (“go live”), and, duration.

 It is a detailed schedule of when the transition period starts and when the service provider
assumes control of the contracted processes

 In terms of type per duration; most contracts are typically multi-year contracts, however and
when deemed most effective, on-demand contracts may also be put into effect.

4. Costs to the client

  Refers to the payment made by the client to the service provider for honoring contractual
agreements

5. Other Specific Operation Requirements:

 Who will provide the service

 Qualifications of personnel
 Location of operations
 Outline of reporting procedures, decision-making, and escalation of problems
 Legal provisions (e.g., non-competition, confidentiality)

IT-BPM Contract Pricing Models (Fixed Price ~ Time & Material)

1. Fixed Price:

 This pricing model is easy to plan and more predictable than other pricing models.

 A fixed, pre-agreed price per unit is negotiated (e.g., a fixed price per call or a fixed price per
transaction)

 Advantages for service providers: it is known in advance what will be paid and what will be
delivered

 Advantages for clients: provides greater cost certainty

 Disadvantages: several risks with capital requirements and lower flexibility

2. Time and Material.

 The price for service is based on the time and material that was used.

 Used when a service is very flexible and it is not predictable in terms of how much time and
material is needed.

 In some cases, a maximum price for the service is negotiated by the client/ customer to build in
some control or safety level.

 In practice, it is often a mix of the above mentioned pricing models that is used.

IT-BPM Contract Financials ( CAPEX-OPEX ~ Process Costs ~ Loaded Costs )

CAPEX (or Capital Expenditure)

is a business expense incurred to create future benefit. Expenditure on assets like a

building or the physical space, machinery, equipment or upgrading existing facilities so their value as
an asset increases.
OPEX (or Operational Expenditure)

is the money the business spends in order to turn inventory into output (throughput). These are
operating expenses which also include depreciation of plants and machinery which are used in the
production process.

Those expenditures required for the day-to-day functioning of the business, like wages, utilities,
maintenance and repairs fall under the category of OPEX

Components of Process Cost

Process costs associated with roles (activities-processes-tasks) that may be outsourced via the
offshoring outsourcing strategy

 Labor cost

- Compensation
- Benefits
- Bonuses
- Incentives

 Direct costs
 - Employee Development (Training), Employee Relations Programs
- Employee Tools/ Equipment; desktop computers, communications
- Coordination and Management: travel, representation, meetings, and, workshops

 Indirect costs

- Infrastructure: indirect costs for network, mail, and other shared employee services, rental,
depreciation/amortization

- Other charges: head office or regional shared cost allocation, interest cost, foreign
exchange gains/ losses

Components of Loaded Annual Cost

Loaded Annual Cost:

1. Compensation: Salary and Bonuses

2. Benefits: Training, Health and Life Insurance, Profit Sharing, Pension Matching, Worker’s
Compensation, Employer share of payroll and Social Security taxes

3. Infrastructure: Facilities, Venue Rent, IT Support

Regulatory Requirements BOI Qualification & Requirements ~ PEZA

Regulatory Requirements

Adherence to Government Regulations (External):

- Board of Investments (BOI)

- Bureau of Internal Revenue (BIR)
- Bureau of Immigration
- Department of Labor and Employment (DOLE)
- Pag-Ibig Fund
- Philippine Economic Zone Authority (PEZA)
- Securities and Exchange Commission (SEC)
- Social Security Services (SSS)
- Data privacy Law

Industry/ Company Regulations (Internal):

- Institutional and operational standards/ policies/ guidelines

- Service provider implements own regulations

External Regulatory Requirements - BOI

Board of Investments

 A Republic of the Philippines agency created under the Department of Trade and Industry.

 It strives to attract direct investments into the country to contribute to economic growth and
jobs creation in the Philippines

BOI Qualification

A Philippine enterprise can register their project with the BOI if the proposed activity is listed as a
preferred project in the current IPP. The said enterprise may engage in domestic-oriented activities in
the IPP whether classified as pioneer or non-pioneer.

However, an activity which is not listed may still be entitled to incentives if the following conditions
are met:

 At least 50% of the production is marked for export (for 60% Filipino-40% Foreign-owned
enterprises); or

 At least 70% of production is marked for export (for more than 40% Foreign-owned
enterprises)

Any outsourcing company is

Qualified under 100% export

For foreign-owned firms or those whose foreign investment exceeds 40% of the outstanding capital
stock who can engage in domestic-oriented activities, can only be registered with the BOI if they
propose to engage in an activity listed or classified in the IPP as pioneer.

However, if it fails to meet the pioneer classification, it can likewise opt to be an export-oriented firm
to qualify for BOI registration. However, this time, the export requirement is at least 70% of actual
production.

BOI Requirements:

 DTI Registration: Sole Proprietorship

 SEC Registration: Corporation, Branch Office, Regional Headquarters
 Audited financial statement and Income Tax Return for the past three years (if applicable)
 Board Resolution to authorized company representative
 Accomplished Application Form 501 and Project Report

External Regulatory Requirements - PEZA

PEZA, The creation of

The development of Special Economic zones throughout the country, and the very competitive
incentives available to investments inside PEZA Special Economic Zones are embodied in the
Special Economic Zone Act of 1995 (Republic Act No. 7916), a law passed by the Philippine
Congress.

Promote Philippine investments, extend assistance, register, grant incentives to and facilitate the
business operations of investors in export-oriented manufacturing and service facilities inside
selected areas throughout the country proclaimed by the President of the Philippines as PEZA
Special Economic Zones.

Qualification

Export-oriented enterprises that are found in any of PEZA special economic zone

Requirements

 Duly accomplished and notarized PEZA application form and anti-graft certificate.

 Corporate Profile (including that of parent company, if applicable)

 Board Resolution authorizing the filing and designation of a representative

 Securities and Exchange Commission SEC Certificate of Registration, Articles of Incorporation

and By Laws (if not available, submit draft of Articles of Incorporation)

 Project brief(i.e., Information on Market, Technical, Financial and Management aspects of the
project to be registered)

Data Privacy Law – Republic Act No. 10173

An act protecting individual personal information in information and communications systems in the
government and the private sector, creating for this purpose a national privacy commission, and for
other purposes.

Internal Regulatory Requirements - Industry

Industry Specific Regulations - Control of communication channels and information systems:

ARTICLE 16- (1)

The communication channels and information systems of the bank shall be controlled to ensure that
information obtained within the bank is reliable, complete, traceable, consistent, in a suitable format
and character to meet the requirement, and accessible by relevant units and personnel in a timely
manner.
Industry Specific Regulations - Auditing of partnerships subject to consolidation: ARTICLE
34- (1)

Banks shall take all necessary measures to ensure that their internal audit units can inspect all
activities and units of their consolidated partnership without limitation.
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Module 3 - Managing Outsourcing Transition

INTRODUCTION
Employment is an intrinsic part of our human identity. Therefore, significant
improvements to our working conditions are improvement in our perception of oneself. Job is
also a position where we try to meet some of our most fundamental needs, such as income
needs, socialization, respect and more. So, it should not come as a surprise that any change
in our work – or just the suggestion of a change – will have a significant impact on us. During
outsourcing the process of transferring employees from one company to another is often
referred to as a transition process. At the end, a transformation phase has three targets. The
first is to ensure smooth transfer of responsibilities such that no interruption to the service
happens to the customer. The second is handling the people side of the transition in such a
way as to treat the employees fairly and with respect. Third, designing the workers to maximize
the quality of employment. Research shows that most transformations do not at the same time
achieve all three objectives.

In this module, we will talk about managing outsourcing transition strategies, success
factors and effectiveness. Readiness of documents and assessment as well as the hand-offs,
scales and time tracking will also discussed. This module will let us know how to adjust and
manage transition of outsourcing activities of IT-BPM industry.

LEARNING OUTCOMES
At the end of this module, the students should be able to:

• define and explain Transition Management

• define the migration strategies and knowledge transfer frameworks
• define and explain the transition risks
• list the critical success factors
• identify transition effectiveness
• outline the requirements for good transition documentation
• explain work-shadowing
• define the components of readiness assessment
• define hand-off
• explain the concept of Scale
• explain time tracking

LEARNING CONTENT
• Transition Strategies and Knowledge Transfer Framework
• Transition Success and Effectiveness
• Document Readiness
• Work-Shadowing
• Readiness Assessment
• Hand-offs
• Scale
• Identifying Task Candidates for Outsourcing Scale
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1. Transition Strategies and Knowledge Transfer

Framework
Under this topic, we will discuss the transition manager,
different transition strategies and knowledge transfer
frameworks

Transition Management- A collection of activities that

accompany the signing of a BPO contract enforcing or
executing the comprehensive movement or
transition of processes from the customer to the service
provider.

Proper transitioning of tasks from a client to a service provider helps in achieving successful business
relationships.

A Transition Manager- responsible for migrating the function or process from the client location or organization
to the service provider or outsourcing organization. He/she needs to be an effective communicator, as the role
requires extensive interaction with the clients.

Transition Manager Skills and Competencies:

• Need to have strong project management skills, as the migration process are complex projects that
require expert management skills
• Needs to be comfortable to work with multicultural environment, since most of the clients are from
overseas
• Needs to have a thorough understanding of the existing business and legal processes, current and
emerging technologies to be used for offshoring of business function

Two Common Transition Strategies

a. Lift and Shift- common methodology used when the process is mature. The Lift and Shift approach is used
for migrating. This means moving a matured process from its current organization to a service provider.

Phases:
1. Move the current process to the service provider without changes/improvements
2. Stabilize
3. Re-engineer the process to achieve efficiency gain- produce same output, less FTEs

When we say “Move the current processes.”, we’re not just talking about a physical movement. It also involves
transferring a process to another performer or provider.

b. Re-engineer and Migrate- fundamental rethinking and radically redesigning of the business process to
achieve dramatic improvements in critical measures of performance such as cost, service and speed.

Items to Consider
1. Useful when the process is either broken and requires fixing, or is due to undergo significant change
in the near future (systems change or process change)
2. It may be important to utilize the expertise of the existing team (which built over several years) to drive
the change, before it is handed over to the new team.
3. Company that outsources industry common processes to a market-leading service provider will
generally follow service provider processes
4. Company changes its processes as part of the transition to service provider.

a. Service transition- Knowledge transfer process

Knowledge Transfer (KT) is a central process in any transitional service program- for a new service or service
shift. New services may only commence after completion of the necessary information transfer process.
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Based on the KT strategy, an appropriate KT plan is created. A knowledge transition plan contains the
following:

▪ List of documents (user manuals, deployment guides, ready reckoner for incidents, technical documents,
process documents)
▪ Target completion date
▪ Plans for instructor-led training, web sessions, and any other training document (presentations, videos),
if required
▪ Details of the knowledge management tool (like SharePoint), and artefacts (repository/tool location,
access, intended audience)
After sign-off, the knowledge transition plan is executed and tracked. Regular feedback is a necessary
part of tracking the plan and necessary changes are made to the plan, training material and methodology.
Templates and checklists are developed to help in creating a knowledge transition plan, capturing the training
requirements, and assessing the effectiveness of the trainings. Reverse knowledge transfer
sessions/quizzes/tests which assess the efficacy of the activities, are a critical component of a robust
knowledge transition plan.

2. Transition Success and Effectiveness

In this topic, we will the risks and pitfalls of transitions, the critical success factors, and overall transition
effectiveness.

Transition Pitfalls and Risks

Any transition is in jeopardy if any of the following occurs:

1. Inadequate investment and sponsorship- Example here is a manufacturing company expecting volume
sales from agency that provides manpower- the sales force, but fails to invest on proper equipment to
allow product demonstrations so potential buyers can freely experience or try out the products.

2. Unclear scope of work- and unclear roles and responsibilities- These are doubt, serious concerns that can
torpedo your efforts for successful transition. A good solution is through proper documentation and process
mapping.

3. Training shortcuts- As future leaders expected to develop people, be mindful of the following training
dimensions:
• Timing and duration
• Content and delivery
• Skills practice and learning evaluation
*Just imagine what is going to happen o your subordinates if we try to do shortcuts in these dimensions?

4. Not retaining the experts- Having subject matter experts in a company gives benefits. The breadth and
depth of experience of your resident SME that is exactly what they leverage. With that experience comes
perspective, discipline, temperance, analysis, decisiveness, rigor, and compassion- meaning maturity.

Transition Critical Success Factors

The success or failure of a transition project is fundamentally measured in two
aspects:

Technology Readiness- state of readiness of the enabling hardware and software to support the ongoing
operations
The following questions may give us assurance to this aspect:
- Do we have right type of computers?
- Do we have the right number of computers?
- Do we have generators in place just in case there is a power shortage? - Are we using the
latest or most compatible applications?
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With these questions, managers and leaders can now have a guide as to how they picture the big
perspective of transition in their company. Having enough resources depending on the needs is very
important for the success of the transition.

Manpower Readiness- state of the readiness of the operating staff- hired, trained and skilled for the service
processes.

In this aspect, we are looking at the knowledge and skill of the workforce. It would be a challenge
getting things done if your operations have the most powerful desktop PCs for animation and rendering
but have workforce with little experience using such equipment. A good example is, Efren “Bata” Reyes
and Francisco “Django” Bustamante would beat an amateur at billiards even if they took turns using the
same cue-stick.

Transition Effectiveness

2 ways to measure transition effectiveness:

Financial Benefits- It is important to quantify the real cost of the function before off-shoring (baseline costs)
and the cost of the offshore team on an ongoing basis.
• Cost related to moving the function to the new team should be tracked separately as project costs
• Capturing these cost elements enables comparison of baseline costs with current costs, and provides
an accurate measurement of the saves.

Performance of the Team- primarily done by developing performance metrics and usually subject to a testing
phase to determine reasonability of the service measures- known as “baselining period”.

3. Document Readiness
Proper documentation helps us have a smooth and effectiveness transition. We should look the bigger picture
in mind, like asking ourselves, “What should be documented?”.

The following are guides for proper documentation:

a. Inputs- It is important to know where the inputs are coming from, how they are given and who uses
the inputs, including when inputs are to be delivered and what to do when challenges arise to
maintain its quality are to be carefully considered also. Source systems and dependencies are
inputs to be documented. Timing of the delivery quality assumptions and work-around in case of
failure in delivery of some inputs.
b. Processes- these are documented using the industry standard format and in complete detail. Hand-
offs to other parties, internal and external are documented including timing and format.
Internship/flash reports, if required, are also documented as deliverables. Delivery time, day-of-
month, period targets are documented. With enough details and information based on the
company’s standards, processes will be clear to everyone who needs it. Even on processes,
updates and tasks endorsed with its deadlines should help the company have smooth and consistent
process. If we are to outsource a task to internal or external partners, it would be helpful if our
partners would be informed on what things are used and how it I used to perform a certain task in
process.

c. Outputs- A checklist or list of guidelines could be helpful to ensure that outputs are made on time
and comply with the company’s standards before it is endorsed to next final steps.
Interim/flash and final outputs are completely
documented. Formats, control steps and
quality assurance checklist are completely
defined. Delivery time/day-of-period are
reviewed to ensure they are
achievable/consistent with input timelines.
Service provider and transition project
manager should validate that timeline are
current and not “aspirational”. This could put
in desired/unrealistic deadlines when
outsourcing.
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d. Communication- people inside the company know who to communicate with and how is very
important. Communication channels for output to be explicitly defined. Clarity here minimizes
misunderstanding during early production period, especially if the output is an input to another
process.

e. Supervision- It is also important to document how we manage people who plays an important role
in our business. Onshore supervision points and what will be reviewed/checklist should be defined.
Supervisory review paves the way for transition into “center of excellence” mode where supervisory
control rests offshore.

4. Work Shadowing
Work Shadowing is the activity of spending time with someone who is doing a particular job so that
you can learn how to do it (Cambridge Dictionary). Meaning, you need to get quality work experience or do
some work shadowing.

In IT-BPM Industry, work shadowing is a term usd for “learning-by-doing” activity of service provider
personnel, generally done at the same location as current company performer.

Phases:

1. Onshore personnel doing the activity- This is about performing activities and conducting trainings by the
onshore personnel. Service provider staff reviews documentation provided against actual activity done by
Onshore Personnel.

Example: Our school decides to contract a security agency to install CCTV camera system. The school
administration and the vendor (security agency) agreed to install 21 cameras feeding back to the servers the
videos of all offices and classrooms. The vendor will be installing the proper software (meaning processes
along with the applications). Peopleware – providing the school personnel proper training on how to use the
system. All together, the entire process (installing hardware, software
and peopleware) would take 144 hours with the cost of 280,000.00.
During the installation process, the observed actual hours worked was
only 102 hours. This discrepancy in work hours will be documented.
On the second item; if addressing those discrepancies would improve
the quality of the process, then a modification of the process
documentation can be done. Thus, the third item suggests that it would
be an advantage for the company to resize the staffing doing the
training based on the modified documentation.

2. Guided service provider network- The service provider performs while being observed by the service provider.
This may be done onshore or at service provider site. This phase complete 1 or 2 full cycles. If output is
monthly, guidance is given for 2 month-end, if daily, guidance is given for few days. In general, 1 to 2 months
of guided work.

3. Go-Live- Service provider performs on its own but is still closely monitored by the client company for a certain
period of time to ensure good quality of the task being performed. Service provider performs the activity
independently in the service provider site. This phase needs to closely monitored for a period of 3 months to
ensure stable performance.

5. Readiness Assessment
The purposes of readiness assessment are to verify if the
process to be outsourced is adequately documented, correctly sized
and with right level of quality assurance and supervisory control.

Adequately documented means if documents are properly

documented with sufficient information, the current process will
result in ungroup knowledge. Service providers with sure certainty of
process premium in their proposals will lead to very clear on what
will be delivered, how and by when.

Take note that unclear processes, misunderstandings and uncertainties are more likely to happen
without adequate documentation. This results to poor quality of outputs and additional costs.
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Correctly Sized in generic resources, most current processes done in-house operate with long-
experienced staff (veterans in role). Without readiness assessment, the company will estimate the current cost
low. The receiving provider may incorrectly size the role, may have initially 2 performers (with very structured
role) to do the same 1 FTE job until knowledge is gained/documented.

Resource sizing already includes activity of quality assurance and supervisory control. This
means that, most in-house processes rely on veterans’ performers with long- developed “business acumen”
that allows unstructured sense-check quality assurance.
Here, most contracts (especially shared service center migrations) are under-configured because service
providers will inevitably use the “change request” process to add to the cost.

6. Hand-offs
This is when work is endorsed from one worker to another or from one work station to another
function. Hand-offs are transfers of output to a different performer, an approver, for further action prior to
continuation.
Reasons for hand-offs are:

1. Data enrichment- the other performer adds data to the transaction. We can look back at our assembly line
as an example. Each segment performs a different task with its own enterprise. The more hand-off the
output passes, the more the output gets completed.

2. Quality assurance- the second performer is a checker. Hand-offs can be used to check the quality of an
output.

3. Control – approval for materiality and substance is done by a separate person. It is more like getting help
from a person who is not part of the company to check the output.

7. Scale
In this topic, we will be looking at scale, sufficiency of scale and some tips on how to optimize scale.
Number of employees (manning compliment, head count, full time requirements FTE) are sufficiently of scale
depends on the following:

1. Service provider – when a client considers a service provider, the client look at its hardware, software and
peopleware capabilities. If the service provider has a favorable performance track-record to boot then this
would be additional points to influence the decision of the client.

2. Requirement of the job- The service provider might need to ask, do we already have the appropriate
hardware, software, and peopleware I place to consistently meet the requirements of the job in a
sustainable manner? Requirements can be described through: volume capacity of transactions,
complexity of the job and expected cycle- time for job completion. Of course, the final or ultimate judge to
determine readiness of hardware, software and peopleware of the service provider is the client.

3. Client- The client can freely make decisions that will directly impact the service provider’s hardware,
software and peopleware capabilities.

Tips to Optimize scale:

1. If the process to be outsourced is done by only a few FTEs, it is not worth outsourcing. Example: Create Letter
of Credit. But the role is only done by one person who does everything, or one-person full day plus a supervisor
for 1 hour a day.
2. Near self-contained roles have good potential for outsourcing- because more FTEs covered complete help
desk and mortgage processing (from application, form acceptance to creditworthiness calculations until fund
will be released).
3. End to end roles are ideal. As an example, an offsite computer repair service starts with receiving equipment
and ends with computer ship back; parts ordering, receipt and repair are included in outsourced process.
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Identifying Task Candidates for Outsourcing

Tool for task analysis can be:

1 Follow the performer: consultant follows a performer and tracks time spent in each task.
2 Time tracking: each current performer tracks his activities, how much time is spent in each task, over a
period of 1 or 3 months

Task Candidates for Outsourcing Considerations

1 Readiness assessment
2 Level of documentation of onshore processes
3 Scale
4 Time-tracking
5 Prioritize role that are more ready
6 Lift-and-shift for less documented roles
7 Cost of low outsourcing readiness

RECOMMENDED LEARNING MATERIALS

To supplement the lessons in this module, you may download the following articles:

• Successful transition in outsourcing By Morten Kamp Andersen (Aspect or) & Peter Ankers Jerne (ISS A/S)
• Transition Process and Performance in IT Outsourcing Evidence from a Field Study and Laboratory
Experiments

REFERENCES

Monmita, J. & Goel, N. Feruary 12,2020. Knowledge management during service transition and beyond.
Retrieved July 18,2020 from https://www.nagarro.com/en/blog/service-transition- knowledge-
management-system

Deloitte (2012). Global Outsourcing and Insourcing Survey. Retrieved from

https://deloitte.wsj.com/cio/2013/03/27/outsourcing-success-may-hinge-on-smooth- transition/

Luthra, V. Knowledge transfer is the key to business process outsourcing

Tiwari,V.(2010). Transition Process and Performance in IT Outsourcing Evidence from a Field

Study and Laboratory Experiments. ISBN 978-90-5892-241-0

How to Do Business Process Modeling Notation. 2016. Retrieved from www.aiim.org