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Part 2: What’s Driving the Growth of BPO? The Emergence of Transaction Engines By Eric Simonson, Everest Group

In Part 1 in November’s BPO Journal, we discussed how labor arbitrage impacts the ability of outsourcing providers to capture leverage benefits. Due to the significant cost savings potential offered purely by labor arbitrage (30 to 80 percent depending upon the geography), outsourcing providers are compelled to find new ways to utilize other sources of leverage such as technology, best practices, and scale. After applying those additional sources of leverage, the maximum potential cost savings is typically reduced to 50 to 60 percent because of the additional cost of remotely running and managing operations in a lower cost labor market.

We term the resulting solution that an outsourcing provider offers by applying labor arbitrage with other sources of leverage a “transaction engine.”

Definition of a “Transaction Engine”
The term transaction engine is intended to capture the repetitive and scalable nature of the solutions outsourcing providers develop to provide BPO services through the use of labor arbitrage.

“Transaction” refers to the well defined and repeatable nature of how an outsourcing provider manages the activities of the solution. For example, as described in Part 1 of this series, the outsourced process must be carefully defined and disaggregated to ensure that roles and responsibilities are exceptionally clear for a process to be managed across time zones, cultures, and multiple locations. This is not to suggest that the activities are simple or completely automated, but rather that the inputs, outputs, and working rules are so well-defined that there is no doubt as to how the work will be completed.

“Engine” refers to the scalable nature of the solutions of providers. Much like the engine of an automobile, many different components (or companies) can draw power from the engine. In an automobile, the transmission, air conditioner, and radio all draw power from the engine. Similarly, in a BPO transaction engine, different companies can derive similar benefits (power) from the engine, although each company’s benefits may be put to slightly different uses.

For example, an outsourced human resources (HR) service may provide each client with reliable and efficient management of employee records, payroll, and benefits. However, some companies may capture value from this service through simple cost reductions while others may receive benefits from the ability to more quickly scale their organizations and operations through mergers and divestitures. Accordingly, the service offering is typically built around the principle of “mass customization” – the ability to tailor critical aspects of the service while retaining the underlying leverage provided by the scalable solution.

The Two Types of Repetitive Activities in a Transaction Engine
Much of the transaction engine is designed to handle activities that are automated. However, not all of these activities are completed by computer systems transferring information to and fro. Some automated activities are completed by humans working within explicit guidelines that leave no room for judgment or analysis. For example, clerical resources may work from scanned images to code the information on an application or invoice into an information system.

In addition to automated activities, a second set of activities that we call analytical activities are critical components of transaction engines. These activities may be significantly supported by information systems, but, at the end of the day require human judgment and analysis. Example activities requiring analysis include:

Finance and Accounting
– Exercising discretion in release of payments.
– Deciding whether customers meet conditions to receive discounts.
– Identifying additional opportunities to reduce working capital.
– Appropriately interpreting tax laws or amortization guidelines for items booked to the general ledger.

HR
– Counseling employees on understanding benefits or 401k plans
– Coaching managers on how to apply HR policies

Although the analysis activities are not naturally top-of-mind when people think about BPO, they are often critical components of the transaction engines developed by providers. These analysis activities become critical because the ability of a provider to deliver business impact beyond simple cost savings is directly linked to the provider’s ability to develop and act upon insights that aid in better managing the business impact of the processes for which they are responsible.

Synergy Across the Two Types of Repetitive Activities
By combining both automated activities and analysis activities into the transaction engine, an important synergy is released: self-service. Self-service is the ability of a user to input, access, and utilize information without the support of another human. Shifting some of the work to the user (e.g., new employees filling out forms at a kiosk in HR) creates a more efficient use of time for both the company and the user.

For example, when an employee wishes to change her benefit plan, a self-service model that can be completed in the evening allows input from the employee’s spouse. In this situation, no human resource from the company must be involved in the process and the employee is able to make changes at a time convenient for her (and likely to have an easier decision process with her spouse).

Synergies of Grouping Processes into the Transaction Engine By combining an appropriate scope of processes into a transaction engine, an outsourcing provider is able to capture synergies across processes that buyers of outsourcing services often don’t recognize in their initial outsourcing plans.

Examples of cross-process synergies include:

Linking benefits and payroll systems allows a change to benefits to be automatically reflected in payroll, thereby reducing clerical work.
Creating a single HR system helps uncover the total healthcare costs and plan usage to better negotiate coverage and policies with insurance companies.
Implementing a single GL/AP vehicle allows better analysis of spend across vendors, thereby supporting the ability to gain optimal discounts in procurement efforts.

In short, these cross-process synergies provided by a transaction engine provide increased visibility into the operation of the company. This increased visibility provides an opportunity for an outsourcing provider to both:

Collect new information that provides insights, and
Act on these insights to gain benefit for their customers.

With transaction engines, buyers of outsourcing services can now hold providers of the transaction engines accountable for identifying and delivering impact from cross-process synergies.

However, the scope of the processes included in the relationship must be consistent with the desire to capture cross-process synergies. Transaction engines are a powerful, new addition to BPO. Companies considering a BPO solution should carefully investigate the capabilities of different transaction engines and determine which ones are appropriate for their needs.

Lessons from the Outsourcing Journal:

Transaction engines are repetitive, scalable BPO solutions that meaningfully incorporate labor arbitrage into the leverage provided by the solution.
Repetitive activities included in a transaction engine include both automated and analysis activities.
Transaction engines capture additional synergies through self-service and appropriately grouping processes to capture cross-process synergies. Companies considering a BPO solution should carefully draw the scope of the solution to reflect the capabilities of transaction engines provided by providers able to meet the buyer’s needs.

In the January Forecast issue of the BPO Outsourcing Journal, Peter Bendor-Samuel will provide his predictions on BPO for 2003. In February, we will conclude this series with Part 3, a discussion of different types of transaction engines.

Publish Date: December 2002