IT BPO 3 – Fundamentals of Business Process Outsourcing 101

I. Chapter 2: Fundamentals of Outsourcing

II. Introduction

This module shows what businesses are involved and what kind of work there is in the
Information Technology – Business Process Management (IT-BPM) industry. Topics
cover in this module are the following: Two (2) Types of Outsourcing; Strategies of
Outsourcing; What to Outsource; Key Technologies That Support Outsourcing; and
Fundamentals of Outsourcing.

Below are different vocabularies for your reference.

Client

Customer of a professional service provider or the principal of an agent or contractor.

Crowdsourcing

The practice of obtaining needed services, ideas, or content by soliciting contributions

from a large group of people, and especially from an online community, rather than
from traditional employees or suppliers

Multisourcing

The division of activities or services involved in the execution of an essential business

function among a combination of providers, both internal and outsourced, in order to
gain more control over costs and accountability while reducing dependence on any one
provider.

Vendor

The party in the supply chain that makes goods and services available to companies or
consumers. The term vendor is typically used to describe the entity that is paid for the
goods that are provided, rather than the manufacturer of the goods. A vendor, however,
can operate both as the supplier of goods (seller) and the manufacturer.

SharePoint

A tool that provides intranet portals, document & file management, collaboration, social
networks, extranets, websites, enterprise search, and business intelligence. It also has
system integration, process integration, and workflow automation capabilities.

Teleprescence

a set of technologies which allow a person to feel as if they were present, to give the
appearance of being present, or to have an effect, via telerobotics, at a place other than
their true location.
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 WebEx

An application for sharing and conferencing service that is widely used for
presentations, demos, training and support. Everything that the presenters see and
manipulate on their computers can be viewed by everyone in the conference.

III. Learning Outcome

By the end of this module, students will be able to:

1. Name and define the two types of outsourcing;
2. List the two strategies of outsourcing;
3. Demonstrate the two strategies of outsourcing;
4. Explain the common types of activities, task and/or processes that get outsourced;
and
5. Identify what are the key technologies and trends in outsourcing.

IV. Learning Content

The Two (2) Types of Outsourcing

There are two (2) types of outsourcing and they are as follows:

1. Third-Party
- Owned by a service provider, a local entity or part of a global group
- Providing services to clients of the service provider

For “Third-Party” let’s look at Microsoft and their service SharePoint. Client
companies rely on Microsoft to leverage its technical expertise to ensure for an
optimum user experience by providing intranet portals, document & file
management, collaboration, social networks, extranets, websites, enterprise search,
and business intelligence.

Examples:
Accenture, AEGIS, Convergys, EGS (NCO/ APAC), IBM, Sitel, SPi Global,
Stream Global, Sutherland, Sykes, Tele Tech, Teleperformance, Telus

2. Shared Service Center (SSC)

- Wholly-owned by the mother company
- Providing services entirely to affiliates and subsidiaries, or more rarely to clients
of the mother company.

Now for Shared Service Center, let us try to bring it closer to home so to speak.
Take for example San Miguel Packaging Products (SMPP), SMPP provides the total
packaging solution to San Miguel’s beer division. SMPP provides SMB (San

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 Miguel Beer) with the bottles and cans, the crowns for the bottles, the labels for the
bottles, even the plastic palettes or cartoons for easy transport of products.

Then in similar fashion, SMPP also works with other beverage products of San
Miguel doing the same service it provides for SMB.

Examples:
ANZ Bank, Chartis Technology and Operations Management, Chevron, Citigroup,
Dell, DKS, HP, HSBC, J.P. Morgan Chase, Maersk, Manulife, Shell Shared
Services Asia, Thomson Reuters

Strategies of Outsourcing

1. Multisourcing
- Multiple vendors for client’s outsourced project.

Example:
- GM’s Brazillian e-commerce site. Vendors: Oracle, AT&T, Microsoft,
Cisco, EDS (now HP Enterprise Services), IBM
- GM’s 2007/ $7.5B IT outsourcing contract with EDS (now HP Enterprise
Services), IBM, Capgemini, and Wipro Ltf.

Multisourcing simply means contracting or using multiple vendors for

fulfillment of a client’s outsourced project.

The obvious benefit or advantage to multisourcing is that the buyer or the client
can leverage the best possible: technical expertise, support infrastructure, system
or product support from the host of service providers that they engage through
separate contracts.

One disadvantage that can arise is the minute possibility of incompatibilities of

technologies intended to work together. Then again this is easily overcome with
project planning, testing, training, and, quality assurance

2. Crowdsourcing
- Company puts out a call for a project; best solution/ submission is accepted
and contracted.
- “…outsourcing to an undefined, generally large group of potential offerers
in the form of an open call.” (JeffHowe)

Crowdsourcing is the practice of obtaining needed services, ideas, or content by

soliciting contributions from a large group of people, and especially from an
online community, rather than from traditional employees or suppliers.

Take for example a game developer who releases a beta version of a game for
public testing. To test and evaluate a product, they invited people to see and test
it as they finalize the product.

It would have been an added cost to company to hire professionals so as an

alternative, they invited people to see and test the software.
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 3. Onshoring
- Vendor in the same home country as client

Advantages:
- Allows immediate response: product designers in the same country respond
to market feedback quickly
- Local contractors have same market knowledge, culture, language,
communication style; minimizes culture issues

Onshoring or Onshore Outsourcing simply means that the vendor or service

provider is based in the same country as the client company.

The example earlier of San Miguel Beer and SMPP is a perfect match to
illustrate what onshoring is.

Disadvantages:
- Risk of inadequately selected, trained, supervised staff – i.e., less skilled
because contracted staff are lower paid
- Risk of higher attrition (lower business acumen/ process knowledge) than
internal staff; less motivation to deliver quality
- Example: New York bank contracting start-up security service firm in New
York

Given these potential disadvantages it is critical for a client to conduct a

thorough market research for a service provider that not only fits budgetary
requirements but also can provide sufficient proof based on a track-record of
related experience.

4. Nearshoring
- The transfer of business to a nearby country, often sharing the same border.

Advantages:
- Fee-for-service variability rather than fixed compensation costs
- Significant labor cost arbitrage

Both parties expect to benefit from one or more of the following dimensions of
proximity: geographic, temporal (time zone), cultural, linguistic, economic,
political, or historical linkages. A good example would be US outsourcing the
business to Mexico. Other than the labor being cheap, it would be easier for the
business to manage their offices in Mexico since its location is just beside their
country.

Variability in most instances implies a certain degree of uncertainty that is

something uncontrollable. As future managers and business owners, uncertainty,
unpredictability and uncontrollability in your business operations are terms that
can cause you a significant amount of discomfort.

Disadvantages:
- Additional coordination costs, sourcing management, communications
- Transfer pricing/ tax margin requirements
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 - Example: Hongkong retail firm offshoring garments manufacturing in
Manila
A retail firm in Hong Kong may outsource the manufacturing of their garments
to Manila for some reasons. However, they may need to train some Filipino’s
about their culture and language for better communication. Transporting the
garments and coordinating from Manila to Hong Kong would also incur
additional cost.

5. Offshoring
- Vendor and client in different countries.

Advantages
- Allows company to focus in core business
- Fast ramp-up/ down at reasonable cost
- Opportunity to expand into new areas cost effectively

Disadvantages
- Data privacy/ confidentiality issues
- Lack of right business acumen/ right market knowledge in offshore location
- Cultural differences leading to delays and miscues
- Risk of high attrition in service provider, weak staff selection/ training

Offshoring or Offshore Outsourcing is the most popular form of outsourcing.

For advantages, Let us look at the personal electronics giants Apple and
Samsung. Beyond being competitors in the mobile phone and tablet market
segments, they are also in business together.

Apple contracted Samsung to produce processor chips for their highly

successful product offering the iPhone. In this case Apple was the buyer or
client, and Samsung was the vendor or service provider. Now, both Samsung
and Apple including Nokia for certain products they all “produce” use corning®
gorilla ® glass. Corning® gorilla® glass is a very robust and durable glass that
does not compromise viewing experience or user interface for touch devices.
This glass is produced by another vendor. So in this instance; Apple, Nokia, and,
Samsung are all clients or buyers of the vendor or service provider – Corning.

Therefore with having Corning as their supplier, Apple, Nokia, and Samsung
can focus company resources and expertise on their core business which is
definitely not glass manufacturing. One clear benefit for us consumers with
these three competing Telco manufacturers is that we get to pick the best
possible phone to fit our lifestyle, needs, and, of course, our budget.

Despite these disadvantages there is a very clear upward growth trend for the
outsourcing industry as a whole. What keeps all these disadvantages from
becoming lethal is the proactive enforcement of government and industry
regulations and incentives, as well as, company standards and guidelines
regarding quality, data security, product training, cultural sensitivity training,
and worker well-being.

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 What to Outsource?

Before moving to the main topic, let us define these 2 things first - Core Activities-
Tasks-Processes and Non-core Activities-Tasks-Processes. Let us use Reebok as an
example. Reebok is an athletic company that creates and designs sports apparels.
Keeping that in focus, Reebok management chose to outsource its administrative
Human Resource (HR) functions. In doing so Reebok’s total back-office or support
manning head-count is significantly lean.

Now, the two types of what to outsource are the following:

1. Core Activities-Tasks-Processes

Core activities-tasks-processes are essentially what the company is known for, is

what you are bringing home, is what you are paying for, or how the company
makes its money. In our example, the core activity of Reebok is to create and
design sports apparels.

2. Non-Core Activities-Tasks-Processes

For Non-core activities-tasks-processes, let us look at Reebok again. Reebok

needs a Human Resource Department to support their internal operations but
this indirectly affects the fulfillment of their value proposition to their
customers.

What Not to Outsource

Core Activities-Tasks-Processes:
- Design
- Product Development
- Process
- “Recipe”

Both KFC an American brand and Jollibee proudly Pinoy, closely protect their
chicken recipes. Another example is the multitude of brands that use Android as the
preferred operating system on their smart phones, but because of clear differences in
product development and manufacturing processes some brands are more durable
and attractive than others.

Core activities are the “bread and butter” of the business – the money makers of the
company.

What to outsource? We can outsource a well-defined/ documented tasks, standard

outputs.

Examples:
- IT Development: programming, documentation, unit and integration testing,
implementation of new systems, conversion to new platforms
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 - IT Maintenance: application maintenance, helpdesk, network support.

Typically Outsourced Activities-Tasks-Processes

1. Business Process Outsourcing (BPO)
- Outsourcing of entire business process components, e.g. HR, payroll,
accounting, financial, etc.

On our table, Reebok is just one of the companies that chose to get services of
other companies to do its HR functions. Shell SSC, Deutsche, Knowledge
Services, Coca-Cola Bottlers Business services are companies that offer HR
services for other companies. Same goes for the next two examples. These will
only be possible if there is a clear definition of tasks or processes.

2. IT Outsourcing
- IT Technical Support
- IT Application Development
- IT Application Management
- Data Center Operations
- Software as a Service (SaaS)
- Cloud (On-line Storage) Services

Some of the companies that caters to IT outsourcing are the following:

Accenture, Chartis, Chevron and HP.

3. Support Function/s
- Cafeterias
- Copy centers
- Security
- Janitorial services
- Trucking/ shipping
- Building maintenance

If you look closely at some schools you would find that most likely five (5) of
the six (6) items presented here are performed by agency provided personnel
and not direct employees of the school.

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 4. Routine Activities or Activities that can be Automated at Larger Centers
- Small banks outsourcing check processing to larger banks, riding on ATM
base of multi-bank network
- Small vendors using Amazon.com as data center, marketing and payment
processing platform
- Banks using common/ multi-bank core banking services of large technology
providers

Let’s take the second example. Amazon.com is close to some websites like
Sulit.com. It is like virtual marketplace where people can sell anything. All
information about the product and the vendor is there. Given that it is a
marketplace, there will also be buyers accessing it to find what they need.

5. Seasonal Requirement/s
- One day 50 employees needed, next day only 10 are needed
- Christmas hires to handle additional volume of transactions
- Temporary extension of operating hours to accommodate foot traffic

Another example for Seasonal Requirements is a call center that takes call for
flower orders and delivery would have their peak and off-peak season. To
accommodate calls during events such as Christmas or Mother’s day, they
would hire more people ONLY for that season. For employees being hired, they
would sign a contract which is short term. After the season, their contracts are
up. But these people’s record would be kept as reference and they would be
priority hires the next time the company needs more personnel.

6. Part-Based Activities
These are activities that are: routine, scheduled, with little uncertainty
- Automobile assembly
- Electronics assembly
- Packing solutions
- Handicrafts or garments for mass production

For all part-based activities, let’s look at the automobile assembly as an

example. The main car company may have their names on the product but some
of the parts are actually done by other manufacturers especially if the car
company doesn’t have the capacity to produce certain car parts.

Key Technologies that Support Outsourcing

Video Conferencing
- HP – Halo (8.5 min. video)
- Cisco – Telepresence
- Sun – MPK20: Project Wonderland

Web-based Conferencing and Workflow Tools:

- WebEx
- MS Windows Meeting Space
- MS SharePoint
- Google Applications
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 Each item presented here are tools that empower workforces that increasingly need
to conduct parts of its business functions virtually. These tools help the organization
knowing that some companies may not be in the same country where the service
provider is located. This covers sharing files, conducting meetings, doing
presentations and many more.

Fundamentals of Outsourcing

The diagram shows the Business cycle for an IT-BPM company. The cycle starts by
the time parties come up with an agreement and sign a contract which will be
discussed in the next module.

V. Teaching and Learning Activities

The class is about to experience being a CLIENT by putting up their own business.
Note that this group activity might pose a challenge to some who have a limited
exposure to the world of business. Googling or conducting a research is allowed to be
familiarized to the business assigned.

The class will be divided into 6 groups through a game or as per advise by the
Instructor. Choose a leader and a secretary for the group. Leaders will choose among
the businesses via draw lots. The chosen secretary should write the names of the
groupmates. The following businesses are listed below.

1. Restaurant 2. Salon
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 3. Clothing (tailor) 5. Boutique Hotel
4. Printing Shop 6. Flower Shop

Note that all business types are subject to the team or group’s interpretation. The
restaurant business type does not exclusively refer to a fast-food or fine dining
establishment. Similarly, the salon business is not an exclusive to women only salon
concept. The clothing tailoring shop business does not necessarily have to focus on just
formal custom built outfits. The printing shop business does not mean that the team or
group cannot include internet services as part of the product mix. The concept of the
boutique hotel we will be using in this group exercise is the boutique hotel concept that
is limited to total guest capacity – between seventy (70) to one hundred twenty (120)
guests, or, thirty-five (35) to sixty (60) rooms. And, for the flower shop concept this
business concept can freely include event coverage – flowers for weddings, flowers for
store openings or product launches, or even flowers for a funeral.
1. In your respective teams, create your business concept and supply the following
information:
- Name of the business
- Products and services
- Price of products and/ or services
- Image/ brand identity that you want to create
- Location
- Marketing strategy
- Operating processes

Stated are the requirements for each business. Start with the first two requirements by
coming up with the name and the services you plan to offer.
Products and services is what customers will be buying. Be mindful of trying to create
too narrow or too broad a mix of products and services. For the restaurant team/ group,
what is the house specialty? For the printing shop team/ group what is different about
your shop’s printing services? Or for the boutique hotel team/ group, what is attractive
about your business?
Price of products and/ or services. When dealing with this item – price of products and/
or services, try to be as realistic as possible. If a competitor’s salon in the same mall as
your own salon charges Php1,200.00 for re- bonding for normal hair length, then it does
not make sense if your salon business charges Php8,500.00 for the same service of re-
bonding.

Image and brand identity is critical for any business. For purposes of this group
exercise, we can capture this concept in well-written and thoroughly thought through
paragraph or sentence. For our purposes it can sound as simple as; “... a computer in
every home” which is a paraphrasing of the famous tagline of Microsoft. Currently
Microsoft is changing its tagline as a result of the evolving identity of the company.
Your team/ group can opt to present your business identity this way; “to be the number
one flower shop in the Philippines terms of: customer service, price, and delivery
efficiency.”

Location does not refer to a specific physical address, but rather as a description of a
target location where you intend to set-up your business establishment. Location
selection is also an important concern for many businesses. ASK Why do you think this
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 is so? For example; our restaurant operations will be situated or located; in a mall that
has assorted boutique shops, movie theaters, other restaurants different in concept from
ours, sufficient parking, that is accessible to public transportation.
Marketing strategy is another critical business decision for management teams around
the world. For your group activity you can simplify this critical business concept by
listing activities. For example, to attract customers to our boutique hotel we will be
placing tarpaulins at the exit points of airports, ferry as well as bus terminals. We will
also be distributing flyers with information about our boutique hotel at all major
shopping malls in the city. We will be airing commercials over the radio and have
television commercials. The point is to be as creative as possible in writing your
marketing strategy.
ASK what other marketing approaches do think you can use to market a business?
Operating processes for the most part, answer the question of “how will my business
make money?” To fulfill on this part of your group activity, I recommend that you
begin by identifying the functional departments or units of your business. For example,
with our boutique hotel, we have the following departments: front office, housekeeping,
food and beverage, and, security. I am not saying that these are the only departments a
hotel needs, there could be more.
Each team/ group to submit a detailed description of an average or normal customer
transaction. This detailed description should clearly demonstrate and illustrate how and
when the customer receives the products and/ or services and more importantly pays for
it. Beginning with initial contact with the customer and ending when the customer
finished his or her transaction up until leaving your establishment.

To make this group activity more realistic let us all assume the following business
expenses.
Assumptions:
- Water – 5,000 per month
- Electricity – 5,000 – 10,000
- Internet connection – 1,000
- Minimum wage – PhP 446.00, 15 workers or less
- Base rent – 5,000 – 10,000
2. Provide for the total expenses for two (2) years.
For the benefit only of the boutique hotel group assume full occupancy and that the
following cost items apply:
- Water – add 10% for every guest
- Electricity – add 5% for every guest
- Internet Connection – add 10% for every five (5) rooms
- Minimum wage – assume total manpower of one-hundred fifty (150) staff across
all departments (front office,
- housekeeping, engineering, etcetera)
- Base Rent – assume Php.5M per month

3. Identify what services/ products will you be outsourcing and why?

For this phase of our group work, you and your group mates must decide what parts or
functions, service delivery or fulfillment, product creation or production – of your
business is to be outsourced. State the reason why.
For this particular output, groups must include in their explanation the perceived or
desired benefits to outsourcing.
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 Encode your output on any word processing software like MS Word using the A4 size
of bond paper and prepare for a group presentation using any presentation graphics
software like MS PowerPoint. Group presentation will be done online via Zoom video
conferencing application.

VI. Recommended Learning Materials and Resources for Supplementary Reading

Please click/ copy-paste the following links listed below in a web browser like Google
Chrome or Mozilla Firefox for supplementary readings.
1. https://www.deloitte.co.uk/makeconnections/assets/pdf/the-outsourcing-handbook-
a-guide-to-outsourcing.pdf
2. https://www.outsourceaccelerator.com/whitepaper/strong-future-of-outsourcing-
white-paper/
3. https://www.xerox.com/downloads/usa/en/t/TL_whitepaper_records_management_
Rich_Baily.pdf

VII. Flexible Teaching Learning Modality (FTLM) Adopted

In this module, the online and remote FTLM is adapted using Edmodo and Zoom
application. For the online modality, the Zoom video conferencing application shall be
used for the purpose of delivering a lecture and allowing a synchronous discussion with
the students. For the remote modality, Edmodo shall be used to upload and download
the module, and to allow asynchronous discussion with the students. This will also be
used as a platform for the submission of the requirements.

VIII. Assessment Task

Quiz No. 1

Instruction: Match Column A with Column B to identify what specific reason for outsourcing
is described.
Column A Column B
_____ 1. A strategy where the vendor is in the a. Multisourcing
_ same county with the client b. Crowdsourcing
_____ 2. The transfer of business to a nearby c. Nearshoring
_ country, often sharing the same border d. Onshoring
_____ 3. Multiple vendors contribute to the e. Offshoring
_ client’s project
_____ 4. A strategy where the vendor and the
_ client are in different countries
_____ 5. The client opens a call to a large group
_ of potential providers

Quiz No. 2
Instruction: Encircle the letter of the correct answer.
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 1. Which of the following is an example of IT Outsourcing?
a. Data center operations
b. Copy centers
c. Electronics assembly
2. Which is an example of a business process component?
a. Janitorial services
b. Human resources
c. IT Technical Support
3. Which is an example of support function/ services?
a. Building maintenance
b. Payroll and accounting
c. Check processing
4. Which is not an example of Part-Based Activities?
a. Handicrafts and garments for mass production
b. Automobile assembly
c. Trucking and shipping
5. Based on this lesson, which process can be automated at larger centers?
a. Payment processing
b. Cafeterias
c. Human Resource

Quiz No. 3

1. What are the two (2) types of outsourcing?

2. Enumerate and briefly explain the five (5) outsourcing strategies.
3. What are the typically outsourced activities/ processes/ tasks? List it down.

IX. References

Books
 2013. Fundamentals of Business Process Outsourcing 101 Teacher’s Guide. Talent
Development, IT and Business Process Association of the Philippines
 2013. Introduction to BPO. Jaipur National University, Jaipur, India
Online

 http://www.businessdictionary.com/definition/client.html#ixzz2daCV7fEN

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 http://www.businessdictionary.com/definition/multisourcing.html#ixzz2daCyWqsG
 http://www.hongkiat.com/blog/what-is-crowdsourcing/
 http://www.merriam-webster.com/dictionary/crowdsourcing
 http://www.investopedia.com/terms/v/vendor.asp
 http://office.microsoft.com/en-001/sharepoint-foundation-help/what-is-sharepoint-
HA010378184.aspx
 http://classes.bus.oregonstate.edu/BA302/Cabak/outsourcing.html
 http://fashiongear.fibre2fashion.com/brand-story/reebok/vision.asp - Reebok
 http://www.oxforddictionaries.com/us/definition/american_english/telepresence
 http://encyclopedia2.thefreedictionary.com/WebEx
 http://www.urbandictionary.com/define.php?term=onshoring

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