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The New Route to Collaborative Workflow

New Wealth Leveraging Technology to Improve the interview
Over time, every business model and Customer Experience and Corporate
every strategy goes stale pg14 Profitability pg12
Gary Hamel, Management Guru Jordan Brown, CEO, MarketWise Kiran Karnik
Advisors, LLC President, NASSCOM,
talks about the trends
and developments in
Mortgage BPO Services the KPO industry
Complexity of Industry Challenges
Will Drive Accelerating Adoption of pg6
Mortgage BPO Services pg38
Andy Efstathiou, Director, Madhavi
Senior Analyst with Celent’s
Legislating For Success Banking Group talks about emerging
How to Create a Sourcing Contract and
Operating Environment that will Ensure
trends of BPO in banking pg57
Sourcing Success pg20
Marc Stark, EquaTerra

Douglas G
BPO Story Duncan
Governance of Offshore Program: Does One Model Fit All? Senior Vice President and
pg28 Chief Economist, Research and Business
Avinash Vashistha, Dr. P. K. Mukherji, Vinu Kartha
Development, Mortgage Bankers
Mortgage Offshoring to India Goes Mainstream
Craig Focardi, director, TowerGroup
pg34 Association of America, talks about pg9
Mortgage Banking trends and future
Putting the Value of Outsourcing Consultants in Perspective
Peter Bendor-Samuel, Founder & CEO, Everest Group pg36
Finding Lost Value in offshore outsourcing
Paul Thompson, Senior Advisor, Metagyre Inc. pg42 Atul Vashistha
CEO of neoIT, talks about
Outsourcing: Inside Out and Outside In seven secrets of successful
Anupam Govil, ceo & founder, global equations pg44
outsourcing strategy

Leader’s Room
The Laws of Behavior The View from a Cubicle Why Leaders... pg54
A Global Leaders’ Secret Weapon pg46 An Interview with Scott Adams
pg50 ...Should Reconsider Their Measurement Systems
Aubrey C. Daniels Scott Adams Michael Hammer
Leading authority on behavioral science Creater of bilbert Management guru and author

Management Corporate Headquarters (USA) Letters to the Editor

Don Ganguly, Chief Executive Officer 10 Corporate Park Send letters to manu.tandon@equinoxco.com or to any
Arin Brahma, EVP-Corporate Business Solutions Suite 130 of our writers.
K V Subramanian, Chief Financial Officer Irvine , CA 92606
Chiranjib Pal, Vice President, Client Services T : 949-250-1445 (ext-278) Feedback
Umesh Gupta, Chief Information Officer F : 949-250-7481 Share your suggestions and opinions with us at
Sumit Sapra, Transitions Leader Jyoti.makhija@equinoxco.com
Deepratna Srivastav, Operations Leader India
Ashima Varanasi, HR and Training Leader Equinox Global Services Private Limited Vision
DLF Infinity Tower A , 3rd Floor To educate banking professionals on BPO trends and
Equinox Sales Team DLF Cyber City, Phase 2 strategies and to bring experts and institutions to these
Tim Harmon, Director Sales Gurgaon – 122002 professionals through our magazine.
tim.harmon@equinoxco.com Haryana , India
Joe Beck, Manager Sales joe.beck@equinoxco.com Rewards and Recognition
Offshoring Best Practices Online Equinox has been quoted in the Global Outsourcing
Editorial Go to www.equinoxco.com where you will find an Top 100 in the leaders category by The International
Manu Tandon, Executive Editor, Sr. Manager Marketing online version of this magazine Association of Outsourcing Professionals (IAOP)
Manu.tandon@equinoxco.com published in FORTUNE® Magazine in May.
Jyoti Makhija, Executive Editor Electronic Newsletter Equinox has been ranked 18th between Top 50 Best
Jyoti.makhija@equinoxco.com Subscribe to the Offshoring best Practices newsletter, Managed Global Outsourcing Vendors in The Black
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Contributors: i-flex Solutions  |  Mortgage Bankers Association of America  |  NASSCOM  |  TowerGroup  |  MarketWise Advisors  |  NelsonHall  |  Everest
Group  |  Equaterra  |  Leadertoleader.com  |  Sourcingmag.com  |  MetaGyre Inc  |  Aubrey Daniels International  |  Celent  |  Tholons  |  NeoIT  |  Global Equations

outsourcing best practices    annual issue 2006

 CEO/Editor’s note

Dear Friends,
In our constant endeavor to provide you with the most comprehensive information on global outsourcing
in the mortgage industry, we have come up with our annual issue of Offshoring Best Practices.
Equinox Corporation is a global leader in providing cost-effective, high quality, Knowledge Process
Outsourcing (KPO) services to the Banking, Consumer Finance, Securities & Capital Markets and Insurance
sectors. Equinox is an i-flex company; i-flex Solutions, a multi billion dollar market capital company, is a
Global Leader in Providing IT and Outsourcing Solutions to financial institutions worldwide. i-flex services
over 625 customers across more than 120 countries.
Our Six Sigma driven integrated delivery methodology is based on a well-orchestrated blend of off-shore
and on-shore best practices model, and has significantly reduced the costs of business processes outsourced
while improving the quality and the productivity. Currently, we are handling over 35 different mortgage
Welcome to a processes, as well as, providing a complete end to end solution that utilizes a high-tech platform that contains,
an LOS, and a workflow design for distributing and monitoring the entire loan processing cycle. Some of
new mortgage our value propositions:

outsourcing l  Transforming Costs Structures- your company can save upto 60% of the current cost depending upon
the location and process complexity
revolution l  Redefining the Value Chain -Continual Process Improvement through Six Sigma Quality practice
l  Faster Operational Cycle - Speed to Market
l  Efficient Management of Volume Changes
l  Access to Leading Edge Technology
l  Managing Growth Effectively & Profitably

Cost advantage upto 60%! Yes, this is a big number. If you would like to know how Leading Mortgage
Banks are benefiting from a relationship with us, please write to me at dong@equinoxco.com or call me at
949-250-1445 Ext: 278. I shall be glad to brief you on our services through a webinar presentation.
Smart Companies Need Smart Solutions.

Yours Sincerely
Don Ganguly, CEO

The US mortgage industry is going through a technological transition. Mortgage has been on the low
priority in terms of automation and outsourcing in the whole banking chain. But with increasing interest
rates and competition, Mortgage banks are looking for ITO and BPO as long term strategic tools. India is
fast becoming a Mortgage manufacturing hub, with its strong competitive advantage over other economies
like China, Canada, and Philippines etc.
Some reports suggest that the offshore “BPO market size for the US Mortgage is in the range of $6 -
$7.4 billion. It is estimated that the US mortgage banking BPO market in India will grow to approximately
$1 billion over the next 5 years.”
Offshoring Best North American banking is going through a consolidation phase, it has thrown basket of opportunities
Practices, is an in space of BPO. Biggest challenge in any consolidation is the integration of processes and functions.
endeavor to Success of consolidation also depends upon how fast organizations integrate. This is a very resource & cost
connect you intensive process and banks may look for external experts to help them through their consolidation phase
by taking up outsourcable processes. Thus reducing the burden on internal resources, this also helps the
with leaders in bank to concentrate on their core competencies.
Outsourcing Though offshoring and outsourcing seems to be strategic cost optimization tool, the cost benefit
and Mortgage depends upon how successfully the outsourcing project is executed. We have seen wide gaps between
expectations and the deliverables.
space. Offshoring Best Practices, is an endeavor to connect the buyer community with the who’s who of
outsourcing and mortgage space. Some articles of this issue also address real challenges which some of you
might be facing and how you can gear up for successful outsourcing and offshoring projects. I am sure it
will guide many of you in formulating your outsourcing strategies. The flavor for year 2007 will indeed be
distributed workflow based outsourcing solution which extends risk free end to end window for mortgage
Happy Reading!
Manu Tandon / Jyoti Makhija

outsourcing best practices    annual issue 2006


“Our Strength
Lies in Non-
In a discourse with Don Ganguly,
CEO, Equinox Corporation, Kiran
Karnik, President, NASSCOM
(National Association of Software
and Services Companies),
talks about the trends and
developments in the KPO industry.

What are your thoughts on training filter that will create a wider base at the specific test especially for voice has to be
at the primary level? What would you entry level, and are not concentrating on created, and we are working with the
define as basic BPO skills? How is people for specialized areas. British Council on this.
NASSCOM addressing this issue? This training is useful not only for
There are two parts to what we are The Indian brand experience is either BPO executives, but to those work-
doing right now. The first one is very great or lousy. Many operators are not ing on the front-end as well. This en-
generic; it’s for the entry-level at the keeping quality at the margin, while sures that people have access to a broad
call center--domain knowledge with no a few small operators who should range of job openings. However, voice
specialization. The focus, here, is on re- not be in business are actually in it. assessment cannot be performed with-
moving the barriers of bad communica- Is there a certification, especially on out face-to-face interaction. As we have
tion skills, low analytical skills, and poor the voice side, for call center oriented intended to go online with the generic
voice and accent. operators as the voice experience is test, we need to get people to conduct a
We identify several skill sets that the personal and goes a long way? face-to-face professional assessment.
industry’s HR personnel have defined. It’s a matter of concern that qual- The other thing that I’m very keen
These aspects are very generic, but they ity standards are sometimes not main- on is in training English teachers, so
do help the industry to cut down time tained. This has been happening for a that they can teach spoken English
and costs of recruitment and training. long time now. There are some people along with accent and communication
This is not the best solution when we are who are satisfied and some who have skills. This is a long-term plan, and we
looking for specialized skills; therefore, had a bad experience. hope to produce not only effective writ-
we hope to try and develop specialized Along with the generic certification, ers, but effective verbal communicators
courses, which add on to the general skill we need to look at communication and in the next five or ten years.
sets. For advanced levels, people will spe- accent, which happens to be a huge
cialize on specific verticals. Nevertheless, problem area. We need to look at an The Indian outsourcing industry is
we are just looking at creating a first level individual base certification for that. A reeling under a high attrition rate.

outsourcing best practices    annual issue 2006


How will NASSCOM address this is- as companies realize that they cannot tions that have been providing some
sue, especially in terms of creating a turn a blind eye towards these issues. kind of broader low-level financial serv-
guideline policy? Background checks are performed, rea- ices on a mass scale on a factory kind of
This is a tough question. Frankly, sons for resignation from the previous model. However, these companies may
there are no easy answers to this. At the company are demanded, and serving of focus on an area and be unsure about
very basic level, we are trying to increase the stipulated notice period is insisted which model would work--hybrid or
supply at the input stage, to somewhat upon. Hopefully, these small steps will people-related.
reduce attrition. For specialized areas, a make a small difference to the high rates
company trains people to put them on of attrition. BPO to KPO is a big story. Do you
the job, but soon a new player comes However, even with all this in place, see that this is going beyond labor ar-
in and the first thing they do in order the attrition rate will remain bitrage, because even when
to stand apart from the others is to of- high in specialized fields, as you talk of a specialized
fer higher incentives. We tried hard to there is a dearth of readily domain, I’m still training
look at industry standards, ethics, and available skills in the market. or looking for skilled labor
created HR practices to curb this trend. This is particularly true in the at the end of the day? Have
Companies turn a blind eye to recruit- sophisticated financial serv- you seen a true solution
ing agencies who lure people away by ices section, as it requires a emerging beyond labor ar-
not only offering high salaries, but by deeper amount of training. bitrage knowledge process
also asking candidates to take up new We will also try and im- at the workplace?
offers in less than a week’s time, in order plement employee-friendly I have seen a few, but la-
to avoid using excuses like job satisfac- measures while developing bor arbitrage continues to be
tion in their existing jobs. Recruiting the database so candidates BPO to KPO at the base. It’s not that peo-
agencies benefit largely from this as need not worry about back- is a big ple would come if they had
they run the same candidate through ground check as details like story. Do a lead cost. Given a certain
different companies and get easy profit date of birth and graduation you see increase in cost levels, there
margins from the same database. We try should be enough. These are other factors that people
and reduce this with the usage of bet- kinds of checks stay with a
this going are taking into account. The
ter practices, along with fostering better person for life and will also beyond drive in most of these ar-
understanding between both recruit- serve as a complete check labor eas has been mere numbers.
ers and the industry. This problem is for the employer, simultane- arbitrage? However, this is not sustain-
bound to persist for the next few years, ously saving an employer a Don Ganguly,
able, as other locations and
until the supply system catches up. lot of money. It will be built CEO, Equinox countries will soon begin to
by an independent, respected Corporation offer the same talent.
How about creating some kind of third-party and be accessible We need people with
a national database to gather data only to an employer and not to a pro- doctorates. The US, for example, doesn’t
about people who are abandoning spective employer. have enough numbers. Companies
jobs, or are staying in jobs only for come to India looking for these skills
brief stints? This will help companies The BPO industry has gone through and are willing to pay more money for
perform background checks and en- several levels of evolution. What level it. Talent is the important driver here,
quire about references. of evolution are we at? after money. Though we have moved
We are in the process of putting in We are now beginning to see the de- from quality, to skills to data protection,
place a database for the industry, but velopment of niche players. About two- what lies at the bottom of the pyramid
there are issues like the data protection three years ago, we saw a set of small is cost. Things are fine as long as this is
security angle, employee concerns, and companies doing better than those who under control, but if costs go haywire,
unions amongst others. This system ramped up rapidly. This is happening customers are going to look for alterna-
should provide any employer with ac- particularly in new areas like market re- tives soon.
cess to a database on a “third-party search and legal outsourcing. Specializa- If you look at customers from the US,
checked” basis. tion is taking place in traditional areas typically, it’s not a labor-based play. You
The problem is not the issue of attri- like the financial services sector, and the have a system or a solution that embeds
tion, but the willingness of companies bigger players with their varied aspects labor or the solution--e.g. in the case of
to take a candidate who hasn’t served are adding to their portfolio and emerg- loan processing in mortgages, you have
the notice period in the previous com- ing as a new group of extremely special- to have a platform or a system for cus-
pany. The scenario is now improving ized people. These are often organiza- tomers. So, when we are taking our proc-

outsourcing best practices    annual issue 2006


esses to India, we are standardizing our amendments, too, to strengthen this model. They may have different centers
platforms and are embedding that onto law itself. in multiple countries for different rea-
a solution. In the US, all outsourcers Second, we are working on the en- sons, or one may be following a near-
have a system for delivering services. In forcement side with law enforcement shore strategy (working out of Japan,
India, we perform collaborative process- agencies, amongst others, to create Korea, etc.). Others may not be catering
ing, where we hang off awareness and train people to large call centers which are focused on
the customer system, then to track cyber criminals, the US. Therefore, you are beginning to
work on a piece of a proc- projecting evidence, and get an increasing amount of Indian com-
ess, and give it back to the understanding what needs panies, both in the BPO space and the
customer, and so on. From to be done. A cyber crime title space, getting to global delivery.
a KPO perspective, you laboratory will be set up As a country, we are in competition
create your own solutions soon. with China. There are many countries,
or infrastructure, but the We have recognized that especially in the European Union, who
labor angle does not get there are a lot of problems will be taking their work into China
the same screening as from inside the industry apart in the next three-five years, for reasons
a pricing standpoint. from database protection of cultural affinity, but India scores in
As long as you are do- and, therefore, have em- terms of talent and comparative costs.
ing a bit of the activity, barked on two other ini- Also, we need to create something new,
your costs will be critical. tiatives. One, finding and which is different and unique to India.
Certainly, if you move to- sharing best practices not Our strength lies in non-commoditized
wards providing solutions just within the Indian in- higher-end work.
or using your intellectual We need dustry, but also worldwide.
property in the process to We now have something What do you think of English as a
people with
create a platform of some akin to an annual summit spoken language? I have heard about
kind, then you move away doctorates. where there are collabora- an initiative where hundred million
from this and start look- The US, for tions and discussions with resources in China are being trained
ing at the value and not example, customers, vendors, secu- to speak English, with the objective
the cost. It’s happening in doesn’t have rity providers, and regula- of catering to demands in the next
few areas, but not across enough tory agencies in the US, in- few years.
the board. My assessment cluding homeland security Yes, I don’t doubt this, given the im-
is that it will take a few and financial security. mense determination of the Chinese.
years to get there. There is Companies Two, the task is to They are importing English teachers,
certainly recognition and come to India integrate some of these including people with the right accent
an awareness to increase looking for initiatives into a self-regu- so they can learn English in the cor-
capabilities and expertise these skills latory organization, the rect manner. The structure of their own
to be able to produce that and are framework of which is be- language and the fact that they are a
kind of a solution. This
willing to pay ing built now. The organi- comparatively homogenous country
would mean increased do- zation will be completely will ensure that English is not difficult
main knowledge—much more money voluntary and companies for them. In India, the reverse happens.
more than what we have for it. can join and abide by a When two Indians from different com-
at present. standard set of guidelines munities speak to each other in English,
on what they are expected to follow. We there are accent and language issues.
In the light of the data security debate, can ensure tight data protection, infor- Nevertheless, there is definitely a com-
what are your thoughts on proactive mation security, and good practices on fort factor while speaking the language.
communication and lobbying against the human resources front. In China, the entire top management
it? not only knows English, but would have
First, we have worked with the gov- What is your opinion on economies also been educated in the US. The prob-
ernment very closely to amend a few like China, the Philippines, and Ire- lem area lies with the common folk. If
laws, especially the Information Tech- land as a competitive threat to India’s you try to speak in English to someone
nology Act, in order to take care of some efforts in this field? What needs to be who is actually doing the work, he is
possible loopholes and ambiguities. This done to stay competitive? able to understand the language, but
work has been completed and there will Most Indian companies are increas- not able to speak it. In this scenario, In-
be a law soon. There will be additional ingly moving towards the global delivery dia should maintain its leading position
for the next 15 years or so.
outsourcing best practices    annual issue 2006

“Our Current
Expectation Is that
Rate Will Be Stable
for Some Time”
Douglas G Duncan, Senior Vice President
and Chief Economist, Mortgage Bankers
Association of America, shares his views on
the emerging trends in mortgate banking
with Arin Brahma, EVP Corporate Business
Solutions at Equinox.

The U.S. economy has bounced back continued slowing impact on the hous- I understand the long term rates are
so strongly from a slow period late last; ing market but the word which we are very much dependant on the bond
the IMF forecast the U.S. economy using for this phenomenon is “Normal- market.
would grow 3.4 percent this year but izing”. The reason to use this word is Absolutely, mortgages are priced off
inflationary pressures guides for high- because there is so much hype about the of the treasury yield curve. The 10 year
er interest rates. So, how do you trans- home prices. There will be some markets treasury is the base price for fixed rate
late these macro economic indicators where prices will fall, so you are going to mortgage products. This is because peo-
in perspective of Mortgage Industry? hear bunch of stories that the price bub- ple in US stay in a house on an average 7-
Economy is very strong but clearly ble blew up. However, we will witness 9 years. At present time the spread of the
slowing. The first quarter results were the normal state of US housing market mortgage rate over the10 year treasury is
stronger than expected but the second with prices falling in a few markets and 150 basis point so a 4.75 percent treasury
quarter was significantly slower, which in most market the prices will rise. The plus 150 basis point spread makes a 6.25
will ease the pressure on federal reserve last four & a half years were unusual percent 30 year fixed rate mortgage inter-
to continue pushing the interest rates in that very few markets had declining est rate. We believe the 10 year treasury
up. There is a debate as to how much prices thus the average increase has been is not going to go far from what it is but
further the rates will go, but our current high. The number with declining prices the spread is going to widen out little bit
modeling does not show that the Fed will increase. That’s why we use the word at close to 170 basis points by the end of
will make any further move. Our current normalizing. the year, which will translate to 6.5%.
expectation is that rate will be stable for I think the first priority of the Fed- If Fed goes up by another quarter
some time. Their next move will likely be eral Reserve will be to keep the long add another 15 to 20 basis points. Our
in early 2008. Lets suppose we are wrong term inflation expectation low. Macro mortgage applications survey which is a
and there is a raise of another quarter, we environment has a lot of uncertainty in very accurate predictor for new homes
will adjust our forecast accordingly. But regard to how far the Fed will go with put the expected 2 year decline at 20%.
it seems rates will be flat for the year. In respect to interest rates. Nonetheless, we For existing homes we expect a 12-14%
the present scenario, the fixed rate prod- are of the view that in worst case mort- decline over the same period
ucts will be around 6.25% to 6.5% by gage interest rates will be not pushed to
the end of the year, which will have a beyond 7.5%. What about the builders? We talk

outsourcing best practices    annual issue 2006

10 Interview

to some builders and the trends we the customer side increases the volatility sales culture that was ten years ago.
see is that there is lot of activity in in the business. In 2003, there was $2.5
the building space. Why is building trillion of refi in addition to $1.4 trillion So what you are saying is that there
new homes is high against the stated of the home purchase loans (the total of has been 80% decline in the margins
trends by you? $3.9 trillion). In 2004 and 2005 the and it will make lending operations
It’s true. When a builder starts a loan origination volumes were in range more sensitive to cost. I keep on get-
property they tend to take it through of $2.8 -$2.9 trillion, this year we think ting diverse numbers from various
completion. We see the number of per- the volume will further drop down to lenders on the cost of loan per unit.
mits obtained on which the property is $2.4 trillion. The dollar value of mort- I have read MBAA 2004 cost study; I
not started is at record levels, but the in- gages to finance homes sales will drop as would like to know what is included
ventory of completed properties for sale well since home sales will be down and in the unit cost and what is the unit
is at record levels. That is very consist- price will flatten. There is no question cost of originating a loan?
ent with the decline in new home sales that refis are coming down and all of All the firms operate in one or more
as demand has slowed. Secondly the this is having significant impact on the channels i.e retail, broker, correspond-
properties will are sold but not yet start- production margins of lenders. This has ent or direct marketing. Direct market-
ed is also at the record levels. So, this is translated to close to 80% ing includes telephone
a buffer on the supply side of the larger decline in margins. and internet. You have
builders. If you look at the reports you One other structural to sort the cost vis-à-vis
will see cancellations and concessions thing that’s taking place channel and also have to
are up in general for them. All of this to is on securitization front. sort by cost to create serv-
us is an orderly slowing in the housing A significant shift to the icing, secondary market-
market. On mortgage refinance side, re- private label securitiza- ing and investor relations.
fis are stronger than would be implied tion market happened be- The large diversified com-
by the current level and structure of in- cause of the development panies certainly have all of
terest rates. Interestingly, the sales mar- of vertical columns from those. You have to look
ket is not as sensitive to the interest rates consumer directly to in- at servicing cost per loan
as lot of people think. We will see a 30% vestors through secondary and secondary market ex-
decline in the refi volumes this year. market execution. So you ecution including hedg-
In some market the home prices will have companies like Mer- ing cost and servicing rate
fall steeply. Markets with heavily con- rill Lynch, Bear Stearns amortization.
centrated condos will be effected as the and Lehman who are buy-
prices of condos will fall sharply in a few ing mortgage origination Bread and Two years back the cost
markets. Supply of condos is at about 8 operations and driving the butter of the of production was not
months compared to 4 months (twenty product through their own an issue when compa-
months ago), so supply has risen very securitization structure
mortgage nies were enjoying the
rapidly. Interestingly the higher per- into investor community. market in the margins. But today it’s
centage of condo owner do not live in This is fairly recent phe- long run is becoming very critical
them as their primary residence, so the nomenon and if you take home sales. If so how do you see mort-
condos tend to be more price sensitive in context with what Wa- you look at gage bankers looking at
to short term market movements and chovia did in its acquisition the finance core vs non core, fixed
prices are more variable, so we watch of Golden West, Wachovia cost to variable cost regi-
condo markets as the leading indicator. has column within the
of home men also how they are
holding company. A year sales, it’s very looking at offshoring?
In terms of refi mortgage lenders, in ago they bought American steady. Definitely, I see a trend
last few years many brokers counted Network Mortgage which there but from mortgage
into banker and major growth has is a broker operation, but they didn’t market perspective it’s a unit labor cost
come from refi boom that pool is fast integrate it with their mortgage portfo- issue. If adjusted for productivity differ-
drying up. What will be its impact on lio operation but rather have integrated ences, wage rate advantages and efficient
mortgage lenders? it with their capital market group. So execution exist, then they make a switch.
Bread & butter of the mortgage you have got some interesting structural Most large companies are doing it but
market in long run is home sales. If you changes taking place. The industry is for some of them tried and they were not
look at the finance of home sales, it’s more about capital management and successful but part of it has to do with
very steady. The option to repay from capital market execution as opposed to the scale of the operation. Some points

outsourcing best practices    annual issue 2006

interview 11

are critical- are they narrowly focused or companies which are extending end and see whether or not it’s adding any
broad based, are they national, regional to end solution for loan processing. value. If it’s not, cut it off or find pos-
or local. But its an industry where the What are your thoughts on that? sibilities for re-engineering.
rule of pure competition applies. That I have tracked the structural changes
means cost minimization is profit maxi- in manufacturing like automobiles & Offshoring is in nascent & experimen-
mization in long run. So, the trick is go- airlines. Mortgage industry tal stage in Mortgage eco-
ing to be the for successful to invest in processes other than contact system, there is a need to
technology to survive and lot of them are with customers is essentially educate banks with both
making significant investments. a manufacturing process. the risks and advantages.
There are great efficiencies What role MBAA can play
The increased compliance burden that can be imported into in facilitating the same?
like Sarbox, DoNotCall, Basel II, processes but the main con- Do you plan to create a
HMDA, RESPA, TILA will surely cern is of quality control. team which can develop
increase the cost of operations, with The way I look at the end standards in offshoring
excess industry capacity and loan vol- game is electronic mortgag- (same as MISMO for in-
umes declining by 20%. How do you es. That is defined as a cus- formation technology)?
see the industry responding to these tomer sitting at a computer Two years Standardization is the
external challenges to maintain their and applying for a loan and back, the objective of MISMO.
profitability? not meeting another person cost of MISMO is a two phase
The underlying theme of all these is throughout the entire appli- production process. Firstly it is data
transparency. Transparency means data cation, approval and grant- was not an definition & structure and
availability and purity. There is no ques- ing process including the that’s what has been fo-
tion that firms with larger databases will sale and transfer of the loan
issue when cused on for last five years
have to make investments in technology to the investor. companies of its existence. MISMO is
and tools to help them meet the compli- The information that’s were a toll to enhance the inter-
ance requirement. It’s a challenge as in- externally entered passes enjoying face between lenders and
dustry is not accustomed to this deep of through the system sup- the vendors. One thing that
consistent data reporting. Some smaller plemented by information margins. MISMO has not done is
firms will deploy the capital elsewhere or that service providers sup- process re-engineering and
go for readily available off the shelf com- ply upon the queries by and
But today in the eMortgage context
pliance tools which will immediately im- from the production man- cost is there is lot more of that to
port the efficiency that come with those. ager. It is imported into the critical. discuss. The second phase
same file with quality control Arin Brahma of MISMO activity will be
In mortgage life cycle from origina- run. This file is automatical- EVP, Corporate data purity. Data flow has
tion to servicing, how do you see ly transferred to the investor Business Solutions at become very smooth, hard-
the role of IT outsourcing and BPO who has agreed to purchase ware and software can talk
strengthening their competitive ad- it in electronic format. Though we are to each other because they are using the
vantage in a cutthroat market? long way from that it is the production same language. This doesn’t translate
The industry has been outsourcing process and you have to see the pressure that data is of good quality. There has to
for years. Things like tax and insurance points to find out the error rates and at- be lot of efforts to standardize the data
require narrow and highly specialized tack those points and then look at each purity which is what SOX and other
capabilities, where there can be econo- entry point at the production process compliance rules are targeted at.
mies of scale. If you look at technol-
ogy solutions, anything that is narrowly
Douglas G Duncan is Senior Vice President and Chief Economist at the Mortgage
defined and replicatable will at least be Bankers Association (MBA). As leader of MBA’s Research and Business
exposed to whether or not it can be con- Development Group, Duncan is responsible for providing economic and policy
ducted efficiently again on a unit labor analysis services in the areas of real estate finance, legislative and regulatory
proposals, and industry trends for MBA and its members. He also oversees the
cost basis internally or externally. Today education products and services of the association as well as its Industry
in mortgage industry there is no compa- technology committees and standards efforts. He has oversight responsibility for the Research
ny which can say that they can do every Institute for Housing America (RIHA), the Mortgage Industry Standards Maintenance
Organization (MISMO), the Secure Identity Standards Accreditation Corporation (SISAC), and
step in mortgage process by themselves. Lender Technologies Corporation. Duncan received his doctorate from Texas A&M University,
BS and MS degrees from North Dakota State University and AA degree from Fergus Falls
There is a new breed of outsourcing Community College.

outsourcing best practices    annual issue 2006

12 Main Story

Collaborative Workflow: technology backbone. The limits of ge-
ography, static processing, and depend-
ency on external vendors that create
bottlenecks in the process are eliminat-
ed. Technology is a core driver but the

true innovator is the mortgage lender
itself in its definition of their business
practice, principles, and their ability to
define the right strategic relationships
with technology-enabled partners.
Collaborative workflow incorpo-

to Improve the rates both automated workflow in a

loan origination system with the con-

Customer Experience and

cept of fulfillment resources that may
be located across the city or the globe
to complete tasks necessary to drive the

Corporate Profitability
business. It’s a relatively simple concept
with tangible results—cost reduction,
cycle time compression, parallel
task execution, touch-less
service ordering, and re-
source balancing. There
are three steps in
achieving collabora-
tive workflow.

Step One:
Establish a Solid
Loan Origination
The first step in estab-
lishing collaborative work-
flow is to deploy a solid loan
origination platform that has the
operational flexibility to incorporate
workflow, file imaging, a product and
pricing engine, automated underwrit-
ing, and the ability to inter-connect
partners through web services. The
combination of the five core compo-
nents is essential to reach optimal op-
erational effectiveness.
l  Product and Pricing

A Product and Pricing Engine (PPE)

is often confused with a custom Au-
What is the next innovation that is going to change the tomated Underwriting System (AUS).
way that mortgage lenders work everyday? The function of the PPE is to provide
instant product eligibility decisioning
Jordan Brown flexibly allocate and utilize both hu- to the point of sale--a retail loan officer,
CEO of MarketWise Advisors LLC man and technology resources to ef- loan broker, consumer, correspondent,
fectively complete a task. In order to or branch manager. The eligibility of a
Collaborative workflow is the develop- accomplish this objective, mortgage loan is tested and the individual loan
ment of the organizational process to firms need to evaluate and build a solid attributes are used to determine the

outsourcing best practices    annual issue 2006

Main Story 13

true price or rate/point combinations be reviewed without human interac- rules can be setup to handle virtually
available to a consumer. The benefit of tion through a series of business rules all normal situations and exception
a PPE is that a lender can ensure that or across the globe by a processor that queues designed to provide an appro-
eligible loans are entering the transac- is an expert in a particular work task. priate level of manual intervention.
tion platform. The PPE is a separate A healthy balance needs to be struck
component that may work interac- Step Two: Organize the Process between exception management and
tively with the AUS to deliver both an to Leverage Technology and automation to ensure that corporate
underwritten result set and the pricing Achieve Business Goals profitability goals and customer service
options to the point of sale. Once the technology platform is in levels are met.
l  Automated Underwriting Systems place, the next step is to clearly establish True automation is possible when
Access to investor or internal automat- the business process steps to leverage resources work interactively within the
ed underwriting systems is an essential the investment. The important prin- technology framework to fulfill a loan.
function of the transaction platform to ciple, however, is not only to develop/ A review of process steps to organize
provide decisions quickly to the con- deploy the right technology, but rather and leverage technology to achieve the
sumer. The most effective firms use the view technology as an investment to business goals of a mortgage lender is
automated underwriting function as a achieve a specific business goal/metric as follows:
marketing tool to capture loan transac- (cost per loan, channel profitability, l  Evaluate the current business

tions. Collaborative workflow is highly customer satisfaction level, etc.). process

dependent upon the integration and The process should be mapped out l  Develop interactive work queues

investment in automated decisioning for each loan from point of sale through l  Parallel task execution (apprais-

technology. loan closing. A keen eye will often re- al, credit, title, flood, and stipulation
l  Web Services Architecture veal duplicative steps, significant wait clearing)
In order to connect to the wide array times, and bottlenecks. Careful atten- l  Exception management (use
of service partners and technology pro- tion should be directed in identifying work queues and business rules to au-
viders that are involved in the mort- business processes that can be done in tomate)
gage origination process, it’s important parallel such as instantly ordering serv- l  Integrate onshore, offshore, and

that the loan origination system has ices without human interaction (title, in-house resources into work queues.
an open architecture to support web flood, credit, fraud detection, apprais-
services. Optimal efficiency is achieved al, etc.). Step Three: Measure, Monitor,
when all internal and external partici- The business process is modeled to and Focus on Key Performance
pants in the mortgage lending process meet the objectives of an organization. Metrics
are connected through the transaction One clear objective may be to utilize Collaborative workflow is the intersec-
platform. Often, web services can be all resources in the most effective man- tion of technology, people, and busi-
deployed to transfer loan data electron- ner. This may include a mix of staff ness process to effectively deliver a
ically eliminating duplicate data entry employees, offshore, or outsourced service. Every step in the business flow
and costly data quality issues. resources. Collaborative workflow pro- needs to be managed, monitored, and
l  Workflow and Image Management vides the flexibility to allocate work to focused upon. Open partnerships that
Workflow is the heart of what makes resources anywhere and anytime, based embrace both interactive technology
collaborative workflow achieve its on resource availability, work-group and resources create the operational
goals. The workflow tool can poten- skill set, and level of task complexity. environment to leverage collaborative
tially sit on top of any loan origina- Lenders should evaluate and de- workflow and drive profitability, quali-
tion system with an effective product velop a business flow that establishes ty, and ultimately the customer experi-
and pricing, automated underwriting, work queues for resources to effectively ence. Once the technology and process
and web-services architecture. Auto- complete their assigned tasks. Some are in place, key performance metrics
mated workflow must aim at creating loan processes can be fully automated can be put into place to dynamically
an electronic business process where such as electronic file image stipulation measure, monitor, and ensure profit-
the number of human-touch points clearing while other processes may still ability goals and a positive customer
for processors, underwriters, and clos- require human intervention. Business experience.
ers is minimized. Document imaging
is an important element of the work-
About the Author
flow in that it enables the manual file
Jordan Brown is CEO of MarketWise Advisors, LLC (www.marketwiseadvisors.com) which
to become an interactive work file that provides technology consulting and investment banking services to the mortgage industry.
contains the electronic images that can

outsourcing best practices    annual issue 2006

14 Main Story

The New route


to New Wealth
Over time, every business model and every strategy Gary Hamel
goes stale. World renowned author, speaker and business
thought leader

Leader to Leader, No. 19 Winter 2001

Reprinted with permission of John
Wiley & Sons, Inc.

WHERE does new wealth come from?

Like a four-year-old’s curiosity about
how babies are born, it’s a deceptively
direct question that often disarms our
capacity to answer. To be sure, we’re
ready with pat responses peppered with
references to return on investment, re-
turn on net assets, and economic value
added, but these measures tell us more
about how revenues are rearranged than
about how they’re created anew. Af-
ter all, we’re not talking about market
share sliced loose from a competitor
or revenues boosted by an acquisitions
binge—but truly new wealth: revenues
from new customers buying products or
services that yesterday they didn’t know
they needed and today can’t live with-
Creating new wealth requires more
than simply responding to market de-
mand. Think about some of the path-
breaking products of the past few
decades. No car buyers walked into
Chrysler dealerships in 1983 saying
that what they really wanted was a van
mounted on a car chassis with folding
seats—and don’t forget some cuphold-
ers. No customers told Sony the only
thing wrong with its tape players was
that you couldn’t strap one on your
head. Neither the BBC nor any of the
Big Three U.S. TV networks saw a mar-
ket for 24-hour news; it took a renegade

outsourcing best practices    annual issue 2006

Main Story 15

named Turner operating out of Atlanta was able to establish a dominant posi- saw liabilities, PECO saw opportunity.
to wed three developments—the shoul- tion in the online trading world. PECO would follow its competency
der-held minicam, more affordable ac- Today, Schwab controls some 30 into places other companies feared to
cess to satellite transmission, and the percent of all the stock trading that takes tread—taking on responsibility for
fact people no longer make it home in place on the Web. Even more impres- running environmentally risky nuclear
time for the six o’clock news—into the sive, Schwab’s market capitalization— plants in a safe, efficient manner. PECO
concept of a continuous news format. $3.5 billion in 1995, less than half that has now bought three U.S. nuclear
Innovations like the minivan, the Walk- of Merrill Lynch—has now pulled even plants that had been for sale for years—
man, and CNN succeeded not because with Merrill’s, which instead of engag- including a reactor at Pennsylvania’s
they responded to market need but be- ing the Internet, pursued until recently notorious Three Mile Island, obtained
cause they created a need consumers a policy of digital denial. for $23 million—a substantial discount
had yet to sense themselves. from its $640 million book value.
All of which attests to the fact that in You’re Never Too Old to Innovate The problem-plant strategy proved
the New Economy, the greatest rewards SCHWAB is not an upstart. And inno- just one element of a broader inno-
go to companies that create new business vation isn’t the special preserve of Inter- vation agenda. PECO teams looked
models—ideas that spark new sources of net upstarts or the denizens of the dot- beyond their traditional market to to-
revenue based on changing technology, com motels of Silicon Valley. In fact, morrow’s opportunities. A prime exam-
demographics, and consumer habits. By innovation can happen at any company, ple: PECO conceived of the wire that
definition, new business models destroy regardless of its line of business, age, or delivers electricity into each home as
old ones, which is why creating new location. a pipeline permitting a far wider car-
wealth is a threat to every traditional, Can a century-old company learn rying capacity. The company built on
unimaginative business. Never before to innovate like an industry ingenue? its core competency in power delivery
have strategy life cycles been shorter The answer is yes—provided the com- networks to launch a new communica-
and market leadership counted for less. pany is willing to examine its orthodox- tions platform. Exelon, a subsidiary of
Call it the First Law of the Innovation ies, abandon its strategy-by-habit ways, PECO Energy, has strung 27,000 miles
Economy: Companies that are not con- and engage its employees broadly and of high-speed telecommunications line
stantly pursuing innovation will soon be deeply in the effort to envision the new atop electrical transmission poles—and
overwhelmed by it. Strategy innovation markets and new opportunities that signed up over 100,000 phone custom-
is the only way to deal with discontinu- promise new wealth. ers in its first year in operation. PECO
ous—and disruptive—change. Consider the experience of PECO now looks to combine the installation
Energy Corporation—the old Phila- of electric, gas, telephone, and cable to
The Innovation Imperative delphia Electric Company. Founded in provide a single-source installation serv-
SOME companies seem to understand 1881, PECO had operated for its entire ice for its customers.
the innovation imperative instinctive- existence within the public utility para-
ly. Consider Charles Schwab’s daring digm, with a regulatory strategy that Three Signs
plunge into the online unknown: When brought it significant success. In June WHAT’S standing in the way of com-
the bricks-and-mortar broker took the 1997, however, the company was look- panies that fail to innovate? In many
view that online trading was inevitable, ing to transform its regulatory strategy cases, it is the tried-and-true recipe that
it faced a choice between leading the to fit the dawning deregulated environ- brought them past success.
brokerage industry to the future or be- ment. It’s understandable. Businesses with
ing a victim of some dot-com start-up Working to examine its hidden as- a winning formula are
Over time,
that got there first. Thus, on the fateful sumptions, PECO uncovered a core logically reluctant to
day in 1995 when a technology team competency in operating large, mission- change horses in mid-
within Schwab presented a demo of critical infrastructure—a competency stream. Over time,
what the Web could do, senior man- honed in time of crisis a decade earlier however, every busi-
and every
agers almost instantly recognized how when PECO grappled with bringing its ness model and every
the Internet could make life better for own Peach Bottom nuclear plant into strategy goes stale—
goes stale.
Schwab customers. Schwab invested in federal compliance. PECO emerged and in our fast-for-
the Web even before it realized it would from the Peach Bottom process with a ward economy, strate-
face aggressive price-based competition proven ability to bring “problem plants” gies reach their “sell-by” date faster than
from other Web brokers. By committing to high-capacity performance with low ever. Indeed, the life cycle of successful
to the goal—and pursuing it through a operating costs. business strategies has been rapidly de-
series of low-risk experiments—Schwab As a result, where other companies clining in a period of high competition

outsourcing best practices    annual issue 2006

16 Main Story

and innovation. In the Industrial Age, a will come from. Don’t be fooled by from an afternoon at California’s Ven-
successful business strategy for steel the rosy glow of growth: Companies ice Beach, as company execs watched
manufacture or durable goods might living off a single great insight are the sun-drenched skaters slash down the
power a company for a generation or corporate equivalent of dead stars-in boardwalk, sporting color-coordinated
more; today, Moore’s Law (which states spite of their sparkle, they’re cold at the shades, Rollerblades, and bathing suits.
that computing power and speed dou- core. Like grandma’s favorite “Five and The realization: Mobile phones are as
ble every 18 months) is setting the terms Dime” store in the age of category-kill- much fashion accessory as communica-
for strategy life cycles that are measured ers and cyber-shopping info-bots: Stand tions tool, an inspiration that’s pushed
in months, not years. pat with your original business model, Nokia to the cutting edge of cells.
How can a company tell if its present and burnout is only a matter of time. l  Shatter the “strategy monopoly.”
profits come from spending down past In any company, a hierarchy of organi-
success? Here are three new realities to Creating an Innovation Engine zation dominates a hierarchy of ideas.
consider: IF companies can’t depend on the The antidote: To encourage innovation,
l  The inevitability of commodi- lightning bolt of sudden inspiration unlock ideas from across the company.
tization. Every new product or service or serendipitous discovery, then what? Bring together a cross-section of em-
will become a commodity in time. Not An innovative environment can be ployees at all levels to share the new
many years ago, cell phones cost upwards consciously created—if a company is perspectives that may just contain the
of $100; today, companies will give you willing to abandon old rules, shed old kernel of a bold new idea. Realize that
one to sell you their service. Likewise, habits, and upend cherished conven- every company promotes success as de-
phone service itself is now a commod- tions. The key is recognizing that past fined by today’s reigning strategy; the
ity: Traditional telecoms—local as well achievement militates against future question is how to promote new ideas
as long-distance—are engaged in a race adaptability by creating well-worn ways that may have nothing to do with that
to the bottom to see who can sell access of doing things that cause a company strategy—or may even cut against it.
to a dial tone for how little. Meanwhile, to undervalue or ignore rule-breaking That’s how Virgin Enterprises oper-
Internet upstarts are considering giving insights. Yesterday’s laserlike focus be- ates under the lead of Richard Branson.
away long-distance calls to lure people comes today’s set of blinders, narrowing Every employee has Branson’s phone
to their site, while deriving their revenue an enterprise’s field of vision from what number, and can pitch new project ideas
from advertising and other sources. is truly new to what it already knows. directly to the top. That’s how a Virgin
l  The impossibility of forecasting Glimmers of great ideas are evident in Airlines flight attendant turned her dif-
future trends. Most forecasts are worth- most organizations; the problem is that ficulties in planning her own wedding
less exercises in spread- in direct proportion to the degree those into a new venture: the wedding plan-
sheet manipulation— Most great ideas are different, the “immune ning boutique Virgin Bride.
and not just because forecasts system” of most organizations attacks Institutionalize innovation by build-
small adjustments in are those ideas as foreign organisms, threat- ing a safe place for people to think new
key variables create worthless ening the host. thoughts. In some companies, new ideas
wildly different pro- exercises. Part of the challenge is demystifying are in short supply—stifled by a corpo-
jections over time. The innovation by breaking it down to its rate climate that cuts off intellectual ox-
larger problem is that traditional fore- constituent parts. Here are three ways ygen, discourages change, and demands
casting projects past assumptions for- to begin the process of awakening in- conformity. At other companies, ideas
ward, providing a sense of false comfort novation in your company: abound—and the challenge takes a dif-
to established companies wedded to ex- l  Recognize that innovation doesn’t ferent shape: Creating the conceptual
isting business models. It’s like auto in- follow a schedule. Most companies are conveyor belt that moves from ideas to
dustry forecasters painting a reassuring so bounded by existing orthodoxies and action.
picture of steadily rising minivan and obsolete business models that they think
family sedan sales—the year before Ford they can schedule strategic insight the From Ideas to Action
rolled out something it called the Sports way you record a reminder in your day- CAN a company really institutionalize
Utility Vehicle. Whatever industry planner. But the truly innovative bursts innovation? Witness the effort of Royal
you’re in, you can’t drive change looking of insight that trigger new ideas don’t Dutch/Shell, the Anglo-Dutch oil giant.
in the rear view mirror. obey the corporate planning calendar. With $138 billion in revenues, 102,000
l  The futility of waiting for inspira- Consider that the idea for Nokia’s employees, and nearly a century-old tra-
tion. If it’s a given that great companies wildly successful rainbow-hued cell dition, Shell is the epitome of a lumber-
are built on a brilliant idea, the next phones emerged not from a daylong ing industrial behemoth—the last place
question is where the next great idea strategy session in the corner office but you’d expect to find entrepreneurial

outsourcing best practices    annual issue 2006

18 Main Story

zeal. Within Shell’s Balkanized organi- Shell, a kind of innovation stockpot Innovation-minded companies spark
zation—which one employee com- that helps entrepreneurial employees new conversations by bringing together
pared to a maze of 100-foot-high brick shape their own ideas or bring new in- executives with employees of all ranks
walls—access to capital is tightly con- sight to existing ones. To date, several to question corporate orthodoxies and
trolled, investment hurdles are daunt- of GameChanger’s ventures have found search for new ways to do business.
ing, and radical ideas move slowly, if at homes in a Shell operating unit or in l  Seek new perspectives. If you want

all. Shell’s globe-trotting managers are one of the company’s various growth your company to do a better job of en-
famously disciplined, diligent, and me- initiatives. Still others have been carried visioning the future, ask the people who
thodical. In cataloguing their character forward as R&D projects, while the re- will get to the future first: Your young-
and capabilities, “wild-eyed dreamers” is mainder have been wound down and est employees. If you want to know how
not a term that comes to mind. written off as interesting but unproduc- consumers act, don’t observe them in
Enter Shell’s GameChanger initia- tive experiments. focus-group captivity—join the Nokia
tive, begun in 1996. As an incentive to GameChanger is producing measur- execs for a day at the beach. Want a new
innovate, a group of Shell employees able results: Of Shell’s five largest growth vision? Try a new vantage point—and
were given the authority to allocate $20 initiatives for 1999, four had their gen- watch a world of opportunity open up.
million to rule-breaking, game-changing esis in the GameChanger—including l  Spark new passions. Innovation

ideas submitted by their peers. Proposals one exploring an entirely new business comes from the heart
would be accepted from anywhere with- focused on renewable geothermal en- as well as the head. Innovation
in the company—no need to squeeze ergy sources. Fully 30 percent of Shell’s Companies that aren’t comes
radical new ideas through the keyhole of exploration and production R&D afraid to innovate en- from the
existing programs and priorities. budget is now devoted to ventures that gage employee ener- heart as
Shell’s GameChanger team embarked are GameChanger graduates. gies in a new and pro- well as the
on an Action Lab: An intensive five-day As the Shell case suggests, it is possi- foundly different way. head.
experience designed to dramatically ac- ble to create an internal constituency for When people are part
celerate the translation of “gamechang- change—inspiring a new breed of “in- of a cause and not just a cog in the
ing” ideas into practical venture plans novation activist” to find an ear and an wheel, their IQ—innovation quo-
for the launch of new businesses—plans outlet for creative new concepts within tient—skyrockets.
of the kind that would pass muster with a company. Compared to innovation- And above all, recognize that in to-
venture capitalists in Silicon Valley. The unfriendly organizations that leave their day’s economy, capital is plentiful; good
goal was for each team to present its iconoclasts no option but to take their ideas are scarce. Companies that look
story to a “venture board”—a panel of bright ideas elsewhere, Shell’s experience to incremental change to generate ad-
senior Shell executives and representa- proves that established companies can ditional revenue will tend toward sub-
tives from Shell Technology Ventures create a hospitable climate for change. sistence at best—eclipsed by companies
Inc., a unit whose job is to fund late- that create an environment of innova-
stage technology commercialization. Hammer Time tion, spawning the new ideas that gen-
The venture board was empowered by WHAT can innovation-minded execu- erate new wealth. That’s why an ambi-
GameChanger to “sponsor” winning tives do to create such a culture in their tious enterprise must replicate within
concepts and fund the next round of company? Here are three ways to kick- itself the basic DNA of innovation: A
business development. In the end, four start the innovation process: culture of continuous experimentation
teams out of the original twelve received l  Start new conversations. New embedded broadly and deeply through-
six-month funding to put them on a ideas don’t obey an organizational out a company.
path toward full-fledged business plans. chart. Companies that want to get seri- All of which brings us to the final
For Shell, GameChanger was the be- ous about innovation need to break the characteristic of the true innovator: cour-
ginning of an attempt to institutionalize “strategy monopoly” that closes off the age—the guts to realize it’s time to take
innovation. Today, any employee with a executive suite from new ideas perco- a hammer to your own business model,
promising idea is invited to give a 10- lating in other corners of the company. before someone else does it for you.
minute pitch to the panel, followed by a
15-minute Q&A session. Ideas that get About the Author
a green light often receive funding—on Gary Hamel is founder and chairman of Strategos, a consulting firm focused on strategy
average, $100,000, but sometimes as innovation, and also a visiting professor of strategic and international management at the
much as $600,000—within eight or ten London Business School. A frequent contributor to Harvard Business Review, Fortune, and
days. Ideas that don’t pass muster enter the Wall Street Journal, Hamel is coauthor of the best-selling Competing for the Future and
author of Leading the Revolution.
a database accessible to anyone within

outsourcing best practices    annual issue 2006





20 Main Story

How to Create a Sourcing Contract and Operating
Environment that will Ensure Sourcing Success.

outsourcing best practices    annual issue 2006

Main Story 21

Marc Stark, EquaTerra Creating a Flexible Contract on to new challenges. This is clearly a
Companies should think logically success that should be encouraged in
This EquaTerra briefing paper looks about how they will run the deal in the order to attract quality new recruits.
at some of the pitfalls to avoid when future. Rights must be protected but Often clauses concentrate upon key
negotiating a contract, and highlights the details must be workable. Flexibil- staff retention and locking staff in,
three main areas companies need to ity needs to be built into the contract rather than the development of suc-
provide for when legislating for success: to ensure companies can readjust price cession plans, skills planning, and the
creating contract flexibility, putting in points and re-examine methodologies. maintenance of a robust service team
place good governance structures and Being too detailed in the wrong places through opportunity.
implementing proper change controls. can cause breakdown in communica- Focus on milestones: Companies
Although the sourcing market is tion and make the contract unwork- should focus on milestones that en-
maturing rapidly, many companies still able. In one contract, for example, the sure the appropriate level of manage-
remain naive as to the contractual ele- lawyers set tough provisions for hourly ment scrutiny, and that are supported
ments that can make or break a sourc- wage rates, who could do which tasks in the contract by detailed acceptance
ing relationship. Often the general and when these could be adjusted. The criteria. Failure to provide such crite-
environment during the contracting provisions were so complicated they ria prevents the parties from achieving
phase of a sourcing engagement is one were unworkable for the provider and, agreed outcomes, which in turn puts
of opposition and conflict. But there ultimately, resulted in it breaching its pressure on the relationship. Assum-
are no winners in aggressive negotia- contract, which led to deterioration in ing the acceptance criteria are in place,
tions as they lead to unworkable con- the relationship. Building in flexibility then milestone payments can be made
tracts and set a negative tone for future means being able to look at the practi- contingent upon defined successful
working relationships. cal workings of the contract on a day- completion.
Companies must recognize the need to-day basis. There are four key points Opportunities also exist to place a
to negotiate a good deal, but not too a contract should address to make it successful twist on failure-oriented leg-
good. Contracts need to be ‘fair and flexible: islation. Although Service Level Agree-
commercially reasonable’ meaning the Set clear expectations: Companies ments (SLAs) focus on failure, they can
provider must be able to make money need to be clear on their retained re- also be used to drive success. A vari-
while the buy-side company must be sponsibility and unrealistic expecta- ety of earn-back provisions on service
able to save money. Although this tions. credits may be employed, agreements
seems logical, the lawyers who negoti- Allow for minor change: Contracts can be drafted that allow performance
ate for the buy-side companies often should be active and not set in stone. thresholds to be raised or lowered, and
forget this. They should enable the parties to re- facilities that allow the introduction of
examine key points on a regular basis, new service levels can be incorporated.
for example, promoting and modify- Benchmark for market/business
ing service levels, or managing succes- change: As business cases change, or
sion plans for key personnel. Inevitably markets change, contracts need to be
a successful service will result in indi- flexible enough to allow for changes to
vidual staff developing and moving services, service levels and price points.
Effective benchmarking should allow
for changes to be made to the contract.
For example, if a market moves dra-
matically by 10 or 15 percent against
agreed benchmarks, then the con-

outsourcing best practices    annual issue 2006

22 Main Story

tract should allow for both parties to should include a steering committee which should be delivered to a speci-
come to the table to discuss changes in of top executives who meet twice a fied level rather than delivering the
price points. The key is to remember year, an operations governance team services themselves. This may in turn
both sides need to win and to have an that meets monthly to review per- require that the organization needs to
open discussion about how this can be formance, and an account relationship acquire different retained skills. At the
achieved. governance team that meets weekly, as same time, the retained organization
Promote innovation: Success- well as a transformation or innovation must be aware of unrealistic expecta-
based legislation constitutes more owner. tions and the appropriate time to dis-
than just continuous process improve- Not only does the governance team cuss issues with suppliers.
ment or a gain-share mechanism. In- need to understand the contract and Define lines of communication:
novation provisions, where possible, how it should be practically imple- The company’s senior executives are
should be mandated into a contract. mented, they must also communicate responsible for communicating to its
The contract should embody clauses regularly with the other side to ensure workforce how the new order will
that cause the parties to actively man- both parties know how contract provi- work and what should be expected
age, reevaluate, and reinvent. Specific sions are being met. It is often advis- from it. Often, outsourcing deals fail
contract clauses that support innova- able to have individuals who were in- on the misunderstanding of what
tive behavior and continued activity volved in the creation and structuring employees believe they should be re-
may include: client advocacy and sup- of the transaction to have an ongoing ceiving against what the deal is really
port of sales initiatives in return for role in the governance organization so about. Ensuring proper internal trans-
strategy assessment of current service, as to provide continuity and consisten- formation and expectations through-
technology developments, and new cy with original tenets and underpin- out the organization is key to success.
BPO initiatives inside and around the nings of the transaction. For example, employees need to know
scope of the services. These types of how outsourcing will change the way
clauses are already in use but they are Provide for Change Control they do business or their job, what
vague; to correctly incentivise both The failure of sourcing relationships to expect in the new order and how
parties, they need to be linked and and contracts is often placed at the they are locked in to certain elements
regularly reassessed. feet of the provider. But the buy-side or not. As part of this, organizations
While creating a flexible contract organization has a critical role to play need to make sure they have a pro-
is key to legislating for success, com- in implementing the right change gram office for internal change and
panies need to beware of creating too controls within its organization to that its activities are properly funded
much flexibility or providers will run help the new order succeed. The com- to enable real change.
roughshod over their organizations and pany must have realistic expectations The effect of legislating for suc-
potentially impact the organization’s about what can be achieved in years cess and putting in place a flexible
business case for the transaction. There one and two, as well as a realistic end contract, good governance structures
is a fine balance to be struck, which is goal. By implementing proper change and proper change controls will help
where it is useful to talk to those com- controls, expectations can be set and organizations obtain the most return
panies who have done it before, or use met. from their sourcing investment. One
advisors to give a good perspective on Set clear expectations: Companies of the central axioms of sourcing is
what is acceptable and the best practice need to be clear on their retained re- to access world-class capabilities of a
in the marketplace. sponsibility and unrealistic expecta- provider to make certain that a desired
tions – are they enforcing the contract future state is achieved and continues
Specify Good Governance appropriately or not. Senior executives to evolve. With this in mind, the con-
Structures need to recognize that they are respon- tract must legislate for the provider
A good contract will make provisions sible for what gets done, not how it is and the organization to focus on that
for governance structures and the role done. They are now buying into a set evolution by allowing for continuous
and responsibilities that team has for of given services, at a particular price, change and improvement.
ensuring a successful and innovative
relationship is maintained. A layered About EquaTerra
governance structure will detail how EquaTerra sourcing advisors help clients achieve sustainable value in their business processes.
the communications should be run With an average of more than 20 years of industry experience in over 600 global transformation
between both parties and enable any and outsourcing projects, our advisors offer unmatched industry expertise. EquaTerra has
deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critica
issues or problems to be resolved early.
business processes with advisors throughout North America, Europe and Asia Pacific.
For example, a governance structure

outsourcing best practices    annual issue 2006


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w w w. n e w g e n s o ft . c o m
24 tips on quality management

Leveraging Lean
80% and continues to fall with their
on-going Kaizen (continuous process
improvement) efforts. This business
transformation effort was so success-

six sigma
ful that Fujitsu was awarded the con-
tract for handling BMI’s entire IT asset
infrastructure. This time around, the
contract was structured with the same

in Business Process
emphasis on cost cutting, but with the
addition of gaining continuous process
improvement and better quality.

This article outlines how lean Six
Sigma can help you move up the value
chain if you’re a service provider and
achieve true business transformation if
you’re the client. If you want to learn
the basics of lean Six Sigma, I provide a
list of resources under “Useful Links.”

The Typical Transition

The figure below shows the as-is state
of most processes under transition
from the client to the service provider
in the usual outsourcing initiative.
Typical steps in the BPO transition
process include:
l  Process transition: Observing,

participating and training in the proc-

ess; documenting the process and key
Critical to Quality (CTQ) or Service
Level Agreement (SLA) measures;
forming a process team; training the
Nari Kannan In Lean Solutions: How Com- team; and running a pilot effort in
panies and Customers Can Create parallel to the regular operation of the
We hear the slogan, “moving up the Wealth Together authors James Wom- process.
value chain” often in the context of ack and Daniel Jones describe how Fu- l  Transfer to regular BPO opera-

business process outsourcing (BPO). jitsu Services did precisely this with its tions group: Once the process team is
BPO service providers typically use contract with British Midland Interna- in place with the BPO service provider
this to refer to the execution of other tional. BMI outsourced its service help and it has been executing the process
knowledge processes such as financial desk function to Fujitsu. Pretty bland for a certain period of time, it is tran-
or legal research that gain them bet- stuff. This business process involved sitioned to their operations group for
ter revenues and margins. We also handling calls from BMI agents at air- ongoing operations.
frequently hear the phrase, “business ports regarding computers and print- l  Measure and report SLAs and

transformation,” usually used as a syn- ers that were installed at airport offices metrics: BPO contracts may specify
onym for BPO that demonstrates cost and airline service counters. SLA measures like average handle time
savings and little more. Fujitsu’s goals for this business (for phone processes) or network avail-
What’s the key to gaining true value process evolved from one of just pro- ability (for network management proc-
and business transformation? One ap- viding the help desk services to try- esses). Service providers often measure
proach is to apply lean Six Sigma to ing to eliminate the root causes of the a number of additional metrics that
move processes from a point of stable calls and thus the calls themselves! It help them evaluate the performance of
outsourcing to “leaning” to process worked with the printer makers to their own employees and/or to make
redesign and ultimately, to process in- improve printer reliability to such an sure that the business process is ex-
novation. extent that calls to the help desk fell ecuted well.

outsourcing best practcies    annual issue 2006

tips on quality management 25

that each process step is adding value

Transition to the customer and non-value add-
Business Process
ing steps are completely eliminated or
speeded up), failure mode and effect
Transfer for Regular analysis- FMEA (analyzing and mini-
BPO Operations
mizing risks due to failure of process
steps), service blue printing (analyzing
Measure and Report customer touch points and minimizing
Metrics & SLAs
the chances for making mistakes) and
Poke Yoke methods (mistake proof-
Is Business Process ing). (If these terms are new to you, I
in Statisfical Process
suggest you look them up at iSixSig-
Yes No ma.com to further your education on
these techniques. You’ll find the URL
Minor Adjustments
as Needed
Address Root in “useful Links.”)
l  Process redesign/innovation:
These flow naturally after an extended
l  Statistical process control check: change to the process is implemented. period of process leaning and use of Six
Optionally, many service providers All KPIs need to be stable and in sta- Sigma. Radical process redesign may
make sure that key performance in- tistical process control! Defects need to not work as well as process innovation
dicators are in statistical process con- be identified and minimized, moving and redesign born out of an extended
trol. If they’re in process control, only from lower sigma levels towards a Six period of deep analysis and under-
minor adjustments are made to the Sigma level. standing of existing processes.
process, often necessitated by people l  Process leaning: This involves a
turnover or other more minor factors. number of tools and techniques that How You, the Client, Will Benefit
If KPIs aren’t in statistical process con- provide continuous improvement When your BPO service provider
trol, then root causes may be addressed to all aspects of a business process -- moves up the value chain with lean
and adjustments to the process made turnaround time, accuracy, error rates, Six Sigma, you benefit in a number of
appropriately. currency-related effectiveness metrics, ways:
If you analyze the above as-is state customer satisfaction levels and so on. First, you’ll see an evolution from
of BPO transitions and operations, The tools you’ll find of value include pure cost savings to process improve-
you might notice that there’s no fun- value stream analysis (making sure ment. Presumably, this metamorpho-
damental innovation or reengineering
of the business process. Sure, there Transit on
may be minor adjustments or tweaks, Business Process

but nothing more. This hardly heralds

business transformation in the mak- Transfer for Regular
BPO Operations

Movin’ On Up Measure and Report

Metrics & SLAs
The figure below shows the to-be state,
where the business process is improved
Is Business Process
continuously using lean Six Sigma. in Stastical Process
Let’s walk through the stages. Yes No
The first set of steps are the same as
in the as-is state -- process transition, Minor Adjustments
as Nedded
Address Root
transfer to operations, measure and re-
port SLAs and statistical process con-
trol check. Here’s what’s added.
Leaning of Current Process
l  Six Sigma efforts: These help

ensure that the process is in statistical

process control whether the process Process Redesign/Process Innovation
runs as-is or when any fundamental

outsourcing best practcies    annual issue 2006

26 tips on quality management

sis results in better quality and greater tensions or other business processes. day! This kind of structuring provided
speed at less cost (as the application They become a partner that provides an incentive for the service provider to
of the Toyota Production System and true business transformation. They can do real business transformation! It be-
other lean Methods have proven in renegotiate contracts based on value came a win-win for both the buyer and
manufacturing as well as services). added with process improvement rath- provider! For proper process improve-
Process improvement adds to the cost er than a simple time and materials or ment efforts, incentives and contract
savings or at least mitigates costs as and full-time equivalents approach. need to be designed in such a way that
when they rise. Second, the service provider be- they encourage appropriate efficiency
Second, you’ll be able to leverage comes a true business partner. Moving and effectiveness.
process understanding and documen- up the value chain provides a chance Don’t expect immediate payback,
tation. In many large organizations in for a longer term relationship with especially in the trust department.
the US and Europe, business processes your company. When a client out- Moving up the value chain in BPO
have evolved over time. The latest doc- sources a technical help desk, the ideal needs to be done one step at a time
umentation for the business process isn’t to handle those calls in the best over a long period. First, the provider
may not exist. BPO vendors may insist possible way; it’s to reduce those calls needs to execute the business process
on documenting the business process altogether while still keeping customer that exists today properly and then
along with workflows, KPIs and SLAs sat levels high. That kind of transfor- slowly improve it step by step. Once
for legal and contractual purposes. mation, effected through lean Six Sig- the provider understands the process
The very process of outsourcing makes ma, can demand revenues an order of in all its dimensions, it can earn client
many of these processes explicit. Mov- magnitude higher than simple process trust by demonstrating small improve-
ing up the value chain with lean Six execution (because the client gains far ments first before attempting any proc-
Sigma depends upon proper documen- greater benefit). ess redesign or innovation.
tation of the business process. Third, the service provider gains You need to take a long-term out-
Third, you’ll see a movement from invaluable vertical skills development. look. Service providers -- especially
informal to formal process measure- When a BPO service provider moves offshore ones -- are vulnerable to price
ments. Before outsourcing, there may up the healthcare claims processing val- competition from other countries. For
not have been a compelling need to ue chain, they cease being just a service example, when the focus is on price,
formally identify SLAs and KPIs for provider. Over time, they slowly be- many business processes in India could
processes and measure them diligently. come world-class experts in healthcare, be considered vulnerable to price com-
However, now that they’re outsourced, not just claims processing! They can petition from lower-cost locations. Mov-
informality leads to formality due to le- leverage this expertise for much more ing up the value chain requires a longer
gal and contractual reasons. Process im- valuable process design/redesign/in- term outlook on the vendor. The beauty
provement can build on these measure- novation business, thereby continuing of that is that it is difficult for a com-
ments and result in better quality while the cycle of continuous improvement. petitor to duplicate in a short amount
identifying areas to reduce expense. of time. When service providers begin
How To Start Down Your Road their lean Six Sigma journey and bring
How Your Service Provider Will to Business Transformation clients along for the transformation,
Benefit One place to begin is by looking for they can ensure protection of their cur-
Moving up the value chain in BPO the addition of incentives for process rent business -- and even win additional
benefits your service provider in a improvement to your contracts. Initial- business once they demonstrate that
number of ways. Why should you care? ly, Fujitsu was getting paid by BMI for they’re long-term business partners.
The success of the outsourcing engage- help desk processes on an FTE number BPO provides an outstanding op-
ment depends as much on the relation- of agents basis. The service provider had portunity for both clients and service
ship you form with your service pro- no incentive to fix root causes of com- providers to look at both optimizing
vider as on the services performed by monly reported problems in calls to cost savings and achieving continuous
that provider. their help desk. However they renego- process improvement! Lean Six Sigma
First, it gets the vendor out from tiated the contract. They based it on the provides the tools and techniques for
under the mode of competing on price. number of BMI employees that could making business transformation not
When a service provider adds value potentially call their help desk rather just a slogan, but a systematic, disci-
over and above simple costs savings than the number of agents needed to plined way of daily operation.
with continuous process improvement, take calls (FTE number). This meant
Copyright © 2006 CTQ Media LLC- All Right
it removes that company from the fray they would get paid the same if they Reserved Content Reproduced with Permission
of competing on price for contract ex- handle 100 calls a day or 1,000 calls a of Sourcingmag.com

outsourcing best practcies    annual issue 2006

28 bpo story

liver the anticipated benefits. An in-

Governance of Offshore Programs: ternal survey conducted within the

Does One
globalization industry reveals that the
absence or ineffective use of Govern-
ance organizations is the leading cause
for failure.
A recent study by Diamond Clus-

Model Fit
ter revealed that more than 75% of
organizations rated “Management
Complexity” as the number one risk
factor in globalization.

A more recent survey that Tholons
conducted with our clients, found that
nearly a third (28%) reported that the
lack of a Governance organization was
a key reason for not achieving globali-
zation goals.
All of these studies point to one
important question – How critical is
a formal Governance organization to
the whole globalization story?
In this paper, we examine:
Avinash Vashistha reduce costs, organizations use glo- l  What is Offshore Program Gov-
Dr. P. K. Mukherji balization as a powerful advantage. ernance?
Vinu Kartha
This strategy is popularly called “Serv- l  What is the impact of not having
ices Globalization”, and it is becom- a formal Governance Organization?
The services sector is progressively ing the accepted business paradigm l  What are the elements of a good
becoming the major contributor to and an integral part of all successful governance model?
the Gross Domestic Product (GDP) business strategies. However, the ex- l  Does one size fit all?
of developed nations. The GDP of perience of the past few years suggests
most developed nations have services that not all globalization initiatives Offshore Program Governance
as the major contributor. In order to have been successful. It is estimated Governance of an Offshore Program
drive efficiency, improve quality, and that 50% of all initiatives fail to de- for services can be defined as specify-
ing the decision rights and account-
ability framework to enable decisions
Buyer Viewpoint: Top Outsourcing Risk Factors and actions that ensure achievement
of the objectives and goals of globali-
Complexity The primary role of the a Gov-
Financial Payback ernance organization is to help the
stakeholders develop the globaliza-
Quality of Output tion strategy, aggregate demand, as-
sess risk, schedule and prioritize, pool
Control of Resources
resources, source and manage the de-
Reduced Effectiveness
livery of engagements, enforce quality
standards, and build relationship with
Information offshore partners.
A formal management framework
Proximity to Staff and structure enables organizations
and their partners to mutually man-
Low Level of Concern High
age the relationship, expectations,
Offshore contractual dependencies, and serv-
Source: DiamondCluster International Onshore
ices. Organizations that have been

outsourcing best practices    annual issue 2006

bpo story 29

resources within five years. Initially,

Lack of a governing body everything went well; the first set of
to manage the offshore 28%
program applications was migrated successfully
Poorly managed 18%
within the allotted time. However, as
Migration soon as they settled in, problems start-
Lack of internal knowledge
ed to arise. Each business line insisted
about offshoring
that its project be delivered first. Then
Poor Internal 14% the business line decided to choose
buy in
the globalization partner it wanted to
Weak control on 10% give the work to. Things became even
more complicated when each business
Poor vendor domain 9% line bypassed the procurement and IT
departments in reporting the benefits
Vendor staff 4% of the globalization initiative. While
one reported 50% savings, another re-
0% 5% 10% 15% 20% 25% 30%
ported a net loss, and a third claimed
Percent of Respondents
Source: Tholons industry survey 5% savings. Ultimately, the organi-
zation shifted the Chief Information
successful in their globalization initia- ated risks. Officer, and the company never real-
tives have had a Governance organiza- The following are the most critical ized their goal from globalization.
tion which: challenges that organizations face in Offshore sourcing is more compli-
l  Proactively defines globalization managing globalization programs: cated than domestic sourcing because
strategies and keeps them aligned to l  Ad-Hoc Scheduling of Projects many of the elements of a globaliza-
corporate goals. Puts Pressure on Internal Resources: tion engagement cannot be taken
l  Closely monitors and measures Many organizations have no formal for granted. Even simple things like
performance and value generated process for identifying what to glo- 24-hour electricity or telephone con-
from the initiative. balize, how to globalize, and when nections are risk elements in some off-
l  Continuously gathers knowl- to globalize. This results in each busi- shore locations. Without a governing
edge from implementation and indus- ness unit making ad-hoc decisions body that has visibility into globali-
try best practices and shares it across about what and when they want to zation initiatives across the organiza-
organization to affect operational im- globalize. Often the priorities of the tion, there is no way to ensure that
provement. various business units clash. Since standard processes are implemented.
l  Maintains an effective commu- the budgets for the various IT or Each business unit or IT department
nication channel across geographies shared services often come from the will implement its own procurement,
and boundaries of partner organiza- individual business units, it makes it measurement, and reporting process-
tions. difficult for the IT or procurement es. This makes it difficult to evaluate
organization to say no. As a result, the effectiveness of the vendors, meas-
Impact of Not Having a Formal there is tremendous pressure placed ure returns, or simply even report on
Offshore Program Governance on the IT or shared service organiza- status. The lack of transparency of the
The management of any large business tion, procurement, legal department, various initiatives across the organiza-
operation is loaded with risks and is and project management; all of which tion inhibits long term strategic plan-
especially tricky if a strong leadership leads to schedule slippages, processes ning. As a result, organizations end
is missing. The magnitude of this risk circumvention, budget overruns and up offshoring only for the cost arbi-
multiplies if the project is executed staff attrition. trage and forego other benefits, such
five or 10 thousand miles away in a l  No Standardization of Proc- as quality improvement, innovation
remote location and with unfamiliar esses for Demand Aggregation, Pro- stimulation, resource scalability and
partners. However, this is exactly the curement, Delivery or Monitoring: A de-risking of business drivers.
scenario found with most globaliza- large Fortune 500 Financial Services l  Alienation of the IT/Shared

tion programs. Ever since offshore major in the US has 13 business lines Services Organization by the Busi-
sourcing started as a means of leverag- with more than 10,000 IT resources ness Units: Often, IT and shared
ing low-cost resources, this challenge distributed among them. This organi- services organizations complain about
has existed. Most organizations are zation started a globalization initiative the lack of authority and responsibil-
poorly equipped to handle the associ- in 2001 with a plan to scale up to 5000 ity to execute IT projects due to inter-

outsourcing best practices    annual issue 2006

30 bpo story

ference from the business lines. Since

the business units control the budget, Resource
they often dictate what applications Allocation

or processes to globalize, what model Requirements Risk

Aggregation and Management
to use, which vendors to choose, and Prioritization
what performance measures to imple-
ment. This alienates the IT/shared
services department, since they are the
Innovation &
ones that have to make sure projects Continuous
Governance Quality of
Service & SLA’s
are delivered on time, within budget Improvement organization
and with high quality. Any problems
that arise are therefore highlighted as
the inability of the IT/shared services
organization to plan properly, and of- Vendor Financial
Management Monitoring
ten end in the CIO being fired.
l  Duplication and Redundancy
Voice of the
Caused by Different Business Units Customer
Sourcing Similar Applications/Proc-
esses: Without a central organization
that brings together the various busi- balization initiative. the services required are identified,
ness units on a common platform for qualified, selected and managed.
globalization, there is a real danger of Program Governance Goals n  Key activities:
duplication and wastage of valuable There are eight critical goals for pro- – Identification of internal and ex-
resource time and effort. Each busi- gram governance, which if managed ternal resources
ness unit conducts its own procure- properly will reduce the risks with l  Internal resources include
ment or sourcing process and selects globalization and improve the ben- project teams and managers,
its own vendors. They also typically efits: technical and globalization
do not track and manage in the same l  Requirements Aggregation & Pri- subject matter experts; support
way as another business unit. oritization: resources such as infrastructure,
Since a large percentage of the IT n  This is the process by which all security, procurement, legal, fi-
and shared services needs of the busi- requirements for information tech- nance, etc.
ness units are similar in nature, they nology and business process glo- l  External resources include
end up duplicating the effort and los- balization services are identified, third party service providers,
ing out on economies of scale, while aggregated and prioritized across company owned captive cent-
also doubling the risks. various divisions of an organiza- ers, or consultants.
l  Projects with Sub-optimal Re- tion. This ensures transparency, – Make or Buy analysis
turns From Globalization are Often avoids duplication and wastage – Sourcing of resources
Sourced: On the whole, few program of resources and time, as well as l  Risk Assessment and Management
or project managers have extensive maximizing financial and business n  Risk assessment and manage-
experience with globalization. As a benefits. ment involves identifying, quali-
result they end up offshoring appli- n  Key activities: fying and managing various risks
cations and processes that are poor – Assessment of a portfolio’s suit- associated with globalization.
candidates for globalization. A study ability for globalization n  Key elements:
of globalization initiatives that have – Aggregation of demand to create – Knowledge Risk
failed will most likely point out that optimal size for globalization – Process Risk
the wrong processes or applications – Prioritization of execution based – Communication Risk
were offshored in the first place. Off- on internal business imperatives, – Environment Risk
shoring the wrong process or applica- resource availability, budget and – External Risk
tion is equivalent to using the wrong risk profile – Technical Risk
map to start a cross-country expedi- l  Resource Allocation – People/Resource Risk
tion. It can lead to financial loss, loss n  This is the process by which in- l  Quality of Service
of morale, setback to business plans ternal and external resources ca- n  Quality of service ensures that
and eventual termination of the glo- pable of managing and executing the organizational goals of qual-

outsourcing best practices    annual issue 2006

bpo story 31

ity are identified, measured and Component Purpose Focus

reported. Relationship Align the Journey towards strategic partnership
n  Key activities: Management operations of
Clearly define roles and responsibilities.
– Metrics definition outsourced setup
with company’s Understand rules of engagement and jointly manage
– Metrics measurement strategic objectives contractual commitments
– Metrics reporting and
Focus on business results expected out of globalization
– Continuous improvement
Performance Ensure that Performance definition, configuration, assessment and
l  Financial Monitoring
Management performance levels assurance
n  One critical goal of globaliza- are met in an
Escalation procedure and resolution for performance
tion is the reduction of operational engagement on
continuous basis
cost, thereby releasing savings that Quality Metrics
can be deployed in other essential
Performance reporting, scorecards and dashboards
areas. Financial monitoring ensures
Effective resource deployment and utilization
that the plan to actual expenses for
globalization are tracked and re- Risk Address the risks Risk assessment and impact analysis
Management in globalization
ported. and provide
Risk mitigation; Risk sharing
n  Key Activities: mechanism to Focus on security, Disaster Recovery/Business
– Base case mitigate risks Continuity Planning and compliance issues

– Financial savings scenario mod- Change Handle changes Cultural alignment

Management brought about by
els Focus on business results
the globalization
l  Voice of the Customer engagement. Communicate effects of globalization and catalyze
n  No service is successful without Exchange retooling /redeployment exercise
putting the customer at the center Communication Planning, transparency and
and promote
and ensuring their satisfaction. transparency in an
information distribution
Voice of the customer measures organization
expectations of the end customers Knowledge Collect knowledge Monitor industry best practices and benchmarks.
of the IT services through feedback Management about best
Assimilate, institutionalize and disseminate best
practices and
and continuous improvement. institutionalize
practices knowledge
n  Key Activities: such knowledge
– Customer satisfaction surveys through timely
– Capturing lessons learned and Catalyze right
implementing continuous im- choice of tools and
provements technologies

l  Vendor Management

n  Vendor management covers all Main Components of organization is identified to assume

aspects of monitoring delivery ex- Governance responsibility for the applications
ecution, vendor resource deploy- There are six key responsibility areas or business processes and deliver the
ment, performance measurement, for effective governance which allow service in a more effective fashion. The
culture, relationship and commu- an organization to successfully man- offshoring can be to a single service
nication exchange, contractual ob- age a globalization initiative: provider or multiple service provid-
ligations, financial remuneration l  Relationship Management ers based on risk mitigation strategies
and continuous improvement. l  Performance Management adopted by the organization.
l  Innovation and Continuous Im- l  Risk Management l  Captive/Shared Services: The

provement l  Change Management organization may choose to create a

n  The goal of any globalization l  Knowledge Management separate sector under its own manage-
initiative should be to leverage the ment to service the outsourced busi-
potential for stimulating innova- Governance for Different ness processes. The center is generally
tion to grow the business. This Models of Globalization located in a low cost country and serv-
is possible through a process of Offshoring of business processes and ices core processes of the organization.
continuous application of lessons technology support can be undertak- In this model the up-front investment
learned, and also by moving from en using alternate business models: is high.
skill augmentation to leading by l  Third Party Offshoring: In this l  Build-Operate–Transfer: This
innovation. model a third party vendor/ partner model allows the organization to out-

outsourcing best practices    annual issue 2006

32 bpo story

source to a third party partner organi- Third Party BOT Captive

zation while retaining a higher degree Operation Focus Rel Mgmt-High Rel Mgmt-Low
of control. The organization also re-
Perf Mgmt-High Perf Mgmt-High
tains the option of making the unit a
Risk Mgmt--Med Risk Mgmt--Low
captive setup beyond a specified pe-
riod. Change Mgmt-Med Change Mgmt-High

Intensity between the two extremes

The globalization strategy adopted Knowledge Mgmt-Low Knowledge Mgmt-Low
by the organization spells out the most Customer Intimacy Rel Mgmt-High Rel Mgmt-Med
appropriate business model for im- Perf Mgmt-Med Perf Mgmt-Med
plementing the initiative. The choice Risk Mgmt--Med Risk Mgmt--Low
of business models is one of the key Change Mgmt-High Change Mgmt-High
dimensions for deciding the optimal
Knowledge Mgmt-Low Knowledge Mgmt-Low
governance model.
Product Leadership Rel Mgmt-High Rel Mgmt-Med

Does Organization Strategy Perf Mgmt-Med Perf Mgmt-Med

Impact Governance Model? Risk Mgmt--High Risk Mgmt--Low

When deciding on the appropriate Change Mgmt-Med Change Mgmt-Low
governance model it is important to Knowledge Mgmt-High Knowledge Mgmt-High
understand the strategy and value dis-
ciplines of the outsourcing organiza- solutions, and concentrate on rapid This framework and structure is
tion. The three value disciplines are: commercialization. supported by a defined set of stand-
l  Operational Efficiency: Here Organizations that are market lead- ards, documented processes and best
the focus is on business efficiency ers excel in at least one value discipline practices. The degree of intensity of
and reliability. Organizations of this while meeting minimum threshold each component can be mapped as
nature lead the industry in price and levels in the other two disciplines. below:
convenience. They excel in minimiz-
ing overhead costs and streamlining Dimensions that define the Principles of Right
supply chain. Optimal Governance Model Implementation of Governance
l  Customer Intimacy: These or- The optimal governance model for a Model
ganizations focus on cultivation of re- globalization initiative is an outcome To have a successful globalization en-
lationships, customer service, respon- of the interplay between the three di- gagement, it is necessary to have the
siveness and customization based on mensions; namely, the organization’s right governance model and ensure
deep customer knowledge. strategy and value principles, the glo- that it is implemented properly. A
l  Product/Service Leadership: balization strategy adopted and choice handful of important principles for
Organizations that adopt this value of business model and lastly the man- implementation guarantee success.
discipline focus on innovation, ex- agement intensity of the various com- While governance requires manag-
periment with new approaches and ponents of governance. ing complex relationships, strong
processes, skills and tools to succeed,
Governance globalization excellence depends on a
Component governance operating model imple-
Intensity mented based on principles, rather
than rules. The important principles
of implementation include:
l  Balancing stakeholder needs:

Companies that successfully outsource

continuously “take the pulse” of all
stakeholder groups to balance their
needs over time. It may be impossible
to please all stakeholder groups at the
same time. However, the governance
Strategy & Value Outsourcing group should strive to balance each
Principles Business Model group’s needs over the term of the
agreement. When the stakeholders see

outsourcing best practices    annual issue 2006

bpo story 33

that the governance group does not l  Experience matters: When gov- pointed. Continued disappointment
consistently place one group or set of ernance group members are drawn leads to distrust, which can seriously
requirements above the others, their exclusively from the client company, damage the relationship. It is better
participation and satisfaction will in- they begin with a globalization experi- to seek true alignment around mutu-
crease. ence deficit that puts them at a real dis- ally beneficial outcomes than to gain
l  Pursuing stakeholder involve- advantage. It helps to include service false agreement to one-sided goals.
ment: Formal governance boards and providers in the framework, but their l  SLAs aren’t enough: Service-

steering committees are essential, but perspective may not be fully aligned level agreements are extremely im-
informal stakeholder involvement to the organizations perspective. The portant and should be continuously
is the way successful relationships best approach is to have an independ- refined and improved over the life of
are built and maintained over time. ent third party with real hands-on the agreement. However, they must
Stakeholder involvement results from experience in client-side governance be augmented by other methods to
an effective combination of informa- participate in the implementation for ensure customer satisfaction. For
tion exchange and action. a defined period of time. example, the principles of balanc-
l  Seeking cultural synergy: One l  Avoid the paradox of align- ing stakeholder needs and pursuing
criterion often used when selecting an ment: Alignment between the cli- stakeholder involvement can be used
outsourcer is cultural synergy. Gov- ent company’s goals and the service to monitor and improve customer
ernance groups achieve improved re- provider’s actions has long been con- satisfaction and relationships among
sults by identifying and building on sidered the Holy Grail of globaliza- stakeholders. Ultimately, customer
strengths both cultures share. tion. Yet alignment remains elusive satisfaction depends on the relation-
l  Driving out false agreement: -- client companies want to cut costs ship between the governance group
False agreement occurs when some- and increase service quality, while and the service provider. When trust
one agrees to do something without service providers want to increase is high and commitment to achieving
any intention of actually doing it. revenue and decrease service deliv- the agreement’s goals is shared, cus-
Although not unique to outsourcing ery costs. While these objectives are tomer satisfaction becomes a key suc-
relationships, this can be particu- not necessarily opposed, they tend cess ingredient that is jointly nurtured
larly damaging to them. A govern- to prevent effective alignment unless by both sides.
ance group operates predominantly both parties actively seek out those l  What Next? The first step for an

through influence rather than author- areas where both sets of objectives organization is to realize the impor-
ity. Therefore, its members must be can be met. Client companies that tance of having a formal governance
able to rely on commitments made by expect the service provider to adopt organization. Having gained that, the
others, whether internal employees or and align with their objectives at the next step will be to seek ways to de-
service provider staff. expense of their own will be disap- velop a strategy and implement it.

Excellent offshoring governance requires many components: leadership,
tools, processes, personnel, skills and principles. Operating from shared
principles can create the basis for the high-trust relationship required to de-
liver the complex results expected from today’s globalization initiatives.

outsourcing best practices    annual issue 2006

34 Cover story

Craig Focardi cost component will decline to reach spending budgets grow more slowly or
Research Director, TowerGroup 46.5% of total direct origination costs decline. Yet demands on the IT depart-
The global sourcing of information by 2010. ment don’t decline commensurately,
technology (IT) services and business and innovative chief information offic-
process outsourcing (BPO) has moved How Big Is the Offshore Market? ers are increasingly looking offshore as a
from a leading edge to mainstream ac- Not all mortgage processes and costs way to do more with the same budget.
tivity for U.S. financial services institu- are offshorable. The offshorable cost
tions (FSIs). Mortgage lending has be- base are those direct loan origination Offshore Opportunities for Small
come a leading line of business within and loan servicing costs that lenders Lenders
FSIs for reducing labor costs through can perform offshore. TowerGroup es- Most lenders offshoring today are top
offshoring. timates the offshorable cost base for US 20 banks operating captive operations
mortgage loan origination processes will in India, the Philippines and elsewhere.
The Problem: Too Much Manual increase from 19% of total direct costs Some large lenders that are just begin-
Labor in 2005 to 35% in 2010. The offshora- ning to offshore, and many small and
In 2005, approximately half of the es- ble cost base for mortgage loan servicing medium-sized lenders will increasingly
timated $44 billion (USD) direct cost processes will increase from 37% 2005 look to business process outsourcing

Mortgage Offshoring to
India Goes Mainstream
base of the US mortgage industry was to 55% in 2010. TowerGroup estimates (BPO) vendors for offshore loan process-
labor expense. Approximately 18.9 mil- that the offshorable market for mort- ing rather than build captive operations
lion loans were originated at an estimat- gage lending processes will grow from abroad, due to the lack of processing
ed average total direct cost of $2,100 $9.0 billion in 2005 to $13.1 billion in scale, IT, management breadth, and
USD per loan, for a total cost base of 2010, with over 80% of these costs oc- capital required for a captive operation.
nearly $40 billion. In the same year, ap- curring in loan origination processes. TowerGroup envisions two paths for
proximately 55 million first mortgages small lenders to participate in offshor-
were serviced at an average total direct Should Lenders Offshore? ing. The first is by outsourcing to US-
cost of $67 per loan, for a total cost base The US Mortgage Bankers Association based mortgage lenders that own and
of $3.8 billion. Lenders are aggressively (MBA) estimates (as of August 2006) manage their own offshore operations
looking to offshore the labor intensive, that residential mortgage lending vol- and that have, or can develop, private-
back-office activities performed by loan ume will drop roughly 19 percent in label offshore BPO operations. For the
processors and clerks who perform data 2006 and another 7% in 2007. Tower- second path, TowerGroup believes that
entry, document sorting, secondary Group analysis of historical MBA loan over time, some offshore, India-based
marketing, quality control and loan origination cost and loan volume data mortgage BPO vendors, instead of per-
shipping activities. shows that lender cost metrics worsen forming lending tasks on each lender
Based on the size of the US mort- considerably when loan volumes de- client’s IT platform, will license core
gage market and the share of that cline. This happens because too many loan origination and servicing systems
market that is operational labor cost, lenders forecast market-share increases to provide complete loan origination
the opportunity for offshore mortgage that don’t materialize, and then it takes (private-label lending) or loan servic-
BPO vendors is huge. TowerGroup a lot of time to restructure people, proc- ing (subservicing) to small lenders. This
forecasts that through a combination esses and locations to fit the lower level model will also require BPO providers
of business process reengineering, of demand. to establish onshore processing facilities
document imaging, business process Declining loan volume, productiv- to execute those processes that lenders
management, and offshoring, the labor ity and profitability also means that IT do not want performed offshore.

outsourcing best practices    annual issue 2006

Cover story 35

offshored cost base will rise at a 21%

CAGR from 2005 to 2010, reaching
$1.2 billion in 2010. The mortgage
BPO market size component of this
offshored cost base was $120 million
in 2005. Offshore mortgage settlement
services BPO brings the total mortgage
BPO market to approximately $240
million. Both of these figures exclude
additional mortgage IT services work
that lenders and settlement service pro-
viders offshore.

The offshoring of lending processes is
a permanent and growing share of the
US mortgage industry cost base. Off-
shoring is creating significant operating
cost advantage that leading lenders will
use to competitively differentiate them-
selves in price, service, and profitability.
As interest rates fluctuate and lending
volume declines into 2007, large lend-
ers without an offshoring strategy are
scrambling to catch up. Although most
large lenders establish captive opera-
tions, some of the large lenders playing
catch-up and medium-sized lenders will
look to BPO vendors for offshore loan
Indicator of booming economy, a high-rise building accommodating Foutune companies. processing.
As with any new venture, successes
When and How? How Big Will The Offshore and struggles abound. Confidential in-
TowerGroup believes than any top-40 Market Actually Be? formation provided to TowerGroup by
U.S. mortgage lender (originating more The offshorable market defines the gross financial institutions indicates some un-
than $7.5 billion in new loan volume) costs that lenders can offshore. It doesn’t anticipated startup costs, training costs
needs a global sourcing strategy. While define net savings from offshoring or the and employee turnover. But within a
the captive (owned) model is not scal- revenue opportunity for BPO vendors. few months operational cost efficiency
able for many lenders, joint ventures NASSCOM defines the addressable is strong as labor productivity increases.
with a BPO provider and BPO itself are market as the potential revenue mar- The offshoring of selected US mortgage
viable options. Conversely, the largest ket for lenders and BPO vendors that processing will increase returns to share-
lenders should not limit offshoring to offshore work. The addressable market holders, improve service to customers,
their own captive operations. They can is thus a percentage of the offshorable and create a sustainable competitive ad-
benefit from BPO vendor best practices cost base. vantage for those FSIs that expand and
garnered from serving a diverse range TowerGroup estimates that the refine their global sourcing strategy.
of customers. Some lenders already use
multiple BPO vendors to diversify ven-
dor risk, create a competitive market for About the Author
Craig Focardi, CMB, is research area director for TowerGroup’s Consumer Lending,
services and scale more quickly. Fur-
Global Payments and Wholesale Banking research services, which covers a wide range of
thermore, other lenders may determine business, process, strategic, and technical topics relating to origination, servicing,
over time that offshoring through a cap- securitization, and risk management. Craig has 20 years experience in a variety of finance,
tive operation is not a core competency product development, and business development roles for mortgage technology vendors,
and consumes excessive management lenders and risk management firms.TowerGroup Research is available to subscribers on the
Internet at www.towergroup.com

outsourcing best practices    annual issue 2006

36 bpo story

Peter Bendor-Samuel
Founder & CEO, Everest Group

With the importance of outsourcing on

the rise in financial services institutions
as a proven course of action for trans-

the Value
forming a business to be more com-
petitive and for increasing shareholder
value, mortgage bankers recognize the
growing need for expertise in structur-
ing their deals to be more successful in
capturing value. This translates to en-
gaging an outsourcing consulting firm.

of Outsourcing Consultants
For most organizations, the fun-
damental objective in using a consult-

in Perspective
ing firm is to help run the Request for
Proposal (RFP) process and get a better
deal by reducing the service provider’s
margin in the outsourcing arrangement.
This approach will often yield some fa-
vorable price points, but it is limited in
its ability to ensure an outsourcing ar-
rangement is built for success, especially
considering the complexities of business
process outsourcing (BPO) and global
sourcing models.

How can an outsourcing

consulting firm assist mortgage
The mortgage banking business has a
lot of opportunity for creating value
through outsourcing, and it’s a strategic
tool that has been widely used by the in-
dustry for many years. It has consistent
processes that are somewhat controlled
by regulations and also have consistent
outcomes. The IT and claims processing
functions throughout the industry look
alike; therefore, there are plenty of op-
portunities for building leverage points
such as economies of scale; process or
domain expertise; and technology, hu-
man, and capital resources.
In addition, a brand new ingredient,
or leverage point, has been introduced
to outsourcing: labor arbitrage. It has
a proven ability to reduce costs and in-
crease quality and productivity by mov-
ing work to low-cost locations such as In-
dia or the Philippines. Within mortgage
banking, labor arbitrage, or offshoring,
provides an opportunity for economies
of scale built around applications and

outsourcing best practices    annual issue 2006

bpo story 37

IT infrastructure, as well as the ability to nications, and equipment costs? How firm with deep expertise and a research
further reduce costs through the people about training and management costs capacity can help a client better predict
component of claims processing. and other overhead? And what about the attractiveness of a location five, sev-
Offshoring is a “game-changer” in currency exchange rates? One location en, or 10 years from today. This type of
outsourcing in that the same amount of may be optimal for a particular business consultancy can also help clients better
capital will hire more resources, which process but not for others. understand the maturity and financial
will result in greater productivity and An example of the information that viability of the pool of service provid-
reduced turnaround time. Financial higher-value consulting can offer is the ers.
services institutions were among the Cost-Maturity Framework in Everest’s Moreover, consultants can help a cli-
early adopters of labor arbitrage, prima- Location Optimization product. It ent better understand and manage the
rily through building their own shared- combines benchmark information that risks associated with enforcing contrac-
service centers (the “captive” model) in reveals all elements of tual commitments in
low-cost locations. However, success cost (even the impact on Client an offshore location as
has proved to be difficult for the captive costs from government well as the increased
models, and many organizations are now incentives and subsidies) organizations regulatory issues be-
reaching out to outsourcing service pro- at a city, not country, lev- also benefit cause the work is han-
viders to help them drive down cost. el. In addition, the Cost- from a dled in two countries.
A good consulting firm, such as Ev- Maturity Framework Mortgage bank-
erest Group, can help a mortgage bank- provides an assessment consultant’s ing institutions can
ing institution identify opportunities of a particular location’s expertise and benefit greatly from a
for capitalizing on leverage points such risks such as maturity in experience in more robust and holis-
as economies of scale and labor arbi- outsourcing, the size and tic approach to weigh-
trage and can the client design a better quality of the labor pool identifying risks, ing their needs against
outcome—whether it’s building a cap- for a particular process, developing different outsourcing
tive service center or moving toward a inflation, attrition rates, risk-mitigation solutions. With higher-
third-party outsourcing relationship. infrastructure reliability, value consulting services
Client organizations also benefit maturity of language ca- strategies, and combined with research
from a consultant’s expertise and expe- pabilities, and other risk developing capabilities, a consultant
rience in identifying risks, developing factors. appropriate can merge benchmark
risk-mitigation strategies, and develop- A provider’s matu- information around IT
ing appropriate governance structures. rity, for instance, is an governance infrastructure and ap-
important factor, as it structures. plications with location
Taking Consulting to the Next indicates the ease of so- optimization informa-
Level lution implementation or transition to tion, enabling a mortgage institution to
However, there are information the provider’s environment and, thus, design a better solution and select a bet-
gaps—the real costs of labor and in- the speed to value realization from the ter outsourcing partner. The information
frastructure in low-cost locations, for outsourcing strategy. Attrition rates not will also result in designing more realistic
example—that hinder the effectiveness only indicate the risk of rising labor costs incentives and a more manageable gov-
of many consultancies. These informa- but also potential impact to the cost of ernance vehicle.
tion gaps can be dramatic in their bot- managing the relationship. Infrastruc- Most important of all, such con-
tom-line impact to clients. ture reliability and other sustainability sulting services will enable the client
A consulting firm that has a research risk factors are in ensuring the client’s to identify risks and appropriate miti-
capacity, such as the Everest Research future needs will be met. gation strategies. The need to do this
Institute, can bring this additional in- In addition, the attractiveness of a is implicit in any outsourcing arrange-
formation that is crucial in designing a location and its savings sustainability ment but particularly crucial to success
higher-value solution with lower price, may change over time. A consulting in an offshore outsourcing relationship.
more flexibility, and higher-quality
services. About the Author
Salary costs are not the only con- Peter Bendor-Samuel is the Founder and Chief Executive Officer of Everest Group. Peter’s
sideration when evaluating an offshore thought leadership and expertise span more than two decades of developing significant,
location; in fact, they account for only large-scale outsourcing and partnering solutions in a broad range of industries and business
around 44%-57% of operating costs. processes. He is the recipient of the 2001 Outsourcing World Achievement Award and the
author of “Turning Lead Into Gold: The Demystification of Outsourcing,”
What about real estate, telecommu-

outsourcing best practices    annual issue 2006

38 Main Story

ity. Banks face the additional challenge
that years of cost competition and out-
sourcing have hollowed out their abil-
ity to internally develop, maintain, and

of Industry
operate custom systems.
Banking BPO is mature as most
banks outsource select processes. In
fact, banking BPO represents prima-
rily an Up-sell opportunity, rather than

a Greenfield opportunity. Many past
outsourcing deals haven’t delivered the
expected results. However, those per-
formance failures have often reflected
that the bank transferred a platform or
workforce that was delivering sub-par

Will Drive Accelerating performance already. “Same mess for

less” is a failed business model. Intrac-

Adoption of Mortgage BPO

table problems do not become tracta-
ble just because they are outsourced.
For better or worse, in a world

where regulatory change necessitates
operational transformation, “lift and
shift” is not an option. Banks need to
The challenges of making BPO engagements successful form a point of view on what the new
are dwarfed by the challenges of internal delivery. operational bases of competition will
be and partner with service providers
to capitalize on the new landscape. Ul-
Andy Efstathiou tion of one key area of BPO—mort- timately, in banking, it’s survival of the
Research Director at NelsonHall
gage processing BPO for banks. most adaptable.
Much has been made during the past
year of the slowdown in new BPO (and Banking BPO Mortgage BPO
ITO) contract signings. Is the market Globally, the banking industry is facing In the banking segment, mortgage
slowing down? Dying? Are customers the greatest change in regulatory over- processing is under great pressure to
dissatisfied with service quality and sight since the 1930s. Basel 2, SEPA, transform. Deteriorating market con-
cost? What is an informed customer Check 21, and SAS 70--to name a few ditions for mortgages, brought on by
to do? of the key regulatory changes mandat- increasing interest rates, declining col-
NelsonHall’s research shows a very ed, but not yet fully implemented--will lateral values, and deteriorating bor-
different story. Customers are using a necessitate that each bank re-architect rower credit quality are forcing mort-
disciplined approach to service acquisi- its core systems and operational de- gage lenders adapt or exit the market.
tion, which isn’t surprising considering livery capabilities. These regulations Banks are looking for five key benefits
that industries such as banking, which change the underlying processes such from mortgage processors:
has the highest propensity to outsource as payment processing, so that re-con- l  Conversion of fixed cost to vari-

of all industries, have been outsourc- figuring systems will not be possible, able cost: through transaction based
ing IT and select processes for close to system conversion will be necessary. pricing and rapid scaling of services.
40 years. Banks have also been early to This is true, regardless of whether this l  Cost reduction: cost reductions

offshoring, as evidenced by Citibank’s is done in-house or not. of 20%+, with continuing cost reduc-
outsourcing to India in 1986 and set- Our conversations with banks show tions over the next five years.
ting up its own captive in 1991. The that banks understand that this is not l  Increased speed of execution: as

slowdown in contract signings the past a “best of breed” selection process, but lenders compete for a shrinking pool
year is the result of customers taking rather a set of decisions that “bet the of business in deteriorating conditions,
a considered approach to solving very bank” on the future landscape of the in- executing quickly is a key competitive
complex business challenges using dustry. Execution cost take-outs matter advantage.
BPO services. Let us discuss the direc- less than time to market and flexibil- l  Re-engineered processes: to en-

outsourcing best practices    annual issue 2006

Main Story 39

Key Mortgage Processes Exhibit 1

Prime Residential Sub-prime Residential Commercial Mortgages

Customer acquisition,
Origination services Business acquisition focused services efficiency, and accuracy are
Customer acquisition driving mortgage BPO
Customer acquisition Customer selection
Underwriting services
Data entry Lenders are trying to maintain
volume through more effective
Account set-up Scale efficiency Transaction accuracy
customer acquisition
Compliance checking (orgination) and/or portfolio
acquisition (secondary market)
Mortgage services Operational efficiency focused services
Maintenance and customer services
Scale efficiency Transaction accuracy Lenders are trying to reduce
Payment services cost through scale efficiencies
in the prime market increased
Default management Transaction accuracy
accuracy where risks are
Secondary market services Busines disposition focused services higher or more concentrated
Sale of loan portfolios
Transaction accuracy
Portfolio management
Portfolio servicing Scale efficiency
Source: NelsonHall 2006

hance straight-though-processing and l  Support for secondary market shore delivery of services. The offshore
data access. activities: an increasingly important delivery market remains very small,
l  Platform flexibility, compat- segment of the marketplace. at under 1% of total global mortgage
ibility, and improvements: the ability l  Portfolio quality enhancement service delivery. As cost pressure forc-
to integrate to legacy platforms, while services: reduce portfolio defaults and es consideration of alternatives that
adding functionality over time. manage default activity. promise aggressive cost reduction,
To achieve these benefits, vendors l  Access to data: customer selec- the offshore market is poised for very
are breaking apart the entire mortgage tion and default management in a de- strong growth over the next five years.
process lifecycle and re-architecting teriorating credit environment require Conclusion: A complex chang-
processes to deliver relevant benefits superior information. ing business environment makes BPO
(see Exhibit 1). These enablers are driving a change choices difficult, where process transfor-
Mortgage BPO has been segmented in the characteristics and nature of the mation is required. However, cost pres-
by borrower type, with vendors special- vendors themselves. Vendors have tra- sure and access to talent have made it
izing on one or a few borrower types. ditionally provided services to highly imperative that customers increasingly
Service is migrating to network enabled, localized geographies and specific mort- engage with BPO providers to deliver
low-cost delivery. Key differentiation is gage types. Today, vendors are reaching those processes in a flexible manner.
moving away from borrower character- out across country boundaries to buy The BPO market will continue to grow
istics to process service features. regional vendors and product type spe- for the foreseeable future because, over-
To meet these market needs, ven- cialists to incorporate them into a glo- all, there are no credible alternatives.
dors must be able to provide six key bally delivered, “industrially hardened”, Mortgage BPO is a leading area
enablers: set of service offerings to create the nec- for process transformation due to the
l  Consistent execution of proc- essary enablers and benefits. confluence of several factors driving
esses: strengthening consumer protec- Since the beginning of 2005, M&A consideration and adoption of new
tion regulations (resulting in fines and activity driven by third party mortgage service delivery methods. New vendors
negative publicity) necessitates consist- processors has spiked. At the same are entering the marketplace to deliver
ency of execution. time, divestitures of mortgage process- services adapted to the changing needs
l  Rapid adaptation to regulatory ing operations by firms not committed of this rapidly evolving industry.
changes: incorporation of regulatory to this marketplace as strategic to their
changes into operations as a tactical business, has also spiked upward. These About the Author
Andrew Efstathiou is the Director for
weapon, rather than a response. activities will ensure both consolida- NelsonHall’s Banking Benchmarking
l  Access to country-specific op- tion and globalization for the industry and Sourcing Program. Andy brings
erational experience: to support new over the next five years. to NelsonHall 25 years experience in
market entry. Finally, everyone is considering off- banking and financial services.

outsourcing best practices    annual issue 2006

40 Interview

‘It will be a big

failure if all the
companies focus
just on cost
Atul Vashistha, CEO of neoIT, a
leading management consultancy
focused on offshore and global
sourcing of services.

How can optimum balance be ket for certain processes. Hence, in the using a mix of third party, captive, dif-
achieved keeping in mind the off- case of a company trying to optimize ferent locations, project governance is
shoring benefits (cost savings, risk, balance for BPO operations, it tends not enough. A company can’t always
control, and quality)? to put a lot more focus on the risk and get all the benefits if it’s not looking at
Optimum balance can be achieved control than what is required in the organizational lines.
by evaluating the kind of cost savings case of IT industry. Under operational governance, a
the organization is looking for, the lev- company needs to look at five key ar-
el of risk it’s willing to bear, the kind of What ideally should be the gov- eas:
control it desires, and the kind of qual- ernance model to manage offshore l  Performance. This is where serv-

ity that’s acceptable. When it balances, projects in order to prevent failure? ice levels are looked at.
rather optimizes all those factors, the The mistake that most companies l  Relationship Management. This

optimum balance is achieved. This is make is that they limit their govern- is where a company looks at how good
the reason why certain companies tend ance just to project governance, while the relationship is, how well are they
to go to the Philippines for their BPO we recommend that companies should working together and how well are is-
operations many times as they look at look at governance at three levels. sues resolved.
a captive situation and attempt to bal- l  Organizational Level. Look across l  Resource Management. Here,

ance the risk and control over quality the board: it’s almost like air traffic con- the company needs to eye the core re-
and cost. trol, the best way to explain it. sources and development of resources.
l  Functional Level. Here, the l  Contract

Do these factors also play a critical company needs to look across func- l  Financial.

role in vendor evaluation? tions such as Financial, F&A, HR, IT, We recommend when a company
Companies look at vendors while and more of the cluster. looks at operational governance, it
making decisions regarding the risk, l  Operational Level. It’s the day- should not just look at service levels. In
control and quality. If we compare the to-day governance and day-to-day fact, it should look at all five key areas
IT industry with BPO industry, we see management of projects. as described.
that there is much greater control and Governance becomes very effective
risk issue involved in BPO as the mar- particularly by use of different out- What, according to you, are the criti-
ket is not as developed as the IT mar- sourcing or globalization models. Only cal factors an organization should

outsourcing best practices    annual issue 2006

interview 41

address while planning to outsource/ How would a continuous improve- when to outsource. Any company that
offshore? (Cultural, political, and ment model be inculcated in an en- takes on outsourcing or offshoring
other risks involved). vironment wherein the whole service needs to recognize that it has to build
I would say that there are seven se- methodology is being based on the maturity over a period of time before it
crets/key factors to look at while off- premise of cost advantage? can do more complex things. It’s about
shoring/outsourcing. It will be a big failure if all the com- sending work offshore as you and your
l  Embrace Globalization. Com- panies focus just on cost supplier, or offshore op-
pany embracing globalization should advantage because cost eration reaches a certain
have sponsorship related to this--has savings mean nothing if level of maturity. “Wave
the CEO bought on to this, where is quality isn’t accomplished. 1” is simple to outsource
the resistance in organization coming Success just doesn’t come and as you go up in
from, does sponsorship exist for this? with cost advantage. Even waves your complexity
l  Welcome It as a Transformation if it’s cost advantage that and scale of things are
Lever. A company needs to evaluate the company is looking changing. It’s very much
why it’s agreeing to make this move. at, the market is mature about what you are off-
The reasons need to be clearly looked enough now that one can shoring and how it stays
at and the company should try to find get all the benefits. The over a period of time. It
out if there is an agreement across the supplier-buyer relation- also enables offshore op-
board and if the move is being looked ship should be such that erations to reach higher
at as a transformation lever. you should together be levels of maturity and to
l  Take a Lifecycle Approach. Li- working on improving be successful and build
fecycle approach means offshoring is quality consistently rather confidence over a period
not just about supply selections but than seeing what you are of time.
also about understanding what should paying for the service. balance can
be offshored and then looking at the be achieved Will this Wave Strat-
sourcing side as to which suppliers and We have seen transition- by evaluating egy be a suitable strat-
what locations are right for you. ing of a service-based the kind egy/tool for companies
l  Align Business and Globalization model to a product- looking at outsourcing
of cost
Objectives. A company needs to clearly based model in today’s or offshoring?
savings the
align business and globalization objec- BPO world. What are Whenever companies
tives and make sure the business objec- your thoughts on this? orgainzation are looking to develop a
tives that offshoring is going to accom- Vendors are focusing is looking roadmap, lay out a three
plish for them are clearly defined. on outcome rather than for and level or five-year plan for how
l  Assign the Best People. The just providing a service. I of risk it is they are going to out-
best people should be assigned to don’t see this as a transition willing to source or offshore. It’s
the project. The best that fit can be but just as another level pretty important to be
trained, developed or selected, and as- of service available in the able to select what they
signed to launch and manage the pro- market. I just see this as an option. For are going to offshore and then being
gram. Strong participation from CEO certain processes, the client infrastruc- able to put on a timeline to it. That’s
and C-level executives and attention ture is not being used. For most proc- what a wave strategy is. It focuses very
and recognition by senior manage- esses that are very integrated with the much on not just what and when to do
ment is also required to lure the best companies, e.g. Finance and Account- but also how to structure relations and
talent. ing, companies continue to use their value to mature in the perspective of
l  Implement a Strong Governance own infrastructure. Companies have both onsite and offsite. That’s why it’s
Model. become more comfortable with out- called wave strategy because the work
l  Embrace a Continuous Im- sourcing particularly offshoring--there goes offshore in waves.
provement Mindset. Embracing a will be a rise in product-based model.
Atul Vashistha is the CEO of neoIT, a
continuous improvement mindset as I just call it a much bigger outsourcing leading management consultancy
the process of outsourcing/offshoring platform than purely just a process. focused on offshore and global sourcing
is not easy and companies can make of services. He is a leading authority
on globalization and outsourcing and
mistakes. The mindset that you need to What is the “Wave Strategy” defined was recently recognized by Consulting
continuously improve things and keep by you in outsourcing perspective? Magazine as one of the “Top 6 IT Power
working on things is needed. Wave strategy is about time, i.e. Brokers”.

outsourcing best practices    annual issue 2006

42 bpo story

to better manage the activities they

have sent offshore.
Step one in working with clients en-
gaged in offshore outsourcing; review
all contracts and validate how they
support the company’s strategic goals.
Originally, those client goals may not
have been articulated well, so now is
the time to define success from my
client’s perspective and architect the
desired transformation. Contracts are
filled with legal terms and conditions.
Negotiating an additional partnering
agreement and service level agreement
(SLA) is a way to augment the legal
contract with plain business terms and
specific targets against which perform-
ance can be evaluated. Each item in
the agreements should have a clear
description, a statement of purpose,
methods for measurement, time tables
and associated incentives.
A good SLA focuses on desired re-
sults with minimal attention to how the
provider will actually achieve success.

This leverages the provider’s experience
and brings their best practices to the
table. Any number of items can be put
into the SLA, however, there is a cost
for measuring, managing and tracking

Lost Value
each item. A few key SLA items that I
suggest my clients consider include:
l  Defect density and removal rates

l  Timeliness of deliverables

l  Response times

l  Staff control

in offshore outsourcing l  Operational improvements

l  Average recovery times

l  End-user satisfaction

In the practical sense, managing an

outsourcing arrangement comes down
Paul Thompson much easier. to the client-vendor relationship. Both
Senior Advisor, Metagyre Inc.
Companies choose outsourcing parties need to consider and agree on
A funny thing happened to me on the strategies for a number of reasons how they will build trust, share risk,
way to my next high-tech consulting and regardless of the country or out- agree on accountability, and share suc-
engagement. It was no longer where sourcing provider, every option has its cess. There has to be continual con-
I left it, conveniently located down the own advantages, limitations and risks. versations focused on reasonableness.
road from the last company I support- When a company decides to outsource How will success be demonstrated and
ed. It seems that while I was focused software development, IT services or compromise achieved without the bur-
on one client, an offshore company business processes offshore it must ac- den of an overly taxing bureaucracy?
came in and moved my future client’s cept that a major transformation will Once the contractual issues are ad-
information technology (IT) work to occur. This is the point when I often dressed, I face changing my client’s
another country and that made my job get called to advise companies on how understanding of their outsourcing

outsourcing best practices    annual issue 2006

bpo story 43

responsibilities. Initially I concentrate have a truly successful relationship. lead to problems if not kept in check.
my efforts on bringing together execu- In any business, major organiza- For example: emailing requirement
tive sponsorship from IT, HR, finance tional change cannot possibly be trou- changes between staff may seem quick
and other key business functions. These ble-free and all major changes are in and effective but can leave projects
executives form the strategic guidance some part a discovery process. Since at risk for scope creep and cost over-
team which focuses on the outsourc- the governance program addresses the runs when configuration management
ing relationship. As you would expect, organizational change, I find it essen- and change control procedures are
executive members set the tone for tial that my client fill the governance not followed. I work with my clients
the offshore effort and its acceptance program director’s position with an in- to keep project communication ap-
throughout the enterprise. The strategic dividual who is influential throughout propriate for the task and the overall
guidance team will address existing per- the enterprise. One of the most com- project goals in mind when we build
formance issues, leverage new offshore mon mistakes is to have individuals and execute the project’s plan. Often
services across the enterprise, and drive in crucial roles that are not suited to the required communication includes
future outsourcing toward a shared risk- partnering. Most often interpersonal daily turnover logs, status reviews, is-
reward partnership. skills are more critical than technical sue documentation and review, change
Offshore governance is a discipline. understanding. control, query resolution logs, quality
It takes more than a good offshore pro- As I move my client’s focus down gates and, yes, even the occasional face
vider to have a positive outcome. The to day-to-day activities, we concentrate to face team building.
client’s offshore governance program on the project management processes By the time I complete my client as-
is responsible for commissioning, ac- needed to ensure timely delivery, qual- signment, managers are running their
cepting, managing and facilitating off- ity assurance, budget adherence and projects by tracking progress of deliv-
shore processes and projects through- scope management. Management by erables, defects, risk reserves, overtime
out their enterprise. It is important walking around is no longer an op- hours, staff turnover, quality gate evalu-
to recognize that this governance is an tion. It is replaced by focusing on the ations and earned value measures. By
evolving body of offshore and project planning, controlling, management bringing all this information together in
management knowledge coupled with and close-down phases of individual a dash board style presentation, clients
the appropriate tools. To facilitate the projects. The processes defined by at all levels see the information that sup-
governance role, I work with clients to the governance program together with ports their area of responsibility.
set up a number of processes and tools project management training address At the beginning my client thought
covering operational issue manage- the complexities of communication and their role was mostly administrative and
ment, training, project management management. The tools at the heart of had no experience with offshore. Now
methodology, process tools and sup- the executing phase involve improving when I look around at their organiza-
port as well as human resource man- communication. The growth of net- tion, I see that project management is
agement. work technologies has made it easier a core competency, service level agree-
One often overlooked bonus of to share documents and communicate ments support their needs, relationship
working with an offshore provider is directly with individuals around the management is practiced with all pro-
the opportunity to learn about a new world. This is one area in which tech- viders and there is a solid governance
culture first-hand. Culture influences nology has provided advancements for program which extends over all IT and
all aspects of our lives. Everything from offshore projects. Some of the tools business processes regardless of their lo-
the work ethics that drive business to available today include group-ware cation. What was once trail and error
courtship and marriage are affected by and collaboration applications, email, is now a sound common sense solution
culture. As a result, undocumented as- Internet chat, voice over IP and wire- generating high returns and delivering
sumptions can easily lead to costly mis- less communication. positive transformations.
takes. Working with the governance These same tools which provide Now if I can just remember where I
board, I help them to reduce this risk improved communication can also left my keys…
by building their processes and tools to
include cultural influences and ensur-
About the Author
ing that this knowledge is disseminated
Paul Thompson is a Senior Advisor with Metagyre Inc. (www.metagyre.com) a company that
into all projects. When both my cli- provides assessment advise and management services for companies choosing to outsource.
ent and their providers understand all Metagyre assists client’s in finding and managing the right vendors to outsource business
the cultural influences, they will begin processes, software development and infrastructure modernization efforts.
to trust in the process and each other. For a free copy of Metagyre’s insights on vendor partnering, go to www.metagyre.com/
Without this trust it is impossible to

outsourcing best practices    annual issue 2006

44 bpo story

multi-faceted management talent and

Outsourcing: re-christening it as the “Global Sourc-

Inside Out and

ing Group (GSP)”.
One of the main benefits of a cen-
tralized GSP is that it can de-couple the
task of decision-making from various
functional divisions such as IT, Op-

Outside In
erations, HR and Finance. Not only
does this group take a more dispas-
sionate and objective view of various
cross-organizational processes that can
be outsourced, but it also strives to de-
velop a new chemistry with outsourc-
ing service providers. However, this re-
quires a different thought process and
management discipline to strategize,
plan, and implement major outsourc-
ing initiatives. One of the outcomes of
this approach is that Outsourcing Part-
ners (OPs) can now be considered as a
virtual extension of your organization-
“Experience is a hard -responsible not only for achieving
teacher because she measurable results but also for creating
gives the test first, the incremental business value.
lesson afterwards,” This is a significant shift from the
(Anonymous). traditionally adversarial approach of
maximizing cost savings by “beating
down” the vendor for the lowest pos-
sible quote. Structuring contracts, ne-
Anupam Govil l  What is the optimum outsourc- gotiating pricing, and defining Service
Founder & CEO, Global Equations ing model? Level Agreements (SLAs) now have a
Outsourcing as a discipline has l  Whether to go offshore and, if different objective. But how can an
evolved rapidly over the last five years. so, what is the right blend between on- outside vendor inherit client processes,
Several major universities now con- shore and offshore? perform them at a better SLA, lower
duct courses as part of their Manage- l  How to time the transitioning transactional costs, and create business
ment Program that teach profession- phase to avoid an adverse impact on value? The solution is through an in-
als on managing outsourcing business balance sheets (especially for public telligent blend of different levers such
and aligning outsourcing strategy companies)? as leveraging better process manage-
with organizational growth objectives. l  To go multi-vendor (best of ment practices, employing automation
However, today there is a plethora of breed) or single vendor (economies of methods, dislocation of service delivery
choices available to outsourcing deci- scale)? Which is the ideal engagement to a lower cost location, and replication
sion makers, making the task far more model? of domain expertise. It’s when some of
complex than ever before. Besides l  And the list continues … these levers are not utilized adequately
requiring financial and operational To make the task even more com- that things start to go wrong and an
number crunching and analysis, a typi- plicated, the ramifications of these outsourcing initiative falls apart.
cal initiative also needs a fair amount of decisions go beyond the immediate Recently, we have seen some reports
judgmental and experiential acumen. core group that is affected, necessitat- from Gartner that outsourcing is not
And often, experience isn’t enough, be- ing involvement of different functional delivering the desired results and that
cause of fast changes in the outsourc- divisions within the organization-- IT, the customers aren’t realizing cost sav-
ing landscape. Operations, HR, Financial, Market- ing! What’s apparent from this analysis
The list of considerations in a typi- ing, Sales, and so on. No wonder that is that many organizations are not able
cal decision matrix continues to grow: more and more corporations have been to capture the true cost of executing
l  What processes to outsource? staffing up their outsourcing team with processes in-house. Hence, it’s difficult

outsourcing best practices    annual issue 2006

bpo story 45

for them to estimate cost savings ac- combination. can executives rise above this noise
curately. Most outsourcing initiatives The Decline in Mega-outsourcing and make the right decision? It’s best
fail not because of mess-ups by either Deals addressed by Peter Drucker who had
party, but because of misalignment According to Gartner, the number a slightly different take on the ration-
of goals and outcomes. In order to of outsourcing mega deals has declined ale and objectives of outsourcing than
win the contract, based on lowest cost in the recent years as companies are now Jack Welch. According to Drucker,
model, the service provider over-prom- opting for multi-sourcing options. In “Most look at outsourcing from the
ises but cannot deliver the service prof- fact, some previously inked mega deals point of view of cutting costs, which
itably and thereby has to cut corners. are being broken down into multi- I think is a delusion. What outsourc-
More often than not, the company sourcing arrangements ing does is greatly im-
that is outsourcing fails to calibrate the to take advantage of Most prove the quality of
savings properly or underestimates the best-of-breed skills. outsourcing the people who still
amount of management bandwidth This clearly indicates work for you. I believe
needed to govern the initiative. The re- a move towards spe-
initiatives fail you should outsource
sult is dissatisfaction and discord, lead- cialized BPO players not because of everything for which
ing to breakdown of the outsourcing that understand an in- mess-ups by there is no career track
relationship. dustry’s organizational that could lead into
To achieve success, an organiza- and process dynamics,
either party, senior management.”
tion’s outsourcing decisions have to be and enables successful but because of Hence even the most
rooted in ground reality and based on embedding within the misalignment core task--assessing risk
engendering a symbiotic relationship client organization. It for an Insurance under-
with the outsourcing vendor. Consid- doesn’t necessarily ring
of goals and writer--could be a can-
ering outsourcing vendors as partners the death knell for the outcomes. In didate for outsourcing
or collaborators--with the same goals large outsourcing firms order to win if it leads up a dead-end
as the customer--is the key. This re- since they still get a ma- career path. Eventually,
quires structuring contracts and setting jor chunk of these mul-
the contract, this ties to how each or-
SLAs that impart equal emphasis on ti-sourcing deals, but based on lowest ganization views itself
the business value derived from “shar- it certainly augurs well cost model, the and its long-term goals.
ing” process ownership versus lowering for small to mid-sized
costs. BPO firms that believe
service provider Using improvement
of work quality of its
Two trends that reflect this shift in in process expertise in over-promises. employees--as a factor-
outsourcing philosophy are: certain verticals versus -may be a contrary way
The Emergence of Gain Sharing as broad-based service offerings. These of making critical outsourcing deci-
a Pricing Mechanism firms also have the ability to be end-to- sions. However, in the long run, that
Here, the presumption is that there end service providers, enabling custom- is what separates the Good from the
will be additional cost-savings achieved ers to outsource the entire value chain Great.
through business process optimization rather than discrete tasks. Hence, it’s More importantly, this does bring
and that the customer will be willing likely that services such as Insurance into question the use of the classi-
to internalize those savings and share and Mortgage Processing will be domi- cal core versus non-core distinction
it there forth with the vendor. Giv- nated by verticalized business service for identifying processes that can be
ing an outsourcing provider a finan- providers rather than the outsourcing outsourced. The need of the hour is a
cial stake in the business for which it behemoths. more holistic approach that balances
provides services is an incentive that Rapidly evolving practices within internal organizational dynamics with
can work well, yet few companies use the outsourcing domain and contra- external desirable outcomes and a per-
this practice. The main reason for this dictory advice (it’s often happening) spective that transcends the traditional
is that most firms do not always trust in the market have created a profusion buyer versus seller roles. To summarize:
the provider’s ability to affect business- of choices as well as confusion. How inside is out and outside is in.
critical processes and it’s often difficult
to come up with appropriate metrics to About the Author
measure such efforts. However, mature Anupam Govil is the Founder and CEO of Global Equations, an Offshore Advisory firm. He has
buyers catalyzed by progressive vendors over 17 years of experience in consulting, business development and venture capital; focusing
on Enterprise Software, IT services and BPO. Currently he also serves as a Venture Partner with
have begun to look at gain sharing as a Enhanced Capital Partners and Texas Global LLP.
way to developing that elusive win-win

outsourcing best practices    annual issue 2006

46 Leader’s Room
Every boss
ain’t as
The Laws of Behavior

A Global
as me!

Catch and positvely reinforce people in the act
of doing what you want, and you will always
get better results.

Aubrey C. Daniels other, they would all describe

World’s Leading Authority on
themselves by saying, “We’re
Behavioral Science
different.” And you know what?
When organizations begin to work glo- They are right! Every supervisor
bally, they are often overwhelmed by the and manager creates a work cul-
apparent challenges—new country, new ture that is different from every
language, different customs, and more. other one in the organization. So
However, these obvious differences it should not be surprising that
often distract leaders from the task at when we travel sometimes several
hand—to produce an efficient and ef- thousand miles that people would
fective product or service at a profit. be substantially different. Unfor-
tunately, too many managers and
“We’re Different” executives focus on the differenc-
For as long as I have been consulting es rather than the similarities.
with businesses, over 40 years, I have Although the obvious charac-
heard people say, “We’re different.” teristics are different in that we
When telling someone in the North look different, talk different, and
about a successful engagement in the act different, under the skin we are
South, they would immediately say all pretty much the same. If I were
that they were different from people to go to the emergency room in
in the South. Regardless of whether it China they would not need to
was one southern bank talking about know where I was from to locate
success to another southern bank, one my heart. They would not need
office or bank in the same company, to look up the average body tem-
or one department of the bank to an- perature of citizens of the US. As a

outsourcing best practices    annual issue 2006

Leader’s Room 47

matter of fact, although my brain may that he doesn’t believe in gravity, but he cally reinforced and which are typically
be smaller than some and veins and ar- will still fall if he walks off a roof. On punished.
teries that feed it may be in slightly dif- visiting Saudi Arabia, we don’t need to l  To discover what things and ac-

ferent places from others, my occipital ask, “If people run long distances here, tions act as reinforcers and punishers.
lobe would be in the same place in my do they get hot and sweaty?” By know- Although these two characteristics
skull as those in China. ing the laws of nature, we can operate may require some time to understand
To manage cross-culturally, leaders in different environments and know fully, knowing how to identify them
need to acquire a secret weapon that is certain ways to respond to them even gives leaders a distinct advantage over
universal, one that translates in a glo- without asking. those who see a culture as something
bal environment; something that will If the laws of nature are helpful in that requires a complex analysis of a
undeniably work no matter the setting dealing with differences in the physical society, its history, and the subtleties
or circumstances. That secret weapon environment, might the laws of behav- of its language and economic and po-
is a practical understanding of the laws ior be helpful in dealing with differ- litical systems. Not that these are un-
of behavior. ences in a global economy? The answer important over the long term, because
is, of course, yes. they can provide information on the
No, We Are All the Same I have worked with people in more culture’s contingencies of reinforce-
As it applies to business and in life, one than 20 different countries to use the ment and punishment, but they are
way we are all the same is that we all laws of human behavior to improve the not necessary to get to work.
follow the same laws of behavior. If that performance of their organizations. In If you, as a leader, do only one
were not so, they would not be laws. I each instance, they successfully solved thing, it should be to fully understand
have a friend that calls me from time to problems related to performance, qual- the power of positive reinforcement
time to check to see if the laws of be- ity, cost, morale, and safety. and how to put it to good use.
havior are still on. Of course, I laugh
and tell him that they are still operating How Culture Fits with the Laws What Is a Positive Reinforcer?
like they always have been and always of Behavior Technically speaking, a positive rein-
will. Whether in China, India, England, A culture is nothing more than the forcer is any consequence that follows
and Pakistan, all people obey the laws characteristic or typical ways that a a behavior that increases its frequency.
of behavior. When day turns to night, group of persons behave. These char- By this definition, an atta-boy, a warm
people in all countries look for electric- acteristic ways of behaving come about fuzzy or a pat-on-the-back are not
ity or fire to light their way. It is pre-or- by patterns of reinforcement and pun- positive reinforcers unless they increase
dained. We can’t escape them any more ishment. Understanding a culture re- the behavior that they follow. Yelling
than we can choose to exempt ourselves quires: and screaming at someone may be a
from the laws of nature. One may say l  To map which behaviors are typi- positive reinforcer if it increases the
frequency of the behavior that gener-
ated the yelling and screaming.
It could be that negative attention for
the person is better than no attention at
all. By the same token, telling someone
that he has done a good job would be
a punisher if the person stopped doing
what he has been complimented for do-
ing. If the person doesn’t like or trust
you, he may have no interest in doing
something that would please you. We
know reinforcers and punishers by their
effect, not by what was done or by the
intent of what was done.
Simplistic notions of positive rein-
forcement create more problems than
they solve. Banks and financial institu-
tions tend to use what they know as re-
inforcers—money and tangible objects
and rewards. While tangible rewards

outsourcing best practices    annual issue 2006

48 Leader’s Room

certainly have their place, they are woe- the rules. Money cannot be given fre- phere, from a financial perspective it is
fully inadequate to bring out the best quently in most organizations. Money the only behavioral consequence that
in people because they fall short on the is most effectively used as a back-up to captures the highest value for both the
critical aspects of reinforcement that social reinforcers. A social reinforcer person and the organization.
maximize behavior or performance. can be any interaction that lets the per- Knowing the importance and im-
There are four considerations or rules former know that he is liked, valued or pact of positive reinforcement on the
for the efficient and effective delivery of appreciated through some action other performance of an organization, the
positive reinforcement, no matter where than money or the things that money first thing you should do when going
in the world you use them: can buy. Examples include getting the to another country to work is to es-
Make it personal. To be effective, people to tell you how they were able tablish yourself as a positive reinforcer.
the reinforcer must be meaningful to to accomplish a difficult task, asking That is, someone people want to please
the receiver. Some people hate to be their permission to share their ideas and to be around. Employees seek out
recognized for anything in public, but and work practices with others, visit- these people for their opinions and ad-
many like it. Find out what is mean- ing them in their work space rather vice, and most importantly, they give
ingful to the individual. than in your office and having a con- these people their best effort.
Make it immediate. The longer you versation about how things are going The way you become a reinforcer in
wait to reinforce desired behavior, the in their lives. Of course, smiles, waves, a new culture is to let employees teach
less effective it will be. Catch and posi- thumbs-up and other non-verbal ways you something. Ask questions that
tively reinforce people in the act of do- of communicating your pleasure with would let the employees demonstrate
ing what you want, and you’ll always employees’ performance can never be their knowledge and experience. Give
get better results. over-done and are almost always ap- them a socially acceptable way to tell
Make it frequent. One positive re- preciated and motivational. you how industrious and clever they
inforcer will not make a habit. In some In some cultures, physical gestures are. Once you’ve shown interest in
athletic performances, it takes hun- such as thumbs-up may have different their accomplishments and that you
dreds of positive reinforcers to get to meanings. While it is generally posi- value them, they will almost always re-
peak performance. At work, there are tively received in our culture, it is not ciprocate by giving you their best.
a great many behaviors that require in all. We discovered that in certain When you know positive reinforce-
the same level of reinforcement. We work settings, calling people by their ment as a scientific concept, rather
have been asked many times, “Can first name was not a reinforcer as it than a common sense one, differences
you reinforce too much?” If you do it typically is in the US. Physically pat- are a way to create hybrid vigor in an
wrong, one time is too much. If you ting someone on the back also may not organization and in your own life. You
do it correctly, don’t worry about it. go over well in many workplaces. will see differences not as a barrier but
After all, does a golfer ever tire of being as something to celebrate. Too many
told “Good shot?” People almost never Why Positive Reinforcement? organizations inadvertently reinforce
complain of too much reinforcement. Positive reinforcement is the most behavior they want less of and punish
They frequently complain of too little. powerful interpersonal tool known. behavior that they want more of. When
Make it earned. Indiscriminate It is true around the world. Although you know the laws of behavior, you are
praise is a very bad practice. Bad for there is a time and place for negative less likely to make these mistakes and
the person receiving the praise and for consequences for behavior, the only more likely to create a strong partner-
the person giving it. Benjamin Franklin way you ever get a group of people to ship that is positively reinforcing to all.
recognized this when he wrote, “Praise work at consistently high levels is with As the French say, “Vive la difference.”
all and blame all are two blockheads.” positive reinforcement. While there are This so-called secret weapon is really
People respect most what they earn, obvious interpersonal benefits in terms not so secret to those who understand
and they respect leaders who deliver of teamwork and general work atmos- and can apply the laws of behavior.
reinforcement contingent on some ac-
complishment. Leaders who reinforce
the good, the bad, and the ugly alike About the Author
Aubrey C. Daniels, Founder and Chairman of Aubrey Daniels International (ADI),
are weak leaders who do not have the
is the world’s leading authority on behavioral science in the workplace. He is the
respect of the followers. author of three best-selling books including, Bringing Out the Best in People
As you can see, money is an effec- (McGraw-Hill), and his latest release, Measure of a Leader, which lays out a
tive reinforcer when you follow the powerful new vision for defining effective leadership by examining the behavior of followers.
rules above. The problem is that when Daniels is an internationally recognized expert on management, leadership, and workplace
issues and has received numerous awards for his work in the field of behavior analysis.
using money, it is difficult to follow

outsourcing best practices    annual issue 2006

50 Leader’s Room

The View from a Cubicle: use it that way. It would be interesting

to have a new employee handbook that

An Interview with
was just Dilbert cartoons; that would
certainly tell you what you were get-
ting into—but it’s not my goal.

Scott Adams
L2L: It seems that at least one
speaker at every management confer-
ence uses a Dilbert cartoon to illus-
trate a point. So senior managers, not
only cubicle workers, seem to appre-
ciate your point of view. If that’s the
case, why does the absurdity persist?
SA: Often absurdity is more desir-
able than the alternative. I’ll give you
an example. A high level manager in a
large organization who was considering
implementing casual Friday recently
asked for my opinion. I explained that
there’s nothing funnier than the notion
that it would be safe to allow people to
dress comfortably one day of the week
but that if you extended it to two, per-
haps that would hurt your stock price
or morale. But, having said that, I went
out to support the notion of casual Fri-
day because it’s 20 percent better than
not having it at all. So here you have
a clear example of absurdity—one day
Scott Adams, Creator of Dilbert ple read your work as an inoculation that casual is OK—being better than
Leader to Leader, No. 13 Summer 1999 against all that they will encounter in the non-absurd alternative, all casual
Reprinted with permission of John
Wiley & Sons, Inc.
the workplace? or all noncasual. So absurdity is often
Scott Adams: I never think of my- the comfortable compromise. That is
ONE of the most influential manage- self as against gurus. The thing I’m just an oddity of the world.
ment observers of the 1990s works shooting for is a point of view. I’m giv-
from a simple home office in Danville, ing you the employee-in-the-cubicle L2L: What is the most absurd prac-
California. He spent nine years work- point of view. That’s very distinct from tice that you’ve seen in businesses?
ing in a cubicle office at Pacific Bell. what a lot of consultants and gurus SA: There are few things that top
But Scott Adams reaches 1.5 million do. Usually they drop in by parachute, cubicles. If you know the history of the
people every day and his Dilbert com- talk to the executives and go away hav- cubicle—the original idea, just over
ic strip, books, and TV show shine a ing no idea what the employees are 30 years ago, was that everyone has
harsh, silly, and often deadly accurate thinking. Sometimes it doesn’t matter. different requirements for desk space
light on today’s workplace. He spoke Sometimes you’re shoving something and storage space. So if you build an
recently with Leader to Leader editors down people’s throats and all you want environment that was modular, then
Paul Cohen and Alan Shrader about is higher stock price. Getting touchy- everyone could pick and choose the
his views of management, manage- feely with employees may be counter- components that were appropriate for
ment gurus, and his own work prac- productive to your mission. their function. But when big compa-
tices. I’m not trying to present solutions. nies saw it, they said “You know, if we
Leader to Leader: Scott, in a world But to the extent that it’s useful to made them all exactly the same, these
full of management gurus, you may show what things are silly or objection- should be really cheap.” So the myth
be the first anti-management guru. able or just annoying from the employ- put forward is that this will help com-
Do you see yourself as kind of an an- ee’s point of view, that can translate to munication and allow the free flow of
tidote to gurus? Should young peo- some benefits if somebody chooses to knowledge, when in fact it’s just cheap-

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Leader’s Room 51

er. Nobody’s fooled by the myth. But because they’ll be picked to death: “Are they are good managers, too. Almost
telling people, “We’re saving a lot of you saying there’s going to be a reor- never will you meet a manager who says,
money, so just get in your little box,” ganization? Is there a merger? I better “You know, I have to admit, I really am
wouldn’t work. Again, it’s more com- stop working.” Nothing is more dam- terrible at managing. Everybody hates
fortable to compromise on the absurd. aging than the usual “what have you me and I’m incompetent.” No one says
heard” rumor mongering. That’s the it because I think people don’t believe it.
L2L: Others call it living with para- kiss of death for productivity. And over time, I’ve come to grips with
dox. the fact that I probably was a bad man-
SA: Yes. The Dilbert Principle, in L2L: Did you ever have a good boss? ager, or certainly bad in some ways that
my book of the same name, is another And if so, what did that person do? were completely invisible to me, just
example: “The most ineffective work- SA: People are surprised to hear that as everyone else’s faults are invisible to
ers are systematically moved to the I had more good bosses than not. And them. Some of the magic of managing is
place where they can do the least dam- the Dilbert world is every bad experi- to somehow not see how you’re destroy-
age—management.” That wasn’t just ence that I ever had with maybe 30 ing people’s productivity.
a comic exaggeration; I was actually different bosses, plus experiences col-
observing that the least skilled people lected from others. For example, the L2L: How does a manager get a
were being promoted specifically so boss who said, “My job is to give you sense of what’s really going on in the
that you didn’t waste your skilled peo- what you need to do your job.” We’d organization or with customers?
ple in those jobs. And nothing could say, “We really need to create a budget. SA: The way I’ve seen it done is with
be more absurd than putting the least Can we talk to you next week?” And spies. And what that usually means is
competent people in a job that has lev- he’d be out for the next month, liter- befriending specific employees in key
erage on everybody’s results. ally. He was completely unavailable to places who are at lower levels. Their
do the thing which he was just telling incentive is they want to suck up to
L2L: You treat bosses harshly in us was his only job. Otherwise, he was somebody who is in power, and your
your work. Is there something about a great guy and smart and had lots of incentive is you want somebody who
being in a position of authority in an good things going for him. will actually tell you what people are
organization that brings out the worst saying. Of course, all information is
in people? L2L: Have you ever had to manage imperfect but the spy method is the
SA: In Dilbert’s world, the technical others ? And if so, what did you learn only one I’ve seen that is reliable. Even
world, where Dilbert is an MIT gradu- from that? now, with no employees, I get filtered
ate with double 800s on the SAT’s, SA: I was a bank supervisor and al- information. Every problem that I’ve
there are things that he sees as obvious though I did not have my own office ever heard about—from licensing to
that his boss is not going to see. But it then, I had a taller anything else—somebody out there
has always amused me that you can go Almost cubicle. That’s what was willing to tell me anonymously by
anywhere and the guy in the John Deere never will you got. It was very e-mail. It’s a pretty wonderful system.
hat will get off the tractor and tell you a manager special. I had—at the
why NAFTA won’t work and why trade admit, “I am peak—nine people L2L: You have noted that it’s very
policy needs to be different. And he terrible at working for me. And hard to assess performance in most
won’t say, “It’s bad for me personally.” managing.” they of course all had organizations. How would you handle
He’ll give you supply side economics completely different performance assessment?
and political theory. Everyone believes requirements. I tried to treat them dif- SA: You want to avoid any situation
that they’re smarter than the people in ferently. My rule number 1 for boss- in which your success depends on mo-
charge. But usually that’s because they dom is that you have to craft it to the tivating someone who can’t be meas-
have less information. Every decision specific person in that specific job. But ured. You can’t win that game. But I
the boss makes may not appear to make that means that basically you’re doomed find that when people have contracts,
perfect sense. But isn’t it possible he if you have a group of even three peo- they perform, because they treat you
knows something we don’t? ple. You will be inconsistent—treating like a customer. There’s an immediate,
some people harshly and others with specific reason that they want you to
L2L: But isn’t that also a conven- encouragement. I try to avoid being in be delighted with their work. But as
ient dodge? “If you only knew what I that position. soon as people become an employee,
knew.” Or, “You don’t have the whole The other thing I learned is that dur- they feel like they’re a kid in the family
picture.” ing that time I actually thought I was a and you can’t really disown them that
SA: But then bosses can’t say that good manager. Everyone I meet thinks easily. There’s a process and paperwork

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52 Leader’s Room

and you don’t want to feel you made reason to be working. Part of the prob- pilots are never shown. So you disband
the wrong decision to hire them in the lem also is that so many people have jobs and then some other group collects. It’s
first place. You’re stuck. where what they produce is invisible: I a different model than anything you see
drafted a contact today. I improved in corporate America. If you’re making
L2L: You’re saying don’t be a boss— how my biggest customer thinks about a toothpaste in corporate America and
be a customer. us—which is real, but you just can’t see it’s not exactly right the first time, you
SA: Yes. And ultimately, put yourself it. So, you look for the stuff you can do your focus group—keep working on
in a position where you can assess by see—how long people are in the office it. In Hollywood you throw it away, and
outcomes. But don’t try and what they’re wearing. You default to all the people instantly. And they don’t
to put objective meas- “Don’t be that because it’s visible. ever work together again except in ones
ures on something that a boss, and twos.
can’t be quantified. I al- ...be a L2L: Have you found any leader-
ways told my employ- customer” ship training approaches that have L2L: In Dilbert’s world, the mar-
ees that performance value? keting department is always the en-
reviews didn’t matter too much and that SA: The only things that I think emy. Why? When you put engineers
what mattered is whether they were get- work are where people are doing the and marketing people in the same
ting better and were learning stuff. actual job, where they get shared ex- room, it just doesn’t work.
perience and enjoy some success as a SA: Things happen based on how
L2L: You’ve said that most employee team. But taking them out and mak- you’re trained. Economics people can
recognition and motivation efforts are ing them hang from ropes and trees—I talk to engineering
degrading—pointing out, for instance, once experienced a trust exercise where people because you’re So when
that senior managers don’t get employ- my partner jumped out of the way and always looking for the you put
ee recognition. How should you recog- let me fall on my butt, because she cheapest, easiest, sim- engineers
nize and acknowledge effort? thought that I looked too heavy. I’m plest, most elegant so- and
SA: I’ll speak only as an employee 5’8”, and she outweighed me. lution. You’re looking marketing
who has been on the receiving end. I also was in a problem-solving ex- at complexity and try- people in
What has worked for me is that some- ercise where you had to get from one ing to simplify. Mar- the same
body let the people I worked with know place to another by putting planks keting people are try- room,
that I did a good job. Pure ego gratifi- from some tree stump-like things to ing to hide reality. it just
cation. But the employee of the week other tree stump things and then col- They’re trying to take, doesn’t
thing—there was a case recently where lect all the planks and get all your peo- for example, long dis- work.
the employees were mad because the ple to the other side. And I had a boss tance telephone serv-
only person who ever got the employee who ignored what everyone was saying ice, which is exactly the same no mat-
of the week was the top performer. and insisted on doing it his own way. It ter who you buy it from, and convince
That seemed so unfair. So management ended with all of us on the other side people that one is better. All of your
actually caved and started giving it out and him on a plank out in the middle. instincts as an engineer are to be logical
on a “fairer” basis—everybody got to It was everything I needed to know— and simple and reliable—and in mar-
be employee of the week. everything discouraging about where I keting, everything is to take what is
worked. It was the clearest signal that clear and make it unclear.
L2L: In your ideal company, de- we were doomed as a group.
scribed in “The Dilbert Principle,” L2L: How have you approached
managers try to keep employees hap- L2L: You suggest that, outside of the marketing of your ideas and prod-
py, not humiliate them, allow them to sports, teamwork is dangerous. How ucts?
be productive, and let them leave at do you think people should organize SA: If you look at my cartoon work,
5:00. Why is that so difficult for or- complex work that requires multiple what was missing was, I didn’t know
ganizations? types of expertise? what people liked or didn’t. So I put my
SA: It’s difficult mostly because you SA: I’m learning how they do stuff in e-mail address in the strip and did what
don’t get to choose your employees. Hollywood. Everything there is a virtual any business person does—I opened a
Often, you’re the manager who comes business. If you shoot a pilot episode, channel to the customer. A standard
in and you inherit a group and they’re everybody’s a free agent. You find your business practice, but never had been
already disgruntled. All positive models director, your writers, you put the thing done because artists don’t use stand-
of work depend on having people who together, a few people look at it—and ard business practices. And it worked,
want to be there and feel there’s some then it dies, usually. Nineteen out of 20 because standard business practice is

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Leader’s Room 53

standard because it usually works, at he’s evil, she’s good. End of story. Mother like a big deal. But the biggest cause of
least when it comes to stuff like listen- Teresa worked her whole life with lep- illness and death in the United States
ing to the customer. The other thing ers, and she left a great legacy. Bill Gates is poor diet. That means the single big-
that I’m a maniac about is to limit what wrote one check for $100 million dol- gest opportunity to improve health is
I’m involved with—whether it’s the TV lars to give vaccinations to children. He by improving diet. I assumed, as most
show or licensing the cartoon or the helped a thousand times more people people do, that if you eat “right” you
Webs ite or whatever—to the creative than Mother Teresa, and he did it in the get most of what your body needs.
part, which is the part I know. I don’t time it took to write a check. But check the nutrition labels on your
try to program the Web or to be a direc- You can argue about specific tactics food. You could eat a wheelbarrow full
tor or editor or sound guy on the show. or things that Microsoft has done or not of food before you got your vitamin
done. But for the most part, Gates has and mineral requirements.
L2L: Information overload and really big goals and he works on them I’d call what I’m doing enlightened
competing priorities are huge frustra- very diligently and—this is the inter- capitalism. I’m investing in a nutrition
tions for managers. You get hundreds esting part—he works on them like a product—as opposed to making a new
of e-mails a day, and you have to meet scientist. He doesn’t work on them like kind of hubcap—because improved nu-
daily deadlines. How do you manage a Mother Teresa. He’s not the market- trition will make life on earth better. I
your time and your creative process? ing guy, he’s the problem solver, he’s chose capitalism as
SA: I tend to be really good at time the game winner. If his wealth doubles I can’t make my engine because
management. This is also the business every 10 years, he could become the the clear it’s self-sustaining
part, the hard wiring of the brain. It first trillionaire! And he says he wants distinctions and relatively effi-
turns out that when you get massive to give it away. Let’s say he does, and he between cient. And it’s some-
amounts of e-mail it all falls into about does it the same way he gave away the charity and thing I’m good at.
20 different types of comments, and first little bit: he picked something the capitalism My economics train-
the speed at which you can read them government just wasn’t going to do. It that most ing doesn’t allow me
is phenomenal. Also, I’ve got software had immediate, amazing lifesaving im- people do. to make the clean
that searches for keywords so it picks pact. Did 10 million people live because distinctions between
out messages I know I have to deal he wrote that check? Possibly. So he is charity and capitalism that most people
with at a higher level of priority. picking out those places where only he do. In any case, I plan to rid myself of
Let me give you a few other tips. I can make a difference and have long- whatever wealth I’ve created before I
don’t answer the phone before 10 A.M. term benefits and are not just washing die, so in my case the only differences
And I do most of my creative work the feet of a leper. That’s a holy thing to between capitalism and philanthropy
from about 7 to 10. That’s the great do, but when you’re done, all you have are timing and effectiveness.
thing about working at home: no one is a leper with clean feet. I know it’s
can drop in to my cubicle. If I don’t a totally unpopular point of view, but L2L: Scott, we started by talking
answer my phone, I am unreachable. I you can’t escape the math of it. about gurus, so let’s finish with this.
had a pager for a while—got rid of it. Some people view you as a kind of
And when you have control over your L2L: You’re not far from the point spokesman for our times. What do
own schedule, you can do busywork in your career where a lot of success- you make of the impact that your
types of things when your mind can ful entrepreneurs start thinking about work has had on others?
only do those things and do creative their legacy—what they want to do for SA: I’ve never been comfortable
things when you’re at your peak. I just others. Do you have any such plans? with the “spokesman” label. I think
don’t ever mix those. SA: I do, yes. I just created a com- Dilbert’s impact has less to do with
L2L: Do you have heroes, people pany that makes a nutritious food item what it says than what it hears. I sense
you admire or look to for inspiration? called the “Dilberito”. It’s a microwave- a collective relief from Dilbert readers
SA: Yes. Lately I’ve been reading able burrito with 100 percent of your that their unspoken frustrations have
about great geniuses through time, like 23 daily vitamin and mineral needs. been heard. Sometimes people just
Isaac Newton and Richard Feynman. I On the surface, this doesn’t sound need to know someone is listening.
also like Bill Gates. Maybe the fact that
About the Author
he’s so demonized appeals to me on some
Scott Adams is the creator of Dilbert, which appears in 1,900 newspapers around the world,
level. But the thing I can’t escape—this is and author of four bestselling books, including The Dilbert Principle, which has sold 1.5
the economist part of my hardwiring—is million copies since 1996. His publications, prime-time TV show, Web site, and 700 licensed
to compare Bill Gates to Mother Teresa. products have made Adams the head of a virtual company with an estimated $200 million in
Now, on the surface, it’s hahahahaha— annual revenues.

outsourcing best practices    annual issue 2006

54 Leader’s Room

Why Leaders
Michael Hammer, Management Guru
and Author the conference table had no idea what know what kind. Or, to cite an oft-used
Leader to Leader, No. 24 Spring 2002 could be done to improve any of these cliché, “Using financial measures to man-
Reprinted with permission of John
Wiley & Sons, Inc.
numbers. If the numbers were good age your company is like driving while
they would smile. If the numbers were looking into the rearview mirror.”
THE chaotic state of contemporary bad they would click their tongues and In simpler times, the dynamics of
measurement was impressed upon me make a careful note that something business were easier to comprehend.
when I attended a senior executive would definitely have to be done to im- When a measurement indicated trou-
meeting of a major electronics compa- prove that measure by the next execu- ble, leaders intuitively knew what to
ny, at which the company’s leaders were tive meeting. Then they would move on do. Before the advent of the customer
carefully reviewing their dozen or so key to the next item. economy, they didn’t need sophisticated
performance measures. The measurement system did not measurement systems and, for the most
The executives meticulously exam- connect the numbers to each other in a part, they could get by with only the
ined a list of measures that was notable meaningful way or most basic financial information. In a
for its breadth: customer satisfaction, provide executives Most world of placid customers and genteel
sales closure ratio, market share, order with any guidance measurement competition, performance was a low
fulfillment time, employee satisfaction, as to how to im- systems were priority. Higher costs could be passed
working capital, service cost per cus- prove them. not designed along, dissatisfied customers could be
tomer, customer retention, new product This should for leaders. safely ignored, and innovation was op-
break-even time, revenue per employee, not surprise us. tional. Businesses were less complex.
and return on equity. Some of these After all, most measurement systems Customer demands were more narrowly
numbers described overall company were designed not for leaders but for ac- focused, product lines were thinner, and
objectives (return on equity and market countants so that companies could report the technologies of manufacturing were
share), some were operational metrics their financial results to shareholders and less intricate. The size and scale of most
(service cost per customer and order tax authorities. These systems were then operations were a fraction of what they
fulfillment time), some were miscella- inappropriately pressed into service to are today. Intuition and relatively sim-
neous items (employee satisfaction and support management decision making, ple interventions worked. If sales were
customer retention). where for the most part they are useless. down, managers could push their re-
But what was most enlightening When you see that costs are high, sales gional sales reps to push their sales reps
about the meeting and the list of meas- are low, and profit is falling, you know harder; they could raise or lower prices,
ures was that the executives around that action is necessary, but you do not or they could fire all the sales manag-

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Leader’s Room 55

ers. Those were the choices. With such not to know how a business is perform- all this measurement and diligence
limited options for treatment, there was ing but to enable it to perform better. To produced nothing that was of even the
little need for elaborate diagnosis. The this end, a contemporary measurement mildest interest to the customer, who
analytics associated with sophisticated system must have two basic features. was interested in accurate information,
measurement were overkill. First, all data must include a rationale the immediate restoration of service,
But now the age of intuition is over. and a purpose; people must know why and a neat, durable repair. The CSRs
Businesses are so complex and change things are measured and, more im- were motivated to end each call quickly,
so rapidly that a gut feel for what is im- portant, what they are supposed to do even if that meant failing to give nec-
portant is extraordinarily difficult to de- about them. Second, all measurement essary information. The dispatcher was
velop and impossible must be based on a careful analysis of motivated to send field crews to sites
The age of to maintain. There is the business, one that links the objec- that were located close together, even if
intuition is relentless pressure to tives of the business to the things over that increased customer waiting time.
over. improve performance which managers and front-line person- The field crews were motivated to fin-
and to do so immedi- nel have control. Only then can the ish jobs quickly; the quality of the repair
ately. It is not obvious what steps are recognition of a problematic measure was secondary. In theory, the idea be-
necessary to achieve the required im- lead to the right actions that will correct hind these measurements was that the
provements. it and to improved performance of the faster everyone worked, the faster cus-
An organization’s measurement business as a whole. tomers would have their service back,
system should be able to reveal the The old saw “Be careful what you and the happier customers would be.
sources of performance inadequacies. wish for, you may get it!” has a business In practice, the theory and the reality
Yet few measurement systems do so. As version: “Be careful what you measure, didn’t connect.
businesses became more complex and you may get it—and it To make them connect, an organiza-
harder to understand, many compa- What you may kill you.” Unfortu- tion needs to create a formal, structured,
nies responded by grafting nonfinancial measure nately, it is common- and quantified model of the enter-
elements onto their existing financial may kill place for companies to prise—the kind that scientists and en-
measurement systems. These systems you. measure their way into gineers use to describe physical systems.
developed as department managers disaster when they have Such a model connects an organization’s
were called upon to improve the per- not paid sufficient attention to the de- overarching goals with its controllable
formance of their various domains. To sign of their measurement system. Con- activities. Then, the organization needs
this end, managers invented measures fronting unprecedented competition in to create a deliberate process for using
to track how their people were doing; the aftermath of deregulation, one major measurement data to improve enter-
they measured cost, accuracy, speed, telephone company was trying desper- prise performance. This process must be
and productivity, often using dozens of ately to improve customer satisfaction. structured and focused to use measure-
variables. They compiled these statistics Its measures of this variable seemed stuck ment information to identify the causes
with the unarticulated belief that if their in concrete. Its managers’ intuition was of inadequate performance and then do
employees performed well according to good enough to tell them that the caliber something about them.
them, then the company as a whole of service delivered to customers was a Building a model of an organization
would achieve its overall objectives. key determinant of satisfaction. But how means understanding the dynamics of
This was an idle hope—no connection they measured the performance of the the business. When it works, it works
was ever made between the items being people who helped solve customer com- beautifully. For example, a few years
measured and the company’s objectives. plaints was their downfall. ago, a credit card company wanted to
Instead, what was created was a meas- The customer service representatives improve customer retention and in-
urement monster, a vast outpouring of (CSRs) were measured on personal pro- crease card utilization (that is, to in-
data that was of little use to anyone and ductivity-how many calls they handled crease both the percentage of custom-
therefore ignored by almost everyone. each day. The dispatchers who sent field ers who renewed expiring cards and the
Companies need a new approach to crews to fix the problems were meas- percentage of each customer’s spending
measurement, one that begins with the ured on how much time the crews spent that went through the company’s card),
recognition that measurement is now working on site, as opposed to traveling thereby boosting the number of card-
an essential part of managing. A Tal- between sites. The field crews were carrying customers and the company’s
mudic dictum teaches, “Study is not the measured on productivity—how many revenue from the commissions it re-
essence, but action.” Similarly, measure- jobs they finished each day. Everyone ceived from merchants. The company’s
ment is not the essence, but improve- did their best to perform well according leaders had many ideas about how to
ment. The purpose of measurement is to these measurements. Unfortunately, achieve these goals—strong ideas. But

outsourcing best practices    annual issue 2006

56 Leader’s Room

the leaders couldn’t reach a decision achieving its financial ambitions. These measures, not just the lagging ones, to
because there was so little supporting became the company’s overall objectives prevent slippage.)
evidence about which idea was most and were placed at the top of the model. This—or any other—organizational
likely to be successful. To get the facts, The first was customer retention. The model is not useful until a formal system
the leaders decided to build a model of second was employee retention. The for using the information is created. First,
their business. third was to add more products and ac- target levels must be established for each
The first draft was qualitative and quire more partners to distribute them. of the important measures. Then actual
answered the question, Why do our cus- Then the company analyzed each calculations must be performed regularly
tomers buy our product? Answer: they of these goals, and came to understand so that the value of each measure will be
are satisfied with our product and they what factors would lead to achieving known. Then the obvious comparison
are not drawn to the competition. The each goal—and which of these factors must be made between achievement and
leaders recognized that the second fac- Allmerica could control or influence. For aspiration. If all measures are on target,
tor was out of their control, but the first example, using an industry-wide measure then no improvements need to be made.
was not. They continued building their of customer satisfaction, the Dalbar rank- If they are not, managers must intervene
model, asking themselves what it was ings, Allmerica discovered that it ranked by addressing the root causes of the per-
about their credit card that satisfied the 37th out of 55 companies on the list. formance problems.
customer. They made a list: its value (in- Like the credit card company described Most managers know how to rec-
cluding cost and value-added services), earlier, Allmerica undertook, through ognize and handle problems that stem
customers’ experiences using it, custom- research and surveys, to determine what from inadequate individual perform-
ers’ experiences interacting with the com- would improve customer satisfaction. It ance. But what can be done when indi-
pany, and the overall corporate image. made a model—a fairly complex one— vidual performances are fine yet organi-
The second draft was quantitative. and in a very disciplined way set out to zational performance lags? The first step
The company used its databases and climb to the top of the Dalbar rankings. is to recognize that when this occurs,
did research to determine the relative Two years later, it was number 4 out of the strong suggestion is that the fault
importance of each factor in the quali- 55 while cutting expenses by tens of mil- lies with the model and how it connects
tative model. Some of what the model lions of dollars. Its people were able to the company’s goals to the work the
revealed surprised them. One service cut costs because their model allowed people in the company are doing.
enhancement their intuition told them them to stop doing what was unneces- There are two possibilities to inves-
was important turned out to have lit- sary and to concentrate on what was im- tigate. First, the model may have been
tle impact on either retention or usage. portant—serving the customer! flawed from the outset. Perhaps the
Corporate image was important to re- Once a company has a model, it has model makers did not understand their
tention but not usage. And so on. As a to use the information it generates. Duke customers well enough so the compa-
result, they made adjustments in their Power has 200 measures, each of which ny’s imperatives have been incorrectly
priorities and resource allocation. As all tracks an important aspect of the com- defined. Second, the model may have
the steps were taken, the customers re- pany’s progress toward its goals: boost- become obsolete as a result of changes in
sponded just as the model had predict- ing revenue and cutting costs. Every customer needs or competitors’ actions.
ed. Usage and retention—and in turn month, the 200 go out in a notebook to Using models as a basis for measuring is
profitability and growth—all went up. every manager, providing a freeze-frame an excellent way to keep up with changes
The credit card company had suc- image of the company. Each measure in the marketplace in a disciplined fash-
cessfully modeled how its products and is on its own page: current value, trend ion. It is to be expected that models will
services affected customer behavior. But over the past several months, value in be revised and retooled over time as
this is not a model of an entire enter- each of the company’s locations. Team conditions change. In either case, when
prise since it does not include the rest of leaders receive printouts of the measures a model isn’t working, it needs to be up-
the company’s operations. A complete that their teams can influence and for dated, and the whole cycle begun again.
model is one that correlates all a com- which the teams are held accountable. As with so many things, the true value
pany’s specific activities with desired (Teams are held accountable for a set of lies in the process, not in the end result.
outcomes. Connecting these individual
activities to company results is the great About the Author
Michael Hammer is the originator of reengineering, process-centered enterprises, and
challenge in the area of performance
superefficiency -- managerial innovations that have become part of standard business
measurement and improvement. practice. He has written four books, including the international best-seller Reengineering the
Allmerica Financial has created and Corporation. From his base in Cambridge, Massachusetts, he disseminates his latest ideas
used such a model with great success. and discoveries through public courses and conferences that are attended by thousands of
Its managers identified three goals for people annually.

outsourcing best practices    annual issue 2006

interview 57

at offshoring,
activity is likely
to focus on loan
process of
mortgage life
Madhavi Mantha, senior analyst
with Celent’s banking group talks
about emerging trends of BPO in

In your recent report “BPO in ness processes are IT-enabled and BPO Do you see a trend in moving cost
Banking—A Review of Strategies will increasingly also drive ITO. benefit regime to other factors for
& Trends”, it’s estimated that the Looking at key drivers, the main offshoring like quality and technol-
spending by North American banks driver of outsourcing has traditionally ogy?
on BPO will be $7.9 billion by 2007, been cost savings. But other factors Yes, cost savings alone aren’t suffi-
what according to you are the key have become increasingly important. cient to sustain a momentum towards
drivers for such a growth in spend- Outsourcing can allow companies to outsourcing. If you save money but the
ing? accelerate process re-engineering ef- quality of the work is not high, then
First, I think we are starting to see forts, and to shift from a fixed to a the outsourcing initiative will have es-
a shift in how companies think about variable cost structure. Outsourcing sentially failed. Therefore, quality is of
outsourcing—a shift from a purely IT- to specialized providers can also allow critical importance. The ability to pro-
driven decision-making process to one banks to take advantage of special- vide process transformation benefits is
that is more business-driven. So rather ized skills that may be scarce in-house, also very important, and technology
than asking the question “Should I which can lower the time-to-market for tends to play a role here. Business proc-
outsource my IT department?” finan- new products and services. Outsourc- esses within an organization are often
cial institutions are beginning to ask ing can also allow companies to free up very complex and not always fully
whether they should outsource a par- internal resources—both people and documented. Knowledge tends to be
ticular business process, along with the capital—to focus on the core, such as embedded in the minds of the people
underlying IT that powers it. So, the on revenue generation initiatives. performing a particular function for
growth that’s projected in BPO spend- a very long time. Going through the
ing levels reflects this broader view of What are the various trends driving exercise of assessing and implementing
outsourcing, because virtually all busi- banks to look for BPO as an option? outsourcing offers an opportunity to

outsourcing best practices    annual issue 2006

58 Interview

deconstruct the business process into viders as well as financial institutions The range of processes being
its component pieces and identify po- have developed their own method- outsourced by mortgage lenders re-
tential areas of improvement. The goal ologies. Some examples of successful ally cuts across all three areas of the
is to streamline the process and actu- practices include: Identifying criteria mortgage processing life cycle, from
ally improve performance. Technology for evaluating the “offshorability” of acquisition to origination to servic-
often plays a role in this transforma- specific processes based on factors such ing. However, mortgage servicing is
tion by allowing for automation of as risk, customer impact, employee a fairly mature market and offshor-
previously used manual processes. impact, and degree of automation, ing plays a smaller role there. Look-
ensuring that a proper governance ing specifically at offshoring, activity
North American banking is going structure is in place for assessing the is likely to focus on loan origination
through a consolidation phase, how success of a process once processes. The sub-proc-
prudent will the decision be to off- it’s outsourced. In general, esses within loan origi-
shore? a systematic analysis across nation tend to be less
There are two schools of thought business processes is re- efficient and relatively
on this: some feel it’s risky, some feel quired. It‘s also critical that expensive to conduct, so
it’s a very good opportunity. The real- a cross-functional team there are opportunities
ity is that integrating organizations is from within the bank be in this space. Acquisi-
a very resource-intensive process and involved in the evaluation tion is another area with
banks may not have sufficient internal exercise including process potential, particularly in
resources to help them through their experts from the line of areas such as analytics
consolidation phase. Some will look to business, IT, risk manage- and lead generation.
third parties to assist in this effort. ment, etc. to ensure that
an offshored process is well What is your outlook
What according to you are the key integrated into the organi- for the next three-four
challenges faced by banks to offshore zation’s internal activities. years in this industry?
their processes? With the boom in
Banks need to have a well-defined How do you see the mort- Banks need mortgage refinancing
process for deciding what to out- gage industry responding coming to an end, lend-
source or offshore and how to do it. to BPO as a long-term
to have a ers can no longer counter
Deciding what to outsource requires business strategy? well-defined the rising unit cost per
an understanding of the bank’s focal The mortgage indus- process for loan through increased
point within the industry value chain try is going through a pe- deciding mortgage volumes. Lend-
to determine which processes are riod of rapid technological what to ers will be looking to cut
most amenable to outsourcing based change. There is still much outsource or costs without compro-
on well-defined risk and fit criteria. room for automation and mising service, and some
The question of how is about ensur- process improvement with-
offshore and will turn to third parties
ing that the right governance process in the mortgage-processing how to do it. to provide assistance.
is in place to manage the relationship life cycle. Moving forward, Therefore, we are likely
with the service provider. Banks must I think that banks will leverage a com- to see an increase in mortgage out-
ensure that they have the right people bination of both internal and external sourcing and offshoring over the next
and tools to manage such third-party resources to improve the efficiency of three-four years. But offshore providers
relationships, to ensure that perform- their mortgage operations and BPO will also face challenges as questions of
ance can be measured and that service will likely play a role in these efforts. data security; regulatory compliance,
levels can be monitored. and operational transparency receive
In the Mortgage Life Cycle, what key greater attention. Offshore service pro-
What according to you are the best processes are high on the offshoring viders will have to be proactive in ad-
practices in evaluating a particular list? dressing such issues.
process for offshoring in the whole
banking value chain? Madhavi Mantha is a senior analyst with Celent’s banking group and is based in Montreal.
The BPO and offshoring industries Ms. Mantha’s research and consulting focus on emerging technologies and business
strategies across retail and wholesale banking, with a focus on sourcing strategies (including
are still quite young and I would argue outsourcing and offshoring), ATMs, and content and business process management. She
that mature best practices have yet to is the primary author of recent Celent reports on business process outsourcing and ATM
emerge. However, many service pro- advanced functionality.

outsourcing best practices    annual issue 2006