Activity-Based Costing: Activity-based costing looks at aspects of an organization’s operations and attempts to answer the very simple, but sometimes hard to answer question, “How much does it cost to dothat?” For example, how much does a company spend processing a receivable or taking a customer call? How much does it cost a city to fill a pothole? The term relates to outsourcing in that once an organization can answer the cost question at the activity level, it can more objectively compare the cost of internal versus external sourcing for performing it.
ASPs: Application Service Providers are companies that remotely host software applications and provide access to and use of the applications over the Internet or a private network. Typically, the service fee is usage based, for example, per user per month. Although the term itself has somewhat fallen into disfavor because of the number of ASPs that were formed and then failed at the end of the dot-com bubble, today almost all outsourcing service providers rely on the ASP model for linking aspects of their services to the customer organizations.
Barriers to Outsourcing:Companies often see resistance, especially from inside the organization, to outsourcing. Commonly referred to as ‘barriers to outsourcing’ the most common ones are: fear of loss of control, viewing an activity as too critical to outsource, loss of flexibility, concern over potential customer issues, and concerns over potential employee issues. All of these barriers can not only be overcome but turned into positives through properly structured and managed outsourcing relationships.
Benchmark: An objective measure of performance that can be used to compare operations across organizations. Most commonly used to compare the cost for an activity, but can also be applied just as effectively to other aspects of an operation. For example, days sales outstanding would be used to compare the performance of companies to each other in their collections activities. The comparison is often termed in quartiles, with the top quartile being the best 25 percent of companies and the bottom quartile being the poorest 25 percent.
BPO:Business Process Outsourcing puts together two powerful business tools - business process management and outsourcing. Business process management uses technology to break down barriers between traditional functional silos, such as those found in finance, order processing, and call centers. Outsourcing uses skills and resources of specialized outside service providers to perform many of these critical, yet non-core activities. BPO means examining the processes that make up the business and its functional units, and then working with specialized service providers to both reengineer and outsource them at the same time.
Captive Center: A company-owned offshore operation. The activities are performed offshore, but they are not outsourced to another company.
Case Study:A case study is a more collaborative approach to defining a customer’s requirements styled after a Harvard Business Review case. It is used to engage a small number of pre-qualified providers in the conceptual design, development, and proposal of an outsourcing solution.
Commercialization:Outsourcing often provides an opportunity for an organization to ‘commercialize,’ that is, generate incremental revenue dollars or equity value, from its internal operations. This can be done in many ways, such as, selling existing internal assets to the provider, licensing intellectual properties, and entering into a strategic alliance or joint venture with a provider.
Commoditization:Power is essentially shifting from the producers of goods and services to the consumers. As a result, a company’s ability to command a higher price for the unique value it offers lasts only for a shorter and shorter period of time. Once commoditized, a product or service can no longer be differentiated in the marketplace and is selected by the customer based almost exclusively on price.
Core Competencies:The unique internal skills and knowledge sets that define an organization's competitive advantage -- as seen by its customers. Core competencies are usually limited in number and are embodied in the organization’s products and services rather than being the actual products or services themselves. For example, Microsoft’s core competencies are software design, development, and marketing. Chrysler’s are product design, process design, and marketing. These are the capabilities that enable these companies to produce and sell their uniquely competitive products for the customers they serve.
Critical versus Core:Many operations are critical to a business’s operations but do not represent a differentiating competitive capability; that is, they are not core competencies. A classic example is payroll. Processing payroll accurately and timely is critical to the success of any organization, but is a core competency of very few organizations – mainly those that provide this service to other companies as their business.
Disciplines of Outsourcing:Outsourcing is a management discipline in its own right, just like personnel management, financial management, information technology management, strategic management, and the like. There are 12 elements to the disciplines of outsourcing; they are: Understanding Outsourcing's Value Proposition, Identifying Core Competencies, Selecting the Best Candidates for Outsourcing, Forming Successful Project Teams, Defining Requirements, Performing the Financial Analysis, Selecting Providers, Pricing and Contracting, Negotiating a Win-Win Relationship, Managing the People Dimension, Managing the Ongoing Relationship, and Making Outsourcing a Strategic Management Tool. (Note for our book, “The Outsourcing Revolution: Why It Makes Sense and How to do it Right” (Dearborn Trade Publishing, September 2004) the disciplines were compressed to eight.)
E-Sourcing:Internet-based outsourcing that takes advantage of the application service provider (ASP) delivery model. This approach enables the delivery of business process outsourcing over the Internet.
Functional Process Outsourcing:A company’s business processes end at its true customers, the people paying the bills. There are, however, many internal processes that exist to support people within the company and are often performed within a single department. Human resources, finance and accounting, travel, and facilities services are examples. When these functional processes are outsourced, along with the supporting technologies and supply chains that feed into them, it is referred to as functional process outsourcing.
Gainsharing:A contract structure where both the customer and provider share financially in the value created through the relationship. One example is when a service provider receives a share of the savings it generates for its client.
GBPOV:The Global BPO Value Equation is an expanded value model for outsourcing where: GBPOV = [(Business case) x (Acceleration + Flexibility)] ^ Innovation. That is, the full value of global business process outsourcing is the traditional business case multiplied by the improvement to the organization’s acceleration and flexibility, all raised to the power of innovation.
Governance:The oversight and management of all aspects of an outsourcing relationship. Areas of focus include: change management, communications management, performance management, operational management, risk management, strategic management, and others.