Annual Magazine

Index

The New Route to New Wealth

Over time, every business model and every strategy goes stale Gary Hamel, Management Guru

Collaborative Workflow pg14

Leveraging Technology to Improve the Customer Experience and Corporate Profitability Jordan Brown, CEO, MarketWise

pg12

Kiran Karnik

pg6

pg38

Madhavi Mantha

NelsonHall

Senior Analyst with Celent’s Banking Group talks about emerging trends of BPO in banking pg57

Legislating For Success

How to Create a Sourcing Contract and Operating Environment that will Ensure pg20 Sourcing Success Marc Stark, EquaTerra

Douglas G Duncan

BPO Story Governance of Offshore Program: Does One Model Fit All? Avinash Vashistha, Dr. P. K. Mukherji, Vinu Kartha Mortgage Offshoring to India Goes Mainstream Craig Focardi, director, TowerGroup

interview President, NASSCOM, talks about the trends and developments in the KPO industry

Advisors, LLC

Mortgage BPO Services Complexity of Industry Challenges Will Drive Accelerating Adoption of Mortgage BPO Services Andy Efstathiou, Director,



Senior Vice President and Chief Economist, Research and Business Development, Mortgage Bankers Association of America, talks about pg9 Mortgage Banking trends and future

pg28

pg34

Putting the Value of Outsourcing Consultants in Perspective Peter Bendor-Samuel, Founder & CEO, Everest Group Finding Lost Value in offshore outsourcing Paul Thompson, Senior Advisor, Metagyre Inc.

pg36

Atul Vashistha

pg42

Outsourcing: Inside Out and Outside In Anupam Govil, ceo & founder, global equations

CEO of neoIT, talks about seven secrets of successful outsourcing strategy

pg44

pg40

Leader’s Room The Laws of Behavior A Global Leaders’ Secret Weapon Aubrey C. Daniels

pg46

Leading authority on behavioral science

Management Don Ganguly, Chief Executive Officer Arin Brahma, EVP-Corporate Business Solutions K V Subramanian, Chief Financial Officer Chiranjib Pal, Vice President, Client Services Umesh Gupta, Chief Information Officer Sumit Sapra, Transitions Leader Deepratna Srivastav, Operations Leader Ashima Varanasi, HR and Training Leader Equinox Sales Team Tim Harmon, Director Sales [email protected] Joe Beck, Manager Sales [email protected] Editorial Manu Tandon, Executive Editor, Sr. Manager Marketing [email protected] Jyoti Makhija, Executive Editor [email protected] Bandana Borah, Puneet Arora, Piyali Ghosh, Saurabh Juneja

The View from a Cubicle An Interview with Scott Adams Scott Adams

pg50

Creater of bilbert

Why Leaders... pg54 ...Should Reconsider Their Measurement Systems Michael Hammer

Management guru and author

Corporate Headquarters (USA) 10 Corporate Park Suite 130 Irvine , CA 92606 T : 949-250-1445 (ext-278) F : 949-250-7481 India Equinox Global Services Private Limited DLF Infinity Tower A , 3rd Floor DLF Cyber City, Phase 2 Gurgaon – 122002 Haryana , India Offshoring Best Practices Online Go to www.equinoxco.com where you will find an online version of this magazine Electronic Newsletter Subscribe to the Offshoring best Practices newsletter, published every month at www.equinoxco.com

Letters to the Editor Send letters to [email protected] or to any of our writers. Feedback Share your suggestions and opinions with us at [email protected] Vision To educate banking professionals on BPO trends and strategies and to bring experts and institutions to these professionals through our magazine. Rewards and Recognition Equinox has been quoted in the Global Outsourcing Top 100 in the leaders category by The International Association of Outsourcing Professionals (IAOP) published in FORTUNE® Magazine in May. Equinox has been ranked 18th between Top 50 Best Managed Global Outsourcing Vendors in The Black Book of Outsourcing.

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

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CEO/Editor’s note

Welcome to a new mortgage outsourcing revolution

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 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 our value propositions: l  Transforming Costs Structures- your company can save upto 60% of the current cost depending upon the location and process complexity 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 [email protected] 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

Offshoring Best Practices, is an endeavor to connect you with leaders in Outsourcing and Mortgage space.

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.” North American banking is going through a consolidation phase, it has thrown basket of opportunities in space of BPO. Biggest challenge in any consolidation is the integration of processes and functions. Success of consolidation also depends upon how fast organizations integrate. This is a very resource & cost 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 bank to concentrate on their core competencies. Though offshoring and outsourcing seems to be strategic cost optimization tool, the cost benefit depends upon how successfully the outsourcing project is executed. We have seen wide gaps between expectations and the deliverables. 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 banks. Happy Reading! Manu Tandon / Jyoti Makhija

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Interview

“Our Strength Lies in Noncommoditized Higher-end Work” 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 at the primary level? What would you define as basic BPO skills? How is NASSCOM addressing this issue? There are two parts to what we are doing right now. The first one is very generic; it’s for the entry-level at the call center--domain knowledge with no specialization. The focus, here, is on removing the barriers of bad communication skills, low analytical skills, and poor voice and accent. We identify several skill sets that the industry’s HR personnel have defined. These aspects are very generic, but they do help the industry to cut down time and costs of recruitment and training. This is not the best solution when we are looking for specialized skills; therefore, we hope to try and develop specialized courses, which add on to the general skill sets. For advanced levels, people will specialize on specific verticals. Nevertheless, we are just looking at creating a first level

filter that will create a wider base at the entry level, and are not concentrating on people for specialized areas. The Indian brand experience is either great or lousy. Many operators are not keeping quality at the margin, while a few small operators who should not be in business are actually in it. Is there a certification, especially on the voice side, for call center oriented operators as the voice experience is personal and goes a long way? It’s a matter of concern that quality standards are sometimes not maintained. This has been happening for a long time now. There are some people who are satisfied and some who have had a bad experience. Along with the generic certification, we need to look at communication and accent, which happens to be a huge problem area. We need to look at an individual base certification for that. A outsourcing best practices 

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specific test especially for voice has to be created, and we are working with the British Council on this. This training is useful not only for BPO executives, but to those working on the front-end as well. This ensures that people have access to a broad range of job openings. However, voice assessment cannot be performed without face-to-face interaction. As we have intended to go online with the generic test, we need to get people to conduct a face-to-face professional assessment. The other thing that I’m very keen on is in training English teachers, so that they can teach spoken English along with accent and communication skills. This is a long-term plan, and we hope to produce not only effective writers, but effective verbal communicators in the next five or ten years. The Indian outsourcing industry is reeling under a high attrition rate.

interview How will NASSCOM address this issue, especially in terms of creating a guideline policy? This is a tough question. Frankly, there are no easy answers to this. At the very basic level, we are trying to increase supply at the input stage, to somewhat reduce attrition. For specialized areas, a company trains people to put them on the job, but soon a new player comes in and the first thing they do in order to stand apart from the others is to offer higher incentives. We tried hard to look at industry standards, ethics, and created HR practices to curb this trend. Companies turn a blind eye to recruiting agencies who lure people away by not only offering high salaries, but by also asking candidates to take up new offers in less than a week’s time, in order to avoid using excuses like job satisfaction in their existing jobs. Recruiting agencies benefit largely from this as they run the same candidate through different companies and get easy profit margins from the same database. We try and reduce this with the usage of better practices, along with fostering better understanding between both recruiters and the industry. This problem is bound to persist for the next few years, until the supply system catches up. How about creating some kind of a national database to gather data about people who are abandoning jobs, or are staying in jobs only for brief stints? This will help companies perform background checks and enquire about references. We are in the process of putting in place a database for the industry, but there are issues like the data protection security angle, employee concerns, and unions amongst others. This system should provide any employer with access to a database on a “third-party checked” basis. The problem is not the issue of attrition, but the willingness of companies to take a candidate who hasn’t served the notice period in the previous company. The scenario is now improving

as companies realize that they cannot tions that have been providing some turn a blind eye towards these issues. kind of broader low-level financial servBackground checks are performed, rea- ices on a mass scale on a factory kind of sons for resignation from the previous model. However, these companies may company are demanded, and serving of focus on an area and be unsure about the stipulated notice period is insisted which model would work--hybrid or upon. Hopefully, these small steps will people-related. make a small difference to the high rates of attrition. BPO to KPO is a big story. Do you However, even with all this in place, see that this is going beyond labor arthe attrition rate will remain bitrage, because even when high in specialized fields, as you talk of a specialized there is a dearth of readily domain, I’m still training available skills in the market. or looking for skilled labor This is particularly true in the at the end of the day? Have sophisticated financial servyou seen a true solution ices section, as it requires a emerging beyond labor ardeeper amount of training. bitrage knowledge process We will also try and imat the workplace? plement employee-friendly I have seen a few, but lameasures while developing bor arbitrage continues to be the database so candidates BPO to KPO at the base. It’s not that peoneed not worry about backple would come if they had is a big ground check as details like a lead cost. Given a certain story. Do date of birth and graduation increase in cost levels, there you see should be enough. These are other factors that people this going are taking into account. The kinds of checks stay with a beyond person for life and will also drive in most of these arlabor serve as a complete check eas has been mere numbers. for the employer, simultane- arbitrage? However, this is not sustainously saving an employer a able, as other locations and Don Ganguly, lot of money. It will be built countries will soon begin to CEO, Equinox Corporation by an independent, respected offer the same talent. third-party and be accessible We need people with only to an employer and not to a pro- doctorates. The US, for example, doesn’t spective employer. have enough numbers. Companies come to India looking for these skills The BPO industry has gone through and are willing to pay more money for several levels of evolution. What level it. Talent is the important driver here, of evolution are we at? after money. Though we have moved We are now beginning to see the de- from quality, to skills to data protection, velopment of niche players. About two- what lies at the bottom of the pyramid three years ago, we saw a set of small is cost. Things are fine as long as this is companies doing better than those who under control, but if costs go haywire, ramped up rapidly. This is happening customers are going to look for alternaparticularly in new areas like market re- tives soon. search and legal outsourcing. SpecializaIf you look at customers from the US, tion is taking place in traditional areas typically, it’s not a labor-based play. You like the financial services sector, and the have a system or a solution that embeds bigger players with their varied aspects labor or the solution--e.g. in the case of are adding to their portfolio and emerg- loan processing in mortgages, you have ing as a new group of extremely special- to have a platform or a system for cusized people. These are often organiza- tomers. So, when we are taking our procoutsourcing best practices 

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Interview esses to India, we are standardizing our amendments, too, to strengthen this platforms and are embedding that onto law itself. a solution. In the US, all outsourcers Second, we are working on the enhave a system for delivering services. In forcement side with law enforcement India, we perform collaborative process- agencies, amongst others, to create ing, where we hang off awareness and train people the customer system, then to track cyber criminals, work on a piece of a procprojecting evidence, and ess, and give it back to the understanding what needs customer, and so on. From to be done. A cyber crime a KPO perspective, you laboratory will be set up create your own solutions soon. or infrastructure, but the We have recognized that labor angle does not get there are a lot of problems the same screening as from inside the industry apart a pricing standpoint. from database protection As long as you are doand, therefore, have eming a bit of the activity, barked on two other iniyour costs will be critical. tiatives. One, finding and Certainly, if you move tosharing best practices not wards providing solutions just within the Indian inor using your intellectual dustry, but also worldwide. We need property in the process to We now have something people with create a platform of some akin to an annual summit doctorates. where there are collaborakind, then you move away The US, for from this and start looktions and discussions with example, ing at the value and not customers, vendors, secuthe cost. It’s happening in doesn’t have rity providers, and regulafew areas, but not across tory agencies in the US, inenough the board. My assessment cluding homeland security numbers. is that it will take a few and financial security. Companies years to get there. There is Two, the task is to certainly recognition and come to India integrate some of these looking for initiatives into a self-reguan awareness to increase capabilities and expertise latory organization, the these skills to be able to produce that framework of which is beand are kind of a solution. This willing to pay ing built now. The organiwould mean increased dozation will be completely more money voluntary and companies main knowledge—much for it. more than what we have can join and abide by a at present. standard set of guidelines on what they are expected to follow. We In the light of the data security debate, can ensure tight data protection, inforwhat are your thoughts on proactive mation security, and good practices on communication and lobbying against the human resources front. it? First, we have worked with the gov- What is your opinion on economies ernment very closely to amend a few like China, the Philippines, and Irelaws, especially the Information Tech- land as a competitive threat to India’s nology Act, in order to take care of some efforts in this field? What needs to be possible loopholes and ambiguities. This done to stay competitive? work has been completed and there will Most Indian companies are increasbe a law soon. There will be additional ingly moving towards the global delivery outsourcing best practices 

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model. They may have different centers in multiple countries for different reasons, or one may be following a nearshore strategy (working out of Japan, Korea, etc.). Others may not be catering to large call centers which are focused on the US. Therefore, you are beginning to get an increasing amount of Indian companies, both in the BPO space and the title space, getting to global delivery. As a country, we are in competition with China. There are many countries, especially in the European Union, who will be taking their work into China in the next three-five years, for reasons of cultural affinity, but India scores in terms of talent and comparative costs. Also, we need to create something new, which is different and unique to India. Our strength lies in non-commoditized higher-end work. What do you think of English as a spoken language? I have heard about an initiative where hundred million resources in China are being trained to speak English, with the objective of catering to demands in the next few years. Yes, I don’t doubt this, given the immense determination of the Chinese. They are importing English teachers, including people with the right accent so they can learn English in the correct manner. The structure of their own language and the fact that they are a comparatively homogenous country will ensure that English is not difficult for them. In India, the reverse happens. When two Indians from different communities speak to each other in English, there are accent and language issues. Nevertheless, there is definitely a comfort factor while speaking the language. In China, the entire top management not only knows English, but would have also been educated in the US. The problem area lies with the common folk. If you try to speak in English to someone who is actually doing the work, he is able to understand the language, but not able to speak it. In this scenario, India should maintain its leading position for the next 15 years or so.

interview

“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 so strongly from a slow period late last; the IMF forecast the U.S. economy would grow 3.4 percent this year but inflationary pressures guides for higher interest rates. So, how do you translate these macro economic indicators in perspective of Mortgage Industry? Economy is very strong but clearly slowing. The first quarter results were stronger than expected but the second quarter was significantly slower, which will ease the pressure on federal reserve to continue pushing the interest rates up. There is a debate as to how much further the rates will go, but our current modeling does not show that the Fed will make any further move. Our current expectation is that rate will be stable for some time. Their next move will likely be in early 2008. Lets suppose we are wrong and there is a raise of another quarter, we will adjust our forecast accordingly. But it seems rates will be flat for the year. In the present scenario, the fixed rate products will be around 6.25% to 6.5% by the end of the year, which will have a

continued slowing impact on the housing market but the word which we are using for this phenomenon is “Normalizing”. The reason to use this word is because there is so much hype about the home prices. There will be some markets where prices will fall, so you are going to hear bunch of stories that the price bubble blew up. However, we will witness the normal state of US housing market with prices falling in a few markets and in most market the prices will rise. The last four & a half years were unusual in that very few markets had declining prices thus the average increase has been high. The number with declining prices will increase. That’s why we use the word normalizing. I think the first priority of the Federal Reserve will be to keep the long term inflation expectation low. Macro environment has a lot of uncertainty in regard to how far the Fed will go with respect to interest rates. Nonetheless, we are of the view that in worst case mortgage interest rates will be not pushed to beyond 7.5%. outsourcing best practices 

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I understand the long term rates are very much dependant on the bond market. Absolutely, mortgages are priced off of the treasury yield curve. The 10 year treasury is the base price for fixed rate mortgage products. This is because people in US stay in a house on an average 79 years. At present time the spread of the mortgage rate over the10 year treasury is 150 basis point so a 4.75 percent treasury plus 150 basis point spread makes a 6.25 percent 30 year fixed rate mortgage interest rate. We believe the 10 year treasury is not going to go far from what it is but the spread is going to widen out little bit at close to 170 basis points by the end of the year, which will translate to 6.5%. If Fed goes up by another quarter add another 15 to 20 basis points. Our mortgage applications survey which is a very accurate predictor for new homes put the expected 2 year decline at 20%. For existing homes we expect a 12-14% decline over the same period What about the builders? We talk



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Interview to some builders and the trends we see is that there is lot of activity in the building space. Why is building new homes is high against the stated trends by you? It’s true. When a builder starts a property they tend to take it through completion. We see the number of permits obtained on which the property is not started is at record levels, but the inventory of completed properties for sale is at record levels. That is very consistent with the decline in new home sales as demand has slowed. Secondly the properties will are sold but not yet started is also at the record levels. So, this is a buffer on the supply side of the larger builders. If you look at the reports you will see cancellations and concessions are up in general for them. All of this to us is an orderly slowing in the housing market. On mortgage refinance side, refis are stronger than would be implied by the current level and structure of interest rates. Interestingly, the sales market is not as sensitive to the interest rates as lot of people think. We will see a 30% decline in the refi volumes this year. In some market the home prices will fall steeply. Markets with heavily concentrated condos will be effected as the prices of condos will fall sharply in a few markets. Supply of condos is at about 8 months compared to 4 months (twenty months ago), so supply has risen very rapidly. Interestingly the higher percentage of condo owner do not live in them as their primary residence, so the condos tend to be more price sensitive to short term market movements and prices are more variable, so we watch condo markets as the leading indicator. In terms of refi mortgage lenders, in last few years many brokers counted into banker and major growth has come from refi boom that pool is fast drying up. What will be its impact on mortgage lenders? Bread & butter of the mortgage market in long run is home sales. If you look at the finance of home sales, it’s very steady. The option to repay from

the customer side increases the volatility sales culture that was ten years ago. in the business. In 2003, there was $2.5 trillion of refi in addition to $1.4 trillion So what you are saying is that there of the home purchase loans (the total of has been 80% decline in the margins $3.9 trillion). In 2004 and 2005 the and it will make lending operations loan origination volumes were in range more sensitive to cost. I keep on getof $2.8 -$2.9 trillion, this year we think ting diverse numbers from various the volume will further drop down to lenders on the cost of loan per unit. $2.4 trillion. The dollar value of mort- I have read MBAA 2004 cost study; I gages to finance homes sales will drop as would like to know what is included well since home sales will be down and in the unit cost and what is the unit price will flatten. There is no question cost of originating a loan? that refis are coming down and all of All the firms operate in one or more this is having significant impact on the channels i.e retail, broker, correspondproduction margins of lenders. This has ent or direct marketing. Direct markettranslated to close to 80% ing includes telephone decline in margins. and internet. You have One other structural to sort the cost vis-à-vis thing that’s taking place channel and also have to is on securitization front. sort by cost to create servA significant shift to the icing, secondary marketprivate label securitizaing and investor relations. tion market happened beThe large diversified comcause of the development panies certainly have all of of vertical columns from those. You have to look consumer directly to inat servicing cost per loan vestors through secondary and secondary market exmarket execution. So you ecution including hedghave companies like Mering cost and servicing rate rill Lynch, Bear Stearns amortization. and Lehman who are buying mortgage origination Two years back the cost Bread and operations and driving the butter of the of production was not product through their own an issue when compamortgage securitization structure nies were enjoying the into investor community. market in the margins. But today it’s long run is This is fairly recent phebecoming very critical nomenon and if you take home sales. If so how do you see mortin context with what Wagage bankers looking at you look at chovia did in its acquisition core vs non core, fixed the finance of Golden West, Wachovia cost to variable cost regiof home has column within the men also how they are holding company. A year sales, it’s very looking at offshoring? steady. ago they bought American Definitely, I see a trend Network Mortgage which there but from mortgage is a broker operation, but they didn’t market perspective it’s a unit labor cost integrate it with their mortgage portfo- issue. If adjusted for productivity differlio operation but rather have integrated ences, wage rate advantages and efficient it with their capital market group. So execution exist, then they make a switch. you have got some interesting structural Most large companies are doing it but changes taking place. The industry is for some of them tried and they were not more about capital management and successful but part of it has to do with capital market execution as opposed to the scale of the operation. Some points outsourcing best practices 

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interview are critical- are they narrowly focused or broad based, are they national, regional or local. But its an industry where the rule of pure competition applies. That means cost minimization is profit maximization in long run. So, the trick is going to be the for successful to invest in technology to survive and lot of them are making significant investments. The increased compliance burden like Sarbox, DoNotCall, Basel II, HMDA, RESPA, TILA will surely increase the cost of operations, with excess industry capacity and loan volumes declining by 20%. How do you see the industry responding to these external challenges to maintain their profitability? The underlying theme of all these is transparency. Transparency means data availability and purity. There is no question that firms with larger databases will have to make investments in technology and tools to help them meet the compliance requirement. It’s a challenge as industry is not accustomed to this deep of consistent data reporting. Some smaller firms will deploy the capital elsewhere or go for readily available off the shelf compliance tools which will immediately import the efficiency that come with those. In mortgage life cycle from origination to servicing, how do you see the role of IT outsourcing and BPO strengthening their competitive advantage in a cutthroat market? The industry has been outsourcing for years. Things like tax and insurance require narrow and highly specialized capabilities, where there can be economies of scale. If you look at technology solutions, anything that is narrowly defined and replicatable will at least be exposed to whether or not it can be conducted efficiently again on a unit labor cost basis internally or externally. Today in mortgage industry there is no company which can say that they can do every step in mortgage process by themselves. There is a new breed of outsourcing

companies which are extending end and see whether or not it’s adding any to end solution for loan processing. value. If it’s not, cut it off or find posWhat are your thoughts on that? sibilities for re-engineering. I have tracked the structural changes in manufacturing like automobiles & Offshoring is in nascent & experimenairlines. Mortgage industry tal stage in Mortgage ecoprocesses other than contact system, there is a need to with customers is essentially educate banks with both a manufacturing process. the risks and advantages. There are great efficiencies What role MBAA can play that can be imported into in facilitating the same? processes but the main conDo you plan to create a cern is of quality control. team which can develop The way I look at the end standards in offshoring game is electronic mortgag(same as MISMO for ines. That is defined as a cusformation technology)? Two years tomer sitting at a computer Standardization is the back, the and applying for a loan and objective of MISMO. not meeting another person MISMO is a two phase cost of throughout the entire appli- production process. Firstly it is data cation, approval and grant- was not an definition & structure and ing process including the that’s what has been foissue when cused on for last five years sale and transfer of the loan companies to the investor. of its existence. MISMO is were The information that’s a toll to enhance the interexternally entered passes face between lenders and enjoying through the system supvendors. One thing that the plemented by information MISMO has not done is margins. that service providers supprocess re-engineering and But today ply upon the queries by and in the eMortgage context cost is from the production manthere is lot more of that to critical. ager. It is imported into the discuss. The second phase same file with quality control of MISMO activity will be Arin Brahma run. This file is automaticaldata purity. Data flow has EVP, Corporate Business Solutions at ly transferred to the investor become very smooth, hardEquinox who has agreed to purchase ware and software can talk it in electronic format. Though we are to each other because they are using the long way from that it is the production same language. This doesn’t translate process and you have to see the pressure that data is of good quality. There has to points to find out the error rates and at- be lot of efforts to standardize the data tack those points and then look at each purity which is what SOX and other entry point at the production process compliance rules are targeted at. Douglas G Duncan is Senior Vice President and Chief Economist at the Mortgage Bankers Association (MBA). As leader of MBA’s Research and Business Development Group, Duncan is responsible for providing economic and policy 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 education products and services of the association as well as its Industry technology committees and standards efforts. He has oversight responsibility for the Research Institute for Housing America (RIHA), the Mortgage Industry Standards Maintenance Organization (MISMO), the Secure Identity Standards Accreditation Corporation (SISAC), and 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 Community College.

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Main Story

Leveraging Technology Collaborative Workflow:

to Improve the Customer Experience and Corporate Profitability

What is the next innovation that is going to change the way that mortgage lenders work everyday? Jordan Brown CEO of MarketWise Advisors LLC

Collaborative workflow is the development of the organizational process to

flexibly allocate and utilize both human and technology resources to effectively complete a task. In order to accomplish this objective, mortgage firms need to evaluate and build a solid outsourcing best practices 

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technology backbone. The limits of geography, static processing, and dependency on external vendors that create bottlenecks in the process are eliminated. 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 incorporates both automated workflow in a loan origination system with the concept of fulfillment resources that may be located across the city or the globe to complete tasks necessary to drive the business. It’s a relatively simple concept with tangible results—cost reduction, cycle time compression, parallel task execution, touch-less service ordering, and resource balancing. There are three steps in achieving collaborative workflow. Step One: Establish a Solid Loan Origination Platform The first step in establishing collaborative workflow is to deploy a solid loan origination platform that has the operational flexibility to incorporate workflow, file imaging, a product and pricing engine, automated underwriting, and the ability to inter-connect partners through web services. The combination of the five core components is essential to reach optimal operational effectiveness. l  Product and Pricing A Product and Pricing Engine (PPE) is often confused with a custom Automated Underwriting System (AUS). The function of the PPE is to provide instant product eligibility decisioning to the point of sale--a retail loan officer, loan broker, consumer, correspondent, or branch manager. The eligibility of a loan is tested and the individual loan attributes are used to determine the

Main Story true price or rate/point combinations available to a consumer. The benefit of a PPE is that a lender can ensure that eligible loans are entering the transaction platform. The PPE is a separate component that may work interactively with the AUS to deliver both an underwritten result set and the pricing options to the point of sale. l  Automated Underwriting Systems Access to investor or internal automated underwriting systems is an essential function of the transaction platform to provide decisions quickly to the consumer. The most effective firms use the automated underwriting function as a marketing tool to capture loan transactions. Collaborative workflow is highly dependent upon the integration and investment in automated decisioning technology. l  Web Services Architecture In order to connect to the wide array of service partners and technology providers that are involved in the mortgage origination process, it’s important that the loan origination system has an open architecture to support web services. Optimal efficiency is achieved when all internal and external participants in the mortgage lending process are connected through the transaction platform. Often, web services can be deployed to transfer loan data electronically eliminating duplicate data entry and costly data quality issues. l  Workflow and Image Management Workflow is the heart of what makes collaborative workflow achieve its goals. The workflow tool can potentially sit on top of any loan origination system with an effective product and pricing, automated underwriting, and web-services architecture. Automated workflow must aim at creating an electronic business process where the number of human-touch points for processors, underwriters, and closers is minimized. Document imaging is an important element of the workflow in that it enables the manual file to become an interactive work file that contains the electronic images that can

be reviewed without human interaction through a series of business rules or across the globe by a processor that is an expert in a particular work task. Step Two: Organize the Process to Leverage Technology and Achieve Business Goals Once the technology platform is in place, the next step is to clearly establish the business process steps to leverage the investment. The important principle, however, is not only to develop/ deploy the right technology, but rather view technology as an investment to achieve a specific business goal/metric (cost per loan, channel profitability, customer satisfaction level, etc.). The process should be mapped out for each loan from point of sale through loan closing. A keen eye will often reveal duplicative steps, significant wait times, and bottlenecks. Careful attention should be directed in identifying business processes that can be done in parallel such as instantly ordering services without human interaction (title, flood, credit, fraud detection, appraisal, etc.). The business process is modeled to meet the objectives of an organization. One clear objective may be to utilize all resources in the most effective manner. This may include a mix of staff employees, offshore, or outsourced resources. Collaborative workflow provides the flexibility to allocate work to resources anywhere and anytime, based on resource availability, work-group skill set, and level of task complexity. Lenders should evaluate and develop a business flow that establishes work queues for resources to effectively complete their assigned tasks. Some loan processes can be fully automated such as electronic file image stipulation clearing while other processes may still require human intervention. Business

rules can be setup to handle virtually all normal situations and exception queues designed to provide an appropriate level of manual intervention. A healthy balance needs to be struck between exception management and automation to ensure that corporate profitability goals and customer service levels are met. True automation is possible when resources work interactively within the technology framework to fulfill a loan. A review of process steps to organize and leverage technology to achieve the business goals of a mortgage lender is as follows: l  Evaluate the current business process l  Develop interactive work queues l  Parallel task execution (appraisal, credit, title, flood, and stipulation clearing) l  Exception management (use work queues and business rules to automate) l  Integrate onshore, offshore, and in-house resources into work queues. Step Three: Measure, Monitor, and Focus on Key Performance Metrics Collaborative workflow is the intersection of technology, people, and business process to effectively deliver a service. Every step in the business flow needs to be managed, monitored, and focused upon. Open partnerships that embrace both interactive technology and resources create the operational environment to leverage collaborative workflow and drive profitability, quality, and ultimately the customer experience. Once the technology and process are in place, key performance metrics can be put into place to dynamically measure, monitor, and ensure profitability goals and a positive customer experience.

About the Author Jordan Brown is CEO of MarketWise Advisors, LLC (www.marketwiseadvisors.com) which provides technology consulting and investment banking services to the mortgage industry.

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Main Story

The New route to New Wealth

innovation:

Over time, every business model and every strategy goes stale.

Gary Hamel 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, return 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. After 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 without. Creating new wealth requires more than simply responding to market demand. Think about some of the pathbreaking 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 cupholders. 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 market for 24-hour news; it took a renegade outsourcing best practices 

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Main Story named Turner operating out of Atlanta to wed three developments—the shoulder-held minicam, more affordable access to satellite transmission, and the fact people no longer make it home in time for the six o’clock news—into the concept of a continuous news format. Innovations like the minivan, the Walkman, and CNN succeeded not because they responded to market need but because they created a need consumers had yet to sense themselves. All of which attests to the fact that in the New Economy, the greatest rewards go to companies that create new business models—ideas that spark new sources of revenue based on changing technology, demographics, and consumer habits. By definition, new business models destroy old ones, which is why creating new wealth is a threat to every traditional, unimaginative business. Never before have strategy life cycles been shorter and market leadership counted for less. Call it the First Law of the Innovation Economy: Companies that are not constantly pursuing innovation will soon be overwhelmed by it. Strategy innovation is the only way to deal with discontinuous—and disruptive—change. The Innovation Imperative SOME companies seem to understand the innovation imperative instinctively. Consider Charles Schwab’s daring plunge into the online unknown: When the bricks-and-mortar broker took the view that online trading was inevitable, it faced a choice between leading the brokerage industry to the future or being a victim of some dot-com start-up that got there first. Thus, on the fateful day in 1995 when a technology team within Schwab presented a demo of what the Web could do, senior managers almost instantly recognized how the Internet could make life better for Schwab customers. Schwab invested in the Web even before it realized it would face aggressive price-based competition from other Web brokers. By committing to the goal—and pursuing it through a series of low-risk experiments—Schwab

was able to establish a dominant position in the online trading world. Today, Schwab controls some 30 percent of all the stock trading that takes place on the Web. Even more impressive, Schwab’s market capitalization— $3.5 billion in 1995, less than half that of Merrill Lynch—has now pulled even with Merrill’s, which instead of engaging the Internet, pursued until recently a policy of digital denial. You’re Never Too Old to Innovate SCHWAB is not an upstart. And innovation isn’t the special preserve of Internet upstarts or the denizens of the dotcom motels of Silicon Valley. In fact, innovation can happen at any company, regardless of its line of business, age, or location. Can a century-old company learn to innovate like an industry ingenue? The answer is yes—provided the company is willing to examine its orthodoxies, abandon its strategy-by-habit ways, and engage its employees broadly and deeply in the effort to envision the new markets and new opportunities that promise new wealth. Consider the experience of PECO Energy Corporation—the old Philadelphia Electric Company. Founded in 1881, PECO had operated for its entire existence within the public utility paradigm, with a regulatory strategy that brought it significant success. In June 1997, however, the company was looking to transform its regulatory strategy to fit the dawning deregulated environment. Working to examine its hidden assumptions, PECO uncovered a core competency in operating large, missioncritical infrastructure—a competency honed in time of crisis a decade earlier when PECO grappled with bringing its own Peach Bottom nuclear plant into federal compliance. PECO emerged from the Peach Bottom process with a proven ability to bring “problem plants” to high-capacity performance with low operating costs. As a result, where other companies outsourcing best practices 

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saw liabilities, PECO saw opportunity. PECO would follow its competency into places other companies feared to tread—taking on responsibility for running environmentally risky nuclear plants in a safe, efficient manner. PECO has now bought three U.S. nuclear plants that had been for sale for years— including a reactor at Pennsylvania’s notorious Three Mile Island, obtained for $23 million—a substantial discount from its $640 million book value. The problem-plant strategy proved just one element of a broader innovation agenda. PECO teams looked beyond their traditional market to tomorrow’s opportunities. A prime example: PECO conceived of the wire that delivers electricity into each home as a pipeline permitting a far wider carrying capacity. The company built on its core competency in power delivery networks to launch a new communications platform. Exelon, a subsidiary of PECO Energy, has strung 27,000 miles of high-speed telecommunications line atop electrical transmission poles—and signed up over 100,000 phone customers in its first year in operation. PECO now looks to combine the installation of electric, gas, telephone, and cable to provide a single-source installation service for its customers. Three Signs WHAT’S standing in the way of companies that fail to innovate? In many cases, it is the tried-and-true recipe that brought them past success. It’s understandable. Businesses with a winning formula are Over time, logically reluctant to every change horses in midbusiness stream. Over time, model however, every busiand every ness model and every strategy strategy goes stale— goes stale. and in our fast-forward economy, strategies reach their “sell-by” date faster than ever. Indeed, the life cycle of successful business strategies has been rapidly declining in a period of high competition

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Main Story and innovation. In the Industrial Age, a successful business strategy for steel manufacture or durable goods might power a company for a generation or more; today, Moore’s Law (which states that computing power and speed double every 18 months) is setting the terms for strategy life cycles that are measured in months, not years. How can a company tell if its present profits come from spending down past success? Here are three new realities to consider: l  The inevitability of commoditization. Every new product or service will become a commodity in time. Not many years ago, cell phones cost upwards of $100; today, companies will give you one to sell you their service. Likewise, phone service itself is now a commodity: Traditional telecoms—local as well as long-distance—are engaged in a race to the bottom to see who can sell access to a dial tone for how little. Meanwhile, Internet upstarts are considering giving away long-distance calls to lure people to their site, while deriving their revenue from advertising and other sources. l  The impossibility of forecasting future trends. Most forecasts are worthless exercises in spreadMost sheet manipulation— forecasts and not just because are small adjustments in worthless key variables create wildly different pro- exercises. jections over time. The larger problem is that traditional forecasting projects past assumptions forward, providing a sense of false comfort to established companies wedded to existing business models. It’s like auto industry forecasters painting a reassuring picture of steadily rising minivan and family sedan sales—the year before Ford rolled out something it called the Sports Utility Vehicle. Whatever industry you’re in, you can’t drive change looking in the rear view mirror. l  The futility of waiting for inspiration. If it’s a given that great companies are built on a brilliant idea, the next question is where the next great idea

will come from. Don’t be fooled by the rosy glow of growth: Companies living off a single great insight are the corporate equivalent of dead stars-in spite of their sparkle, they’re cold at the core. Like grandma’s favorite “Five and Dime” store in the age of category-killers and cyber-shopping info-bots: Stand pat with your original business model, and burnout is only a matter of time. Creating an Innovation Engine IF companies can’t depend on the lightning bolt of sudden inspiration or serendipitous discovery, then what? An innovative environment can be consciously created—if a company is willing to abandon old rules, shed old habits, and upend cherished conventions. The key is recognizing that past achievement militates against future adaptability by creating well-worn ways of doing things that cause a company to undervalue or ignore rule-breaking insights. Yesterday’s laserlike focus becomes today’s set of blinders, narrowing an enterprise’s field of vision from what is truly new to what it already knows. Glimmers of great ideas are evident in most organizations; the problem is that in direct proportion to the degree those great ideas are different, the “immune system” of most organizations attacks those ideas as foreign organisms, threatening the host. Part of the challenge is demystifying innovation by breaking it down to its constituent parts. Here are three ways to begin the process of awakening innovation in your company: l  Recognize that innovation doesn’t follow a schedule. Most companies are so bounded by existing orthodoxies and obsolete business models that they think they can schedule strategic insight the way you record a reminder in your dayplanner. But the truly innovative bursts of insight that trigger new ideas don’t obey the corporate planning calendar. Consider that the idea for Nokia’s wildly successful rainbow-hued cell phones emerged not from a daylong strategy session in the corner office but outsourcing best practices 

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from an afternoon at California’s Venice Beach, as company execs watched sun-drenched skaters slash down the boardwalk, sporting color-coordinated shades, Rollerblades, and bathing suits. The realization: Mobile phones are as much fashion accessory as communications tool, an inspiration that’s pushed Nokia to the cutting edge of cells. l  Shatter the “strategy monopoly.” In any company, a hierarchy of organization dominates a hierarchy of ideas. The antidote: To encourage innovation, unlock ideas from across the company. Bring together a cross-section of employees at all levels to share the new perspectives that may just contain the kernel of a bold new idea. Realize that every company promotes success as defined by today’s reigning strategy; the question is how to promote new ideas that may have nothing to do with that strategy—or may even cut against it. That’s how Virgin Enterprises operates under the lead of Richard Branson. Every employee has Branson’s phone number, and can pitch new project ideas directly to the top. That’s how a Virgin Airlines flight attendant turned her difficulties in planning her own wedding into a new venture: the wedding planning boutique Virgin Bride. Institutionalize innovation by building a safe place for people to think new thoughts. In some companies, new ideas are in short supply—stifled by a corporate climate that cuts off intellectual oxygen, discourages change, and demands conformity. At other companies, ideas abound—and the challenge takes a different shape: Creating the conceptual conveyor belt that moves from ideas to action. From Ideas to Action CAN a company really institutionalize innovation? Witness the effort of Royal Dutch/Shell, the Anglo-Dutch oil giant. With $138 billion in revenues, 102,000 employees, and nearly a century-old tradition, Shell is the epitome of a lumbering industrial behemoth—the last place you’d expect to find entrepreneurial

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Main Story zeal. Within Shell’s Balkanized organization—which one employee compared to a maze of 100-foot-high brick walls—access to capital is tightly controlled, investment hurdles are daunting, and radical ideas move slowly, if at all. Shell’s globe-trotting managers are famously disciplined, diligent, and methodical. In cataloguing their character and capabilities, “wild-eyed dreamers” is not a term that comes to mind. Enter Shell’s GameChanger initiative, begun in 1996. As an incentive to innovate, a group of Shell employees were given the authority to allocate $20 million to rule-breaking, game-changing ideas submitted by their peers. Proposals would be accepted from anywhere within the company—no need to squeeze radical new ideas through the keyhole of existing programs and priorities. Shell’s GameChanger team embarked on an Action Lab: An intensive five-day experience designed to dramatically accelerate the translation of “gamechanging” ideas into practical venture plans for the launch of new businesses—plans of the kind that would pass muster with venture capitalists in Silicon Valley. The goal was for each team to present its story to a “venture board”—a panel of senior Shell executives and representatives from Shell Technology Ventures Inc., a unit whose job is to fund latestage technology commercialization. The venture board was empowered by GameChanger to “sponsor” winning concepts and fund the next round of business development. In the end, four teams out of the original twelve received six-month funding to put them on a path toward full-fledged business plans. For Shell, GameChanger was the beginning of an attempt to institutionalize innovation. Today, any employee with a promising idea is invited to give a 10minute pitch to the panel, followed by a 15-minute Q&A session. Ideas that get a green light often receive funding—on average, $100,000, but sometimes as much as $600,000—within eight or ten days. Ideas that don’t pass muster enter a database accessible to anyone within

Shell, a kind of innovation stockpot that helps entrepreneurial employees shape their own ideas or bring new insight to existing ones. To date, several of GameChanger’s ventures have found homes in a Shell operating unit or in one of the company’s various growth initiatives. Still others have been carried forward as R&D projects, while the remainder have been wound down and written off as interesting but unproductive experiments. GameChanger is producing measurable results: Of Shell’s five largest growth initiatives for 1999, four had their genesis in the GameChanger—including one exploring an entirely new business focused on renewable geothermal energy sources. Fully 30 percent of Shell’s exploration and production R&D budget is now devoted to ventures that are GameChanger graduates. As the Shell case suggests, it is possible to create an internal constituency for change—inspiring a new breed of “innovation activist” to find an ear and an outlet for creative new concepts within a company. Compared to innovationunfriendly organizations that leave their iconoclasts no option but to take their bright ideas elsewhere, Shell’s experience proves that established companies can create a hospitable climate for change. Hammer Time WHAT can innovation-minded executives do to create such a culture in their company? Here are three ways to kickstart the innovation process: l  Start new conversations. New ideas don’t obey an organizational chart. Companies that want to get serious about innovation need to break the “strategy monopoly” that closes off the executive suite from new ideas percolating in other corners of the company.

Innovation-minded companies spark new conversations by bringing together executives with employees of all ranks to question corporate orthodoxies and search for new ways to do business. l  Seek new perspectives. If you want your company to do a better job of envisioning the future, ask the people who will get to the future first: Your youngest employees. If you want to know how consumers act, don’t observe them in focus-group captivity—join the Nokia execs for a day at the beach. Want a new vision? Try a new vantage point—and watch a world of opportunity open up. l  Spark new passions. Innovation comes from the heart as well as the head. Innovation comes Companies that aren’t from the afraid to innovate enheart as gage employee enerwell as the gies in a new and prohead. foundly different way. When people are part of a cause and not just a cog in the wheel, their IQ—innovation quotient—skyrockets. And above all, recognize that in today’s economy, capital is plentiful; good ideas are scarce. Companies that look to incremental change to generate additional revenue will tend toward subsistence at best—eclipsed by companies that create an environment of innovation, spawning the new ideas that generate new wealth. That’s why an ambitious enterprise must replicate within itself the basic DNA of innovation: A culture of continuous experimentation embedded broadly and deeply throughout a company. All of which brings us to the final characteristic of the true innovator: courage—the guts to realize it’s time to take a hammer to your own business model, before someone else does it for you.

About the Author Gary Hamel is founder and chairman of Strategos, a consulting firm focused on strategy innovation, and also a visiting professor of strategic and international management at the London Business School. A frequent contributor to Harvard Business Review, Fortune, and the Wall Street Journal, Hamel is coauthor of the best-selling Competing for the Future and author of Leading the Revolution.

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Main Story

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

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Main Story Marc Stark, EquaTerra

This EquaTerra briefing paper looks at some of the pitfalls to avoid when negotiating a contract, and highlights three main areas companies need to provide for when legislating for success: creating contract flexibility, putting in place good governance structures and implementing proper change controls. Although the sourcing market is maturing rapidly, many companies still remain naive as to the contractual elements that can make or break a sourcing relationship. Often the general environment during the contracting phase of a sourcing engagement is one of opposition and conflict. But there are no winners in aggressive negotiations as they lead to unworkable contracts and set a negative tone for future working relationships. Companies must recognize the need to negotiate a good deal, but not too good. Contracts need to be ‘fair and commercially reasonable’ meaning the provider must be able to make money while the buy-side company must be able to save money. Although this seems logical, the lawyers who negotiate for the buy-side companies often forget this.

Creating a Flexible Contract Companies should think logically about how they will run the deal in the future. Rights must be protected but the details must be workable. Flexibility needs to be built into the contract to ensure companies can readjust price points and re-examine methodologies. Being too detailed in the wrong places can cause breakdown in communication and make the contract unworkable. In one contract, for example, the lawyers set tough provisions for hourly wage rates, who could do which tasks and when these could be adjusted. The provisions were so complicated they were unworkable for the provider and, ultimately, resulted in it breaching its contract, which led to deterioration in the relationship. Building in flexibility means being able to look at the practical workings of the contract on a dayto-day basis. There are four key points a contract should address to make it flexible: Set clear expectations: Companies need to be clear on their retained responsibility and unrealistic expectations. Allow for minor change: Contracts should be active and not set in stone. They should enable the parties to reexamine key points on a regular basis, for example, promoting and modifying service levels, or managing succession plans for key personnel. Inevitably a successful service will result in individual staff developing and moving

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on to new challenges. This is clearly a success that should be encouraged in order to attract quality new recruits. Often clauses concentrate upon key staff retention and locking staff in, rather than the development of succession plans, skills planning, and the maintenance of a robust service team through opportunity. Focus on milestones: Companies should focus on milestones that ensure the appropriate level of management scrutiny, and that are supported in the contract by detailed acceptance criteria. Failure to provide such criteria prevents the parties from achieving agreed outcomes, which in turn puts pressure on the relationship. Assuming the acceptance criteria are in place, then milestone payments can be made contingent upon defined successful completion. Opportunities also exist to place a successful twist on failure-oriented legislation. Although Service Level Agreements (SLAs) focus on failure, they can also be used to drive success. A variety of earn-back provisions on service credits may be employed, agreements can be drafted that allow performance thresholds to be raised or lowered, and facilities that allow the introduction of new service levels can be incorporated. Benchmark for market/business change: As business cases change, or markets change, contracts need to be flexible enough to allow for changes to services, service levels and price points. Effective benchmarking should allow for changes to be made to the contract. For example, if a market moves dramatically by 10 or 15 percent against agreed benchmarks, then the con-

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Main Story tract should allow for both parties to come to the table to discuss changes in price points. The key is to remember both sides need to win and to have an open discussion about how this can be achieved. Promote innovation: Successbased legislation constitutes more than just continuous process improvement or a gain-share mechanism. Innovation provisions, where possible, should be mandated into a contract. The contract should embody clauses that cause the parties to actively manage, reevaluate, and reinvent. Specific contract clauses that support innovative behavior and continued activity may include: client advocacy and support of sales initiatives in return for strategy assessment of current service, technology developments, and new BPO initiatives inside and around the scope of the services. These types of clauses are already in use but they are vague; to correctly incentivise both parties, they need to be linked and regularly reassessed. While creating a flexible contract is key to legislating for success, companies need to beware of creating too much flexibility or providers will run roughshod over their organizations and potentially impact the organization’s business case for the transaction. There is a fine balance to be struck, which is where it is useful to talk to those companies who have done it before, or use advisors to give a good perspective on what is acceptable and the best practice in the marketplace. Specify Good Governance Structures A good contract will make provisions for governance structures and the role and responsibilities that team has for ensuring a successful and innovative relationship is maintained. A layered governance structure will detail how the communications should be run between both parties and enable any issues or problems to be resolved early. For example, a governance structure

should include a steering committee of top executives who meet twice a year, an operations governance team that meets monthly to review performance, and an account relationship governance team that meets weekly, as well as a transformation or innovation owner. Not only does the governance team need to understand the contract and how it should be practically implemented, they must also communicate regularly with the other side to ensure both parties know how contract provisions are being met. It is often advisable to have individuals who were involved in the creation and structuring of the transaction to have an ongoing role in the governance organization so as to provide continuity and consistency with original tenets and underpinnings of the transaction. Provide for Change Control The failure of sourcing relationships and contracts is often placed at the feet of the provider. But the buy-side organization has a critical role to play in implementing the right change controls within its organization to help the new order succeed. The company must have realistic expectations about what can be achieved in years one and two, as well as a realistic end goal. By implementing proper change controls, expectations can be set and met. Set clear expectations: Companies need to be clear on their retained responsibility and unrealistic expectations – are they enforcing the contract appropriately or not. Senior executives need to recognize that they are responsible for what gets done, not how it is done. They are now buying into a set of given services, at a particular price,

which should be delivered to a specified level rather than delivering the services themselves. This may in turn require that the organization needs to acquire different retained skills. At the same time, the retained organization must be aware of unrealistic expectations and the appropriate time to discuss issues with suppliers. Define lines of communication: The company’s senior executives are responsible for communicating to its workforce how the new order will work and what should be expected from it. Often, outsourcing deals fail on the misunderstanding of what employees believe they should be receiving against what the deal is really about. Ensuring proper internal transformation and expectations throughout the organization is key to success. For example, employees need to know how outsourcing will change the way they do business or their job, what to expect in the new order and how they are locked in to certain elements or not. As part of this, organizations need to make sure they have a program office for internal change and that its activities are properly funded to enable real change. The effect of legislating for success and putting in place a flexible contract, good governance structures and proper change controls will help organizations obtain the most return from their sourcing investment. One of the central axioms of sourcing is to access world-class capabilities of a provider to make certain that a desired future state is achieved and continues to evolve. With this in mind, the contract must legislate for the provider and the organization to focus on that evolution by allowing for continuous change and improvement.

About EquaTerra EquaTerra sourcing advisors help clients achieve sustainable value in their business processes. With an average of more than 20 years of industry experience in over 600 global transformation and outsourcing projects, our advisors offer unmatched industry expertise. EquaTerra has deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critica business processes with advisors throughout North America, Europe and Asia Pacific.

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Newgen Software is a leader in Business Process and Document Management Solutions using Workflow and Imaging. Newgen Software has a successful track record of deploying mission critical solutions in Banking, Insurance, Telecom, and Government Organizations in more than 25 countries across the globe. The company is known as the fastest implementer of large enterprise solutions. Newgen Software, over last 14 years, has built comprehensive product range for Business Process Management, Workflow, Document Management and Enterprise Content Management to offer end-to-end solutions. Newgen Software is a Certified ISO 9001:2000 and SW-CMM Level 4 company, and employs more than 650 persons world over.

w w w. n e w g e n s o ft . c o m

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tips on quality management

Leveraging Lean six sigma in Business Process Outsourcing

Nari Kannan

We hear the slogan, “moving up the value chain” often in the context of business process outsourcing (BPO). BPO service providers typically use this to refer to the execution of other knowledge processes such as financial or legal research that gain them better revenues and margins. We also frequently hear the phrase, “business transformation,” usually used as a synonym for BPO that demonstrates cost savings and little more. What’s the key to gaining true value and business transformation? One approach is to apply lean Six Sigma to move processes from a point of stable outsourcing to “leaning” to process redesign and ultimately, to process innovation.

In Lean Solutions: How Companies and Customers Can Create Wealth Together authors James Womack and Daniel Jones describe how Fujitsu Services did precisely this with its contract with British Midland International. BMI outsourced its service help desk function to Fujitsu. Pretty bland stuff. This business process involved handling calls from BMI agents at airports regarding computers and printers that were installed at airport offices and airline service counters. Fujitsu’s goals for this business process evolved from one of just providing the help desk services to trying to eliminate the root causes of the calls and thus the calls themselves! It worked with the printer makers to improve printer reliability to such an extent that calls to the help desk fell outsourcing best practcies 

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80% and continues to fall with their on-going Kaizen (continuous process improvement) efforts. This business transformation effort was so successful that Fujitsu was awarded the contract for handling BMI’s entire IT asset infrastructure. This time around, the contract was structured with the same 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 process; documenting the process and key Critical to Quality (CTQ) or Service Level Agreement (SLA) measures; forming a process team; training the team; and running a pilot effort in parallel to the regular operation of the process. l  Transfer to regular BPO operations group: Once the process team is in place with the BPO service provider and it has been executing the process for a certain period of time, it is transitioned to their operations group for ongoing operations. l  Measure and report SLAs and metrics: BPO contracts may specify SLA measures like average handle time (for phone processes) or network availability (for network management processes). Service providers often measure a number of additional metrics that help them evaluate the performance of their own employees and/or to make sure that the business process is executed well.

tips on quality management

Transition Business Process

Transfer for Regular BPO Operations

Measure and Report Metrics & SLAs

Is Business Process in Statisfical Process Control?

Yes

No

Minor Adjustments as Needed

l  Statistical process control check: Optionally, many service providers make sure that key performance indicators are in statistical process control. If they’re in process control, only minor adjustments are made to the process, often necessitated by people turnover or other more minor factors. If KPIs aren’t in statistical process control, then root causes may be addressed and adjustments to the process made appropriately. If you analyze the above as-is state of BPO transitions and operations, you might notice that there’s no fundamental innovation or reengineering of the business process. Sure, there may be minor adjustments or tweaks, but nothing more. This hardly heralds business transformation in the making!

Address Root Causes

change to the process is implemented. All KPIs need to be stable and in statistical process control! Defects need to be identified and minimized, moving from lower sigma levels towards a Six Sigma level. l  Process leaning: This involves a number of tools and techniques that provide continuous improvement to all aspects of a business process -turnaround time, accuracy, error rates, currency-related effectiveness metrics, customer satisfaction levels and so on. The tools you’ll find of value include value stream analysis (making sure

that each process step is adding value to the customer and non-value adding steps are completely eliminated or speeded up), failure mode and effect analysis- FMEA (analyzing and minimizing risks due to failure of process steps), service blue printing (analyzing customer touch points and minimizing the chances for making mistakes) and Poke Yoke methods (mistake proofing). (If these terms are new to you, I suggest you look them up at iSixSigma.com to further your education on these techniques. You’ll find the URL in “useful Links.”) l  Process redesign/innovation: These flow naturally after an extended period of process leaning and use of Six Sigma. Radical process redesign may not work as well as process innovation and redesign born out of an extended period of deep analysis and understanding of existing processes. How You, the Client, Will Benefit When your BPO service provider moves up the value chain with lean Six Sigma, you benefit in a number of ways: First, you’ll see an evolution from pure cost savings to process improvement. Presumably, this metamorpho-

Transit on Business Process

Transfer for Regular BPO Operations

Movin’ On Up The figure below shows the to-be state, where the business process is improved continuously using lean Six Sigma. Let’s walk through the stages. The first set of steps are the same as in the as-is state -- process transition, transfer to operations, measure and report SLAs and statistical process control check. Here’s what’s added. l  Six Sigma efforts: These help ensure that the process is in statistical process control whether the process runs as-is or when any fundamental

Measure and Report Metrics & SLAs

Yes Minor Adjustments as Nedded

Is Business Process in Stastical Process Control?

No Address Root Causes

Leaning of Current Process

Process Redesign/Process Innovation

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tips on quality management sis results in better quality and greater speed at less cost (as the application of the Toyota Production System and other lean Methods have proven in manufacturing as well as services). Process improvement adds to the cost savings or at least mitigates costs as and when they rise. Second, you’ll be able to leverage process understanding and documentation. In many large organizations in the US and Europe, business processes have evolved over time. The latest documentation for the business process may not exist. BPO vendors may insist on documenting the business process along with workflows, KPIs and SLAs for legal and contractual purposes. The very process of outsourcing makes many of these processes explicit. Moving up the value chain with lean Six Sigma depends upon proper documentation of the business process. Third, you’ll see a movement from informal to formal process measurements. Before outsourcing, there may not have been a compelling need to formally identify SLAs and KPIs for processes and measure them diligently. However, now that they’re outsourced, informality leads to formality due to legal and contractual reasons. Process improvement can build on these measurements and result in better quality while identifying areas to reduce expense. How Your Service Provider Will Benefit Moving up the value chain in BPO benefits your service provider in a number of ways. Why should you care? The success of the outsourcing engagement depends as much on the relationship you form with your service provider as on the services performed by that provider. First, it gets the vendor out from under the mode of competing on price. When a service provider adds value over and above simple costs savings with continuous process improvement, it removes that company from the fray of competing on price for contract ex-

tensions or other business processes. They become a partner that provides true business transformation. They can renegotiate contracts based on value added with process improvement rather than a simple time and materials or full-time equivalents approach. Second, the service provider becomes a true business partner. Moving up the value chain provides a chance for a longer term relationship with your company. When a client outsources a technical help desk, the ideal isn’t to handle those calls in the best possible way; it’s to reduce those calls altogether while still keeping customer sat levels high. That kind of transformation, effected through lean Six Sigma, can demand revenues an order of magnitude higher than simple process execution (because the client gains far greater benefit). Third, the service provider gains invaluable vertical skills development. When a BPO service provider moves up the healthcare claims processing value chain, they cease being just a service provider. Over time, they slowly become world-class experts in healthcare, not just claims processing! They can leverage this expertise for much more valuable process design/redesign/innovation business, thereby continuing the cycle of continuous improvement. How To Start Down Your Road to Business Transformation One place to begin is by looking for the addition of incentives for process improvement to your contracts. Initially, Fujitsu was getting paid by BMI for help desk processes on an FTE number of agents basis. The service provider had no incentive to fix root causes of commonly reported problems in calls to their help desk. However they renegotiated the contract. They based it on the number of BMI employees that could potentially call their help desk rather than the number of agents needed to take calls (FTE number). This meant they would get paid the same if they handle 100 calls a day or 1,000 calls a outsourcing best practcies 

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day! This kind of structuring provided an incentive for the service provider to do real business transformation! It became a win-win for both the buyer and provider! For proper process improvement efforts, incentives and contract need to be designed in such a way that they encourage appropriate efficiency and effectiveness. Don’t expect immediate payback, especially in the trust department. Moving up the value chain in BPO needs to be done one step at a time over a long period. First, the provider needs to execute the business process that exists today properly and then slowly improve it step by step. Once the provider understands the process in all its dimensions, it can earn client trust by demonstrating small improvements first before attempting any process redesign or innovation. You need to take a long-term outlook. Service providers -- especially offshore ones -- are vulnerable to price competition from other countries. For example, when the focus is on price, many business processes in India could be considered vulnerable to price competition from lower-cost locations. Moving up the value chain requires a longer term outlook on the vendor. The beauty of that is that it is difficult for a competitor to duplicate in a short amount of time. When service providers begin their lean Six Sigma journey and bring clients along for the transformation, they can ensure protection of their current business -- and even win additional business once they demonstrate that they’re long-term business partners. BPO provides an outstanding opportunity for both clients and service providers to look at both optimizing cost savings and achieving continuous process improvement! Lean Six Sigma provides the tools and techniques for making business transformation not just a slogan, but a systematic, disciplined way of daily operation. Copyright © 2006 CTQ Media LLC- All Right Reserved Content Reproduced with Permission of Sourcingmag.com

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bpo story

Governance of Offshore Programs:

Does One Model Fit All? Avinash Vashistha Dr. P. K. Mukherji Vinu Kartha Tholons

The services sector is progressively becoming the major contributor to the Gross Domestic Product (GDP) of developed nations. The GDP of most developed nations have services as the major contributor. In order to drive efficiency, improve quality, and

reduce costs, organizations use globalization as a powerful advantage. This strategy is popularly called “Services Globalization”, and it is becoming the accepted business paradigm and an integral part of all successful business strategies. However, the experience of the past few years suggests that not all globalization initiatives have been successful. It is estimated that 50% of all initiatives fail to de-

Buyer Viewpoint: Top Outsourcing Risk Factors

Management Complexity Financial Payback Quality of Output Control of Resources Reduced Effectiveness Information Confidentiality Proximity to Staff

Low

Source: DiamondCluster International

Level of Concern

High

Offshore Onshore

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liver the anticipated benefits. An internal survey conducted within the globalization industry reveals that the absence or ineffective use of Governance organizations is the leading cause for failure. A recent study by Diamond Cluster 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 globalization 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: l  What is Offshore Program Governance? l  What is the impact of not having a formal Governance Organization? l  What are the elements of a good governance model? l  Does one size fit all? Offshore Program Governance Governance of an Offshore Program for services can be defined as specifying the decision rights and accountability framework to enable decisions and actions that ensure achievement of the objectives and goals of globalization. The primary role of the a Governance organization is to help the stakeholders develop the globalization strategy, aggregate demand, assess risk, schedule and prioritize, pool resources, source and manage the delivery of engagements, enforce quality standards, and build relationship with offshore partners. A formal management framework and structure enables organizations and their partners to mutually manage the relationship, expectations, contractual dependencies, and services. Organizations that have been

bpo story

Lack of a governing body to manage the offshore program

28%

18%

Poorly managed Migration Lack of internal knowledge about offshoring

17%

14%

Poor Internal buy in 10%

Weak control on costs Poor vendor domain knowledge

9%

Vendor staff attrition

4% 0%

5%

Source: Tholons industry survey

10%

15%

20%

25%

30%

Percent of Respondents

successful in their globalization initiatives have had a Governance organization which: l  Proactively defines globalization strategies and keeps them aligned to corporate goals. l  Closely monitors and measures performance and value generated from the initiative. l  Continuously gathers knowledge from implementation and industry best practices and shares it across organization to affect operational improvement. l  Maintains an effective communication channel across geographies and boundaries of partner organizations. Impact of Not Having a Formal Offshore Program Governance The management of any large business operation is loaded with risks and is especially tricky if a strong leadership is missing. The magnitude of this risk multiplies if the project is executed five or 10 thousand miles away in a remote location and with unfamiliar partners. However, this is exactly the scenario found with most globalization programs. Ever since offshore sourcing started as a means of leveraging low-cost resources, this challenge has existed. Most organizations are poorly equipped to handle the associ-

ated risks. The following are the most critical challenges that organizations face in managing globalization programs: l  Ad-Hoc Scheduling of Projects Puts Pressure on Internal Resources: Many organizations have no formal process for identifying what to globalize, how to globalize, and when to globalize. This results in each business unit making ad-hoc decisions about what and when they want to globalize. Often the priorities of the various business units clash. Since the budgets for the various IT or shared services often come from the individual business units, it makes it difficult for the IT or procurement organization to say no. As a result, there is tremendous pressure placed on the IT or shared service organization, procurement, legal department, and project management; all of which leads to schedule slippages, processes circumvention, budget overruns and staff attrition. l  No Standardization of Processes for Demand Aggregation, Procurement, Delivery or Monitoring: A large Fortune 500 Financial Services major in the US has 13 business lines with more than 10,000 IT resources distributed among them. This organization started a globalization initiative in 2001 with a plan to scale up to 5000 outsourcing best practices 

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resources within five years. Initially, everything went well; the first set of applications was migrated successfully within the allotted time. However, as soon as they settled in, problems started to arise. Each business line insisted that its project be delivered first. Then the business line decided to choose the globalization partner it wanted to give the work to. Things became even more complicated when each business line bypassed the procurement and IT departments in reporting the benefits of the globalization initiative. While one reported 50% savings, another reported a net loss, and a third claimed 5% savings. Ultimately, the organization shifted the Chief Information Officer, and the company never realized their goal from globalization. Offshore sourcing is more complicated than domestic sourcing because many of the elements of a globalization engagement cannot be taken for granted. Even simple things like 24-hour electricity or telephone connections are risk elements in some offshore locations. Without a governing body that has visibility into globalization initiatives across the organization, there is no way to ensure that standard processes are implemented. Each business unit or IT department will implement its own procurement, measurement, and reporting processes. This makes it difficult to evaluate the effectiveness of the vendors, measure returns, or simply even report on status. The lack of transparency of the various initiatives across the organization inhibits long term strategic planning. As a result, organizations end up offshoring only for the cost arbitrage and forego other benefits, such as quality improvement, innovation stimulation, resource scalability and de-risking of business drivers. l  Alienation of the IT/Shared Services Organization by the Business Units: Often, IT and shared services organizations complain about the lack of authority and responsibility to execute IT projects due to inter-

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bpo story ference from the business lines. Since the business units control the budget, they often dictate what applications or processes to globalize, what model to use, which vendors to choose, and what performance measures to implement. This alienates the IT/shared services department, since they are the ones that have to make sure projects are delivered on time, within budget and with high quality. Any problems that arise are therefore highlighted as the inability of the IT/shared services organization to plan properly, and often end in the CIO being fired. l  Duplication and Redundancy Caused by Different Business Units Sourcing Similar Applications/Processes: Without a central organization that brings together the various business units on a common platform for globalization, there is a real danger of duplication and wastage of valuable resource time and effort. Each business unit conducts its own procurement or sourcing process and selects its own vendors. They also typically do not track and manage in the same way as another business unit. Since a large percentage of the IT and shared services needs of the business units are similar in nature, they end up duplicating the effort and losing out on economies of scale, while also doubling the risks. l  Projects with Sub-optimal Returns From Globalization are Often Sourced: On the whole, few program or project managers have extensive experience with globalization. As a result they end up offshoring applications and processes that are poor candidates for globalization. A study of globalization initiatives that have failed will most likely point out that the wrong processes or applications were offshored in the first place. Offshoring the wrong process or application is equivalent to using the wrong map to start a cross-country expedition. It can lead to financial loss, loss of morale, setback to business plans and eventual termination of the glo-

Resource Allocation Requirements Aggregation and Prioritization

Innovation & Continuous Improvement

Risk Management

Governance organization

Vendor Management

Quality of Service & SLA’s

Financial Monitoring Voice of the Customer

balization initiative. Program Governance Goals There are eight critical goals for program governance, which if managed properly will reduce the risks with globalization and improve the benefits: l  Requirements Aggregation & Prioritization: n  This is the process by which all requirements for information technology and business process globalization services are identified, aggregated and prioritized across various divisions of an organization. This ensures transparency, avoids duplication and wastage of resources and time, as well as maximizing financial and business benefits. n  Key activities: – Assessment of a portfolio’s suitability for globalization – Aggregation of demand to create optimal size for globalization – Prioritization of execution based on internal business imperatives, resource availability, budget and risk profile l  Resource Allocation n  This is the process by which internal and external resources capable of managing and executing outsourcing best practices 

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the services required are identified, qualified, selected and managed. n  Key activities: – Identification of internal and external resources l  Internal resources include project teams and managers, technical and globalization subject matter experts; support resources such as infrastructure, security, procurement, legal, finance, etc. l  External resources include third party service providers, company owned captive centers, or consultants. – Make or Buy analysis – Sourcing of resources l  Risk Assessment and Management n  Risk assessment and management involves identifying, qualifying and managing various risks associated with globalization. n  Key elements: – Knowledge Risk – Process Risk – Communication Risk – Environment Risk – External Risk – Technical Risk – People/Resource Risk l  Quality of Service n  Quality of service ensures that the organizational goals of qual-

bpo story ity are identified, measured and reported. n  Key activities: – Metrics definition – Metrics measurement – Metrics reporting and – Continuous improvement l  Financial Monitoring n  One critical goal of globalization is the reduction of operational cost, thereby releasing savings that can be deployed in other essential areas. Financial monitoring ensures that the plan to actual expenses for globalization are tracked and reported. n  Key Activities: – Base case – Financial savings scenario models l  Voice of the Customer n  No service is successful without putting the customer at the center and ensuring their satisfaction. Voice of the customer measures expectations of the end customers of the IT services through feedback and continuous improvement. n  Key Activities: – Customer satisfaction surveys – Capturing lessons learned and implementing continuous improvements l  Vendor Management n  Vendor management covers all aspects of monitoring delivery execution, vendor resource deployment, performance measurement, culture, relationship and communication exchange, contractual obligations, financial remuneration and continuous improvement. l  Innovation and Continuous Improvement n  The goal of any globalization initiative should be to leverage the potential for stimulating innovation to grow the business. This is possible through a process of continuous application of lessons learned, and also by moving from skill augmentation to leading by innovation.

Component

Purpose

Focus

Relationship Management

Align the operations of outsourced setup with company’s strategic objectives

Journey towards strategic partnership Clearly define roles and responsibilities. Understand rules of engagement and jointly manage contractual commitments Focus on business results expected out of globalization

Performance Management

Ensure that performance levels are met in an engagement on continuous basis

Performance definition, configuration, assessment and assurance Escalation procedure and resolution for performance violation. Quality Metrics Performance reporting, scorecards and dashboards Effective resource deployment and utilization

Risk Management

Change Management

Knowledge Management

Address the risks in globalization and provide mechanism to mitigate risks

Risk assessment and impact analysis

Handle changes brought about by the globalization engagement. Exchange information and promote transparency in an organization

Cultural alignment

Collect knowledge about best practices and institutionalize such knowledge through timely dissemination. Catalyze right choice of tools and technologies

Monitor industry best practices and benchmarks.

Risk mitigation; Risk sharing Focus on security, Disaster Recovery/Business Continuity Planning and compliance issues

Focus on business results Communicate effects of globalization and catalyze retooling /redeployment exercise Communication Planning, transparency and information distribution

Assimilate, institutionalize and disseminate best practices knowledge

Main Components of Governance There are six key responsibility areas for effective governance which allow an organization to successfully manage a globalization initiative: l  Relationship Management l  Performance Management l  Risk Management l  Change Management l  Knowledge Management Governance for Different Models of Globalization Offshoring of business processes and technology support can be undertaken using alternate business models: l  Third Party Offshoring: In this model a third party vendor/ partner outsourcing best practices 

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organization is identified to assume responsibility for the applications or business processes and deliver the service in a more effective fashion. The offshoring can be to a single service provider or multiple service providers based on risk mitigation strategies adopted by the organization. l  Captive/Shared Services: The organization may choose to create a separate sector under its own management to service the outsourced business processes. The center is generally located in a low cost country and services core processes of the organization. In this model the up-front investment is high. l  Build-Operate–Transfer: This model allows the organization to out-

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bpo story source to a third party partner organization while retaining a higher degree of control. The organization also retains the option of making the unit a captive setup beyond a specified period. The globalization strategy adopted by the organization spells out the most appropriate business model for implementing the initiative. The choice of business models is one of the key dimensions for deciding the optimal governance model. Does Organization Strategy Impact Governance Model? When deciding on the appropriate governance model it is important to understand the strategy and value disciplines of the outsourcing organization. The three value disciplines are: l  Operational Efficiency: Here the focus is on business efficiency and reliability. Organizations of this nature lead the industry in price and convenience. They excel in minimizing overhead costs and streamlining supply chain. l  Customer Intimacy: These organizations focus on cultivation of relationships, customer service, responsiveness and customization based on deep customer knowledge. l  Product/Service Leadership: Organizations that adopt this value discipline focus on innovation, experiment with new approaches and

Third Party Operation Focus

Rel Mgmt-Low

Perf Mgmt-High

Perf Mgmt-High

Risk Mgmt--Med

Risk Mgmt--Low

Change Mgmt-Med

Change Mgmt-High

Rel Mgmt-High Perf Mgmt-Med Risk Mgmt--Med Change Mgmt-High Knowledge Mgmt-Low

Product Leadership

Rel Mgmt-High Perf Mgmt-Med

Knowledge Mgmt-Low Rel Mgmt-Med Perf Mgmt-Med Risk Mgmt--Low Change Mgmt-High Knowledge Mgmt-Low Rel Mgmt-Med Perf Mgmt-Med

Risk Mgmt--High

Risk Mgmt--Low

Change Mgmt-Med

Change Mgmt-Low

Knowledge Mgmt-High

Knowledge Mgmt-High

solutions, and concentrate on rapid commercialization. Organizations that are market leaders excel in at least one value discipline while meeting minimum threshold levels in the other two disciplines.

This framework and structure is supported by a defined set of standards, documented processes and best practices. The degree of intensity of each component can be mapped as below:

Dimensions that define the Optimal Governance Model The optimal governance model for a globalization initiative is an outcome of the interplay between the three dimensions; namely, the organization’s strategy and value principles, the globalization strategy adopted and choice of business model and lastly the management intensity of the various components of governance.

Principles of Right Implementation of Governance Model To have a successful globalization engagement, it is necessary to have the right governance model and ensure that it is implemented properly. A handful of important principles for implementation guarantee success. While governance requires managing complex relationships, strong processes, skills and tools to succeed, globalization excellence depends on a governance operating model implemented 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 group should strive to balance each group’s needs over the term of the agreement. When the stakeholders see

Governance Component Intensity

Strategy & Value Principles

Captive

Rel Mgmt-High

Knowledge Mgmt-Low Customer Intimacy

BOT

Intensity between the two extremes

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Outsourcing Business Model

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bpo story that the governance group does not consistently place one group or set of requirements above the others, their participation and satisfaction will increase. l  Pursuing stakeholder involvement: Formal governance boards and steering committees are essential, but informal stakeholder involvement is the way successful relationships are built and maintained over time. Stakeholder involvement results from an effective combination of information exchange and action. l  Seeking cultural synergy: One criterion often used when selecting an outsourcer is cultural synergy. Governance groups achieve improved results by identifying and building on strengths both cultures share. l  Driving out false agreement: False agreement occurs when someone agrees to do something without any intention of actually doing it. Although not unique to outsourcing relationships, this can be particularly damaging to them. A governance group operates predominantly through influence rather than authority. Therefore, its members must be able to rely on commitments made by others, whether internal employees or service provider staff.

l  Experience matters: When governance group members are drawn exclusively from the client company, they begin with a globalization experience deficit that puts them at a real disadvantage. It helps to include service providers in the framework, but their perspective may not be fully aligned to the organizations perspective. The best approach is to have an independent third party with real hands-on experience in client-side governance participate in the implementation for a defined period of time. l  Avoid the paradox of alignment: Alignment between the client company’s goals and the service provider’s actions has long been considered the Holy Grail of globalization. Yet alignment remains elusive -- client companies want to cut costs and increase service quality, while service providers want to increase revenue and decrease service delivery costs. While these objectives are not necessarily opposed, they tend to prevent effective alignment unless both parties actively seek out those areas where both sets of objectives can be met. Client companies that expect the service provider to adopt and align with their objectives at the expense of their own will be disap-

pointed. Continued disappointment leads to distrust, which can seriously damage the relationship. It is better to seek true alignment around mutually beneficial outcomes than to gain false agreement to one-sided goals. l  SLAs aren’t enough: Servicelevel agreements are extremely important and should be continuously refined and improved over the life of the agreement. However, they must be augmented by other methods to ensure customer satisfaction. For example, the principles of balancing stakeholder needs and pursuing stakeholder involvement can be used to monitor and improve customer satisfaction and relationships among stakeholders. Ultimately, customer satisfaction depends on the relationship between the governance group and the service provider. When trust is high and commitment to achieving the agreement’s goals is shared, customer satisfaction becomes a key success ingredient that is jointly nurtured by both sides. l  What Next? The first step for an organization is to realize the importance of having a formal governance organization. Having gained that, the next step will be to seek ways to develop a strategy and implement it.

Conclusion 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 deliver the complex results expected from today’s globalization initiatives.

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Cover story Craig Focardi Research Director, TowerGroup

The global sourcing of information technology (IT) services and business process outsourcing (BPO) has moved from a leading edge to mainstream activity for U.S. financial services institutions (FSIs). Mortgage lending has become a leading line of business within FSIs for reducing labor costs through offshoring. The Problem: Too Much Manual Labor In 2005, approximately half of the estimated $44 billion (USD) direct cost

cost component will decline to reach 46.5% of total direct origination costs by 2010. How Big Is the Offshore Market? Not all mortgage processes and costs are offshorable. The offshorable cost base are those direct loan origination and loan servicing costs that lenders can perform offshore. TowerGroup estimates the offshorable cost base for US mortgage loan origination processes will increase from 19% of total direct costs in 2005 to 35% in 2010. The offshorable cost base for mortgage loan servicing processes will increase from 37% 2005

spending budgets grow more slowly or decline. Yet demands on the IT department don’t decline commensurately, and innovative chief information officers are increasingly looking offshore as a way to do more with the same budget. Offshore Opportunities for Small Lenders Most lenders offshoring today are top 20 banks operating captive operations in India, the Philippines and elsewhere. Some large lenders that are just beginning to offshore, and many small and medium-sized lenders will increasingly look to business process outsourcing

Mortgage Offshoring to India Goes Mainstream base of the US mortgage industry was labor expense. Approximately 18.9 million loans were originated at an estimated average total direct cost of $2,100 USD per loan, for a total cost base of nearly $40 billion. In the same year, approximately 55 million first mortgages were serviced at an average total direct cost of $67 per loan, for a total cost base of $3.8 billion. Lenders are aggressively looking to offshore the labor intensive, back-office activities performed by loan processors and clerks who perform data entry, document sorting, secondary marketing, quality control and loan shipping activities. Based on the size of the US mortgage market and the share of that market that is operational labor cost, the opportunity for offshore mortgage BPO vendors is huge. TowerGroup forecasts that through a combination of business process reengineering, document imaging, business process management, and offshoring, the labor

to 55% in 2010. TowerGroup estimates that the offshorable market for mortgage lending processes will grow from $9.0 billion in 2005 to $13.1 billion in 2010, with over 80% of these costs occurring in loan origination processes. Should Lenders Offshore? The US Mortgage Bankers Association (MBA) estimates (as of August 2006) that residential mortgage lending volume will drop roughly 19 percent in 2006 and another 7% in 2007. TowerGroup analysis of historical MBA loan origination cost and loan volume data shows that lender cost metrics worsen considerably when loan volumes decline. This happens because too many lenders forecast market-share increases that don’t materialize, and then it takes a lot of time to restructure people, processes and locations to fit the lower level of demand. Declining loan volume, productivity and profitability also means that IT outsourcing best practices 

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(BPO) vendors for offshore loan processing rather than build captive operations abroad, due to the lack of processing scale, IT, management breadth, and capital required for a captive operation. TowerGroup envisions two paths for small lenders to participate in offshoring. The first is by outsourcing to USbased mortgage lenders that own and manage their own offshore operations and that have, or can develop, privatelabel offshore BPO operations. For the second path, TowerGroup believes that over time, some offshore, India-based mortgage BPO vendors, instead of performing lending tasks on each lender client’s IT platform, will license core loan origination and servicing systems to provide complete loan origination (private-label lending) or loan servicing (subservicing) to small lenders. This model will also require BPO providers to establish onshore processing facilities to execute those processes that lenders do not want performed offshore.

Cover story 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 providers offshore.

Indicator of booming economy, a high-rise building accommodating Foutune companies.

When and How? TowerGroup believes than any top-40 U.S. mortgage lender (originating more than $7.5 billion in new loan volume) needs a global sourcing strategy. While the captive (owned) model is not scalable for many lenders, joint ventures with a BPO provider and BPO itself are viable options. Conversely, the largest lenders should not limit offshoring to their own captive operations. They can benefit from BPO vendor best practices garnered from serving a diverse range of customers. Some lenders already use multiple BPO vendors to diversify vendor risk, create a competitive market for services and scale more quickly. Furthermore, other lenders may determine over time that offshoring through a captive operation is not a core competency and consumes excessive management resources.

How Big Will The Offshore Market Actually Be? The offshorable market defines the gross costs that lenders can offshore. It doesn’t define net savings from offshoring or the revenue opportunity for BPO vendors. NASSCOM defines the addressable market as the potential revenue market for lenders and BPO vendors that offshore work. The addressable market is thus a percentage of the offshorable cost base. TowerGroup estimates that the

Outlook The offshoring of lending processes is a permanent and growing share of the US mortgage industry cost base. Offshoring is creating significant operating cost advantage that leading lenders will use to competitively differentiate themselves in price, service, and profitability. As interest rates fluctuate and lending volume declines into 2007, large lenders without an offshoring strategy are scrambling to catch up. Although most large lenders establish captive operations, some of the large lenders playing catch-up and medium-sized lenders will look to BPO vendors for offshore loan processing. As with any new venture, successes and struggles abound. Confidential information provided to TowerGroup by financial institutions indicates some unanticipated startup costs, training costs and employee turnover. But within a few months operational cost efficiency is strong as labor productivity increases. The offshoring of selected US mortgage processing will increase returns to shareholders, improve service to customers, and create a sustainable competitive advantage for those FSIs that expand and refine their global sourcing strategy.

About the Author Craig Focardi, CMB, is research area director for TowerGroup’s Consumer Lending, Global Payments and Wholesale Banking research services, which covers a wide range of business, process, strategic, and technical topics relating to origination, servicing, securitization, and risk management. Craig has 20 years experience in a variety of finance, product development, and business development roles for mortgage technology vendors, lenders and risk management firms.TowerGroup Research is available to subscribers on the Internet at www.towergroup.com

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Putting the Value of Outsourcing Consultants in Perspective

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 transforming a business to be more competitive and for increasing shareholder value, mortgage bankers recognize the growing need for expertise in structuring their deals to be more successful in capturing value. This translates to engaging an outsourcing consulting firm. For most organizations, the fundamental objective in using a consulting 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 favorable price points, but it is limited in its ability to ensure an outsourcing arrangement 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 bankers? 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 industry 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 opportunities for building leverage points such as economies of scale; process or domain expertise; and technology, human, 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 increase quality and productivity by moving work to low-cost locations such as India or the Philippines. Within mortgage banking, labor arbitrage, or offshoring, provides an opportunity for economies of scale built around applications and

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bpo story IT infrastructure, as well as the ability to further reduce costs through the people component of claims processing. Offshoring is a “game-changer” in outsourcing in that the same amount of capital will hire more resources, which will result in greater productivity and reduced turnaround time. Financial services institutions were among the early adopters of labor arbitrage, primarily through building their own sharedservice centers (the “captive” model) in low-cost locations. However, success has proved to be difficult for the captive models, and many organizations are now reaching out to outsourcing service providers to help them drive down cost. A good consulting firm, such as Everest Group, can help a mortgage banking institution identify opportunities for capitalizing on leverage points such as economies of scale and labor arbitrage and can the client design a better outcome—whether it’s building a captive service center or moving toward a third-party outsourcing relationship. Client organizations also benefit from a consultant’s expertise and experience in identifying risks, developing risk-mitigation strategies, and developing appropriate governance structures. Taking Consulting to the Next Level However, there are information gaps—the real costs of labor and infrastructure in low-cost locations, for example—that hinder the effectiveness of many consultancies. These information gaps can be dramatic in their bottom-line impact to clients. A consulting firm that has a research capacity, such as the Everest Research Institute, can bring this additional information that is crucial in designing a higher-value solution with lower price, more flexibility, and higher-quality services. Salary costs are not the only consideration when evaluating an offshore location; in fact, they account for only around 44%-57% of operating costs. What about real estate, telecommu-

nications, and equipment costs? How firm with deep expertise and a research about training and management costs capacity can help a client better predict and other overhead? And what about the attractiveness of a location five, sevcurrency exchange rates? One location en, or 10 years from today. This type of may be optimal for a particular business consultancy can also help clients better understand the maturity and financial process but not for others. An example of the information that viability of the pool of service providhigher-value consulting can offer is the ers. Moreover, consultants can help a cliCost-Maturity Framework in Everest’s Location Optimization product. It ent better understand and manage the combines benchmark information that risks associated with enforcing contractual commitments in reveals all elements of an offshore location as cost (even the impact on Client well as the increased costs from government organizations regulatory issues beincentives and subsidies) also benefit cause the work is hanat a city, not country, levdled in two countries. el. In addition, the Costfrom a Mortgage bankMaturity Framework consultant’s ing institutions can provides an assessment expertise and benefit greatly from a of a particular location’s more robust and holisrisks such as maturity in experience in tic approach to weighoutsourcing, the size and quality of the labor pool identifying risks, ing their needs against developing different outsourcing for a particular process, inflation, attrition rates, risk-mitigation solutions. With highervalue consulting services infrastructure reliability, strategies, and combined with research maturity of language cadeveloping capabilities, a consultant pabilities, and other risk can merge benchmark factors. appropriate information around IT A provider’s matugovernance infrastructure and aprity, for instance, is an structures. plications with location important factor, as it optimization informaindicates the ease of solution implementation or transition to tion, enabling a mortgage institution to the provider’s environment and, thus, design a better solution and select a betthe speed to value realization from the ter outsourcing partner. The information outsourcing strategy. Attrition rates not will also result in designing more realistic only indicate the risk of rising labor costs incentives and a more manageable govbut also potential impact to the cost of ernance vehicle. Most important of all, such conmanaging the relationship. Infrastructure reliability and other sustainability sulting services will enable the client risk factors are in ensuring the client’s to identify risks and appropriate mitigation strategies. The need to do this future needs will be met. In addition, the attractiveness of a is implicit in any outsourcing arrangelocation and its savings sustainability ment but particularly crucial to success may change over time. A consulting in an offshore outsourcing relationship. About the Author Peter Bendor-Samuel is the Founder and Chief Executive Officer of Everest Group. Peter’s thought leadership and expertise span more than two decades of developing significant, large-scale outsourcing and partnering solutions in a broad range of industries and business processes. He is the recipient of the 2001 Outsourcing World Achievement Award and the author of “Turning Lead Into Gold: The Demystification of Outsourcing,”

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Main Story

Complexity of Industry Challenges tion of one key area of BPO—mortgage processing BPO for banks.

ity. Banks face the additional challenge that years of cost competition and outsourcing have hollowed out their ability to internally develop, maintain, and operate custom systems. Banking BPO is mature as most banks outsource select processes. In fact, banking BPO represents primarily an Up-sell opportunity, rather than a Greenfield opportunity. Many past outsourcing deals haven’t delivered the expected results. However, those performance failures have often reflected that the bank transferred a platform or workforce that was delivering sub-par performance already. “Same mess for less” is a failed business model. Intractable problems do not become tractable 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 form a point of view on what the new operational bases of competition will be and partner with service providers to capitalize on the new landscape. Ultimately, in banking, it’s survival of the most adaptable.

Banking BPO Globally, the banking industry is facing the greatest change in regulatory oversight since the 1930s. Basel 2, SEPA, Check 21, and SAS 70--to name a few of the key regulatory changes mandated, but not yet fully implemented--will necessitate that each bank re-architect its core systems and operational delivery capabilities. These regulations change the underlying processes such as payment processing, so that re-configuring systems will not be possible, system conversion will be necessary. This is true, regardless of whether this is done in-house or not. Our conversations with banks show that banks understand that this is not a “best of breed” selection process, but rather a set of decisions that “bet the bank” on the future landscape of the industry. Execution cost take-outs matter less than time to market and flexibil-

Mortgage BPO In the banking segment, mortgage processing is under great pressure to transform. Deteriorating market conditions for mortgages, brought on by increasing interest rates, declining collateral values, and deteriorating borrower credit quality are forcing mortgage lenders adapt or exit the market. Banks are looking for five key benefits from mortgage processors: l  Conversion of fixed cost to variable cost: through transaction based pricing and rapid scaling of services. l  Cost reduction: cost reductions of 20%+, with continuing cost reductions over the next five years. l  Increased speed of execution: as lenders compete for a shrinking pool of business in deteriorating conditions, executing quickly is a key competitive advantage. l  Re-engineered processes: to en-

Will Drive Accelerating Adoption of Mortgage BPO Services.

The challenges of making BPO engagements successful are dwarfed by the challenges of internal delivery. Andy Efstathiou Research Director at NelsonHall

Much has been made during the past year of the slowdown in new BPO (and ITO) contract signings. Is the market slowing down? Dying? Are customers dissatisfied with service quality and cost? What is an informed customer to do? NelsonHall’s research shows a very different story. Customers are using a disciplined approach to service acquisition, which isn’t surprising considering that industries such as banking, which has the highest propensity to outsource of all industries, have been outsourcing IT and select processes for close to 40 years. Banks have also been early to offshoring, as evidenced by Citibank’s outsourcing to India in 1986 and setting up its own captive in 1991. The slowdown in contract signings the past year is the result of customers taking a considered approach to solving very complex business challenges using BPO services. Let us discuss the direc-

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Main Story

Key Mortgage Processes

Exhibit 1

Prime Residential

Underwriting services

Commercial Mortgages

Business acquisition focused services

Origination services Customer acquisition

Sub-prime Residential

Customer acquisition

Customer selection

Scale efficiency

Transaction accuracy

Data entry Account set-up Compliance checking Operational efficiency focused services

Mortgage services Maintenance and customer services Payment services

Scale efficiency

Default management Secondary market services Sale of loan portfolios Portfolio management Portfolio servicing

hance straight-though-processing and data access. l  Platform flexibility, compatibility, and improvements: the ability to integrate to legacy platforms, while adding functionality over time. To achieve these benefits, vendors are breaking apart the entire mortgage process lifecycle and re-architecting processes to deliver relevant benefits (see Exhibit 1). Mortgage BPO has been segmented by borrower type, with vendors specializing on one or a few borrower types. Service is migrating to network enabled, low-cost delivery. Key differentiation is moving away from borrower characteristics to process service features. To meet these market needs, vendors must be able to provide six key enablers: l  Consistent execution of processes: strengthening consumer protection regulations (resulting in fines and negative publicity) necessitates consistency of execution. l  Rapid adaptation to regulatory changes: incorporation of regulatory changes into operations as a tactical weapon, rather than a response. l  Access to country-specific operational experience: to support new market entry.

Transaction accuracy

Transaction accuracy Busines disposition focused services

Customer acquisition, efficiency, and accuracy are driving mortgage BPO

Lenders are trying to maintain volume through more effective customer acquisition (orgination) and/or portfolio acquisition (secondary market) Lenders are trying to reduce cost through scale efficiencies in the prime market increased accuracy where risks are higher or more concentrated

Transaction accuracy Scale efficiency

l  Support for secondary market activities: an increasingly important segment of the marketplace. l  Portfolio quality enhancement services: reduce portfolio defaults and manage default activity. l  Access to data: customer selection and default management in a deteriorating credit environment require superior information. These enablers are driving a change in the characteristics and nature of the vendors themselves. Vendors have traditionally provided services to highly localized geographies and specific mortgage types. Today, vendors are reaching out across country boundaries to buy regional vendors and product type specialists to incorporate them into a globally delivered, “industrially hardened”, set of service offerings to create the necessary enablers and benefits. Since the beginning of 2005, M&A activity driven by third party mortgage processors has spiked. At the same time, divestitures of mortgage processing operations by firms not committed to this marketplace as strategic to their business, has also spiked upward. These activities will ensure both consolidation and globalization for the industry over the next five years. Finally, everyone is considering off-

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Source: NelsonHall 2006

shore delivery of services. The offshore delivery market remains very small, at under 1% of total global mortgage service delivery. As cost pressure forces consideration of alternatives that promise aggressive cost reduction, the offshore market is poised for very strong growth over the next five years. Conclusion: A complex changing business environment makes BPO choices difficult, where process transformation is required. However, cost pressure and access to talent have made it imperative that customers increasingly engage with BPO providers to deliver those processes in a flexible manner. The BPO market will continue to grow for the foreseeable future because, overall, there are no credible alternatives. Mortgage BPO is a leading area for process transformation due to the confluence of several factors driving consideration and adoption of new service delivery methods. New vendors are entering the marketplace to deliver services adapted to the changing needs of this rapidly evolving industry. About the Author Andrew Efstathiou is the Director for NelsonHall’s Banking Benchmarking and Sourcing Program. Andy brings to NelsonHall 25 years experience in banking and financial services.

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Interview

‘It will be a big failure if all the companies focus just on cost advantage’ Atul Vashistha, CEO of neoIT, a leading management consultancy focused on offshore and global sourcing of services.

How can optimum balance be achieved keeping in mind the offshoring benefits (cost savings, risk, control, and quality)? Optimum balance can be achieved by evaluating the kind of cost savings the organization is looking for, the level of risk it’s willing to bear, the kind of control it desires, and the kind of quality that’s acceptable. When it balances, rather optimizes all those factors, the optimum balance is achieved. This is the reason why certain companies tend to go to the Philippines for their BPO operations many times as they look at a captive situation and attempt to balance the risk and control over quality and cost. Do these factors also play a critical role in vendor evaluation? Companies look at vendors while making decisions regarding the risk, control and quality. If we compare the IT industry with BPO industry, we see that there is much greater control and risk issue involved in BPO as the market is not as developed as the IT mar-

ket for certain processes. Hence, in the case of a company trying to optimize balance for BPO operations, it tends to put a lot more focus on the risk and control than what is required in the case of IT industry. What ideally should be the governance model to manage offshore projects in order to prevent failure? The mistake that most companies make is that they limit their governance just to project governance, while we recommend that companies should look at governance at three levels. l  Organizational Level. Look across the board: it’s almost like air traffic control, the best way to explain it. l  Functional Level. Here, the company needs to look across functions such as Financial, F&A, HR, IT, and more of the cluster. l  Operational Level. It’s the dayto-day governance and day-to-day management of projects. Governance becomes very effective particularly by use of different outsourcing or globalization models. Only outsourcing best practices 

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using a mix of third party, captive, different locations, project governance is not enough. A company can’t always get all the benefits if it’s not looking at organizational lines. Under operational governance, a company needs to look at five key areas: l  Performance. This is where service levels are looked at. l  Relationship Management. This is where a company looks at how good the relationship is, how well are they working together and how well are issues resolved. l  Resource Management. Here, the company needs to eye the core resources and development of resources. l  Contract l  Financial. We recommend when a company looks at operational governance, it should not just look at service levels. In fact, it should look at all five key areas as described. What, according to you, are the critical factors an organization should

interview address while planning to outsource/ offshore? (Cultural, political, and other risks involved). I would say that there are seven secrets/key factors to look at while offshoring/outsourcing. l  Embrace Globalization. Company embracing globalization should have sponsorship related to this--has the CEO bought on to this, where is the resistance in organization coming from, does sponsorship exist for this? l  Welcome It as a Transformation Lever. A company needs to evaluate why it’s agreeing to make this move. The reasons need to be clearly looked at and the company should try to find out if there is an agreement across the board and if the move is being looked at as a transformation lever. l  Take a Lifecycle Approach. Lifecycle approach means offshoring is not just about supply selections but also about understanding what should be offshored and then looking at the sourcing side as to which suppliers and what locations are right for you. l  Align Business and Globalization Objectives. A company needs to clearly align business and globalization objectives and make sure the business objectives that offshoring is going to accomplish for them are clearly defined. l  Assign the Best People. The best people should be assigned to the project. The best that fit can be trained, developed or selected, and assigned to launch and manage the program. Strong participation from CEO and C-level executives and attention and recognition by senior management is also required to lure the best talent. l  Implement a Strong Governance Model. l  Embrace a Continuous Improvement Mindset. Embracing a continuous improvement mindset as the process of outsourcing/offshoring is not easy and companies can make mistakes. The mindset that you need to continuously improve things and keep working on things is needed.

How would a continuous improve- when to outsource. Any company that ment model be inculcated in an en- takes on outsourcing or offshoring vironment wherein the whole service needs to recognize that it has to build methodology is being based on the maturity over a period of time before it premise of cost advantage? can do more complex things. It’s about It will be a big failure if all the com- sending work offshore as you and your panies focus just on cost supplier, or offshore opadvantage because cost eration reaches a certain savings mean nothing if level of maturity. “Wave quality isn’t accomplished. 1” is simple to outsource Success just doesn’t come and as you go up in with cost advantage. Even waves your complexity if it’s cost advantage that and scale of things are the company is looking changing. It’s very much at, the market is mature about what you are offenough now that one can shoring and how it stays get all the benefits. The over a period of time. It supplier-buyer relationalso enables offshore opship should be such that erations to reach higher you should together be levels of maturity and to working on improving be successful and build quality consistently rather confidence over a period Optimum than seeing what you are of time. balance can paying for the service. be achieved Will this Wave StratWe have seen transition- by evaluating egy be a suitable strating of a service-based egy/tool for companies the kind model to a productlooking at outsourcing of cost based model in today’s or offshoring? savings the BPO world. What are Whenever companies orgainzation are looking to develop a your thoughts on this? is looking Vendors are focusing roadmap, lay out a three for and level or five-year plan for how on outcome rather than just providing a service. I they are going to outof risk it is don’t see this as a transition source or offshore. It’s willing to but just as another level pretty important to be bear of service available in the able to select what they market. I just see this as an option. For are going to offshore and then being certain processes, the client infrastruc- able to put on a timeline to it. That’s ture is not being used. For most proc- what a wave strategy is. It focuses very esses that are very integrated with the much on not just what and when to do companies, e.g. Finance and Account- but also how to structure relations and ing, companies continue to use their value to mature in the perspective of own infrastructure. Companies have both onsite and offsite. That’s why it’s become more comfortable with out- called wave strategy because the work sourcing particularly offshoring--there goes offshore in waves. will be a rise in product-based model. Atul Vashistha is the CEO of neoIT, a I just call it a much bigger outsourcing leading management consultancy platform than purely just a process. focused on offshore and global sourcing What is the “Wave Strategy” defined by you in outsourcing perspective? Wave strategy is about time, i.e. outsourcing best practices 

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of services. He is a leading authority on globalization and outsourcing and was recently recognized by Consulting Magazine as one of the “Top 6 IT Power Brokers”.

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Finding Lost Value in offshore outsourcing Paul Thompson Senior Advisor, Metagyre Inc.

A funny thing happened to me on the way to my next high-tech consulting engagement. It was no longer where I left it, conveniently located down the road from the last company I supported. It seems that while I was focused on one client, an offshore company came in and moved my future client’s information technology (IT) work to another country and that made my job

much easier. Companies choose outsourcing strategies for a number of reasons and regardless of the country or outsourcing provider, every option has its own advantages, limitations and risks. When a company decides to outsource software development, IT services or business processes offshore it must accept that a major transformation will occur. This is the point when I often get called to advise companies on how outsourcing best practices 

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to better manage the activities they have sent offshore. Step one in working with clients engaged 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 performance 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 results 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 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 l  Operational improvements l  Average recovery times l  End-user satisfaction In the practical sense, managing an outsourcing arrangement comes down to the client-vendor relationship. Both parties need to consider and agree on how they will build trust, share risk, agree on accountability, and share success. There has to be continual conversations focused on reasonableness. How will success be demonstrated and compromise achieved without the burden of an overly taxing bureaucracy? Once the contractual issues are addressed, I face changing my client’s understanding of their outsourcing

bpo story responsibilities. Initially I concentrate my efforts on bringing together executive sponsorship from IT, HR, finance and other key business functions. These executives form the strategic guidance team which focuses on the outsourcing relationship. As you would expect, executive members set the tone for the offshore effort and its acceptance throughout the enterprise. The strategic guidance team will address existing performance issues, leverage new offshore services across the enterprise, and drive future outsourcing toward a shared riskreward partnership. Offshore governance is a discipline. It takes more than a good offshore provider to have a positive outcome. The client’s offshore governance program is responsible for commissioning, accepting, managing and facilitating offshore processes and projects throughout their enterprise. It is important to recognize that this governance is an evolving body of offshore and project management knowledge coupled with the appropriate tools. To facilitate the governance role, I work with clients to set up a number of processes and tools covering operational issue management, training, project management methodology, process tools and support as well as human resource management. One often overlooked bonus of working with an offshore provider is the opportunity to learn about a new culture first-hand. Culture influences all aspects of our lives. Everything from the work ethics that drive business to courtship and marriage are affected by culture. As a result, undocumented assumptions can easily lead to costly mistakes. Working with the governance board, I help them to reduce this risk by building their processes and tools to include cultural influences and ensuring that this knowledge is disseminated into all projects. When both my client and their providers understand all the cultural influences, they will begin to trust in the process and each other. Without this trust it is impossible to

have a truly successful relationship. In any business, major organizational change cannot possibly be trouble-free and all major changes are in some part a discovery process. Since the governance program addresses the organizational change, I find it essential that my client fill the governance program director’s position with an individual who is influential throughout the enterprise. One of the most common mistakes is to have individuals in crucial roles that are not suited to partnering. Most often interpersonal skills are more critical than technical understanding. As I move my client’s focus down to day-to-day activities, we concentrate on the project management processes needed to ensure timely delivery, quality assurance, budget adherence and scope management. Management by walking around is no longer an option. It is replaced by focusing on the planning, controlling, management and close-down phases of individual projects. The processes defined by the governance program together with project management training address the complexities of communication and management. The tools at the heart of the executing phase involve improving communication. The growth of network technologies has made it easier to share documents and communicate directly with individuals around the world. This is one area in which technology has provided advancements for offshore projects. Some of the tools available today include group-ware and collaboration applications, email, Internet chat, voice over IP and wireless communication. These same tools which provide improved communication can also

lead to problems if not kept in check. For example: emailing requirement changes between staff may seem quick and effective but can leave projects at risk for scope creep and cost overruns when configuration management and change control procedures are not followed. I work with my clients to keep project communication appropriate for the task and the overall project goals in mind when we build and execute the project’s plan. Often the required communication includes daily turnover logs, status reviews, issue documentation and review, change control, query resolution logs, quality gates and, yes, even the occasional face to face team building. By the time I complete my client assignment, managers are running their projects by tracking progress of deliverables, defects, risk reserves, overtime hours, staff turnover, quality gate evaluations and earned value measures. By bringing all this information together in a dash board style presentation, clients at all levels see the information that supports their area of responsibility. At the beginning my client thought their role was mostly administrative and had no experience with offshore. Now when I look around at their organization, I see that project management is a core competency, service level agreements support their needs, relationship management is practiced with all providers and there is a solid governance program which extends over all IT and business processes regardless of their location. What was once trail and error is now a sound common sense solution generating high returns and delivering positive transformations. Now if I can just remember where I left my keys…

About the Author Paul Thompson is a Senior Advisor with Metagyre Inc. (www.metagyre.com) a company that provides assessment advise and management services for companies choosing to outsource. Metagyre assists client’s in finding and managing the right vendors to outsource business processes, software development and infrastructure modernization efforts. For a free copy of Metagyre’s insights on vendor partnering, go to www.metagyre.com/ newsLetter/articles/feature_article_61.html

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Outsourcing:

Inside Out and Outside In “Experience is a hard teacher because she gives the test first, the lesson afterwards,” (Anonymous).

Anupam Govil Founder & CEO, Global Equations

Outsourcing as a discipline has evolved rapidly over the last five years. Several major universities now conduct courses as part of their Management Program that teach professionals on managing outsourcing business and aligning outsourcing strategy with organizational growth objectives. However, today there is a plethora of choices available to outsourcing decision makers, making the task far more complex than ever before. Besides requiring financial and operational number crunching and analysis, a typical initiative also needs a fair amount of judgmental and experiential acumen. And often, experience isn’t enough, because of fast changes in the outsourcing landscape. The list of considerations in a typical decision matrix continues to grow: l  What processes to outsource?

l  What is the optimum outsourcing model? l  Whether to go offshore and, if so, what is the right blend between onshore and offshore? l  How to time the transitioning phase to avoid an adverse impact on balance sheets (especially for public companies)? l  To go multi-vendor (best of breed) or single vendor (economies of scale)? Which is the ideal engagement model? l  And the list continues … To make the task even more complicated, the ramifications of these decisions go beyond the immediate core group that is affected, necessitating involvement of different functional divisions within the organization-- IT, Operations, HR, Financial, Marketing, Sales, and so on. No wonder that more and more corporations have been staffing up their outsourcing team with

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multi-faceted management talent and re-christening it as the “Global Sourcing Group (GSP)”. One of the main benefits of a centralized GSP is that it can de-couple the task of decision-making from various functional divisions such as IT, Operations, HR and Finance. Not only does this group take a more dispassionate and objective view of various cross-organizational processes that can be outsourced, but it also strives to develop a new chemistry with outsourcing service providers. However, this requires a different thought process and management discipline to strategize, plan, and implement major outsourcing initiatives. One of the outcomes of this approach is that Outsourcing Partners (OPs) can now be considered as a virtual extension of your organization-responsible not only for achieving measurable results but also for creating incremental business value. This is a significant shift from the traditionally adversarial approach of maximizing cost savings by “beating down” the vendor for the lowest possible quote. Structuring contracts, negotiating pricing, and defining Service Level Agreements (SLAs) now have a different objective. But how can an outside vendor inherit client processes, perform them at a better SLA, lower transactional costs, and create business value? The solution is through an intelligent blend of different levers such as leveraging better process management practices, employing automation methods, dislocation of service delivery to a lower cost location, and replication of domain expertise. It’s when some of these levers are not utilized adequately that things start to go wrong and an outsourcing initiative falls apart. Recently, we have seen some reports from Gartner that outsourcing is not delivering the desired results and that the customers aren’t realizing cost saving! What’s apparent from this analysis is that many organizations are not able to capture the true cost of executing processes in-house. Hence, it’s difficult

bpo story for them to estimate cost savings accurately. Most outsourcing initiatives fail not because of mess-ups by either party, but because of misalignment of goals and outcomes. In order to win the contract, based on lowest cost model, the service provider over-promises but cannot deliver the service profitably and thereby has to cut corners. More often than not, the company that is outsourcing fails to calibrate the savings properly or underestimates the amount of management bandwidth needed to govern the initiative. The result is dissatisfaction and discord, leading to breakdown of the outsourcing relationship. To achieve success, an organization’s outsourcing decisions have to be rooted in ground reality and based on engendering a symbiotic relationship with the outsourcing vendor. Considering outsourcing vendors as partners or collaborators--with the same goals as the customer--is the key. This requires structuring contracts and setting SLAs that impart equal emphasis on the business value derived from “sharing” process ownership versus lowering costs. Two trends that reflect this shift in outsourcing philosophy are: The Emergence of Gain Sharing as a Pricing Mechanism Here, the presumption is that there will be additional cost-savings achieved through business process optimization and that the customer will be willing to internalize those savings and share it there forth with the vendor. Giving an outsourcing provider a financial stake in the business for which it provides services is an incentive that can work well, yet few companies use this practice. The main reason for this is that most firms do not always trust the provider’s ability to affect businesscritical processes and it’s often difficult to come up with appropriate metrics to measure such efforts. However, mature buyers catalyzed by progressive vendors have begun to look at gain sharing as a way to developing that elusive win-win

combination. can executives rise above this noise The Decline in Mega-outsourcing and make the right decision? It’s best Deals addressed by Peter Drucker who had According to Gartner, the number a slightly different take on the rationof outsourcing mega deals has declined ale and objectives of outsourcing than in the recent years as companies are now Jack Welch. According to Drucker, opting for multi-sourcing options. In “Most look at outsourcing from the fact, some previously inked mega deals point of view of cutting costs, which are being broken down into multi- I think is a delusion. What outsourcsourcing arrangements ing does is greatly imMost to take advantage of prove the quality of best-of-breed skills. the people who still outsourcing This clearly indicates work for you. I believe initiatives fail a move towards speyou should outsource not because of everything for which cialized BPO players that understand an inthere is no career track mess-ups by dustry’s organizational that could lead into either party, and process dynamics, senior management.” but because of Hence even the most and enables successful embedding within the misalignment core task--assessing risk client organization. It for an Insurance underof goals and doesn’t necessarily ring writer--could be a canoutcomes. In the death knell for the didate for outsourcing large outsourcing firms if it leads up a dead-end order to win since they still get a macareer path. Eventually, the contract, jor chunk of these multhis ties to how each orti-sourcing deals, but based on lowest ganization views itself it certainly augurs well cost model, the and its long-term goals. for small to mid-sized improvement service provider Using BPO firms that believe of work quality of its over-promises. employees--as a factorin process expertise in certain verticals versus -may be a contrary way broad-based service offerings. These of making critical outsourcing decifirms also have the ability to be end-to- sions. However, in the long run, that end service providers, enabling custom- is what separates the Good from the ers to outsource the entire value chain Great. rather than discrete tasks. Hence, it’s More importantly, this does bring likely that services such as Insurance into question the use of the classiand Mortgage Processing will be domi- cal core versus non-core distinction nated by verticalized business service for identifying processes that can be providers rather than the outsourcing outsourced. The need of the hour is a behemoths. more holistic approach that balances Rapidly evolving practices within internal organizational dynamics with the outsourcing domain and contra- external desirable outcomes and a perdictory advice (it’s often happening) spective that transcends the traditional in the market have created a profusion buyer versus seller roles. To summarize: of choices as well as confusion. How inside is out and outside is in. About the Author Anupam Govil is the Founder and CEO of Global Equations, an Offshore Advisory firm. He has 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 Enhanced Capital Partners and Texas Global LLP.

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Leader’s Room

Every boss ain’t as lucky as me!

The Laws of Behavior

A Global Leaders’ Secret Weapon

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

Aubrey C. Daniels World’s Leading Authority on Behavioral Science

When organizations begin to work globally, they are often overwhelmed by the apparent challenges—new country, new language, different customs, and more. However, these obvious differences often distract leaders from the task at hand—to produce an efficient and effective product or service at a profit. “We’re Different” For as long as I have been consulting with businesses, over 40 years, I have heard people say, “We’re different.” When telling someone in the North about a successful engagement in the South, they would immediately say that they were different from people in the South. Regardless of whether it was one southern bank talking about success to another southern bank, one office or bank in the same company, or one department of the bank to an-

other, they would all describe themselves by saying, “We’re different.” And you know what? They are right! Every supervisor and manager creates a work culture that is different from every other one in the organization. So it should not be surprising that when we travel sometimes several thousand miles that people would be substantially different. Unfortunately, too many managers and executives focus on the differences rather than the similarities. Although the obvious characteristics are different in that we look different, talk different, and act different, under the skin we are all pretty much the same. If I were to go to the emergency room in China they would not need to know where I was from to locate my heart. They would not need to look up the average body temperature of citizens of the US. As a outsourcing best practices 

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Leader’s Room matter of fact, although my brain may be smaller than some and veins and arteries that feed it may be in slightly different places from others, my occipital lobe would be in the same place in my skull as those in China. To manage cross-culturally, leaders need to acquire a secret weapon that is universal, one that translates in a global environment; something that will undeniably work no matter the setting or circumstances. That secret weapon is a practical understanding of the laws of behavior. No, We Are All the Same As it applies to business and in life, one way we are all the same is that we all follow the same laws of behavior. If that were not so, they would not be laws. I have a friend that calls me from time to time to check to see if the laws of behavior are still on. Of course, I laugh and tell him that they are still operating like they always have been and always will. Whether in China, India, England, and Pakistan, all people obey the laws of behavior. When day turns to night, people in all countries look for electricity or fire to light their way. It is pre-ordained. We can’t escape them any more than we can choose to exempt ourselves from the laws of nature. One may say

that he doesn’t believe in gravity, but he will still fall if he walks off a roof. On visiting Saudi Arabia, we don’t need to ask, “If people run long distances here, do they get hot and sweaty?” By knowing the laws of nature, we can operate in different environments and know certain ways to respond to them even without asking. If the laws of nature are helpful in dealing with differences in the physical environment, might the laws of behavior be helpful in dealing with differences in a global economy? The answer is, of course, yes. I have worked with people in more than 20 different countries to use the laws of human behavior to improve the performance of their organizations. In each instance, they successfully solved problems related to performance, quality, cost, morale, and safety.

cally reinforced and which are typically punished. l  To discover what things and actions act as reinforcers and punishers. Although these two characteristics may require some time to understand fully, knowing how to identify them gives leaders a distinct advantage over those who see a culture as something that requires a complex analysis of a society, its history, and the subtleties of its language and economic and political systems. Not that these are unimportant over the long term, because they can provide information on the culture’s contingencies of reinforcement and punishment, but they are not necessary to get to work. If you, as a leader, do only one thing, it should be to fully understand the power of positive reinforcement and how to put it to good use.

How Culture Fits with the Laws of Behavior A culture is nothing more than the characteristic or typical ways that a group of persons behave. These characteristic ways of behaving come about by patterns of reinforcement and punishment. Understanding a culture requires: l  To map which behaviors are typi-

What Is a Positive Reinforcer? Technically speaking, a positive reinforcer is any consequence that follows a behavior that increases its frequency. By this definition, an atta-boy, a warm fuzzy or a pat-on-the-back are not positive reinforcers unless they increase the behavior that they follow. Yelling and screaming at someone may be a positive reinforcer if it increases the frequency of the behavior that generated 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 doing. 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 reinforcement create more problems than they solve. Banks and financial institutions tend to use what they know as reinforcers—money and tangible objects and rewards. While tangible rewards

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Leader’s Room certainly have their place, they are woefully inadequate to bring out the best in people because they fall short on the critical aspects of reinforcement that maximize behavior or performance. There are four considerations or rules for the efficient and effective delivery of positive reinforcement, no matter where in the world you use them: Make it personal. To be effective, the reinforcer must be meaningful to the receiver. Some people hate to be recognized for anything in public, but many like it. Find out what is meaningful to the individual. Make it immediate. The longer you wait to reinforce desired behavior, the less effective it will be. Catch and positively reinforce people in the act of doing what you want, and you’ll always get better results. Make it frequent. One positive reinforcer will not make a habit. In some athletic performances, it takes hundreds of positive reinforcers to get to peak performance. At work, there are a great many behaviors that require the same level of reinforcement. We have been asked many times, “Can you reinforce too much?” If you do it wrong, one time is too much. If you do it correctly, don’t worry about it. After all, does a golfer ever tire of being told “Good shot?” People almost never complain of too much reinforcement. They frequently complain of too little. Make it earned. Indiscriminate praise is a very bad practice. Bad for the person receiving the praise and for the person giving it. Benjamin Franklin recognized this when he wrote, “Praise all and blame all are two blockheads.” People respect most what they earn, and they respect leaders who deliver reinforcement contingent on some accomplishment. Leaders who reinforce the good, the bad, and the ugly alike are weak leaders who do not have the respect of the followers. As you can see, money is an effective reinforcer when you follow the rules above. The problem is that when using money, it is difficult to follow

the rules. Money cannot be given frequently in most organizations. Money is most effectively used as a back-up to social reinforcers. A social reinforcer can be any interaction that lets the performer know that he is liked, valued or appreciated through some action other than money or the things that money can buy. Examples include getting the people to tell you how they were able to accomplish a difficult task, asking their permission to share their ideas and work practices with others, visiting them in their work space rather than in your office and having a conversation about how things are going in their lives. Of course, smiles, waves, thumbs-up and other non-verbal ways of communicating your pleasure with employees’ performance can never be over-done and are almost always appreciated and motivational. In some cultures, physical gestures such as thumbs-up may have different meanings. While it is generally positively received in our culture, it is not in all. We discovered that in certain work settings, calling people by their first name was not a reinforcer as it typically is in the US. Physically patting someone on the back also may not go over well in many workplaces. Why Positive Reinforcement? Positive reinforcement is the most powerful interpersonal tool known. It is true around the world. Although there is a time and place for negative consequences for behavior, the only way you ever get a group of people to work at consistently high levels is with positive reinforcement. While there are obvious interpersonal benefits in terms of teamwork and general work atmos-

phere, from a financial perspective it is the only behavioral consequence that captures the highest value for both the person and the organization. Knowing the importance and impact of positive reinforcement on the performance of an organization, the first thing you should do when going to another country to work is to establish yourself as a positive reinforcer. That is, someone people want to please and to be around. Employees seek out these people for their opinions and advice, and most importantly, they give these people their best effort. The way you become a reinforcer in a new culture is to let employees teach you something. Ask questions that would let the employees demonstrate their knowledge and experience. Give them a socially acceptable way to tell you how industrious and clever they are. Once you’ve shown interest in their accomplishments and that you value them, they will almost always reciprocate by giving you their best. When you know positive reinforcement as a scientific concept, rather than a common sense one, differences are a way to create hybrid vigor in an organization and in your own life. You will see differences not as a barrier but as something to celebrate. Too many organizations inadvertently reinforce behavior they want less of and punish behavior that they want more of. When you know the laws of behavior, you are less likely to make these mistakes and more likely to create a strong partnership that is positively reinforcing to all. As the French say, “Vive la difference.” This so-called secret weapon is really not so secret to those who understand and can apply the laws of behavior.

About the Author Aubrey C. Daniels, Founder and Chairman of Aubrey Daniels International (ADI), is the world’s leading authority on behavioral science in the workplace. He is the author of three best-selling books including, Bringing Out the Best in People (McGraw-Hill), and his latest release, Measure of a Leader, which lays out a powerful new vision for defining effective leadership by examining the behavior of followers. 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.

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Leader’s Room

The View from a Cubicle:

An Interview with Scott Adams

Scott Adams, Creator of Dilbert Leader to Leader, No. 13 Summer 1999 Reprinted with permission of John Wiley & Sons, Inc.

ONE of the most influential management observers of the 1990s works from a simple home office in Danville, California. He spent nine years working in a cubicle office at Pacific Bell. But Scott Adams reaches 1.5 million people every day and his Dilbert comic strip, books, and TV show shine a harsh, silly, and often deadly accurate light on today’s workplace. He spoke recently with Leader to Leader editors Paul Cohen and Alan Shrader about his views of management, management gurus, and his own work practices. Leader to Leader: Scott, in a world full of management gurus, you may be the first anti-management guru. Do you see yourself as kind of an antidote to gurus? Should young peo-

ple read your work as an inoculation against all that they will encounter in the workplace? Scott Adams: I never think of myself as against gurus. The thing I’m shooting for is a point of view. I’m giving you the employee-in-the-cubicle point of view. That’s very distinct from what a lot of consultants and gurus do. Usually they drop in by parachute, talk to the executives and go away having no idea what the employees are thinking. Sometimes it doesn’t matter. Sometimes you’re shoving something down people’s throats and all you want is higher stock price. Getting touchyfeely with employees may be counterproductive to your mission. I’m not trying to present solutions. But to the extent that it’s useful to show what things are silly or objectionable or just annoying from the employee’s point of view, that can translate to some benefits if somebody chooses to outsourcing best practices 

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use it that way. It would be interesting to have a new employee handbook that was just Dilbert cartoons; that would certainly tell you what you were getting into—but it’s not my goal. L2L: It seems that at least one speaker at every management conference uses a Dilbert cartoon to illustrate a point. So senior managers, not only cubicle workers, seem to appreciate your point of view. If that’s the case, why does the absurdity persist? SA: Often absurdity is more desirable 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, perhaps that would hurt your stock price or morale. But, having said that, I went out to support the notion of casual Friday because it’s 20 percent better than not having it at all. So here you have a clear example of absurdity—one day that casual is OK—being better than the non-absurd alternative, all casual or all noncasual. So absurdity is often the comfortable compromise. That is just an oddity of the world. L2L: What is the most absurd practice that you’ve seen in businesses? SA: There are few things that top cubicles. If you know the history of the cubicle—the original idea, just over 30 years ago, was that everyone has different requirements for desk space and storage space. So if you build an environment that was modular, then everyone could pick and choose the components that were appropriate for their function. But when big companies saw it, they said “You know, if we made them all exactly the same, these should be really cheap.” So the myth put forward is that this will help communication and allow the free flow of knowledge, when in fact it’s just cheap-

Leader’s Room er. Nobody’s fooled by the myth. But telling people, “We’re saving a lot of money, so just get in your little box,” wouldn’t work. Again, it’s more comfortable to compromise on the absurd. L2L: Others call it living with para-

dox.

SA: Yes. The Dilbert Principle, in my book of the same name, is another example: “The most ineffective workers are systematically moved to the place where they can do the least damage—management.” That wasn’t just a comic exaggeration; I was actually observing that the least skilled people were being promoted specifically so that you didn’t waste your skilled people in those jobs. And nothing could be more absurd than putting the least competent people in a job that has leverage on everybody’s results. L2L: You treat bosses harshly in your work. Is there something about being in a position of authority in an organization that brings out the worst in people? SA: In Dilbert’s world, the technical world, where Dilbert is an MIT graduate with double 800s on the SAT’s, there are things that he sees as obvious that his boss is not going to see. But it has always amused me that you can go anywhere and the guy in the John Deere hat will get off the tractor and tell you why NAFTA won’t work and why trade policy needs to be different. And he won’t say, “It’s bad for me personally.” He’ll give you supply side economics and political theory. Everyone believes that they’re smarter than the people in charge. But usually that’s because they have less information. Every decision the boss makes may not appear to make perfect sense. But isn’t it possible he knows something we don’t? L2L: But isn’t that also a convenient dodge? “If you only knew what I knew.” Or, “You don’t have the whole picture.” SA: But then bosses can’t say that

because they’ll be picked to death: “Are you saying there’s going to be a reorganization? Is there a merger? I better stop working.” Nothing is more damaging than the usual “what have you heard” rumor mongering. That’s the kiss of death for productivity. L2L: Did you ever have a good boss? And if so, what did that person do? SA: People are surprised to hear that I had more good bosses than not. And the Dilbert world is every bad experience that I ever had with maybe 30 different bosses, plus experiences collected from others. For example, the boss who said, “My job is to give you what you need to do your job.” We’d say, “We really need to create a budget. Can we talk to you next week?” And he’d be out for the next month, literally. He was completely unavailable to do the thing which he was just telling us was his only job. Otherwise, he was a great guy and smart and had lots of good things going for him. L2L: Have you ever had to manage others ? And if so, what did you learn from that? SA: I was a bank supervisor and although I did not have my own office then, I had a taller Almost cubicle. That’s what never will you got. It was very a manager special. I had—at the admit, “I am peak—nine people terrible at working for me. And managing.” they of course all had completely different requirements. I tried to treat them differently. My rule number 1 for bossdom is that you have to craft it to the specific person in that specific job. But that means that basically you’re doomed if you have a group of even three people. You will be inconsistent—treating some people harshly and others with encouragement. I try to avoid being in that position. The other thing I learned is that during that time I actually thought I was a good manager. Everyone I meet thinks outsourcing best practices 

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they are good managers, too. Almost never will you meet a manager who says, “You know, I have to admit, I really am terrible at managing. Everybody hates me and I’m incompetent.” No one says it because I think people don’t believe it. And over time, I’ve come to grips with the fact that I probably was a bad manager, or certainly bad in some ways that were completely invisible to me, just as everyone else’s faults are invisible to them. Some of the magic of managing is to somehow not see how you’re destroying people’s productivity. L2L: How does a manager get a sense of what’s really going on in the organization or with customers? SA: The way I’ve seen it done is with spies. And what that usually means is befriending specific employees in key places who are at lower levels. Their incentive is they want to suck up to somebody who is in power, and your incentive is you want somebody who will actually tell you what people are saying. Of course, all information is imperfect but the spy method is the only one I’ve seen that is reliable. Even now, with no employees, I get filtered information. Every problem that I’ve ever heard about—from licensing to anything else—somebody out there was willing to tell me anonymously by e-mail. It’s a pretty wonderful system. L2L: You have noted that it’s very hard to assess performance in most organizations. How would you handle performance assessment? SA: You want to avoid any situation in which your success depends on motivating someone who can’t be measured. You can’t win that game. But I find that when people have contracts, they perform, because they treat you like a customer. There’s an immediate, specific reason that they want you to be delighted with their work. But as soon as people become an employee, they feel like they’re a kid in the family and you can’t really disown them that easily. There’s a process and paperwork

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Leader’s Room and you don’t want to feel you made the wrong decision to hire them in the first place. You’re stuck. L2L: You’re saying don’t be a boss— be a customer. SA: Yes. And ultimately, put yourself in a position where you can assess by outcomes. But don’t try to put objective meas- “Don’t be ures on something that a boss, can’t be quantified. I al...be a ways told my employ- customer” ees that performance reviews didn’t matter too much and that what mattered is whether they were getting better and were learning stuff. L2L: You’ve said that most employee recognition and motivation efforts are degrading—pointing out, for instance, that senior managers don’t get employee recognition. How should you recognize and acknowledge effort? SA: I’ll speak only as an employee who has been on the receiving end. What has worked for me is that somebody let the people I worked with know that I did a good job. Pure ego gratification. But the employee of the week thing—there was a case recently where the employees were mad because the only person who ever got the employee of the week was the top performer. That seemed so unfair. So management actually caved and started giving it out on a “fairer” basis—everybody got to be employee of the week. L2L: In your ideal company, described in “The Dilbert Principle,” managers try to keep employees happy, not humiliate them, allow them to be productive, and let them leave at 5:00. Why is that so difficult for organizations? SA: It’s difficult mostly because you don’t get to choose your employees. Often, you’re the manager who comes in and you inherit a group and they’re already disgruntled. All positive models of work depend on having people who want to be there and feel there’s some

reason to be working. Part of the problem also is that so many people have jobs where what they produce is invisible: I drafted a contact today. I improved how my biggest customer thinks about us—which is real, but you just can’t see it. So, you look for the stuff you can see—how long people are in the office and what they’re wearing. You default to that because it’s visible. L2L: Have you found any leadership training approaches that have value? SA: The only things that I think work are where people are doing the actual job, where they get shared experience and enjoy some success as a team. But taking them out and making them hang from ropes and trees—I once experienced a trust exercise where my partner jumped out of the way and let me fall on my butt, because she thought that I looked too heavy. I’m 5’8”, and she outweighed me. I also was in a problem-solving exercise where you had to get from one place to another by putting planks from some tree stump-like things to other tree stump things and then collect all the planks and get all your people to the other side. And I had a boss who ignored what everyone was saying and insisted on doing it his own way. It ended with all of us on the other side and him on a plank out in the middle. It was everything I needed to know— everything discouraging about where I worked. It was the clearest signal that we were doomed as a group. L2L: You suggest that, outside of

sports, teamwork is dangerous. How do you think people should organize complex work that requires multiple types of expertise? SA: I’m learning how they do stuff in Hollywood. Everything there is a virtual business. If you shoot a pilot episode, everybody’s a free agent. You find your director, your writers, you put the thing together, a few people look at it—and then it dies, usually. Nineteen out of 20 outsourcing best practices 

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pilots are never shown. So you disband and then some other group collects. It’s a different model than anything you see in corporate America. If you’re making a toothpaste in corporate America and it’s not exactly right the first time, you do your focus group—keep working on it. In Hollywood you throw it away, and all the people instantly. And they don’t ever work together again except in ones and twos. L2L: In Dilbert’s world, the marketing department is always the enemy. Why? When you put engineers and marketing people in the same room, it just doesn’t work. SA: Things happen based on how you’re trained. Economics people can talk to engineering people because you’re So when you put always looking for the engineers cheapest, easiest, simand plest, most elegant somarketing lution. You’re looking at complexity and try- people in ing to simplify. Mar- the same room, keting people are tryit just ing to hide reality. doesn’t They’re trying to take, work. for example, long distance telephone service, which is exactly the same no matter who you buy it from, and convince people that one is better. All of your instincts as an engineer are to be logical and simple and reliable—and in marketing, everything is to take what is clear and make it unclear. L2L: How have you approached the marketing of your ideas and products? SA: If you look at my cartoon work, what was missing was, I didn’t know what people liked or didn’t. So I put my e-mail address in the strip and did what any business person does—I opened a channel to the customer. A standard business practice, but never had been done because artists don’t use standard business practices. And it worked, because standard business practice is

Leader’s Room standard because it usually works, at least when it comes to stuff like listening to the customer. The other thing that I’m a maniac about is to limit what I’m involved with—whether it’s the TV show or licensing the cartoon or the Webs ite or whatever—to the creative part, which is the part I know. I don’t try to program the Web or to be a director or editor or sound guy on the show. L2L: Information overload and competing priorities are huge frustrations for managers. You get hundreds of e-mails a day, and you have to meet daily deadlines. How do you manage your time and your creative process? SA: I tend to be really good at time management. This is also the business part, the hard wiring of the brain. It turns out that when you get massive amounts of e-mail it all falls into about 20 different types of comments, and the speed at which you can read them is phenomenal. Also, I’ve got software that searches for keywords so it picks out messages I know I have to deal with at a higher level of priority. Let me give you a few other tips. I don’t answer the phone before 10 A.M. And I do most of my creative work from about 7 to 10. That’s the great thing about working at home: no one can drop in to my cubicle. If I don’t answer my phone, I am unreachable. I had a pager for a while—got rid of it. And when you have control over your own schedule, you can do busywork types of things when your mind can only do those things and do creative things when you’re at your peak. I just don’t ever mix those. L2L: Do you have heroes, people you admire or look to for inspiration? SA: Yes. Lately I’ve been reading about great geniuses through time, like Isaac Newton and Richard Feynman. I also like Bill Gates. Maybe the fact that he’s so demonized appeals to me on some level. But the thing I can’t escape—this is the economist part of my hardwiring—is to compare Bill Gates to Mother Teresa. Now, on the surface, it’s hahahahaha—

he’s evil, she’s good. End of story. Mother Teresa worked her whole life with lepers, and she left a great legacy. Bill Gates wrote one check for $100 million dollars to give vaccinations to children. He helped a thousand times more people than Mother Teresa, and he did it in the time it took to write a check. You can argue about specific tactics or things that Microsoft has done or not done. But for the most part, Gates has really big goals and he works on them very diligently and—this is the interesting part—he works on them like a scientist. He doesn’t work on them like a Mother Teresa. He’s not the marketing guy, he’s the problem solver, he’s the game winner. If his wealth doubles every 10 years, he could become the first trillionaire! And he says he wants to give it away. Let’s say he does, and he does it the same way he gave away the first little bit: he picked something the government just wasn’t going to do. It had immediate, amazing lifesaving impact. Did 10 million people live because he wrote that check? Possibly. So he is picking out those places where only he can make a difference and have longterm benefits and are not just washing the feet of a leper. That’s a holy thing to do, but when you’re done, all you have is a leper with clean feet. I know it’s a totally unpopular point of view, but you can’t escape the math of it. L2L: You’re not far from the point in your career where a lot of successful entrepreneurs start thinking about their legacy—what they want to do for others. Do you have any such plans? SA: I do, yes. I just created a company that makes a nutritious food item called the “Dilberito”. It’s a microwaveable burrito with 100 percent of your 23 daily vitamin and mineral needs. On the surface, this doesn’t sound

like a big deal. But the biggest cause of illness and death in the United States is poor diet. That means the single biggest opportunity to improve health is by improving diet. I assumed, as most people do, that if you eat “right” you get most of what your body needs. But check the nutrition labels on your food. You could eat a wheelbarrow full of food before you got your vitamin and mineral requirements. I’d call what I’m doing enlightened capitalism. I’m investing in a nutrition product—as opposed to making a new kind of hubcap—because improved nutrition will make life on earth better. I chose capitalism as I can’t make my engine because the clear it’s self-sustaining distinctions and relatively effibetween cient. And it’s somecharity and thing I’m good at. capitalism My economics trainthat most ing doesn’t allow me people do. to make the clean distinctions between charity and capitalism that most people do. In any case, I plan to rid myself of whatever wealth I’ve created before I die, so in my case the only differences between capitalism and philanthropy are timing and effectiveness. L2L: Scott, we started by talking about gurus, so let’s finish with this. Some people view you as a kind of spokesman for our times. What do you make of the impact that your work has had on others? SA: I’ve never been comfortable with the “spokesman” label. I think Dilbert’s impact has less to do with what it says than what it hears. I sense a collective relief from Dilbert readers that their unspoken frustrations have been heard. Sometimes people just need to know someone is listening.

About the Author Scott Adams is the creator of Dilbert, which appears in 1,900 newspapers around the world, and author of four bestselling books, including The Dilbert Principle, which has sold 1.5 million copies since 1996. His publications, prime-time TV show, Web site, and 700 licensed products have made Adams the head of a virtual company with an estimated $200 million in annual revenues.

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Leader’s Room

Why Leaders Should Reconsider Their Measurement Systems Michael Hammer, Management Guru and Author Leader to Leader, No. 24 Spring 2002 Reprinted with permission of John Wiley & Sons, Inc.

THE chaotic state of contemporary measurement was impressed upon me when I attended a senior executive meeting of a major electronics company, at which the company’s leaders were carefully reviewing their dozen or so key performance measures. The executives meticulously examined a list of measures that was notable for its breadth: customer satisfaction, sales closure ratio, market share, order fulfillment time, employee satisfaction, working capital, service cost per customer, customer retention, new product break-even time, revenue per employee, and return on equity. Some of these numbers described overall company objectives (return on equity and market share), some were operational metrics (service cost per customer and order fulfillment time), some were miscellaneous items (employee satisfaction and customer retention). But what was most enlightening about the meeting and the list of measures was that the executives around

the conference table had no idea what could be done to improve any of these numbers. If the numbers were good they would smile. If the numbers were bad they would click their tongues and make a careful note that something would definitely have to be done to improve that measure by the next executive meeting. Then they would move on to the next item. The measurement system did not connect the numbers to each other in a meaningful way or Most provide executives with any guidance measurement as to how to im- systems were not designed prove them. for leaders. This should not surprise us. After all, most measurement systems were designed not for leaders but for accountants so that companies could report their financial results to shareholders and tax authorities. These systems were then inappropriately pressed into service to support management decision making, where for the most part they are useless. When you see that costs are high, sales are low, and profit is falling, you know that action is necessary, but you do not outsourcing best practices 

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know what kind. Or, to cite an oft-used cliché, “Using financial measures to manage your company is like driving while looking into the rearview mirror.” In simpler times, the dynamics of business were easier to comprehend. When a measurement indicated trouble, leaders intuitively knew what to do. Before the advent of the customer economy, they didn’t need sophisticated measurement systems and, for the most part, they could get by with only the most basic financial information. In a world of placid customers and genteel competition, performance was a low priority. Higher costs could be passed along, dissatisfied customers could be safely ignored, and innovation was optional. Businesses were less complex. Customer demands were more narrowly focused, product lines were thinner, and the technologies of manufacturing were less intricate. The size and scale of most operations were a fraction of what they are today. Intuition and relatively simple interventions worked. If sales were down, managers could push their regional sales reps to push their sales reps harder; they could raise or lower prices, or they could fire all the sales manag-

Leader’s Room ers. Those were the choices. With such limited options for treatment, there was little need for elaborate diagnosis. The analytics associated with sophisticated measurement were overkill. But now the age of intuition is over. Businesses are so complex and change so rapidly that a gut feel for what is important is extraordinarily difficult to develop and impossible The age of to maintain. There is intuition is relentless pressure to over. improve performance and to do so immediately. It is not obvious what steps are necessary to achieve the required improvements. An organization’s measurement system should be able to reveal the sources of performance inadequacies. Yet few measurement systems do so. As businesses became more complex and harder to understand, many companies responded by grafting nonfinancial elements onto their existing financial measurement systems. These systems developed as department managers were called upon to improve the performance of their various domains. To this end, managers invented measures to track how their people were doing; they measured cost, accuracy, speed, and productivity, often using dozens of variables. They compiled these statistics with the unarticulated belief that if their employees performed well according to them, then the company as a whole would achieve its overall objectives. This was an idle hope—no connection was ever made between the items being measured and the company’s objectives. Instead, what was created was a measurement monster, a vast outpouring of data that was of little use to anyone and therefore ignored by almost everyone. Companies need a new approach to measurement, one that begins with the recognition that measurement is now an essential part of managing. A Talmudic dictum teaches, “Study is not the essence, but action.” Similarly, measurement is not the essence, but improvement. The purpose of measurement is

not to know how a business is performing but to enable it to perform better. To this end, a contemporary measurement system must have two basic features. First, all data must include a rationale and a purpose; people must know why things are measured and, more important, what they are supposed to do about them. Second, all measurement must be based on a careful analysis of the business, one that links the objectives of the business to the things over which managers and front-line personnel have control. Only then can the recognition of a problematic measure lead to the right actions that will correct it and to improved performance of the business as a whole. The old saw “Be careful what you wish for, you may get it!” has a business version: “Be careful what you measure, you may get it—and it What you may kill you.” Unfortumeasure nately, it is commonplace for companies to may kill measure their way into you. disaster when they have not paid sufficient attention to the design of their measurement system. Confronting unprecedented competition in the aftermath of deregulation, one major telephone company was trying desperately to improve customer satisfaction. Its measures of this variable seemed stuck in concrete. Its managers’ intuition was good enough to tell them that the caliber of service delivered to customers was a key determinant of satisfaction. But how they measured the performance of the people who helped solve customer complaints was their downfall. The customer service representatives (CSRs) were measured on personal productivity-how many calls they handled each day. The dispatchers who sent field crews to fix the problems were measured on how much time the crews spent working on site, as opposed to traveling between sites. The field crews were measured on productivity—how many jobs they finished each day. Everyone did their best to perform well according to these measurements. Unfortunately, outsourcing best practices 

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all this measurement and diligence produced nothing that was of even the mildest interest to the customer, who was interested in accurate information, the immediate restoration of service, and a neat, durable repair. The CSRs were motivated to end each call quickly, even if that meant failing to give necessary information. The dispatcher was motivated to send field crews to sites that were located close together, even if that increased customer waiting time. The field crews were motivated to finish jobs quickly; the quality of the repair was secondary. In theory, the idea behind these measurements was that the faster everyone worked, the faster customers would have their service back, and the happier customers would be. In practice, the theory and the reality didn’t connect. To make them connect, an organization needs to create a formal, structured, and quantified model of the enterprise—the kind that scientists and engineers use to describe physical systems. Such a model connects an organization’s overarching goals with its controllable activities. Then, the organization needs to create a deliberate process for using measurement data to improve enterprise performance. This process must be structured and focused to use measurement information to identify the causes of inadequate performance and then do something about them. Building a model of an organization means understanding the dynamics of the business. When it works, it works beautifully. For example, a few years ago, a credit card company wanted to improve customer retention and increase card utilization (that is, to increase both the percentage of customers who renewed expiring cards and the percentage of each customer’s spending that went through the company’s card), thereby boosting the number of cardcarrying customers and the company’s revenue from the commissions it received from merchants. The company’s leaders had many ideas about how to achieve these goals—strong ideas. But

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Leader’s Room the leaders couldn’t reach a decision because there was so little supporting evidence about which idea was most likely to be successful. To get the facts, the leaders decided to build a model of their business. The first draft was qualitative and answered the question, Why do our customers buy our product? Answer: they are satisfied with our product and they are not drawn to the competition. The leaders recognized that the second factor was out of their control, but the first was not. They continued building their model, asking themselves what it was about their credit card that satisfied the customer. They made a list: its value (including cost and value-added services), customers’ experiences using it, customers’ experiences interacting with the company, and the overall corporate image. The second draft was quantitative. The company used its databases and did research to determine the relative importance of each factor in the qualitative model. Some of what the model revealed surprised them. One service enhancement their intuition told them was important turned out to have little impact on either retention or usage. Corporate image was important to retention but not usage. And so on. As a result, they made adjustments in their priorities and resource allocation. As all the steps were taken, the customers responded just as the model had predicted. Usage and retention—and in turn profitability and growth—all went up. The credit card company had successfully modeled how its products and services affected customer behavior. But this is not a model of an entire enterprise since it does not include the rest of the company’s operations. A complete model is one that correlates all a company’s specific activities with desired outcomes. Connecting these individual activities to company results is the great challenge in the area of performance measurement and improvement. Allmerica Financial has created and used such a model with great success. Its managers identified three goals for

achieving its financial ambitions. These became the company’s overall objectives and were placed at the top of the model. The first was customer retention. The second was employee retention. The third was to add more products and acquire more partners to distribute them. Then the company analyzed each of these goals, and came to understand what factors would lead to achieving each goal—and which of these factors Allmerica could control or influence. For example, using an industry-wide measure of customer satisfaction, the Dalbar rankings, Allmerica discovered that it ranked 37th out of 55 companies on the list. Like the credit card company described earlier, Allmerica undertook, through research and surveys, to determine what would improve customer satisfaction. It made a model—a fairly complex one— and in a very disciplined way set out to climb to the top of the Dalbar rankings. Two years later, it was number 4 out of 55 while cutting expenses by tens of millions of dollars. Its people were able to cut costs because their model allowed them to stop doing what was unnecessary and to concentrate on what was important—serving the customer! Once a company has a model, it has to use the information it generates. Duke Power has 200 measures, each of which tracks an important aspect of the company’s progress toward its goals: boosting revenue and cutting costs. Every month, the 200 go out in a notebook to every manager, providing a freeze-frame image of the company. Each measure is on its own page: current value, trend over the past several months, value in each of the company’s locations. Team leaders receive printouts of the measures that their teams can influence and for which the teams are held accountable. (Teams are held accountable for a set of

measures, not just the lagging ones, to prevent slippage.) This—or any other—organizational model is not useful until a formal system for using the information is created. First, target levels must be established for each of the important measures. Then actual calculations must be performed regularly so that the value of each measure will be known. Then the obvious comparison must be made between achievement and aspiration. If all measures are on target, then no improvements need to be made. If they are not, managers must intervene by addressing the root causes of the performance problems. Most managers know how to recognize and handle problems that stem from inadequate individual performance. But what can be done when individual performances are fine yet organizational performance lags? The first step is to recognize that when this occurs, the strong suggestion is that the fault lies with the model and how it connects the company’s goals to the work the people in the company are doing. There are two possibilities to investigate. First, the model may have been flawed from the outset. Perhaps the model makers did not understand their customers well enough so the company’s imperatives have been incorrectly defined. Second, the model may have become obsolete as a result of changes in customer needs or competitors’ actions. Using models as a basis for measuring is an excellent way to keep up with changes in the marketplace in a disciplined fashion. It is to be expected that models will be revised and retooled over time as conditions change. In either case, when a model isn’t working, it needs to be updated, and the whole cycle begun again. As with so many things, the true value lies in the process, not in the end result.

About the Author Michael Hammer is the originator of reengineering, process-centered enterprises, and superefficiency -- managerial innovations that have become part of standard business practice. He has written four books, including the international best-seller Reengineering the Corporation. From his base in Cambridge, Massachusetts, he disseminates his latest ideas and discoveries through public courses and conferences that are attended by thousands of people annually.

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interview

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

In your recent report “BPO in Banking—A Review of Strategies & Trends”, it’s estimated that the spending by North American banks on BPO will be $7.9 billion by 2007, what according to you are the key drivers for such a growth in spending? First, I think we are starting to see a shift in how companies think about outsourcing—a shift from a purely ITdriven decision-making process to one that is more business-driven. So rather than asking the question “Should I outsource my IT department?” financial institutions are beginning to ask whether they should outsource a particular business process, along with the underlying IT that powers it. So, the growth that’s projected in BPO spending levels reflects this broader view of outsourcing, because virtually all busi-

ness processes are IT-enabled and BPO will increasingly also drive ITO. Looking at key drivers, the main driver of outsourcing has traditionally been cost savings. But other factors have become increasingly important. Outsourcing can allow companies to accelerate process re-engineering efforts, and to shift from a fixed to a variable cost structure. Outsourcing to specialized providers can also allow banks to take advantage of specialized skills that may be scarce in-house, which can lower the time-to-market for new products and services. Outsourcing can also allow companies to free up internal resources—both people and capital—to focus on the core, such as on revenue generation initiatives. What are the various trends driving banks to look for BPO as an option? outsourcing best practices 

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Do you see a trend in moving cost benefit regime to other factors for offshoring like quality and technology? Yes, cost savings alone aren’t sufficient to sustain a momentum towards outsourcing. If you save money but the quality of the work is not high, then the outsourcing initiative will have essentially failed. Therefore, quality is of critical importance. The ability to provide process transformation benefits is also very important, and technology tends to play a role here. Business processes within an organization are often very complex and not always fully documented. Knowledge tends to be embedded in the minds of the people performing a particular function for a very long time. Going through the exercise of assessing and implementing outsourcing offers an opportunity to

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Interview deconstruct the business process into its component pieces and identify potential areas of improvement. The goal is to streamline the process and actually improve performance. Technology often plays a role in this transformation by allowing for automation of previously used manual processes. North American banking is going through a consolidation phase, how prudent will the decision be to offshore? There are two schools of thought on this: some feel it’s risky, some feel it’s a very good opportunity. The reality is that integrating organizations is a very resource-intensive process and banks may not have sufficient internal resources to help them through their consolidation phase. Some will look to third parties to assist in this effort. What according to you are the key challenges faced by banks to offshore their processes? Banks need to have a well-defined process for deciding what to outsource or offshore and how to do it. Deciding what to outsource requires an understanding of the bank’s focal point within the industry value chain to determine which processes are most amenable to outsourcing based on well-defined risk and fit criteria. The question of how is about ensuring that the right governance process is in place to manage the relationship with the service provider. Banks must ensure that they have the right people and tools to manage such third-party relationships, to ensure that performance can be measured and that service levels can be monitored. What according to you are the best practices in evaluating a particular process for offshoring in the whole banking value chain? The BPO and offshoring industries are still quite young and I would argue that mature best practices have yet to emerge. However, many service pro-

viders as well as financial institutions have developed their own methodologies. Some examples of successful practices include: Identifying criteria for evaluating the “offshorability” of specific processes based on factors such as risk, customer impact, employee impact, and degree of automation, ensuring that a proper governance structure is in place for assessing the success of a process once it’s outsourced. In general, a systematic analysis across business processes is required. It‘s also critical that a cross-functional team from within the bank be involved in the evaluation exercise including process experts from the line of business, IT, risk management, etc. to ensure that an offshored process is well integrated into the organization’s internal activities.

The range of processes being outsourced by mortgage lenders really cuts across all three areas of the mortgage processing life cycle, from acquisition to origination to servicing. However, mortgage servicing is a fairly mature market and offshoring plays a smaller role there. Looking specifically at offshoring, activity is likely to focus on loan origination processes. The sub-processes within loan origination tend to be less efficient and relatively expensive to conduct, so there are opportunities in this space. Acquisition is another area with potential, particularly in areas such as analytics and lead generation.

What is your outlook for the next three-four years in this industry? With the boom in How do you see the mortmortgage refinancing Banks need gage industry responding coming to an end, lendto have a to BPO as a long-term ers can no longer counter well-defined the rising unit cost per business strategy? process for loan through increased The mortgage industry is going through a pemortgage volumes. Lenddeciding riod of rapid technological ers will be looking to cut what to change. There is still much outsource or costs without comproroom for automation and mising service, and some offshore and will turn to third parties process improvement within the mortgage-processing how to do it. to provide assistance. life cycle. Moving forward, Therefore, we are likely I think that banks will leverage a com- to see an increase in mortgage outbination of both internal and external sourcing and offshoring over the next resources to improve the efficiency of three-four years. But offshore providers their mortgage operations and BPO will also face challenges as questions of will likely play a role in these efforts. data security; regulatory compliance, and operational transparency receive In the Mortgage Life Cycle, what key greater attention. Offshore service proprocesses are high on the offshoring viders will have to be proactive in adlist? dressing such issues. Madhavi Mantha is a senior analyst with Celent’s banking group and is based in Montreal. 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 outsourcing and offshoring), ATMs, and content and business process management. She is the primary author of recent Celent reports on business process outsourcing and ATM advanced functionality.

outsourcing best practices 

  annual issue 2006