Business Process Outsourcing
A shipping industry perspectiveKrishna Prasad
“Nothing in the world is so powerful than an idea whose time has come”. -Victor Hugo
ABSTRACT
The enormous developments in computing power and telecommunications in the recent years has brought in the new business stream called ‘Outsourcing’ which results in competitive advantage through lower costs, better service to customers and flexible organizational structure. There may be drawbacks in adopting ‘outsourcing’ but going by the tremendous growth in this sector, it appears that the drawbacks are effectively overcome. Shipping industry which has been using outsourcing for decades is adapting itself to this new trend. Many processes are being re-engineered to more efficient methods by applying modern technological solutions. As in other sectors of the economy, Charterers, Forwarders, Shipowners and Liner operators are developing newer methods of making ‘back-office’ a tool to gain competitive edge.
1.0 INTRODUCTION
Has the time of Business Process Outsourcing or BPO, as it is often called, arrived? The changes in work culture among business enterprises worldwide in the last five years are phenomenal. Although, in the past, outsourcing was practiced by many in some form or other, the spread of the BPO phenomenon using IT enabled services is surging ahead at an unbelievable pace. According to a recently published IDC study, the worldwide BPO spending will grow from US $382.5 billion in 2004 to US$ 641.2 billion in 2009 – a compound annual growth rate of 10.9%. A consensus estimate by Aberdeen Group, Gartner and IDC points out that the BPO market is growing at 35-40% annually. According to McKinsey & Co functions performed by BPO’s in 2002 was only about 1 pct of the market for business functions that can be performed remotely. Now, over 25 countries in different parts of the globe offer BPO services.
With the advent of industrialization, large organizations started taking shape around industrial cities. These organizations later evolved into monolithic and integrated enterprises controlling not only the core business but also
intermediate products and distribution channels and in some cases even raw materials. Building subsidiaries, either through forward integration or backward integration, around the core business became the norm. Of late this concept is slowly becoming obsolete. The present day corporate philosophy is to “do what you do best and leave everything else to others”. This allows managers to focus on core business issues leaving the routine details to experts. Thus the available resource and attention of the management professionals can be used for important and strategic issues.
With the rapid strides in data processing and faster data flow in the last decade, information exchange across the globe is becoming cheaper day by day. This fact combined with the high reliability of information exchange is transforming business entities worldwide. Firms can now choose to relocate or outsource to any corner of the world their non-core processes leaving the residue of critical and core business inside the firm. Outsourcing is slowly becoming more of a competitive necessity than strategic planning.
With the efficiency and reliability brought in by faster computing and data flow, a modern day organization has its core business at the centre and a chain of knowledge sources, often located in geographically distant locations, connected to it. They work with a common goal through well laid out performance criteria achieved through a price mechanism which makes the whole process competitive.
2.0 BPO – WHAT IS IT?
Business Process Outsourcing is the delegation of one or more business processes, often labour intensive, to an external service provider who owns, manages and operates the selected process on defined and measurable parameters. In other words, the company hands over an entire business function or process to an external service provider who works under clearly laid out guidelines. In a broader sense, outsourcing, apart from applying existing techniques in newer ways, also adopts newer technologies in continuously improving the process. Thus outsourcing brings in world class capabilities and frontiers of technology with minimum capital investment. In most cases the outsourced organization, comprises of a large pool of educated and skilled workers at a remote location which provides a distinct cost advantage.
Business Process Outsourcing began with transnational corporations setting up captive service centers – often for data entry, data conversion and analysis. Most of these operations required intensive human intervention to convert data to information that helped decision making. With the progress of time the amount of data flow between computers as well as requirement of information that supports decision making increased dramatically. Establishing an ‘information processing factory’ (offshore centre) in a low cost regime assured timely information for these trans-nationals.
Initially off –shore outsourcing was restricted to technical tasks such as data entry, data base tuning and data scrubbing (weeding out errors from large transactional data). This later expanded to processes that needed more expertise and skill. There are some cases where one sees the outsourced firm doing part of the core-function itself.
In Business Process Outsourcing, a business process is handed over to an entity outside the parent organization, usually in a low cost locale. Back-office or Off -shore Process Centre does the same tasks as in outsourcing. The main difference is that an Off -shore Processing Centre is either fully or partially owned by the principal organization whereas a BPO is owned by an outside party. Since the purpose of this paper is to delve into various facets of this issue other than ownership, the term Back-office is used to mean both BPO and Offshore Processing Centre.
3.0 WHY BACK-OFFICE?
It is now pertinent to understand why business entities all over the world, small and big, join the bandwagon of process outsourcing.
Motives behind having a back-office are: -Business Objectives
-Cost Factor
- Managing Short Term Fluctuations -Better utilization of resources -Technology and Skill
-Staff Management -Flexible Organisation
3.1 Business objectives: The primary aim of any commercial business firm is to improve business results and increase customer satisfaction. This is done not only by simply outsourcing a process but also through re-engineering the business processes and positioning the enterprise for the on-going business and technical changes thereby bringing about complete business transformation. In many cases out-sourcing has brought in customer service on 24x7 basis which was otherwise impossible due to cost and other factors.
3.2 Costs: Through better economies of scale, the cost of the outsourced process is considerably reduced. Migration of the processes to low cost locales with efficient manpower, which is the norm of the day, has further reduced costs and improved efficiency. The cost factors of an outsourcing agency in India, Philippines or Romania is far different (and economic) than the costs of its principal in USA or Europe who have to work in conformity with much elaborate employment criteria imposed by company guidelines or local and industry norms.
3.3 Managing Short Term Fluctuations: Usually expanding an activity within the organization involves investment which cannot be varied depending on short-term fluctuations in business volumes. Outsourcing is a clear solution to this problem. By out-sourcing a process, the costs are better controlled and can be interlinked to business performance thereby avoiding lumpy investments. Business variances can be managed better. In actual practice outsourcing turns fixed costs into variable costs.
3.4 Better utilization of resources: Outsourcing relieves available management resources from routine activities to strategic and crucial issues. The corporate management is able to shift focus from mundane activities to activities that will add value to the business.
3.5 Technology & Skills: A significant advantage of outsourcing is access to resources available outside the organization particularly at the cutting edge of technology. An organization whose core business is in a non technological function is exposed to latest changes in technology or in adapting newer technological solutions. The outsourced firm thus escapes the obsolescence of technology.
3.6 Staff Management: Outsourcing effectively manages the technological support staff in a firm whose core business is not in IT. Staff training, career progression and opportunities to learn newer technology are better managed through outsourcing.
3.7 Flexible Organisation: An outsourced organization is geared better to tackle organizational restructuring. Work is carried out with improved standards, more in comparison with the best in the industry rather than the standards that would have been set by an individual organization.
While outsourcing can result in distinct cost advantage when compared to doing the same process in an advanced country, in the case of least developed countries, it gives a distinct advantage with respect to quality of service. Since the outsourced operation conforms to global standards performed by the same system catering to the most demanding markets, the disadvantages of inefficient (and at times unreliable) processes in a least developed country can be nullified to a great extent.
Thus it is no wonder that organizations seeking a distinct and strategic advantage whether in terms of reduced costs, overcoming lack of internal capabilities, better and more effective level of service, increased share values or keeping up with competitors resort to outsourcing.
4.0 RISKS OF OUTSOURCING
4.1 Loss of Control and Compromise of Corporate secrets: The most powerful criticism on outsourcing is that of loss of control and compromising corporate secrets. The critics argue that the firm will not have any control on
timely delivery of services and it will be at the mercy of the outside service provider. They argue that often the quality of service is also compromised. The fact is that the control in any outsourcing agreement is decided by the provisions of the agreement between the parties. Careful definition of services and service levels, specification of quality of personnel and penalties for not maintaining the quality of service can result in a very effective outsourcing agreement which effectively delivers much better than an in-house department. Service Level Agreements with clearly defined performance parameters and monitoring systems are made for each processes and sub processes, not only between the organization which adopts out sourcing and the offshore service provider but also between different sections or teams within an Offshore Service Centre.
The security of corporate information is indeed a risk unless necessary precautions are taken in the agreement. Penalties are set for non-compliance as well as privileges set for audit. The termination clause acts as an effective tool to mitigate risk of information security. Often the method of working of the outsourced function is designed in such a way that corporate information security is protected.
4.2 Reduced flexibility to Changes: Some people believe that outsourcing can lead to an inflexible organizational structure which does not respond to changes needed from time to time. However this is not the case. An outsourced organization with its modular structure suitably re-engineered to suit data and information flow is more adaptable to changes.
4.3 Managing Outages: When a process is outsourced or handled in an off-shore service centre outages are a major risk. Outages can be due to system failures, communication failures or even natural calamities like flood, earthquake or fire. Steps have to be taken so that an outage does not stop the entire operations. Usually this is done by the back-office having one or two back-up centers which are mirror images of the main off-shore centre. Whenever an outage – whether planned or unplanned – happens the auxiliary centre(s) takes over all the operations without any of the user being aware of the changeover.
This also ensures that data and all other vital information are protected incase of a major calamity like earthquake, flood or fire.
In practice, the enormous success of the concept of outsourcing in different parts of the world, be it India or Egypt, Philippines or UAE, Romania or the Caribbean Islands, shows that effective and workable agreements can be drawn which will effectively work not just in back-office functions but in some cases in front-line services as well. Clear-cut contractual provisions that ensures flexibility as and when required, price flexibility depending on demand and contractual incentives have become the norm.
The huge success of the ‘back-office ‘ industry has brought its level of criticism from various quarters. In the West, particularly USA, there is a strong lobby which argues that outsourcing is taking away precious local employment opportunities. While we debate on the merits and de-merits of this argument, it is worthwhile to remember that it is the same developed world that vigorously argues for free trade in other sectors of the economy. Why then the ‘free trade’ argument gets a qualification when it comes to ‘services’?
5.0 BACK-OFFICE IN SHIPPING
Outsourcing is not new to shipping. Technical and Commercial Management of ships, Crewing, Bunker planning, Claims handling etc are all methods of outsourcing ship-owners have adopted for many years. Some charterers outsourced part of their work – chartering, post fixture management, claims, laytime calculations, etc to third party service providers. Unlike other modes of transport, the shipping industry had embraced the concept of out-sourcing for many decades.
Of late, these traditional methods of outsourcing are undergoing a sea change. Changes brought in by the ‘global village’ connected by reliable and ultra-fast communication on a 24x7 basis is worth noting. Gone are the days when a broker eats and sleeps beside his telex machine not to miss a fixture. Gone are the days when multiple copies of cargo and freight manifests are typed and mailed from load ports to discharge ports and transshipment ports. Gone are the days of manual comparison of container numbers between port load list, company records and manifests. In a broking firm we now see specialized softwares separating cargoes and ships satisfying required criteria and with the click of button the broker is able to produce a list of cargoes and/or ships. A Liner company now generates bills of lading, prepares manifests and compares equipment numbers using automated systems.
In shipping industry one sees more of off-shoring rather than outsourcing. Various segments of the industry have set up off-shore centers to take up their back-office functions. Most of the big players in the Liner industry resort to off-shoring. Some forwarders also resort to this. However, we do see out-sourcing, in the true meaning of the term, in chartering and ship owning.
5.1 Liner Industry: Typically outsourcing is done where large amount of data is involved. Outsourcing becomes more efficient when such data is available in a structured format. The Liner segment of the industry fits these criteria better than any other segment. Also the Liner segment is the most organized in the shipping industry with few very large players having absolute control on their business and all information pertaining to their business. Perhaps these are the reasons why the concept of back-office is widely used in this segment of shipping commerce.
Most of the big players in the Liner segment have their own off-shore processing centers. P&O Nedlloyd, CP Ships, MOSK and CSAV have their
off-shore data processing units in India. Mearsk has back-offices in India, Costa Rica and Philippines offering value added and innovative services like shipment status through short messaging service in mobile phones.
The typical back-office set-up is as follows:
The offshore processing centre (OPC) or back-office receives details of the booking from the booking office. The shipping instructions are received from the shippers. The back-office checks these data with the available data base on Customer information, tariffs, contracts, load port/disport/transshipment port restrictions, dangerous cargo details and over dimensional cargo restrictions, etc. The details of the booking are passed through “check lists” to ensure that all vital data is available. Any in-consistent data throws up error alerts which are rectified at various stages. Thereafter the data is converted into specific formats specially designed for the processing centre. When the data requirements are completed and the stuffed container is received by the Line, bills of lading instructions are given. Many Shipping Lines allows customers to print the Bills of Lading upon receipt of specific authority. The back-office then prepares the manifests, container lists and other shipping documents and sends it to the respective ports.
The billing department raises the invoice based on the freight calculated by the Freight Calculator module which takes into account various parameters like cargo, service contract with the particular customer, nature of cargo, load and discharge ports, etc, The back-office, apart from doing the routine jobs, also churns out regular MIS reports which facilitate the managements to take vital operational and commercial decisions.
By managing business processes off-shore, these Liner companies are able to have effective control on their business almost on a real time basis. It is not uncommon to see different groups of personnel in the back-office working at different times of the day – to coincide with the time zone in their business region.
5.2 Charterer – a case study: This is the case study of trading company which has embraced the concept of outsourcing extensively. The trading company, let us call it Traders Inc, deals in ores, minerals, steel etc. It has representatives in different parts of the world facilitating sourcing of commodities and assisting in logistics. Traders Inc with a turn over of over USD 150million runs with a staff strength of three in their head-office which controls all trading activities, logistics as well as monitoring the activities of the representatives in different parts of the world. This company has outsourced all functions except the core function of trading. Accounting, HR management, Chartering, etc are all outsourced.
Let’s now see how Traders Inc has outsourced it chartering needs to M/s Charterer Operator Ltd. As soon as a trade enquiry is received Traders Inc checks with Charterer Operator on prevailing freight levels, availability of tonnages/ship space and port position. The feedback from Charterer Operator Ltd, who is an expert in shipping, helps Traders Inc in effectively negotiating the trading deal. Once the sale deal is finalized Charterer Operator Ltd enters
the shipping market for a suitable tonnage to perform the voyage. Available tonnages are evaluated and the most suitable vessel fixed to perform the voyage on time charter or voyage charter which ever is best suited for the particular business. M/s Charterer Operator Limited thereafter undertakes all chartering operations like loading, Ocean voyage, discharge operations, bunkering, appointment of agents, port disbursements, surveys, claims and laytime calculations. The time charter operations are performed on behalf of Traders Inc who bears all profits and losses. Charterer Operator Ltd is compensated by a lump sum management fee for each voyage. Thus Trader Inc enjoys the benefits of time charter without getting involved in the rigmaroles of time charter operations.
Small is indeed beautiful – and effective as well. The owner of this company swears by the effectiveness in outsourcing strategy. The lean organization he runs helps him in concentrating all his energy on the core function – Trading.
5.3 A Typical Forwarding Company
The Case of A Forwarding Company: The revolutionary changes in telecommunications and computing capabilities has resulted in information exchange being cheaper and more reliable. Most recent advancements in ‘Web’ technology is making it easier to integrate widely dispersed networks. We are now in a world where a local telephone call in India is more expensive than a call to USA on a leased line! This has resulted in Freight Forwarders setting up off-shore centers which work as an extended arm of the nucleus.
Consider a forwarding company located in the USA having its off-shore centre (back-office) in India. The back-office answers queries, gives customer support and does all the documentation – be it accepting bookings, interacting with transport providers and ocean carriers, invoicing etc. The back-office is able to serve the company’s customers on a 24x7 basis at a fraction of the cost. In a country like USA where telesales is quite effective, the off-shore centre is able to undertake the sales function. At a more advanced level, the back-office can utilize the data base of the parent company and work out logistic solutions for its customers’ problems. For a country like USA with its high cost of operation and where all necessary information is available in computerized form on the ‘Web’, the back-office centre can effectively find logistic solutions with out sacrificing quality. In fact the quality is far better because the back-office can have the best logistic professionals combined with all necessary data and information as well as technological tools. These professionals are able to work out solutions day and night 365 days in a year. In a back-office like this, one can see that almost all the functions of the parent company – including the core function of working out logistics solution – are carried out. The off-shore centre is nothing but a mirror image of its principal office.
6.0 CONCLUSION
Outsourcing – or off-shore service centers no doubt results in cost savings, adds to flexibility, helps manage short-term fluctuations in business volumes and
improves service levels and gives access to latest technological changes. But if one looks at the most important factor, apart from cost advantage, that made this concept spread itself across various business segments, it is nothing but the well specified performance parameters within defined time limits. In a legacy organizational structure each business process is carried out in manner best suited for the location in which the process is applied. There is no universal standard with respect to reliability of output or time taken to complete a process. A back-office, on the other hand, undertakes each process with well defined performance parameters and accuracy levels which results in reliable and consistent results. This is achieved by having Service Level Agreements (SLA) for each process and sub-processes. There are also SLAs between different process-teams within an off-shore centre. Each of these SLAs is scrupulously followed and the output measured and analysed at regular intervals. Performance criteria which are subjective in nature in a legacy organization are converted to objective and well measurable parameters. Globally acceptable standards are established for each process. Leaving aside financial parameters, the performance of any business operation is judged by the level of customer satisfaction. It is now proven that a well designed back-office can enhance the service levels, improve customer satisfaction, improve financial results as well as adds flexibility to the day-to-day operations. The ‘back office ‘is thus becoming the back-bone of the organization.
The other important factor for the success of outsourcing is the continuous improvement of the process. The regular performance monitoring of the processes using well defined parameters helps in continuous refinement. A legacy organization is not in a position to undertake improvements at such regular intervals.
References
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