By the time each quarter or financial year comes to a close, the figures must stack up. For this reason, any business decision must provide a reasonable answer to the question of what contribution it has made or will make to improving a company’s overall performance. This truism especially applies to outsourcing projects, which, in many organizations, generate particularly high expectations with regard to the economic benefits they bring.
However, when it comes to actually evaluating BPO projects in business practice, many decision-makers lack the know-how to correctly determine the return on investment (ROI) for this particular case. This is due to the fact that there are often misconceptions about which factors are relevant for evaluating Business Process Outsourcing (BPO) and how they should be weighted in order to fully reflect the impact on the company.
In this blog post, we provide you with the knowledge you need to more realistically assess and calculate the ROI for your BPO project.
If you would like to find out what risks and opportunities are generally associated with outsourcing business processes and what you should bear in mind when choosing the right BPO provider, we recommend you read our article: Business Process Outsourcing: What You Should Know About BPO.
Why Apples Are Often Compared with Oranges when Evaluating BPO Projects
ROI is a key figure that helps companies determine the economic performance of a business unit or the efficiency of a business process. To put it in concrete terms, it indicates what return was achieved with which capital investment. The problem with BPO projects, however, lies in the fact that in many cases they are business processes that do not generate a direct return at all.
For example, when it comes to calculating the ROI outsourcing customer service might generate, it is not easy to compare the costs and performance of different vendors. In the long run, the ROI of outsourced services not only depends on the operating costs, but also on the quality of the services provided.
In order to avoid this dilemma, attempts are often made to translate quality standards into key figures. To this end, complex business cases are created, which ultimately all fail because the benefits of Business Process Outsourcing are hard to quantify in an objective manner. For example, high-quality customer service is characterized by the fact that it is an investment in the area of customer relationship management, which is not merely a cost-saving measure but a competitive advantage.
In other words, it is essential to distinguish between investment and operating costs when determining the ROI of BPO projects. This shift in perspective demands that you consider Business Process Outsourcing as an end-to-end process and ask yourself what the specific objectives of the outsourcing project are.
Mandatory: The Cost-Benefit Analysis
In order to better understand the ROI you can expect for Business Process Outsourcing, you first of all need to analyze the existing processes in the company and then formulate the goals you want to achieve with the BPO measure.
For example, is the outsourcing of customer service geared to profiting from wage cost differences in another economic area, or is the step primarily intended to increase customer satisfaction or optimize the after-sales business?
It is only on such a concrete basis that different BPO providers can be compared with regard to the expected ROI. For this purpose, a cost-benefit analysis should be carried out. To do this, compare the contractually agreed or promised services with the internal expenses that would be necessary to provide the same service. At this point, it is crucial you take all costs into account:
- Is it an all-in price or will the project incur new costs during the course of the cooperation?
- How does the cost index change over time and what about the total cost if the outsourcing agreement changes because the business process is to be expanded or reduced?
- Is it necessary to set up an internal project management office (PMO) for the outsourced projects or to monitor the quality of the external service provider with internal measures?
- Does the BPO provider really provide all services that were previously provided internally in the business process, or do certain tasks remain within the company?
On the benefit side of this analysis, the following aspects should be considered:
- The switch from fixed costs to variable costs: By outsourcing business processes to an external service provider, the company gains new financial leeway that can be exploited to better equip core competencies with financial resources.
- Knowledge growth: Outsourcing also enables companies to benefit from competencies that the external service provider can incorporate into the business relationship thanks to its wealth of experience in that specific business area.
- Realistic calculations: You shouldn’t forget to list all the company costs, including incidental costs, that would be eliminated if the business process were outsourced. Among other things, this would include office rent, IT infrastructure and HR resources.
Difficult to Determine: Qualitative Factors
This allows a number of factors to be identified, which can then be compared in a cost-benefit analysis and quantified relatively well. However, even if the analysis of the financial service portfolio is positive, this does not mean that the ROI is ultimately positive. As soon as there are qualitative problems with the BPO provider, even the most attractive cost-benefit analysis will fall down like a house of cards. Qualitative factors such as service levels can be contractually defined and recorded as service descriptions, but must ultimately be proven in practice.
For this reason, we recommend you arrange a continuous, biannual (or annual) quality review with the BPO provider. Care should be taken to ensure the widest possible access to all information that is relevant for a qualitative assessment of the BPO provider’s service quality. If the quality delivered does not meet the initial objectives, then any cost-benefit analysis becomes secondary, however attractive the figures may look on the desktop.
Bottom Line: No Outsourcing ROI Without Clear Goals
The return on investment for a BPO project can only be determined against the backdrop of a previously defined business objective. This objective must be determined by each business unit in accordance with their own criteria. Both qualitative and quantitative factors should be taken into account when calculating the ROI. Their relative weighting should be decided at the beginning of each BPO project.
Are you looking for a trustworthy partner for your next BPO project? If so, then B2X is the right partner for you – get in touch!