Blue Cross Blue Shield of Rhode Island wanted to leverage the cost efficiencies and performance enhancements of business processes outsourcing, but was concerned about the risks of transferring critical functions to a third party. "There are a lot of loose strings associated with an arrangement such as this, and we wanted to make sure everything was tied up nicely to assure success," explains George Calat, executive vice president and CFO of the Providence, Rhode Island, health insurer.

Calat was wise to take his time. In the rush to outsource, many companies fail to recognize the myriad risks posed by shifting critical business processes like HR, finance, accounting, and supply-chain systems to providers with little, if any, experience managing such processes. Some companies haven't even taken the pains to measure their in-house performance to ascertain if BPO will improve it. "Many companies fail to benchmark process performance," says Stan Lepeak, a vice president at Boston-based consulting firm Meta Group.

"They outsource finance and accounting because others are doing it," adds Lepeak, "and yet they lack comparative metrics like 'how many payables are processed per accounts payable clerk' or the 'spend per purchasing agent' to compare against industry and BPO benchmarks. If you don't have current process performance metrics, how do you know outsourcing will improve upon what you already do?"

There are other risks that can doom a well-intentioned BPO effort. So-called offshoring of customer and employee care functions — call centers are a cottage industry in India and China — invites political and public relations risks (see "Off Limits?" at the end of this article). Then there's the risk of selecting an inferior BPO provider, one failing to live up to the expectations of the partnership. Perhaps 2,000 companies claim to offer BPO services, says Julie Giera, a research fellow with Forrester Research, a Cambridge, Massachusetts-based technology research firm. Although methods exist for measuring and comparing the IT outsourcing providers, notes Giera, "there is scant data to compare and measure the capabilities of BPO providers."

Little wonder Calat was anxious. Blue Cross Blue Shield is Rhode Island's largest provider of health insurance, covering some 650,000 individuals, or 65 percent of the Ocean's State's population. The 10-year, $600 million BPO agreement it signed with outsourcing service provider Perot Health Systems calls for the "Blues" to outsource information technology, insurance claims, and cash disbursements to Perot, and to shift significant technology and intellectual capital — the 600 employees who performed these functions — to the provider. If the relationship turned sour in, say, year three, the Blues would be more than blue.

That's why the CFO turned to an intermediary, Houston-based outsourcing advisor EquaTerra, to craft the tightest possible deal. "EquaTerra made sure we outsourced the appropriate functions, reviewed project bids on an apple-to-apple basis and created a contract with clear service-level benchmarks," says Calat.

"For example," he adds, "if Perot fails to process a certain volume of claims within a specified time horizon, the contract holds them accountable." A governance team comprised of individuals form both companies meets regularly to review performance against the benchmarks.

Benchmark Thyself
BPO is big stuff, with nary a day passing without the announcement of another multiyear, billion-dollar deal. But just what is BPO? Simply put, it's the management of a related set of core business processes, as well as the underlying technology, by an organization other than your own. "Unlike traditional outsourcing of, say, the payroll administration function, BPO involves the outsourcing of payroll and other related HR functions like benefits administration and employee hiring and training, which string together to create a process — hence business process outsourcing," explains Lepeak. "The benefits of BPO are many, but then so are the risks."

Every BPO engagement begins with the premise that another company can perform a certain business process better than you can. Unfortunately, proving the premise is often left to the wind. "There's an age-old maxim: If you automate a mess, it's still a mess," says John McCarthy, group director of research at Forrester. "Same applies to BPO. I've seen all this external due diligence where every vendor known to man is analyzed in 100-page RFPs, and consultants are hired for tens of thousands of dollars, when all the company really needed to do was take a good look in the mirror. Yet so many fail to answer simple things like 'how do we do the process today, what's the level of our documentation, and how does this compare with other organizations.' Without doing this, how else can you prove you're getting a good deal or not — that you'll actually save money?"

Few companies measure the performance of internal business processes, maintains Lepeak. "What constitutes running a process well, and what constitutes running it better, are key criteria requiring evaluation before undertaking BPO," he adds. "If you can't understand process performance in-house, you can't understand it outsourced. You must measure your own performance first and then benchmark it to others to understand where that stands — good, better, or worse."

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