Life cycle of a captive BPO

THE life cycle of a captive BPO can be divided into four distinct phases based on the equity participation of the parent company, writes Dipesh Kumar Dipu in a recently posted paper on www.ssrn.com. These are start-up, value addition, competence accumulation, and third party service.

In the start-up phase, which in the author's view can last between two and five years, investments happen in infrastructure, people are hired, governments offer tax benefits to lure firms, and "the scale of operation is generally small as the parent company does not have an indication about the success of operations". Highly rule-bound jobs are done, and crucial decision-making happens abroad, he adds.

Human resources utilisations remain low in this stage, at about 30 to 40 per cent, observes Dipu. Perhaps that can be a simple benchmark to know if a BPO is in this phase, but what are the reasons for such dismal utilisation? "Lower levels of skills, lack of confidence of people in the parent company, operational problems, lack of proper support structures, high employee turnover and lack of proper management," lists the author.

Next is the value-addition phase, running to two to three years. During this period, the parent company reaps not only cost advantage but also something more, such as "additional work deliverables, higher quality of work due to increased attention on review and large back-up research and development", even as utilisation climbs up to 70 per cent. Thus, "a service that could not have been possible due to budgetary or resource constraints can be delivered to the customers, leading to client delight," notes Dipu. How nice to hear that!

The third stage is competence accumulation, lasting to about three to five years, when the unit becomes `matured and self-managed', HR competence at a higher level. "Knowledge management becomes an essential process and the focus shifts from training to career development... Capabilities match the staff levels of the parent company," says Dipu. Importantly, "The deliverables are of much higher quality and go to the clients of parent company even without review, since the quality assurance function is also performed offshore". BPO units may boast of 75 to 85 per cent utilisation in this phase.

What comes last is the `third party service stage' just when the unit has acquired "the critical mass and required capabilities to shrug off the umbrella of parent company and explore business opportunities in the local environment or with third parties".

On the one side is the parent company that doesn't want to offshore certain high-end tasks such as "human resource, legal, customer-related, business model-related and so forth"; and on the other side are the managers in the BPO longing for "taking a shot at strategic decision-making as they are aware of the capabilities available with their teams". There could be a dip in utilisation levels to 70-80 per cent range because of "higher levels of performance and efficiency" at the BPO unit. It would be wise for the parent company to divest and make the offshore unit available for third parties if it can't use the spare capacity, opines Dipu. "The parent company may still want to hold a controlling stake if it views work deliverables critical. However, if that is not the case, it might exit the operations and act as customer to the offshore unit. This reduces the cost for the parent company but keeps the quality intact." An important decision for the parent, that is.

Dipu concedes that it is tough to separate these phases in watertight compartments. Of value is a chart where he plots equity (or investment levels) of the parent company in an offshore unit against the different phases. You may also like to study the examples of BPO operations the author has mentioned in each of the stages.

(My paper was cited in this article on the Hindu Business Line on Sept. 19, 2005)