Process Integration for enterprise value creation

Process Integration for enterprise value creation

The prerequisite for survival for an organisation is agility, and companies are continually reviewing their value propositions and restructuring to become leaner and more efficient in an uncertain business environment. The growth strategy of the organization is two prong :- Organic growth by way diversification into new markets and business opportunities and secondly the route of merger & acquisition. With this growth initiative, the organisations also tends to accumulate & gather lots of mass alongwith it in the journey.

The velocity and the pace of the growth could be only sustained if the organisation continue to stay fit and flexible with no extra flab or mass. This will enable the organise to focus constantly on the core function for growth and value proposition. This is only possible if the support / service functions which provides the edifice for the core function can provide strong footage and grounding. As the saying goes – a hungry man cannot write poetry.

A close look at the organisation will reveal very clearly the Value Creator Functions and Value Provider Functions. The Organisation must devote more resources to nurture the core competencies – those that provide value to customers and shareholders and differentiate the company from the competitors. This is crucial in today’s tough markets.

Therefore, the Value Provider functions like AP, AR , GL, HR, Project, Logistics, QA etc. which are generic and homogeneous in terms of business process across the business groups / units have potential to get integrated. The two pillars based on which organisation wise business process to be initiated for integration are – ERP as a strong operating back-bone and Corporate Governance for sound internal control and security. The units will have purely contractual agreement basis price and service- levels contracts with the in-house service provider function. This integrated service group – Value Providers will work in partnership with the value Creator Function to deliver continuing and sustained value for the organisation. The principal of this partnership must rely strongly on sound business foundations, such as process automation and related technology.

The working principals and arrangements will be exactly like any BPO service but with complete indigenous and in-house domain knowledge expertise. The common problems as experienced with BPO arrangement are - insufficient preparation, too little transparency, and an incomplete understanding of outsourced processes, loss of flexibility, difficulties in measuring performance and financial baselines before and after the agreement, suboptimal governance, complex transitions, and related spiraling costs.


The steps that are required to be taken by the organisation to transform a tempting idea to a thriving reality :-

Step 1 – Think Strategically :-

Identify at every unit level the tasks that require specialization or propriety in nature. A detailed level ground work is required to be done at the Divisional / unit level in order to understand the outsourced functionality even if the same is proposed to be in-house.

This proposition needs buy-in from all the divisional DMCs since the success of such model require tweaking and nurturing over a time. Further, the Divisional DMC can provide commitment and the resource from the division. Otherwise, such programs typically becomes initiative of IT / CIO, who gets the program started and could not get going, because there is no mandate from the divisional CEO to invest time and personnel needed to make it work.

Further, it may be advisable to get the study done across the Divisions by external consultants to evaluate our internal operations and develop benchmarks to measure ROI. That could help the organization to determine what part of the business process should be integrated for value generation.

In order to strategize the successfully, three questions are to answered at the individual business division level ;

• The expected business outcome of the service, such as cost reduction or improved processes
• The best model for delivering the service
• The best location to deliver the service


Step 2 – Develop the right business model :-

With the availability of ERP applications like SAP / RAMCO / Oracle etc. as IS systems back-bone to the business operation, the same has created more flexibility to work out multiple solution options. With multiple options available the key is to design an integration model that works best for the division and the type of activities that each division is willing to share in the integration model. The thumb rule is for high volume task like data entry of employees, the same could be managed through off-site integration but the activities that require more integration and communication, the mix of onsite and off-site model will be a best fit in terms of cost, quality and effectiveness.

A successful model will be to select the right talent from each of the division and form an integrated team who will be motivated to provide value to the business at an competitive price to the market. This will enable the organization to rejuvenate the back-room boys since they know they are compared to rivals at the market place and are also responsible for generating value for the organization. Further, value creating function will no longer use the service of value provider as captive but selective since the value creating function will have to take accountability for both cost and revenue. Hence the whole model should be ‘win win’ for both Value Creator and Value Provider and thereby generate more value for Shareholder and for the organization.

Step 3 – Assemble an in-house team of experts:-

No matter what strategy or business model a company embraces, there should be an external expert appointed as consultant [ Sponsor] for management of the Value Creator and the Value Provider relationship. The competency of the program management consultant as a part of must have – is understanding of the cross-cultural differences and management of out-sourced operation from within the organisation. Further, the program management office will also have representatives from both the function and the same should function as a central repository of knowledge data base, best practice and Corporate Governance & other operating policies.

The managers ensure that milestones and the financial targets are being met. They help to improve processes and resolve issue pertaining to integration.

Step 4 – Value Creator and value provider to work in partnership :-

The service provider function even integrated within the organization, the relationship must be always like vendor and client or partners. The external consultant – sponsor is to constantly evaluate the relationship as collaboration but with the objectivity of out-sourcing service provider.

It is important to create an integrated work-processes flow and operating principals so that every-one can communicate with and understand each other.

Step 5 – Build Value over time :-

Instead of integrating all the possible process in one go, the integration process is required to be ramped up gradually over a period of time. The approach to be taken as small scale operations to be taken up for integration wherein the division level and organisation level risk is low. The integration process to be experienced by both the user and provider function, work out the kinks in the operation and thereafter roll-out to the other branches for capturing the value at the organisational level.

The typical approach will be start with the easier pieces, across stable division, high-volume, easy & repetitive functions where there’s not too much that can go wrong. For example pay-roll and accounts payable function be integrated before auditing and reporting function.

This integration approach will enable the organisation to lay a strong foundation for future integration in area which goes beyond the easy stuff. Because this strategic model promises to pay-off in the long run.

Steps 6 – Go off site for the right reasons :-

It is easy to support all the routine transaction process centrally from a site where the cost of the operation will be competitive and saving can be generating by reducing the cost of operation compared to some very high cost operations in places like Banglaore. Ideally, speaking, this kind of operation must put out to a location where the cost of qualified resources will be competitive but backed by one-time IT infra-structure investment cost in some Class – C towns like Bhopal, Gowalior, Nagpur etc.

The pay-off in savings, efficiency and access to new talent, can be enormous but like everything the value creation won’t happen just like that overnight. The challenges are exactly like out-sourcing – throwing the process over the wall and saying “catch”.

Key components for integration

The potential resources that exists today within the organisation that must be leveraged to kick-start the process of integration are :-

a. ERP back-bone for operating process. Out of all ERP installed divisions, about 75% of the Divisions have installation of best- in- class ERP i.e. SAP which supports ESA [ Enterprise Service Architecture]
b. Highly committed and competent ‘Talent Pool’ of resources across the Value Provider & Value Creator functions.
c. Strong internal audit function for quality assurance
d. Well disciplined Corporate Governance and security policy to ensure integrity and security of both the data and the process.


SAP ERP Solutions as back-bone of IS:

Compared to standard business process outsourcing model, integration powered by SAP solutions will have substantial advantages:
• Lower risk of transformation (migration, ongoing evolution, switching/re in sourcing BPO), operations (for example, cost-effective accuracy, consistency, and timeliness of output),
• legal compliance, and contract governance
• Lower cost during transition and evolution/upgrades, lower ongoing total process cost (process steps, monitoring, cost of errors), and lower cost of keeping long-term options open
• SAP NetWeaver–based applications: state-of-the art and regulation-compliant tools with unparalleled geographic and industry-specific coverage based on superior SAP architecture (out-of-the-box functionalities, multi tenancy for superior economies of scale, clear road map to service-oriented architecture)
• SAP as a trusted, solid, and future-proof partner able to support integration

Therefore, it is advisable that the IS [ information systems] landscape for the integration service provider is required to be on ERP SAP and other ERP application and the business process can get integrated seamlessly through ESA [enterprise service architecture] like SAP NetWeave

Create Talent Pool

“People are our number one asset.” People really are the lifeblood for the organisation and it is the people and people policies that are really generating shareholder value. Further the focus of the organisation has increased on to sustainable development and broader social responsibilities for people due to the diverse external pressures that are presently added to the challenges faced by all the units of business organisation are :

• Global & national geo-political developments, continued terrorist threats, health scares etc have become higher business risks for the organisation.

• Customers’ expectations are becoming ever more demanding thereby increasing the onus to find new sources of potential differentiation

• Recent global capital market adjustments combined with high profile corporate scandals (such as Enron and WorldCom) have altered shareholder expectations and heightened the need to re-build trust between business and its stakeholders through improved transparency

• The ageing population, changing preferences between work and leisure and increasing mobility are among many forces altering the shape of the potential workforce

• Other diverse stakeholders, including governments, are showing growing interest in businesses’ performance and their rights and responsibilities with regards to their employees.

Hence, at the organisation level initiative have been taken to formulate recognition and retention policy for people form both the ‘ Value Provider Function’ and ‘Value Creator Function’ with a clear perception that both being the value drivers for the shareholder and stakeholders. The evaluation strategy of the Value Provider will at par with the service sector workforce outside the organisation and like any other service sector workforce these resources should be also classified as knowledge workers. These new mix of employees suggests that more emphasis needs to be placed on the knowledge or information content of human resources, abandoning the traditional view of labor as variable costs. Under the new paradigm, human resources are treated as an asset of the organisation. This implies that one time hiring and training costs need to be spread out over the economic life of employees at a firm, preferably in a way that reflects their economic value. This argument parallels the traditional theory for the depreciation of physical capital. A significant difference between physical and human capital is that people are capable of learning and improving their performance over time.

The objective of this study is to re-visit and test the potential and hidden assumptions for the influence of human asset specificity on the degree of in-house integration. This corresponds with a more recent claim for advancements in transaction cost theory. In order to recognize the common practice of selective integration, this study focuses on the integration of integration services, including both value-added and routine services. Impact of human asset specificity from the view of TCT [transaction cost theory], the variations in processing and transaction costs by in-house integration service represents two major criteria :-
• trustworthiness and
• intrinsic motivation of internal resources thereby providing effective the internal production cost advantages.

The Resource-Based Theory also suggested that Companies that solely focus on minimizing costs when making outsourcing decisions of service as opposed to integration, run the risk of neglecting the strategic contribution of talent pool and domain knowledge expertise. In managing service, it is not only about minimizing costs but also about ensuring that the output of the service centers matches with the strategic objectives of an organization. A pure cost comparison of alternative sourcing options implies that a service function can be provided in the same manner and of the same quality, no matter whether it is performed in-house or externally. It is assumed that the firm and the market have access to the same input factors and can create the same outputs. In contrast, resource-based theory holds that organizations generally differ in their resources and capabilities and that these differences serve as a basis for the achievement of competitive advantages against competitors.

Hence it is imperative that integrated in-house service function can contribute to achieve cost savings and/or to differentiate the products/services of an organization by enabling a higher level of automation and improved information supply in the primary business processes and operational functions.

This may be summarized as follows:
• The more specific the human assets required to perform an IS function are, the higher is the advantage of in - sourcing as opposed to outsourcing in providing a strategically significant service function.
• The higher trustworthiness
• Intrinsic motivation of in-house as opposed to outsourced service workers in providing an service function, the higher is the impact of human asset specificity on in-house advantages in providing a strategically significant service function.