Throughout the history of business, most firms have built their own processes for almost everything that needed...
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to be done. Producing widgets. Paying vendors. Administering payroll. Whether the processes involved were critical to the organization's strategy or incidental to it, they were generally performed by people within the organization. Sometimes they were done well, sometimes they were done badly -- but since a company had no way of determining how well an outside business might perform these processes, they were kept in-house.
Despite the trend toward outsourcing, however, most companies have remained in do-it-yourself mode for most processes. (Huge multinationals are the most likely to take advantage of outsourcing, but even then, only for highly transactional and administrative activities.) Because of a paucity of process standards, it would be risky to do otherwise. With the exception of IT system development, there is generally no clear basis by which companies can compare the capabilities provided by external organizations with those offered in-house, or to compare services among multiple outside providers. As a result, firms that choose to outsource their capabilities have to proceed on two criteria: faith that the external provider will do a good job and cost. Given the lack of comparability, it's almost surprising that cost is by far the primary criterion that companies apply in evaluating outsourcers, and that cost reduction is their primary objective. The lack of standards may also explain why, in the few broad studies of satisfaction with outsourcing, many companies -- up to half in some studies -- are dissatisfied with their outsourcing relationships.
However, a new world is coming, and it will lead to dramatic changes in the shape and structure of corporations. A broad set of process standards will soon make it easy to determine whether a business capability can be improved by outsourcing it. Such standards will also make it easier to compare service providers and evaluate the costs versus the benefits of outsourcing. Eventually these costs and benefits will be so visible to buyers that outsourced processes will become a commodity, and prices will fall dramatically. The low costs and low risk of outsourcing will accelerate the flow of jobs offshore, force companies to look differently at their strategies, and change the basis of competition. These changes are already happening in some process domains, and there are many indications that they will spread across virtually all commonly performed processes.
Three types of process standards
A business process is simply how an organization does its work -- the set of activities it pursues to accomplish a particular objective for a particular customer, either internal or external. Processes may be large and cross-functional, such as order management, or relatively narrow, like order entry (which could be considered a process in itself or a subprocess of order management). The variability in how organizations define processes makes it more difficult to contract for and communicate about them across companies.
Firms seek to standardize processes for several important reasons. Within a company, standardization can facilitate communications about how the business operates, enable smooth handoffs across process boundaries, and make possible comparative measures of performance. Across companies, standard processes can make commerce easier for the same reasons -- better communications, more efficient handoffs, and performance benchmarking. Since information systems support processes, standardization allows uniform information systems within companies as well as standard systems interfaces among different firms.
Standard processes also allow easier outsourcing of process capabilities. In order to effectively outsource processes, organizations need a means of evaluating three things in addition to cost. First is the external provider's set of activities and how they flow. Since companies have not reached consensus on just what comprises cost accounting or HR benefits management, for example, it remains ambiguous what services should be performed between buyers and providers. Therefore, organizations need a set of standards for process activities so that they can communicate easily and efficiently when discussing outsourced processes.
These process activity and flow standards are beginning to emerge in a variety of businesses and industries. Some are the result of efforts by process groups such as the Supply-Chain Council, which has more than 800 businesses as members. It has developed the Supply-Chain Operations Reference (SCOR) model, which lays out a top-level supply chain process in five key steps: plan, source, make, deliver, return. The model also specifies typical activities for second-, third-, and fourth-level subprocesses with increasing levels of detail. [...]
A second set of needed process evaluation approaches are process performance standards. Once companies in a particular industry achieve consensus about which activities and flows constitute a given process, they can begin to measure their own processes and compare their results with those of external providers. If there is agreement, for example, on what it means to "process a new employee," managers can analyze how much it costs the internal HR function to provide that service, on average, and how long it takes. They can also have an informed discussion with external service providers about their process performance measures. [...]
Finally, organizations need a set of process management standards that indicate how well their processes are managed and measured and whether they're on course for continuous improvement. Because this third type of process standard doesn't require consensus on process activities and flows, it is the easiest to create and the most widely available today. Process management standards are based on the assumption that good process management will eventually result in good process flows and performance. In some domains such as information technology and manufacturing, these standards are already in wide use (via the Software Engineering Institute's Capability Maturity Model and the ISO 9000 series, respectively). They are beginning to lead to the commoditization of capabilities that will eventually transform organizations. [...]
If your organization provides process services, you may have mixed feelings about the development of process standards. Standards will lead to commoditization, more competitors, and lower prices for the services you offer. However, the move to process standards makes so much economic sense that it is probably inexorable—whether or not your company gets involved. It's better to help shape a standard than to be put out of business by it.
Excerpted with permission from "The Coming Commoditization of Processes," Harvard Business Review, Vol. 83, No. 6, June 2005. Buy the full article.
Thomas H. Davenport is a professor of information technology and management and the academic director of the Process Management Research Center at Babson College in Wellesley, MA. His forthcoming book Thinking for a Living: How to Get Better Performance and Results from Knowledge Workers, will be published by Harvard Business School Press in September.
To read more articles like this one, visit HBS Working Knowledge, an online source for business analysis, information and research. © 2005 President and Fellows of Harvard College