“I have been helping outsourcing firms pay their clients millions of dollars,” responded Arijit Sengupta to my cheery “So what have you been doing?” A graduate of the Harvard Business School and Stanford University, Arijit is now the IAOP ambassador for India and a member of the editorial board of Globalization Today he explained that the advanced-analytics company he founded, BeyondCore, Inc., has been helping five of the 10 largest outsourcing providers save money for their clients by helping them avoid the hidden costs of errors. “Advanced-analytics solutions reveal untapped revenue opportunities or hidden costs and then provide actionable insights that help you dramatically increase revenues or reduce costs,” he clarified. Arijit further explained that yesterday, an insurer would pay a provider $10M to process claims and the conversation would focus primarily on how cheaply the provider could process those claims. Today, the provider can use advanced analytics on the claims data to identify patterns of errors that lead to claims overpayment or cause expensive claims-reconciliation activity. By using this data, they can easily reduce these downstream costs and, for example, generate $25M of additional benefits for the client. Now, the question is: “Who wrote whom the check?” Did the customer write a $10M check to the provider, or did the provider in fact write a $15M check to the customer? Tomorrow, outsourcing conversations will no longer focus on the cost of processing the claims—that would be table stakes. The key question will be: “Which provider has better advanced-analytics capabilities and can thus create greater revenue-enhancement or cost-reduction results?

Detecting a Pattern

This vision of the outsourcing ecosystem sounded real interesting. But how real was it? When I asked Arijit for examples of value created, he shared the following: “While analyzing the invoice process of a Fortune 500 manufacturer, we found one pattern that counted for 80% of the errors in the amount paid and was costing the company $2M annually at just one processing center. The manufacturer gave clients who paid on time a small discount on the manufactured goods. However, 37.5% of the operators were, incorrectly, also applying these discounts to third-party line items like freight. This was a systematic error that was easily corrected once our analytics software revealed the underlying pattern.”

“Often, the client or provider is aware of the problem but can’t solve it in the absence of the underlying pattern revealed by advanced analytics. A mid-sized US health insurer had significant concerns about claim overpayment. Despite significant efforts over six months, they and their provider were unable to solve the underlying problem and the client was quite dissatisfied. The provider was still meeting the agreed upon service level agreements and was actually delivering higher-average quality than the original in-house process. Thus, cancelling the outsourcing contract was not likely to be a useful solution and could actually open the client up to significant penalties. BeyondCore analysis revealed a single error pattern that counted for 94% of the overpayments and was costing more than $5M annually. Whenever the amount paid was negative, 83 out of 200 operators were typing it as positive. For example, they would type $200 instead of -$200, leading to an overpayment of $400. Once this underlying pattern was revealed, the provider was able to eliminate the problem in just three weeks. Turned out that these 83 operators did not realize that the amount paid could be negative and were actively ‘correcting this error’ without realizing that they were actually causing a claim overpayment.” 

On the revenue-enhancement front, Arijit described a case where an S&P 500 bank was unnecessarily rejecting potentially profitable credit-card and loan applications. Advanced analytics revealed the underlying pattern to those rejections and helped the bank minimize such rejections, thus increasing their revenue. Other advanced-analytics solutions have helped firms by improving the pricing strategy for their products and services, targeting their offerings at the most likely customers and optimizing supply chains to minimize stockouts while minimizing inventory. Arijit explained, “The underlying algorithms behind most advanced-analytics solutions are often extremely broadly applicable. Thus, the value-creation opportunities are only limited by our imagination. I am always pleasantly surprised and energized by the new ways and new domains in which our partners and customers decide to use our technology.”    

Advanced analytics: the key to outsourcing’s future?

Dr. Warren McFarlan, Harvard Business School professor and investor in analytics firm BeyondCore responded, “In a rapidly commoditizing outsourcing market, advanced-analytics capabilities are one of the critical differentiators that leading outsourcing firms can leverage.” Audrey MacLean, a well-known Silicon Valley entrepreneur, investor and consulting professor at Stanford University who has been recognized in Forbes’ Midas Touch list of top investors added, “As traditional sources of value creation are exhibiting diminishing returns on investment, outsourcing firms are looking for new ways to derive financial benefits for their clients. Advanced-analytics solutions are rapidly becoming the key new source of value creation.”

Clearly, if such leading academics and investors were taking this space seriously, I needed to learn more about it. I reached out to several analytics firms and outsourcing providers and most of them seem to be already leveraging advanced analytics in key outsourcing relationships. (See the sidebar for excerpts from their responses.)

I left Arijit with one question: “What would you change about how analytics is being used today?” He responded, “Customers still see analytics as an add-on offering. It should not be an optional thing the provider does for extra credit; it should be a core part of the outsourcing agreement. Customers should require quarterly reports on how much money their provider saved or additional revenue they generated by leveraging advanced analytics. At the same time, customers should appropriately incentivize their providers by sharing the net benefits with their providers. Here’s a good example: Eons.com set the right incentives with their provider. Including higher basic rates and bonuses paid, they ended up paying the provider four times as much as they were previously paying. However, the provider drastically reduced the error rate of the process and the resultant downstream costs to deliver an overall 67% total-cost-of-ownership reduction to Eons.com. Customers need to be very careful that they are not being penny-wise and pound-foolish here.”

Arijit added, “Provider CEOs also have a major role to play. While many of the senior executives at leading firms understand the importance of advanced analytics, most of them still have not managed to align their corporate culture around this opportunity. Even if the CEO fully understands the importance of analytics, the organization as a whole cannot generate tangible results if the line managers or functional managers see analytics projects as a distraction from their core job of keeping the process running. Moreover, operational organizations have a systematic preference for stability and some suffer from a ‘not invented here’ syndrome. The world of analytics is changing rapidly with new approaches and algorithms being developed every month. Provider organizations thus have to foster an eagerness for new ideas and new approaches and forget about the way they did things in the past.”

Sidebar:

How do you see analytics impacting the outsourcing ecosystem?

“Consumers, apart from wanting low prices, are also looking at differentiators in service offerings and therefore are more value-conscious. The outsourcing industry will see in the days to come a convergence of the traditional back-office processes with analytics to optimize processes, revenue, build forecasts and technology to take service delivery to the next level.” – Ashutosh Vaidya, Head, Wipro BPO Solutions  

“Analytics is the ‘smart’ or ‘intelligent’ part of the overall business-process solution. As outsourcing companies move towards offering more end-to-end services, analytics will need to be embedded in the solutions. At Genpact, we have launched the Smart Enterprise Processes (SEPSM) approach that takes our customers on the journey from efficiency to effectiveness.” – Pankaj Kulshreshtha, Senior Vice President, Analytics and Research, Genpact 

“We will see a convergence of business-consulting, technology and KPO services in the future. Analytics has been traditionally offered as a stand-alone service which typically suffers from adoption and scale. So it is very important that the analytics is relevant to the business context and embedded in the business process. This can happen only if there is an integration of the services that interact with the business, deliver technology and provide the analytics.” – Kishor Gummaraju, Strategic Business Practice Head, Knowledge Services, Infosys 

“Correct usage of analytics will help you take the right decisions; it will allow you to have a better handle on the risks expected and create a governance model that will enable improved control on the outsourcing program.” – Deepanjan Banerjee, Associate Vice President, Zensar Technologies

 “Better analytics that incorporate new data points should continue to drive both lift and efficiency, translating into more proficient policy administration, improved cost estimation, smarter portfolio management, thus leading to better service delivery.” – Manish Jaiswal, National Sales Manager, Insurance BPO Solutions, ACS, Inc.

Please share an example or a scenario of analytics significantly impacting customers.

“Blazent was brought in to help out with a large government organization that was having significant issues with their service provider. Blazent’s analytics discovered that an entire building of servers had not been included in the day-to-day operations inventory, and so was without backups, anti-virus or other operational tools. Critical data was lost, and the bill did not accurately reflect services delivered. Blazent was able to identify areas where the contract was out of compliance, then report on improvements over the course of problem resolution. This shared view of trusted data completely turned around a very contentious relationship.” – Gary Oliver, CEO, Blazent

“One of our customers, a financial-services company, was able to generate $200M in incremental sales using a combination of response, propensity and spend models for their credit-card offering.” – Kulshreshtha

“Predictive-analytics (PA) software can comb through current and past customer-service calls in search of speech patterns that indicate dissatisfaction. Carriers can home in on that data to determine what is driving customers to call. Policies and procedures can then be put in place to correct issues and increase customer satisfaction.” – Jaiswal

“Segmentation and profiling of consumer base to arrive at predictions of which consumer has what probability of responding to marketing promotions, maximize consumer lifetime value, generate more revenue through cross-sell and up-sell targeted consumer campaigns” and “Fraud control models that are implemented real time in the approval and decision engines, for example in credit cards, when a card is swiped and waiting payment authorization.” – Vaidya

“Consider a scenario where a customer-service representative can predict the buying behavior of a customer while on the call. It can be delivered by analyzing the past buying or usage behavior of the client real-time and delivered directly in the operational system. A CSR for a cable company while talking to a customer signing up for Internet can be sent a message that the client is most likely to buy a specific pay-per-view sporting event.

Health organizations can analyze the past history of its members (after appropriate agreements from them) and use predictive modeling techniques to identify potential risk conditions. This information can be utilized to enroll the members into wellness programs like weight reduction, smoking cessation or fitness to avoid future complications for the members. This would also help health organizations to impact the cost of healthcare.” – Gummaraju

“All organizations can reap significant benefits by becoming more analytical. The UK’s Royal Shakespeare Company, for example, examined seven years of ticket sales to optimize its share of wallet among its existing customers—and to identify new audiences. The RSC’s targeted marketing program increased the number of “regulars” by more than 70%.” – Dave Rich, Managing Director, Accenture Analytics

What would you change about how analytics is being used today?

“I would change the perception that buying technology will create analytics-driven value. Starting with the business problem and applying the appropriate mix of data, people, process and technology is required. The need for a holistic approach that overcomes organizational silos makes driving value through the use of analytics a challenge for most companies. In addition, organizations should realize that advanced analytics can be used in non-traditional areas as well.  A new trend centers around the use of advanced analytics for workforce issues as organizations focus on improving workforce planning through a better understanding of supply and demand.  On the supply side, predictive models are being deployed in recruiting and retention. On the demand side, models are being developed that use macroeconomic data to predict demand at the employee level. This can be a true competitive-differentiator for organizations. Given the use of outsourcing in the delivery of HR-related services, advanced analytics for HR and people-related issues will have a big impact on that segment of the outsourcing marketplace.” - John Houston, Principal, Advanced Analytics and Modeling Practice, Deloitte Consulting, LLP

“There is a need, in most companies, to instill a culture that is data- and number-friendly. With cloud computing and open source slowly gaining popularity, many of the analytical models should become ‘off-the-shelf’ service tools to help increase speed of analytical strategy adoption and reduce development effort. For certain specific business problems, custom-built models will of course remain the reasonable choice. However, for the oft-confronted organizational challenges and business issues, a pay-per-use analytics model library should become available whether at a company or an industry level to help reduce time-intensive effort and gain speed.” – Vaidya

“Analytics needs to be used from the beginning of a contract. Too often, it’s introduced only after there are severe problems in the outsourcing relationship. If analytics and measurements are put in place before signing a contract, then there is a common view of the truth by which key contract terms can be established and measured.” – Oliver

“Analytics alone is not sufficient, but the thorough knowledge of the insurance workflows, namely channel of distribution, products, sales, underwriting, claims, etc. coupled with predictive models are important for success.” – Jaiswal