Empirical Validation of Operations Strategy Framework For an Indian BPO Operation

Operations Strategy Final Project Report

By: Group 1 Prashanth Thimmavajjala Raghavendra K Saayantan Roy Saurabh Dhar

1012044 1012047 1012051 1012055

Submitted To: Prof. L S Murthy

Indian Institute of Management Bangalore

Objectives of the Term Paper

Operations strategy, viewed as a set of structural and infrastructural elements put together to achieve a particular set of operational objectives that is derived from and/or is consistent with business strategy and integrated with other functional areas of an organization as well, can be conceptualized by a framework as shown in Figure 2. Theory has long suggested the need for integration amongst internal functions as well as integrating internal functions with the corporate. We define integration as defined by Mark Pagell, 20041. Integration is a process of interaction and collaboration in which various functions including operations work together in a co-operative manner to arrive at mutually acceptable outcomes for their organization. We would like to empirically study an Indian BPO Operation- XLHealth (www.xlhealth.com). The outcome of the research will be: (a) The Actual level of integration present in the organization. (b) Identify the inhibitors and enablers resulting in the integration level. (c) Based on this understanding, provide an evolving model that gives us insights to the antecedents of integration across operations and other functions. However, this will be based on researching a single firm and hence will not give us an accurate picture.

BPO Industry
Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions (or processes) to a third-party service provider. Originally, this was associated with manufacturing firms that outsourced large segments of its supply chain1. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing which includes customer-related services such as contact centre services.BPO that is contracted outside a company's country, is called offshore outsourcing. BPO that is contracted to a company's neighboring (or nearby) country is called nearshore outsourcing. Often the business processes are information technology-based, and are referred to as ITESBPO, where ITES stands for Information Technology Enabled Service. Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry1.

Challenges Faced by Indian BPO Industry

The major challenges being faced by the ITES or BPO industry in India can be classified into internal and external challenges3. The internal challenges include shortage of competent managers for the middle and senior management and the high level of attrition. The external challenges could be in the form of economic slowdown, inflation of currency, change of political stances in the main customer-base countries like US & UK. Also there is a lingering threat from other low-cost countries like

China, Singapore, Philippines etc. who are also focusing on the cost aspect and ramping up their workforces to meet the global challenges. To sustain in the highly competitive global market, the BPO firms also need to adhere to the severe SLAs and adjust to the long sales cycles for international deals. Attrition rate is quite high in the IT/ITES industry and with attrition comes the high incurred costs of training new recruits. To remain afloat in such a market, the BPO service providers need deeper pockets and financial muscles. But with the high initial capital investments in the industry, long gestational period, competition leading to reduced billing rates, the players are finding their margins squeezed.

Process Integration in BPO: Way Out?5

The BPO organizations play an important role in the buying firms strategy by allowing their clients (outsourcer) to specialize in their core competencies and serve as the clients extended enterprise. But research has observed that inspite of the substantial potential savings, a number of firms are unable to realize the benefits of off-shoring and some of the industry practitioners attribute to integration failures (misalignment of the BPO firms performance with the clients). The failures could be due to: - High rate of customer defections adding to hidden costs and nullifying the savings from outsourcing. - Clients didnt have proper strategy and structure to pursue the outsourcing initiative. - Inability of the service providers and their clients to manage the interdependencies of the processes In the face of global competition, the BPO firms are taking a serious look at the need for cooperative, mutually beneficial partnerships and the joint improvement of inter-organizational processes with utmost priority. The ability to integrate processes from multiple contexts can provide the BPO firm with unique capabilities that are non-imitable and non-substitutable, enable them to transition processes quicker, reduce risks of process failure, improve customer service levels and consequently performance. Some of the key factors driving the requirement of integration in BPO industry: - No fixed definition for contents of BPO services - Associated risks of failure for BPO firms may be higher as they are bound by contractual obligations to their clients. - Many of the BPO functions require embedded, complex knowledge components, which may depend on the co-ordination between each process and sub-process shipped offshore. Following is a proposed model in one of the literature we studied for the report. BPO process integration is concerned with the overall coordination of business processes and activities in the outsourced environment. This involves effective division of tasks across units and consequent coordination to execute the tasks within the organization and with the client. Also the level of uncertainties in the work environment drives integration among the diverse work groups involved. Integration can be both external and internal to the firm (see Figure 1).

Internal process integration refers to the degree of overall harmonization of processes within the BPO firm. Interaction between diverse constituent sub-processes is necessary to effectively execute tasks and research shows that achieving internal integration is a first step toward achieving overall process integration. External process integration refers to the degree of interdependence between the processes of the service provider and the client. High level of external process integration leads to increased responsiveness and a high degree of interdependency. Effective workflow between the client and service provider is also a critical aspect of service execution in BPO firms. Following are the few factors that are critical to the process integration in BPO are Task Complexity ( degree of customization & knowledge intensity of tasks), Task Security , End Customer Orientation, Information Technology Capability and Firm Performance

About US Health care system12,13

Affordable Care Act: The 2010 Affordable Care act aims at reforming health insurance in the US over several years. Some of the provisions have already been put in place and most of the changes are set to be implemented by 2014.This law holds insurance companies more accountable, expands coverage for young adults, offers small-business tax credits, and provides access to insurance for uninsured Americans with pre-existing conditions. MedicAid: States decide on the benefits provided under Medicaid, but Medicaid usually provides health care for low-income children and families, and people with disabilities. Covered services usually include doctor visits, hospital care, vaccinations, prescription drugs, vision, hearing, long-term care, and preventive care for children. Medicare: Medicare is a government health insurance plan for people 65 or older, people under 65 with certain disabilities, and people with end-stage renal disease. Medicare helps to pay for care in hospitals, skilled nursing facilities, hospice care, and some home health care. Coverage can also include doctors services and prescription drugs. Health insurance for children: CHIP:The Childrens Health Insurance Program (CHIP) provides free or low-cost health coverage for low-income children. Each state decides on the benefits provided under CHIP, but all states cover routine check-ups, immunizations, hospital care, dental care, and lab and x-ray services. COBRA: Keep your insurance if you leave your job:The Consolidated Omnibus Budget Reconciliation Act (COBRA) can help you temporarily keep your health insurance even though you left your job. Eligibility for the program is based on the reason you left your job, and even if you get to keep your insurance, you may be required to pay the entire premium for coverage. HIPAA: Health Insurance Portability and Accountability Act of 1996: The Privacy Rule standards address the use and disclosure of individuals health informationcalled protected health information by organizations subject to the Privacy Rule called covered entities, as well as standards for individuals' privacy rights to understand and control how their health information is used.

About XLHealth
The firm that we have chosen for our analysis of the framework is XLHealth (www.xlhealth.com) which is a BPO based in Bangalore. XLHealth is a part of the United Health group (www.uhgis.com). XLHealths main product is the Care Improvement Plus (CIP) which is an insurance policy which provides the benefits of the mandatory Medicare policy in US along with some additional coverage. The company has both IT and ITES operating from Bangalore, Baltimore and SA. The company was recently acquired by United Health that provides healthcare plans which provide claim benefits, prevention and early detection of diseases and support services between doctor visits. They also work with health care professionals and partners to expand access to quality health care to people. Its strategy is to leverage offshore outsourcing to enhance quality, obtain cost advantage and use talent from various geographies. XLHealth performs the activities of processing claims, developing technology and maintaining integrity of customer data. The company has 92,000 employees worldwide with 700 employees in the Bangalore location. The Bangalore location has 300 employees in operations, 150 in IT and the rest in other functions. The operations function at Bangalore processes the insurance claims and also does recoveries, these two sub-functions have around 70 employees. XLHealth uses software called FACETS for its operations. This is not proprietary software and has been customized for their usage and process. They also use software called OnBase which is for verification viewing of the supporting medical reports for claims.

Different Functions within XLHealth: The functions we have considered within XLHealth are as shown as below:

We have the following sub-functions under XLHealth Operations:

(a) Shared Services: These are operations like enrollment, data entry, scanning that are required by all the other functions. (b) Provider Data Management: This function deals with data related to providers (doctors). Whenever, there are issues related to things like in-network/out-network providers, they come to this function. (c) Claims: Whenever there are claims related processing, they come to this function. (d) Recoveries: When an extra payment is made to a provider, it is recovered from the provider in the next claim. This adjustment is made in the next transaction. (e) Pharmacy: This function is tasked with speaking to patients (members) and discussing them about the importance of medicines. (f) Medical Management: Whenever, there are any special approvals required for claims like new disease, they come to this function. (g) Quality Assurance: This function randomly samples transactions to check for both speed and accuracy as stated in SLAs. Apart from operations, we also have IT, Human resources and Marketing functions as usual. The IT function helps in supporting and maintaining the IT systems and software. The IT system also contributes in the form of new internal software development for any process improvements or requests of the operations function.

Framework for BPO Operations and Approach for the Term Paper
As discussed above, we have identified XLHealth as the BPO operation to be studied. For a BPO operation we consider the following functional tasks as important for integration: (a) (b) (c) (d) IT Systems Service Operations Human Resources Marketing

Human Resources is identified because manpower is the most critical element of any BPO operation- strategic consensus between Operations, marketing, Human Resources and Marketing is critical. Replacement of these functions in Figure 2 in place of Other Functional Tasks gives us the framework for a BPO operation.

Reference Framework
We consider the reference model given in Mark Pagell, 20046. This is reproduced in Figure 3. This model gives a reference for integration of Purchasing Strategy, Operations Strategy and Logistics Strategy. This gives us a good idea of direction to be explored in the interviews.

Approach
We visited XLHealth (J P Nagar, Bangalore). With the help of Mr. Shiva Prasad, Associate Director- Operations at XLHealth, Bangalore, we could interview the people at XLHealth from various functions. We structured our interviews as in Mark Pagell, 2004 6. We interviewed on Strategy, integration, Measurement, and performance as in the paper. The outcome of the interviews is described in the sections below.

Strategy
XLHealth is a focused player in Medicare based insurance plans. XLHealth is a leader in this category of insurance. XLHealth has a good reputation for service with the Care Improvement Plus (CIP) plan. XLhealth competes with players like Humana, Aetna and Blue Cross Blue Shield. Growth is saturated in this market and hence demand is easy to predict. Technology changes are slow in this saturated industry. Based on the competitive priorities, the following priorities were defined for the services operations14: Scale of 1-5 with 5 indicating highest priority. Service Quality: Very high priority of 4. Expertise and accuracy required are high in all the different sub-functions. There is a strict SLA agreement for the operations. Wherever there are customer interface requirement- image of the organization is considered by taking care of personnel selection with social skills. Delivery: Very high priority of 4. Speed and reliability are both important. Again terms like age of claims are strictly defined in the SLA. Cost: Very high priority of 4. Cost is controlled by allocating a strict budget for all the sub-functions. Flexibility: Low priority of 1. The process design itself does not change much. The technology and process changes are very slow. There is a performance improvement team which is constantly on the look-out for opportunities for performance enhancements. Location: Low priority of 1. Most of the operations can be executed from any of the locations. Consumer Contact: Medium priority of 3. Functions like Pharmacy involve interfacing with customers. For these functions, there is a high need of consumer contact over phone. Skills needed are addressed during personnel selection.

Integration
There are strict SLAs set for all the sub-functions in operations. However, there is very little interaction between various cross-functional teams like operations, IT, human resources and Marketing. The integration between teams like IT and operations is mostly for problem-solving. For instance, the team-members in operations talk to IT team only in case of problems. The

issues are escalated to team-leaders and then taken up with the IT team. There is very little interaction between the marketing team and other teams. There is an absence of events like even town-halls to exchange ideas. There is a cross-functional team called performance improvement team headed by a Business Analyst. However, the weekly meetings held are only attended by department heads. The ideas are pushed mostly from the Business Analyst to the operations team. There is also hardly any movement of personnel between functions unless there is a need in certain functions and excess capacity in others.

Measurement
XLHealth being in the BPO sector has its performance evaluation criteria focused on faster resolution of customers requests. The Operations function of XLHealth evaluates its employees based on reduction of ageing requests, quality of the work done within the SLA set, the accuracy of the claims that are processed, time taken to process a claim. When an employee is new to the process, every claim processed by the employee is checked for quality for the first three months. On a day-to-day basis, the quality of the claims processed is assessed by manual random check by the QA team and by the daily report that is run automatically by the IT system. The report will indicate the over payments, under payments etc on a consolidated basis. The claims that are detected as part of this report are further pursued by the recoveries department in case of over payment and rework is done by the claims department in case of under payment. The employee is evaluated on all the above criteria for the performance assessment. The operations function as a whole is also assessed on the number of claims there were able to process accurately and if the time taken to process the claim was within the SLA limit set. There are no cross functional teams present at the employee level and there is no performance evaluation criteria for that. The individuals reward like bonus etc are based on the individual ability to complete tasks with good quality and within the SLA, part of it is based on the performance of the operations function as whole and the company performance. Individuals providing innovative ideas for improvement of the process are also recognized and rewarded. The IT function evaluates the performance based on the number of internal requests they are able to resolve within the given SLA and the contribution to development of new IT systems to help easier functioning of operations. The HR function evaluates performance based on the ability to get the right candidates for the required job description.

Performance
XLHealth had been the number one in the healthcare insurance sector for many years and has been serving the market well. The key factors to the success of XLHealth have been the accuracy of the claims processing and the better care they take of the members who are enrolled with them in terms of additional support services. The operations function has been a key contributor to the success of XLHealth as it handles the claim processing and also providing support services like provider relations, pharmacy etc. The competitors like Humana, Aetna and Blue cross blue shield

are also using similar IT systems and operations processes but are still behind XLHealth in this sector. We could not get much data on the performance of the IT and HR functions. XLHealth was acquired by the United Health group in Nov11. The acquisition is expected to add approximately $2 billion to UnitedHealth Groups 2012 revenues and $0.05 to net earnings per share, after integration expenses and investments to expand XLHealths scale and provide its services to chronically ill beneficiaries currently served by UnitedHealthcare Medicare & Retirement. Including XLHealth, UnitedHealth Group projected net earnings of $4.60 to $4.80 per share in 2012.7 United Health Group also reported $102Bn revenues in the FY11 (8% increase from the FY10 figures of $94.2 Bn) with operation earnings of $8.5Bn and 19% ROE(Figure 4). The financial performance comparison of some of the major competitors of United Health, in the domain of medical insurance claims are mentioned in Figure 5, 6 and 7. It is evident that UnitedHealth has been doing well in YOY growth of revenue and profits as compared to the main competitors. Also the PAT as % of total revenues has been consistently around 4.5-5% for United Health over the past few years.7,8,9,10,11

Analysis and Conclusions We define three levels of integrations as defined in Mark Pagell, 20046. The three levels of integrations are defined as: (a) Full integration: Majority of the time manufacturing, logistics and purchasing interact, collaborate and work to arrive at mutually acceptable outcomes. (b) Some internal integration: Some of the time manufacturing, logistics and purchasing interact, collaborate and work to arrive at mutually acceptable outcomes. (c) No internal integration: Majority of the time manufacturing, logistics and purchasing do not interact, collaborate and work to arrive at mutually acceptable outcomes.

We put all our findings in a framework as shown below:

Enablers
IT Support Supports operations and marketing at rates specified by the SLA Human Resources Strategy Hiring and rewards based on criteria set by different functions
Alignment only through SLAs

Service Level Agreements in line with business strategy Performance improvement team meetings across functions with participation from department heads

Resources: Now part of a large company United Health Group. Access to more resources

Business Strategy A focused player in Medicare Known for service delivery reliability and accuracy

Some internal integration

Alignment only through SLAs Inhibitors Rewards and recognitions only based on functions performance e and not cross-functional No interaction between Marketing and other functions No interaction between team members across functions No Job rotations All relationships across functions across functions only problem solving No improvement ideas from the team members to other functions. Team members are not even part of any crossfunctional meetings.

Services Operations Strategy Focus on service quality, delivery and low costs.
No Alignment

Environment: Stable Growth Easy to predict demand

Marketing Focused player only in Medicare. Reputation for service quality and market leader.

We classify the organization as Some internal integration. The various functions operate based on strictly SLAs and do not interact, collaborate to exchange ideas. We believe that this is a hindrance for efficiecny improvements and innovations in the organization.

References
1. Wikipedia: http://en.wikipedia.org/wiki/Business_process_outsourcing 2. NASSCOM 2010 Global Outsourcing Report 3. Recent Developments and Challenges in BPO Since Economic Melt-down Manivannan, B. & Ilangovan D 4. INDIAN ITES-BPO INDUSTRY : NASSCOM ANALYSIS 5. The antecedents of process integration in business process outsourcing and its effect on firm performance Sriram Narayanana,Vaidyanathan Jayaraman,Yadong Luo,Jayashankar M. Swaminathan (Journal of Operations Management) 6. Mark Pagell, Understanding the factors that enable and inhibit the integration of operations, purchasing and logistics, Journal of Operations Management, July 2004 7. http://www.xlhealth.com/news 8. http://phx.corporate-ir.net/ 9. http://www.google.com/finance?q=NYSE:UNH 10. http://www.google.com/finance?fstype=ii&q=NYSE:HUM 11. http://www.google.com/finance?q=NYSE:AET&fstype=ii 12. http://www.usa.gov/Citizen/Topics/Health/HealthInsurance.shtml 13. http://www.hhs.gov/ocr/privacy/hipaa/understanding/summary/privacysummary.pdf 14. McLaughlin, Curtis P., Pannesi, Ronald T., Kathuria Narindar (1991), The different Operations Strategy Planning Process for Service Operations, International Journal of Operations & Production Management, Vol 11, Issue 3

Appendix

Figure 1: Proposed Model

Figure 2: Operations Strategy Framework

Figure 3: Reference Framework showing key drivers of integration

Figure 4: United health financial performance(source: United Health annual report)

Company United Health9 Year Ending Total Revenue Operating Expenses Operating Income PAT EPS 2011 2010 2009

Humana10 2011 2010 2009

Aetna11 2011 2010 2009

101,862

94,155

87,138

36,832

33,596

30,743

33,779.80

34,246

34,764.10

93,398

86,291

80,779

34,488

31,742

29,035

30,455.10

31,347.20

32,619.50

8,464

7,864

6,359

2,344

1,854

1,708

3,324.70

2,898.80

2,144.60

5,142 4.73

4,634 4.10

3,822 3.24

1,419 8.46

1,099 6.47

1,040 6.15

1,985.70 5.22

1,766.80 4.18

1,276.50 2.84

** All figures in Millions of USD

Figure 5: Financial Performance comparison of United Health with Competitors

Figure 6: Revenue comparisons of key competitors with United health

Figure 7: Stock performance of United Health and competitors