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FT.com article - A new chapter in outsourcing
A new chapter in outsourcing
By Mark Vernon
FT.com site; May 21, 2003
Business process outsourcing (BPO) is a rare boom area in IT services. According to Forrester Research, it will grow by up to 25 per cent this year, in dramatic contrast with the rest of the IT services marketplace, which will see little, if any, noticeable growth. However, the flip side is that the battle for BPO business will be fierce, as a highly fragmented market becomes even more competitive, and services firms worldwide rush to add BPO offerings to their portfolios. This has serious consequences for companies engaging BPO partners: they need to be clear both about what BPO is and how the relationship should be measured and managed.
In traditional outsourcing, an IT consultancy might come in and offer advice on how to update or upgrade a business function or facility. Alternatively, a service provider might come in and run certain parts of that function, such as the IT infrastructure. But the company itself is left with overall responsibility for changes and delivery.
But with BPO, changes to and delivery of service move out of house too. This might include a project as large as outsourcing an entire HR department, from sick note processing to in-service training. Here, the HR department becomes a facility which, in effect, the company buys back in as a service from the BPO partner. Alternatively, some smaller, discrete business functions might be sourced this way: for example, many banks source items processing with a specialist under BPO arrangements.
A good example of what is becoming more widely possible is found in the case of GlobalExpense, a company that specialises in travel and expense management. This is something that every company has to do, but is, for most, something of a bureaucratic headache. "Automated through BPO, a company can take a step back from the bureaucracy and improve its expense policy," says Ashley Whittaker, director of GlobalExpense. In other words, BPO is not just a cost-saving exercise but one that ideally improves the business process too.
p>"Take an issue like dealing with the Inland Revenue," continues Mr Whittaker. "The rules governing what can and cannot be offset against tax in this area are legion. If a company gets them wrong, it is not just that they stand to be fined, but also that they might be incurring extra costs unnecessarily. For example, travelling business people can spend £5.00 on sundry costs in the UK per day, but if they go over that limit the company is liable for the tax on the full amount. This is the kind of spend that BPO can control." What is more, this type of BPO service is not only within the reach of large corporates but smaller organisations too, since it can be effectively delivered over the web.
But is BPO, like its outsourcing cousin, at risk from being a good idea that only delivers in part? Mike Dodd, an analyst at Forrester Research, emphasises the importance of companies developing a coherent strategy for sourcing providers, especially with BPO contracts, in which the company is especially reliant on external expertise. However, he believes that such strategies are currently few and far between. "Many organisations approach IT services outsourcing using an entirely ad hoc sourcing process,' Mr Dodd says. "They have relied heavily on centralised procurement organisations that possess little or no understanding of the complexities of dealing with IT services suppliers - or how to reward and penalise them effectively." A recent survey conducted by Forrester Research, for example, revealed that only 50 per cent of organisations have documented an IT sourcing strategy. Particularly disturbing was that 43 per cent had no documented strategy or process at all.
Another issue is pricing. The heart of the matter here is that BPO is a nascent business and so pricing structures and attractive deals can be hard to evaluate. "How do you assess the cost of a move to best practice, for example, or how much is business transformation worth?", asks David Orr, principal consultant at Orbust Consulting, a specialist in BPO. "It is important for companies to have good subject matter knowledge. For example, they may not know much about HR, and so are at risk of outsourcing it blind." He also points out that it can be hard to discern where the danger points in the relationship lie up front, and recommends that companies begin by outsourcing what they understand before moving on to more innovative arrangements.
Even when sourcing BPO partners is carried out in an efficient, effective manner, the relationship has to be managed over time. "Companies have to work harder to understand what goes wrong and how it can be put right," says Nigel Backwith, a consultant with BPO specialist Xchanging. In fact, most CIOs or CFOs have little experience in measuring value, and are therefore ill equipped to apply this concept to their current outsourcing relationships, let alone to BPO. "The main issue is not that hard to discern. It is that the focus of most traditional outsourcing relationships is solely on reducing the cost of current services. But because the resources and skills of outsourcers are the most valuable potential assets BPO offers, focusing on cost misses the opportunity for increasing the business impact of IT.
Cost calculations alone have the virtue of being transparent and compelling. They are not the same as business alignment." His point is that successful outsourcing contracts are relationships between the parties, not transactions, and, as such, the value an outsourcing partner can and should deliver goes well beyond low cost. Alignment is everything. Without it any BPO arrangement will fall short.
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