BPO Evolution: From Time-Sharing to Offshoring

Before diving headlong into the BPO opportunity, we should explain its place in the larger history of business automation. BPO is the most recent chapter in a long cycle of business automation that dates back to the time-sharing data processing model of the1960s.

Outsourcing has evolved over the years and now takes many different forms. Outsourcing started as hiring outside vendors to perform specific tasks or manage specific projects within a department of a large organization. Recently, companies have strategically transformed their business by outsourcing entire technology operations or business processes, such as logistics, customer relationship management, and finance. In human resources, outsourcing started twenty years ago with pension plans, 401K, and payroll. Today, it has evolved to recruiting, hiring, and performance management.

The change that is taking place with BPO is from transactional (task) to strategic (process). A fundamental shift from an administrative and tactical focus to a deliberate competitive leverage has occurred. The reason is that companies are becoming more demanding. After a decade of outsourcing their non-core functions, cost-cutting, and improved service levels are not enough of a benefit to outsource. These days, CEOs are demanding value. They have come to expect transformational change from their outsourcing efforts.

To fully understand where outsourcing began and how it has evolved, let's look at the four different outsourcing business models: traditional data processing outsourcing, IT-enabled outsourcing, collaborative task outsourcing, and strategic outsourcing.

Traditional data processing outsourcing
BPO in data processing is not new. Rochester, N.Y.-based Paychex, for example, has been outsourcing payroll processing for small businesses since 1971.

Companies outsourced tasks to cut the growing costs associated with in-house systems. The main goals are to lower costs and hand off support of functions that were outside of a company's core competency. The benefits are cost savings, access to best practices, and a superior management focus on key issues. With the traditional outsourcing relationship, companies expect the same consistent level of service as they are currently experiencing.

The examples of traditional data processing outsourcing include First Data (transaction processing), Fiserv (consumer banking), and Sabre (travel reservations). At the center of this data processing transformation is the need to convert traditional business practices into an e-business model to service customers, suppliers over the Internet.

Information Technology Enabled outsourcing
Within the last few years, outsourcing has evolved from a tactical, cost-cutting maneuver for offloading routine tasks and acquiring temporary manpower to a strategic element. BPO is now an important theme in IT services, and is now responsible for significant revenue growth for many vendors. IT-enabled BPO changes have come in waves that slowly gather shape, gaining energy and momentum. These waves relevant to the outsourcing industry over the past three decades include:

• 1960s - Time-sharing
• 1970s - Data processing
• 1980s - Entire IT operations
• 1990s - Shared business services
• 2000s - Internet-enabled B2B alliances/consortia
• 2000s - Internet-enabled process outsourcing
• 2000s - IT-enabled offshore services

Collaborative Task Outsourcing (Shared Services and Co-Sourcing)
The main goals are to respond to competitive pressure by enhancing non-core processes and reduce expenses. The benefits are significant cost savings, improved services, access to competitive skills, and improved management focus on key issues. With the collaborative outsourcing model, companies can expect a higher level of service because business processes are not simply sent outside the company and supported but were re-engineered and better integrated.

In large corporations, BPO as a concept is not new - it has been a popular management tool in areas like payroll for decades. Organizations have long outsourced such functions as building security, cafeteria services and staffing. But now core activities like finance and accounting are getting outsourced as companies race to reduce their cost structure to stay competitive.

Examples of companies that practice this include American Express, General Motors, and others outsource tend to be data-intensive and are extremely varied, including accounts receivable and payable services, check processing, claims processing, document and records management, loan administration, credit card application processing, payroll processing, order tracking and distribution, student loan processing, mailroom services and call center operations.

Strategic Process Outsourcing
The focus is on business outcomes, not just infrastructure or tasks. The main goal is to achieve sustainable enterprise-level service improvements by transforming processes. The benefits are significant dramatic improvements in service, cost savings, access to leading edge technology, access to industry knowledge, reduced time-to-market, increased innovation, and improved management focus on strategic issues. With strategic outsourcing, companies can radically change their company by utilizing business process outsourcing (BPO) as a competitive advantage.

Today, BPO means examining the various processes that make up the functional operations, and then working with external service providers to re-engineer processes, digitize them and outsource them.

The bottom line: BPO is a variation on an old idea: traditional data-center outsourcing. Business process outsourcing is the evolution of traditional outsourcing into a more comprehensive service offering. BPO has evolved over the last few years; this is not a new industry, and the business model is a proven one.

BPO is a large, fragmented, and high-growth market and should allow many different models to thrive simultaneously. Effective BPO requires putting together three business techniques - re-engineering, digitization, and outsourcing. Re-engineering's objective is to redesign the process, reduce unnecessary steps, and eliminate redundancies.

Digitization objective is the transform the business process from a paper-based model to an electronic one that is highly integrated. The goal is use technology to break down barriers between traditional functional silos, such as those found in finance, order processing and call centers. Outsourcing uses skills and resources of specialized outside service providers to perform many of these critical, yet non-core activities. An effective BPO initiative accomplishes all three objectives at the same time, thereby speeding implementation and ensuring that the intended benefits really hit the bottom line.