BPO: Frequently Asked Questions

Why do corporations outsource?
Which business processes are candidates for outsourcing?
Who is interested in outsourcing?
Why is BPO a key area of focus for large companies?
Why is BPO a key area of focus for IT service providers?
Who are some of the vendors active in the BPO market?
Why are managers considering the BPO option?
What is the difference between Outsourcing and Offshoring?
What are some things to consider in a BPO contract?

Why do corporations outsource?
Corporations outsource various functions for all kinds of reasons. The most common reasons are to reduce and control operating costs, move from a fixed cost to a variable cost model, improve company focus, gain access to world-class capabilities, and free internal resources for other purposes, in that order. BPO also provides start-up companies with a much quicker time to market.

Successful BPO requires three acts: 1) selecting the right activities to outsource, 2) identifying the right supplier to provide the services, and 3) ensuring the right governance approach for the relationship.

Which business processes are candidates for outsourcing?
The targeted business processes generally fall into the six areas as defined below:

1. Human resources - payroll, benefits administration, education, and training.

2. Logistics/distribution - procurement, transportation, warehouse management, and material management.

3. Sales, marketing, and customer service - telesales and marketing, database marketing, Web sales, and marketing.

4. Payment services - credit/debt card processing or check processing.

5. Finance/accounting - accounts payable/receivable management, risk management, and general accounting.

6. Administration - tax processing, claims processing, and document management.

7. Manufacturing - design, production and component inventory management

8. Information Technology - application development and maintenance, desktop support and helpdesk support.

Who is interested in Business Process Outsourcing?

• CFO who are looking at every option to further cut costs
• IT Executives under pressure to reduce costs and improve quality
• Human Resources executives seeking lower transaction processing costs
• Finance and Accounting executives considering new processing options
• Customer Care executives building the next-generation virtual global contact center
• Sourcing executives with cost cutting and offshore mandates
• Shared Services executives looking to leverage an offshore advantage
• Outsourcing Providers seeking new ways to reduce cost and improve services
• Venture Capital Firms targeting the IT and IT-enabled services markets
• Consultants working with clients to develop and implement an BPO strategy

Why is BPO a key area of focus for large companies?

• Most of the back-office infrastructures of large firms were built for a previous era - preglobalization, pre-Internet, and pre-M&A. They must change quickly to meet the need for economies of scale and higher competition. For the large firm, the benefit of BPO is access to best practices, which in turn enables improved efficiency and substantial cost savings.
• BPO makes sense in a fast-moving world where management attention needs to be on critical operational processes and where management talent is scarce. Doing fewer things well and delegating what's non-core externally is strategically crucial. Back-offices, while important, are largely non-core.
• Corporations are ready for BPO. They understand traditional outsourcing and are more comfortable embarking on more complex outsourcing engagements.

Why is BPO a key area of focus for IT service providers?
With BPO, the supplier owns and operates the resources, including infrastructure, applications, and people, to deliver a business process as a service to customers. For the service provider, BPO provides:

• Attractive economics and the competitive landscape are two reasons why services providers are interested in outsourcing. Relative to other areas of outsourcing, BPO is compelling for three reasons: 1) less competition, 2) higher profitability , and 3) it provides a beachhead for smaller or new firms to gain a foothold in the market.
• Technology enablers eliminate some important obstacles to BPO. The adoption of Internet/intranet technologies and enterprise resource planning (ERP) software is making it easier to deliver many corporate functions remotely and more efficiently.
• BPO substantially expands the addressable technology services market. Market research firms estimate the BPO market at roughly $175-$210 billion in revenue and growing to $400 billion-plus by 2004.

Who are some of the vendors active in the BPO market?
BPO is a broad category, and many different publicly traded firms can be classified in some way as BPO firms. A representative, though not exhaustive, list of companies that could benefit from BPO would include:

• Affiliated Computer Services, Exult, Hewitt, and ProBusiness, which are some of the newer companies that we think are best poised to take advantage of BPO today (and where it is a materially significant percentage of revenues).
• Automatic Data Processing and Paychex in payroll, as well as Concord EFS, First Data Corporation, Global Payments, and Total System Services in payment processing. These are some of the larger, more established outsourcing firms.
• The well known IT outsourcing firms - Computer Sciences Corporation, Electronic Data System, Fiserv, and IBM - have all established large, billion-dollar-plus BPO organizations and should benefit from BPO's growth. These lines of business, however, are still relatively small as a percentage of revenues (10%-15%) but should be an increasingly important contributor to growth over the next several years.
• The Big 5 consultants - Accenture, IBM, BearingPoint, Cap Gemini Ernst and Young, and Deloitte - have made particular strides in BPO, leveraging their process improvement-oriented consulting practices.
• Other companies that could potentially benefit from BPO include Convergys and West Corp. (both in teleservices or customer relationship management), and Interelate (in CRM).

A critical success factor in BPO is teaming with the right provider. To date, few vendors have provided complete, end-to-end BPO solutions. The market is cluttered with point and partial solutions, but this is beginning to change thanks to vendors such as Accenture, EDS, ACS, and BearingPoint, and their new one-stop BPO delivery models.

Why are managers considering the BPO option?
Our research indicates that outsourcing is well suited for a fast-growth economy, in which companies use service providers to grow rapidly; outsourcing does well in a slow-growth economy, in which companies look to change their cost structures. CFOs are looking at BPO as a way to reallocate resources and focus on core tasks since so many managers are busy trying to juggle broken processes and have little time for vision and leadership.

Managers are looking at BPO as way to deal with application fragmentation. Despite huge investments in enterprise applications such as SAP, Siebel, PeopleSoft, and Oracle, corporations' business processes have become bureaucratic and inefficient through decades of acquisitions, divestitures, adoption of new technologies, and other changes or adaptations caused by the normal course of business.

BPO offers the opportunity to reorganize and "clean up" a specific function, optimizing it for an organization's current operating structure, competitive environment, and technology platform. Moreover, BPO service providers allow a corporation to continue to re-optimize the function over time. The corporate adoption of Internet/intranet technologies and ERP systems is making it easier to deliver many business processes remotely and more efficiently.

What is the difference between Outsourcing and Offshoring?
Offshore development and maintenance is a subset of outsourcing. The outsourcing provider may perform services on shore, offshore, or in some combination of the two.

The decision is based on a variety of factors, not the least of which is customer preference. Another phrase being used more widely is "near shore," which normally means work done in outside the US in neighbors to the immediate north or south, Canada, Mexico or Caribbean. Yet another phrase is "Any Shore" or "Best Shore". For instance, in November 2002, Electronic Data Systems (EDS) unveiled its Best Shore Initiative, designed to help clients pick the best offshore location for their projects.

Offshore outsourcing is gaining a bigger share of the BPO market. Reasons for this being many large corporations are demanding that offshore services be included in a competitive outsourcing bid. These customers have been attracted by offshore vendors offering substantial price savings ($20 - $30 per hour) for IT services like software code writing and testing, as well as for business processes supported by IT, like claims processing or customer support.

What are some things to consider in a BPO contract?
Some critical issues to pay attention to in a BPO contract are:

• Work scope
• Rates
• Term & Termination
• Performance Guarantees
• Deflationary Pricing over length of contract
• Training costs
• Data Security, Privacy, Confidentiality and Continuity of Business
• Indemnification and Insurance
• Financial Strength of Vendor

Fixing a poorly defined contract during a project is very difficult. So getting it right is extremely important for the overall success of any BPO engagement.