The business process outsourcing (BPO) industry is growing everyday, with new processes being outsourced and new players entering the market. Allie Young, principle analyst, Dataquest, a Gartner Group company, sums up the situation succinctly. “There are a lot of different flavors of business process outsourcing out there,” she said.
BPO often is pegged as the new kid on the outsourcing block when compared with IT, but it actually has been around since the beginning of the industry, noted Young. She pointed to claims processing and check transaction processing as BPO activities that were among the earliest forms of outsourcing.
“A lot of service bureau type services were really sort of the foundational origin of today’s business process outsourcing,” she said.
The outsourcing landscape has changed considerably since the early days of the industry, when IT was the driving force and one of the biggest motivators was cost reduction. Over time, companies began to look at how to measure the return on their IT investment and to ask their outsourcing providers to help make that happen, according to Young. That spurred other activity.
“Simultaneously, as we were moving along the IT outsourcing area, we started developing a lot of areas of expertise in implementing new enterprise systems, using consultants more effectively to help us align IT and business strategy,” she said, “integrating the latest technology to really optimize what we’re doing with technology to improve business.”
What is BPO?
Then BPO began to gain recognition as a viable management strategy. While much has been written about BPO, Young underscores the importance of customers understanding the meaning of the term. BPO, as defined by Gartner Group, is specialized outsourcing services whereby a vendor assumes responsibility for managing and optimizing an entire business process or business function, including the supporting staffing and information technology, to effect improved business performance or results.
“Sometimes we’ve tended to use business process outsourcing and enterprise application synonymously because, by their very nature, some enterprise applications packages actually change how some processes are handled within an organization,” said Young. “It’s important that we make the distinction that simply implementing an ERP or enterprise application solution is not business process outsourcing.”
The BPO Value Chain
So what, in simple terms, is business process outsourcing? Young categorized the many “flavors” of BPO.
First there are the commodity type services that date back to the beginning of the industry. Gartner Group labels those ‘transactional,’ as compared with the newer forms, which Gartner categorizes as ‘strategic business process outsourcing.’
“With strategic business process outsourcing, you’re looking as different processes that, once reengineered, redesigned and implemented, have the ability to have a quite significant business transformation impact,” said Young.
The BPO value chain begins with the transaction intensive process areas or ‘back office’ services, such as payroll processing, claims processing and benefits administration. At that level, service providers compete on a price basis.
Then come the fulfillment type services, such a procurement, human resources, accounting, and document management. “These may not be a core competency of the firm, but they potentially could have great impact on the bottom line,” said Young.
The next step up the value chain leads to value-based pricing, where the vendor shares in benefits to the client and some portion of the vendor’s payment is tied to their meeting the client’s performance objectives.
At the highest level is what Gartner labels “enhancement outsourcing,” where areas such as customer relations management, supply chain integration, and other key commerce activities are outsourced.
“There we see an even higher likelihood of value-based pricing,” said Young. “There’s very much of a shared initiative, thinking outside the box on how to get more business benefits from the enhanced process.”
While the array of BPO services on the market offers many choices for companies, Young stressed that businesses need to understand where their comfort levels are.
The Importance of Corporate Readiness
“Corporate readiness is a very critical factor in companies being able to move into some of these higher, more strategic areas,” she said.
To help companies objectify the process of determining their readiness, Gartner Group has developed a model to help with sourcing decisions. The model assists companies in determining core competencies that must be retained and other areas that are candidates for outsourcing. An underlying question is how to make non-core competencies world class.
“They know they can’t do it all,” said Young. “They don’t have the resources. They don’t have the time. They don’t have the capital investment, and frankly, they don’t want to put limited resources into making some processes world class — but the best organizations and the most competitive organizations will have understood how to make more and more of their processes world class.”
The Gartner model also encourages companies to look at industry solutions they may have developed internally as the potential for going to market as an outsourcing provider. Some companies have done that, partnering with other companies to spin off a new entity that takes their solution to market.
Such situations are one of the factors driving a new cast of players in the BPO marketplace. In addition to the traditional providers who have served the IT outsourcing industry and are now emerging in the BPO area, new players are packaging their expertise in specific business processes and taking them to market.
BPO is definitely on the rise. Young said customers not only will have a wide range of providers from which to choose, they also will have choices in how they go to market — single vendor, partnerships/alliances or joint ventures – and whether they want customized replacement services or the less expensive remote service offerings. With the many options available, the future for BPO is bright.
“BPO has the potential to be the ultimate form of outsourcing,” said Young. “By that, I mean that there’s not the kind of tug-of-war that occurred in so many outsourcing deals where the focus was really on cost savings. Even when that was achieved, there was a certain dissatisfaction…Business process outsourcing is a way that partnerships can be formed that bring together a lot of expertise. It’s more of a guarantee that business objectives will be met, because contract metrics are designed to reflect those business accomplishments.”
The question that is leading companies BPO is a simple one.
“It all gets down to the notion we can’t do it all, so how can we most effectively get world class process,” said Young. “That is a very important beginning point.”
Lessons from the Outsourcing Primer:
- Some BPO services date back to the early days of outsourcing.
- BPO should not be considered synonymous with enterprise applications.
- BPO offerings range from transactional to the much more complex enhancement outsourcing area.
- Corporate readiness is a critical factor in the success of strategic BPO relationships.
- The changing BPO landscape will include both familiar and unfamiliar players.