Although we’ve dressed it up and given it a new name, business process outsourcing (BPO) has been with us since the beginning of outsourcing as an industry. Areas such as payroll processing and credit card processing are regarded as mature outsourcing industries, and payroll is perhaps one of the oldest outsourcing niches around.
Despite the rich history in those areas, BPO still can be considered a new frontier in terms of the soaring diversity of processes now being outsourced. To understand BPO’s role in the marketplace, let’s take a look at how this segment of the industry has evolved.
A simple definition of outsourcing is taking a business process and giving it to a supplier to do. That contrasts with contracting or normal purchasing. When you purchase, you buy a discrete item or service, but when you outsource, you’re buying the results of a process. When you contract, you retain control of the process, but when you outsource, you allow the supplier to have control of the process.
New Worlds to Conquer
Now that concept of outsourcing, which was already widely accepted in information technology and the processes mentioned earlier, is being applied to a steadily increasing stream of processes. In addition to accounting and invoice processing, businesses are outsourcing facilities management, vehicle maintenance, meter reading, logistics — the number of outsourcing industries is multiplying by the minute.
What is driving this new frontier of opportunity? The answer lies in a change of perspective among top executives and companies’ need to create competitive advantage. The concept of outsourcing has entered into the executive psyche, and executives no longer regard it as something to do when you’re in trouble. It has lost its stigma and is now viewed as a legitimate and powerful strategic tool. Now executives are finding that outsourcing, which has worked well in such areas as data processing and payroll processing, can work equally well in other non-core processes.
The Executive Advantage
That knowledge is helping executives streamline their operations by shedding their companies of non-core processes, which aids in their pursuit of competitive advantage. They are searching out suppliers in areas other than the traditional outsourcing niches. Early adopters of BPO have either created outsourcing companies or encouraged a well-positioned supplier to enter the niche.
And some suppliers are responding to that pull of the marketplace. They have seen the opportunity to transform their businesses and add new long-term lines of revenue stream. By owning the business process, they can substantially add to the valuation of their companies. That’s what we see happening with the Big 5 companies, as they recognize the opportunity to generate wealth. PricewaterhouseCoopers, for example, is recognized as having significant expertise in the re-engineering process. As a business process outsourcer, they combine that expertise with a strong brand name and are able to build the kind of economies of scale that allow them to add significant value to their customers while retaining significant revenues and appropriate margins.
Ryder has made the transition to BPO successfully in the logistics field. Xerox has executed the strategy to perfection by wrappping an outsourcing service around their market position and process knowledge in reprographics.
Supply and Demand
However, it begins with customer demand. Companies are examining their processes and discovering that many of those are non-core and suitable for outsourcing. Suppliers, in response, are lining up to provide services ranging from accounting and invoice processing to basically all non-core processes. And that combination — market demand and suppliers’ recognition of the opportunity for creating significant new wealth — is what’s driving this ‘new’ frontier we call BPO.