Whether your crystal ball suggests a bear or a bull market for 1999, the view for business process outsourcing (BPO) is unambiguously rosy. According to Richard Smith, who leads BPO in Europe for Pricewaterhousecoopers, “I think the rate of growth of organizations moving into business process outsourcing is going to grow quite dramatically during 1999.” His forecast is based on a growing acceptance of BPO.
Smith makes a clear distinction between traditional outsourcing such as Information Technology (IT) and BPO outsourcing involving entire operations such as finance and accounting, procurement, or human resources (HR). While there’s no question that these are critical functions, they are not core functions.
Boom or Bust, BPO Grows
Another central point in Smith’s view is that outsourcing is motivated by factors that are stimulated by both expanding and contracting economic conditions. “It seems pretty clear that the last seven or eight years of sustained growth are probably going to come to an end,” he notes, “and in Europe and some emerging economies around the world, we’re looking at zero growth.” In this environment, it’s typical for organizations to take a hard look at their track record for squeezing costs out of their operations, and to explore other alternatives, including outsourcing.
Cost is just one of the benefits from BPO outsourcing. The real advantage, according to Smith, “is that it can be used to achieve a much higher pace of change and a more extensive approach to restructuring in non-core functions, which means it accelerates the cost-reduction process.” It’s his view that the low economic growth overall will only spur BPO growth even faster, in part because there has been so little BPO implementation to date.
“Europe is a quite difficult environment to work in, very unlike the homogenous US market where it has been easy to get economies of scale through shared services and common systems,” says Smith. He notes that PWC has developed a radical solution to BPO with shared service operations that support back office operations and “achieve much better efficiency benchmarks than possible in-house.”
Partnering and Trust
Another factor Smith cites is the changing nature of outsourcing relationships. Traditional outsourcing relationships, such as IT, have been characterized by a reliance on contract agreements that specify exactly what is to be done, what the service levels are, and what the incentives and penalties are. In BPO situations, the outsource providers take a much broader view of what can be accomplished with non-core functions like finance, accounting, HR, and procurement. This perspective offers clients the opportunity to consider more comprehensive and integrated organizational improvements. But the added complexity requires an approach characterized by trust and partnership rather than a tightly-worded contract.
Notes Smith, “It’s just not possible to manage that sort of relationship purely through a contract.” It isn’t as easy to reduce finance and accounting operations to performance parameters as it is for IT. He feels that this is particularly apropos for international and multinational clients who seek a provider with the capability to provide outsourcing support on a truly global basis. “So the relationship is not primarily based on what’s specified in the contract,” Smith says, because often the clients “can’t define exactly what the service parameters are, what the existing performance level is, or even accurately define what the existing costs are.” In this scenario, it’s more typical for the outsourcer to take over the process without a detailed agreement, and after a period of hands-on experience, develop an appropriate performance measurement framework, service level agreement, cost identification, and performance improvement goals. Unlike the traditional outsourcing contract with a fixed price and service level agreement, Smith says that, “BPO is a more open relationship where the customer and supplier agree to share the benefits.”
Naturally, such relationships take time to develop. Most BPO deals don’t come about like traditional outsourcing arrangements. While a client might discuss outsourcing a function with several suppliers in the initial phase, BPO agreements are the result of a client and supplier working together to understand the key issues and developing trust. At that point, the supplier is positioned to develop a meaningful value proposition and BPO proposal.
Smith cites a typical situation where a client might solicit proposals for a payroll function or portion of an accounting process. “We have the opportunity to present our credentials and discuss how to deliver a more effective finance and accounting operation,” Smith says, “and out of that discussion comes an integrated solution that encompasses multiple processes and delivers greater shareholder value.” It can easily take six to nine months developing the relationship and the outsourcing proposition before a contract is signed.
The link to improved shareholder value is a big factor in escalating the BPO process to senior management. As BPO gains more acceptance in boardrooms, more top managers are favorably disposed to give it serious consideration. No one likes to be on the “bleeding edge,” so having a credible track record with other organizations is crucial in concluding most BPO deals. Another management concern is control. “A few years ago,” says Smith, “if you’d spoken to a CEO about outsourcing finance and accounting, the response would be ‘that absolutely cannot be outsourced;’ now, we’re seeing very strong acceptance of finance and accounting as functions that can be outsourced.” Other areas that were formerly off-limits but are increasingly considered for outsourcing include HR and non-supply chain procurement.
Smith suggests a head-on approach to address client concerns like losing control, increasing risks, or increasing costs. A BPO provider should be able to demonstrate that in fact, the client will enjoy improved control, reduced costs, and reduced risk. Smith observes, “Too often, organizations add people and services in a function without considering the costs, and end up changing the process and losing control.” Outsourcing improves the focus on efficiency, effectiveness, and cost. To drive the point home convincingly, Smith says, “We take prospects to one of our centers operating around the world, and encourage them to talk with our existing clients. They talk about concerns they had, the working relationship, and the benefits they have realized.”
Surfing the Wave
In looking ahead for critical issues, Smith notes the importance of staying ahead of the technology wave because of the heavy reliance on technology in outsourcing services. He cites the increasing reliance on the Internet, intranets, and e-commerce by procurement, where investment activity is heavy. Another area where reliance on Internet and intranet technology is increasing is the HR function, particularly evidenced by the increasing deployment of “self-service” employee benefit programs. Employees can access and manipulate their benefit programs directly, saving time and the employer money.
Looking toward the coming year, Smith notes the natural client base for BPO is international, where the opportunities are limited more by the number of qualified providers than any other factor. And with BPO relations characterized by a spirit of shared information, trust, and common goals, he is convinced that there is no more powerful tool than encouraging a prospect to discuss BPO with another respected organization. He’s sure there’s no better way to discover what outsourcing is like, how the staff is handled, what the concerns are, and what the benefits are.