Identifying Business Process Outsourcing And When it Emerged | Article

So what is business process outsourcing (BPO)? Many people have their ideas and they seem to change as technology changes and outsourcing matures. Analyst Eric Blantz of Dataquest, an IT research company, says its definition springs from its heritage as an IT (information technology) services firm. So in its case, BPO is looked at from an IT perspective.

First, Dataquest looks at BPO as information technology (IT)-enabled business processes; those processes that are IT-intensive and/or should be IT-intensive and can be transformed by the application of information technology. Since almost every business process is at least supported to some degree by information technology this definition leaves a lot of gray area. But basically this definition would not include cafeteria services, gardening services, etc. Gardening and cafeteria services have been outsourced for a long time, but require little to no need for IT. BPO would include information-rich business processes.

The second definitional criterion is the separation of BPO and ITO. Dataquest draws the line between business process outsourcing and IT outsourcing in a little bit different place than some vendors and other research firms.

“In general, the short definition is that we would not consider applications outsourcing to be business process outsourcing,” Blantz says. “We see application outsourcing as IT outsourcing because it typically is the management of that application. Onsite or remote, it is an application management function. Now if one were to take an ASP model and add a service component that extends the applications management into an actual business process management role, then it would be considered business process outsourcing.”

So Blantz’s definition needs a very clear process component. And even though an application may be process focused, unless a company is actually running the process it is not outsourcing the process, it is outsourcing the application. This definition differs from some vendor’s explanations of BPO.

Another factor in defining BPO is that it must be a contractual delegation of an ongoing responsibility to an external contractor.

“The key term is ongoing responsibility. So these are long-term contracts,” he says. “If it is project-based then we don’t consider it BPO. If however they were to take over a company function, such that the company maintains little or none of that competency in house, then that would be considered BPO.”

Beating ITO to the Punch

Even though BPO is seen as the emerging market these days, interestingly enough, BPO antedates ITO, Blantz says. Generally speaking, the payroll processing market was considered the first real BPO market that was IT intensive. Other processes had been outsourced before that, but have not been IT-intensive. For example, contract manufacturing, where firms outsource the manufacturing of components or an entire product, has been going on for decades. Other services like facilities management have also been outsourced for years. But the first IT-intensive BPO market, and by far the most mature and consolidated BPO market that Dataquest tracks is payroll, which sprung up in the late ’60s, Blantz says.

“Payroll was one of the first enterprise applications that leveraged the data center,” Blantz says. “It was sometimes seen as the justification for the data center itself from a business process perspective.”

Today, BPO has evolved into a very diverse set of markets. In Datquest’s model the processes are placed into three categories.

  1. The finance and administrative function, which is basically the back office. Finance accounting and human resources (HR) are typically the major buckets. And in each of those there are many sub-processes that can be outsourced on a piecemeal basis.
  2. The operations function, which would include contract manufacturing and supply chain management as a rubric that includes a number of sub-processes that include warehouse management, logistics and indirect and potentially direct procurement.
  3. Sales, marketing and customer care, all in the front office, which include telemarketing, telesales, call center management, database marketing, customer analysis, web sales, web marketing and customer relationship management, which is a bundling of multiple sub-processes.

Where the Processes Fall and Bundling Them Together

This segregated environment changes dramatically as technology bridges some of these processes. So to clearly delineate where these processes fall is really just a conceptual tool. Dataquest and the vendors in this market understand that technology enables the integration of these processes and enables the interaction of the processes in such a way that they often bridge each other’s borders.

“The perfect example would be an end-to-end supply chain management outsourcing concept in which the process bridges the back office, front office and operations in some capacity,” Blantz says. “It’s a trend towards process bundling where there is clearly some efficiencies and incentives to integrating these processes in a single offering.”

Bundling can integrate the processes in a way that makes all the processes cheaper, more efficient and more effectively achieves their goals, he says. Some companies have piecemealed their processes and it is very depredating.

“The incentives to bring all of the BPO functions together are pretty clear to the vendor,” he says. “But the users are still skeptical as to whether a single vendor has the skill set to perform all of the functions. They do appreciate that there are benefits if they can get world class performance on all those fronts from a single vendor. The very fact that they would have a single vendor is a clearly recognizable benefit. Since it provides a single point of contact, the management alone is a key issue. But the larger selling point is that if all the business processes are integrated via IT and management then you would achieve operational performance increases as well as cost reduction.”

Lessons From The Outsourcing Primer:

  • Some consider business process outsourcing (BPO) to be information technology (IT)-enabled business processes.
  • BPO has to be a contractual delegation of an ongoing process to an external contractor and not be used strictly for individual projects.
  • Though BPO is seen as the emerging market, it antedates information technology outsourcing (ITO).
  • BPO has evolved into a diverse set of markets that are separated into three categories: finance and administration; operations; and sales, marketing and customer care.
  • Companies are now bundling the processes to make the delivery and management of them much more efficient.

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