2000 was the year of the BPO mega deals. BPO deals “are getting larger and we will see more of that,” says Tom White, global managing partner for Business Process Outsourcing at Arthur Andersen (AA), a Big 5 accounting firm based in Chicago, Illinois. These outsourcing contracts ranged from $350 million to over $1 billion. And they were long-range contracts, spanning a decade.
The mega deals included:
- General Motors (GM) with Arthur Andersen
- BP Amoco with Exult, PricewaterhouseCoopers and Arthur Andersen
- Nortel with PricewaterhouseCoopers
- Bank of America with Exult
White says AA’s contract with GM was unique because it was the first time a vendor concluded a finance and accounting contract that brought 17 different European countries together in one shared services center. Employees at AA’s shared services center in Barcelona, Spain initially serviced the GM account. Now other BPO clients are in the process of centralizing the languages and cultures of their countries into seamless BPO processes. White notes the payroll function is not included in this agreement for Europe (although Arthur Andersen does process payroll for more than 200,000 employees in the U.S.); GM chose to process the payroll locally.
“Things are a lot more complicated in Europe” because of the national diversity, says White. Europe has been a “fast follower to what has been happening in the U.S.,” he adds.
Outsourcing Reduces Risk
Outsourcing continues to gain popularity because it helps companies reduce their risk. The outsourcing vendor should be an expert in the field, so it should do a better job than the in-house folks who likely aren’t as up-to-date on the latest process improvements and methodologies. In addition, White says buyers “don’t want to continuously focus their efforts or money on new technology” associated with their outsourced processes. Suppliers, however, are eagerly investing in this technology. Finally, trying to attract and retain back office employees in full employment areas like Silicon Valley is difficult, White points out.
“Companies are realizing they can transfer these critical processes to a third party with confidence,” says White.
White says almost every process in a company is core. “If AA misses a payroll for GM’s 300,000 employees, the employees will hardly consider that a non-core activity,” he says. The deciding factor in determining what process to outsource centers more on market competitiveness. Companies have chosen to keep their ‘mission critical’ processes, the ones that promote their brand in the marketplace, under their own roofs.
This year White predicts the mega deals will continue. “Companies realize they can’t remain world class in everything,” he says. Executives are slowly understanding they have to focus on their core competency, concentrate solely on their market advantages, and outsource everything else.
White also bets outsourcing vendors will form partnerships to serve buyers. They will align their interests and present their skills as complementary. “This is a change from the old IT outsourcing model where vendors handled other suppliers with a hammer,” says White.
This year White believes the BPO vendors’ investment in technology will reap benefits. He predicts BPO outsourcing will move toward “a lights out processing mode.” This means shared services centers will operate with fewer people doing the actual processing as technology shoulders more of the load.
BPO providers are also looking offshore to countries like India where there is a large and talented labor pool available at a lower cost. “Labor will become less and less of an issue,” says White.
A BPO Shake Out in the Offing?
2001 may also be the year a shake out occurs; he sees the small BPO start-ups as the most vulnerable. He says many small companies rushed into this space with no history and no customers. The AA executive believes buyers who outsource important tasks like finance and accounting want to see capital and management “stand behind the deal.”
Currently, the hottest areas in BPO are human resources and finance and accounting, two processes with “reasonably mature” applications. White says “there’s a lot of talk” about customer relationship management (CRM), but that field is still in a nascent state. Legacy systems have been a drag on CRM outsourcing growth.
Lessons from the Outsourcing Primer:
- The BPO mega deals started in 2000 and will continue this year.
- 2001 may see a shake out in BPO providers; the smaller vendors are the most vulnerable.
- BPO outsourcing continues to grow in popularity in Europe.
- BPO outsourcing reduces risk for the buyer.
- Buyers are outsourcing processes that don’t give them a competitive advantage in the marketplace.