The emergence of the pure play BPO provider was one of the biggest developments in the BPO world during 2000, observes Mark Hodges. Hodges, a vice president of corporate development for Exult, a human resources (HR) BPO provider based in Irvine, California, defines pure play providers as companies that were founded to do nothing but BPO. Their tunnel vision focus on outsourced processes distinguishes them from other outsourcing providers like EDS and CSC, “old school providers who do everything including BPO,” explains Hodges.
Pure play BPO providers include LeapSource in Phoenix, Arizona, and SourceNet in Houston, Texas. Exult, which uses Web-based technology to take over the entire HR process, is another. “We are the human resources department for global 500 companies,” says Hodges.
In 1999 Hodges says BPO buyers had only one choice when they wanted to outsource: the traditional players. Over the past 12 months the pure play players have become a legitimate option for BPO buyers.
These companies became a reality because private equity backed them, Hodges reports. For the first time venture capitalists were willing to invest in a BPO start up. Hodges says four years ago none of these investors would have considered the possibility of writing a check to launch a BPO company. Exult was the first to be funded in November, 1999. “We started a wave,” he says.
Their founders are the big names in the BPO industry. Many are executives who left long established careers in the Big 5 accounting world to join the wild world of the pure play providers. “Highly seasoned and highly paid executives left their secure jobs to go to a start up,” Hodges says. One executive who joined Exult had been with Arthur Andersen 20 years. The dotcom environment made it attractive for them to join a fledgling firm.
Leaving a Long Time Position to Run Their Own Show
Hodges says for many the opportunity was too tempting to pass up. These executives were offered the chance to run their own shows and concentrate on BPO, what they did best. A BPO executive from EDS, for example, was just one of many department heads. BPO executives “would never be at the top in terms of talent,” Hodges continues.
In addition, the talent in a pure play BPO is focused only on BPO. Executives are not worried about their consulting business or the operation of the data center. They can channel all their energy and capital into improving the process.
Hodges says pure play BPOs are more agile that traditional outsourcing companies, in part because theirs is a new business model with different rules. They understand the Web-based world and feel comfortable in it. “We’re selling more than cost reduction. Having a new economy edge appeals to customers,” says the Exult executive.
These new companies are eager to please their buyers because retaining a customer can become a make or break proposition for them. “Our customers are more important to us,” says Hodges. If a provider like EDS loses a big player, “that would be painful but not mission critical,” says the Exult executive. On the other hand, if a new company doesn’t sign or retain its first big customer, “you don’t have a business.”
However, buyers selecting a new company do shoulder risks. Hodges points out there are three areas of danger. Here are his suggestions to help buyers navigate around the shoals:
Three Things To Watch Out For
- Look for seasoned management beyond the executive team. Examine closely who is going to run the processing center or be responsible for the process. “Talent can get thin very fast,” he points out.
- Check the cash burn. How long can the company run with its current funding? If it loses a customer or doesn’t sign another one, will that be the death knell?
- Study the scalability. Can the company leverage its economies of scale? Customers who demand unique solutions that can’t be leveraged to other customers may cause problems for the BPO provider.
The second major development of 2000 was the rise of the megadeals, which Hodges is labeling contracts over $100 million. The pure players signed contracts with blue chip customers who are household names. These megadeals have helped legitimize these up and coming BPO vendors, says Hodges.
Exult signed three last year. The BP Amoco deal is for $600 million over five years. The Unisys contract reads $200 million over seven years. In October Exult announced its contract with Bank of America, which totals more than $1 billion over 10 years. Other mega deals signed last year include SourceNet’s contract with Compaq and PricewaterhouseCoopers’ agreement with Nortel.
Hodges says the Web-enabled BPO is in his crystal ball for the future. BPO providers are testing the waters to determine how much of the BPO offering can be Web-enabled. Once providers start dealing with large companies, customization becomes required. Not everything can be delivered on the Web to these corporations. Hodges says some employees of these companies don’t have Web access. Other companies don’t have HR Enterprise Resource Planning (ERP) systems like PeopleSoft or SAP. BPO providers will be crafting solutions that use the Web to the greatest extent possible.
The second trend the Exult executive envisions for 2001 is the realization that ASPs method of operation will not translate overseas. He sees ASP success in the domestic market only. He believes ASPs are a great solution for companies with 500 to 1,000 employees, “5,000 tops. Their mission and their business model doesn’t scale beyond that,” he contends.
Today’s “Hot” Processes
He points out that ADP, the payroll processing outsourcing provider, only writes U.S. paychecks. He doesn’t see multi-national corporations flocking to ASPs.
The third trend involves the popularity of certain processes. Hodges reports HR and finance and accounting “are really hot processes right now.” Back office work is a fertile area for BPO because these processes naturally allow themselves to be standardized. “That were the money is being made,” he says.
Lessons from the Outsourcing Primer:
- Pure play BPO providers came into their own last year.
- Many long time employees of traditional outsourcing firms and Big 5 accounting firms left their jobs to join pure play BPO start-ups.
- The pure play providers signed many megadeals last year.
- Finance and accounting and HR are the two hot processes currently.
- Look for seasoned management beyond the executive team.Talent can get thin very fast.
- Check the cash burn. How long can the company run with its current funding?
- Can the company leverage its economies of scale? Customers who demand unique solutions that can’t be leveraged to other customers may cause problems for the BPO provider.