European Outsourcing Catching Up with U.S. | Article

BPO Becomes the Big Party in Town

celebrating outsourcingAcross Europe, growth within both the ITO and BPO industries continued in 2002. The UK continues to be at the forefront in developing these markets domestically, and both the public sector and financial services have been areas where outsourcing has been most prevalent.

According to Gartner, the global IT analyst firm based in Stamford, Connecticut, revenue growth in both ITO and BPO is catching up with the USA. The strongest growth predicted, however, is in BPO. Gartner expects the European Union (EU) BPO market alone to be valued at $64 billion by 2005.

“BPO opportunities within the UK are at an interesting stage of development. Progress has been steady rather than spectacular, but indications are that the market is about to take off,” says Ray Alder, programme director of managed services for Steria, a leading pan-European ITO provider based in Velizy, France, which entered the UK outsourcing market in 2002.

Research from Holway Ovum, a research service specializing in the UK software and IT services marketplace headquartered in London, UK predicts that, “BPO will be the only party in town.” It expects the UK BPO market alone to rise from £3.5 billion in 2002 to £10.3 billion by 2005. This represents a growth of 29 percent for BPO against a projected growth of just seven percent for ITO.

The Evolution of BPO

According to Andy Toms, marketing director for the European financial services division for Computer Sciences Corporation (CSC), a global ITO firm, headquartered in El Segundo, California, BPO has moved forward through two phases: outsourcing of generic services such as finance and HR, followed by the outsourcing of core processes. “The market is just starting to enter its third phase of ‘strategic BPO,’ where the key shift from the traditional BPO environment is around supporting business transformation,” he says.

John Mackie, a senior consultant at London-based research firm Morgan Chambers, agrees: “BPO is seen by the larger outsourcers as strategic, while ITO is often tactical and is increasingly seen as a commodity service,” he says.

Mackie also points out a growing trend among ITO providers that are expanding into BPO because the margins are better, opportunities are greater and the revenue streams are strong and visible. “Typically an outsourcer will engage with a client to outsource IT to then win BPO in the future. Joint ventures are becoming popular and can be a valid tool for business transformation,” he explains.

This trend is becoming evident in the industry. Mike Lusby, a business development director at Liberata Life, Pensions and Investments, a Buckinghamshire, UK-based BPO services provider, says many ITO suppliers have started to set up a BPO capability. “This is increasingly happening through joint venture opportunities, where the supplier manages a client’s operation (people, processes and systems) and uses this to enter the BPO market and attract new clients to be managed from the joint venture,” he explains.

According to Matthew Vallance, London-based regional director, Europe, of ICICI OneSource Ltd, an India-based offshore provider of call center and transaction processing services, there is an increasing emphasis on BPO services. “BPO is seen as one of the few substantial growth opportunities and could help major outsourcing vendors compensate for any slump in the ITO market,” he argues.

Some outsourcing firms have started the joint venture trend, firstly through acquisition in their own market. Steria is an example of how European IT service providers are waking up to the revenue potential of offering joint ITO services. Its merger with Integris, a respected UK-based outsourcer and systems integrator, earlier in 2002, gave Steria a foothold in the UK.

Alder says though Steria’s major strength in the UK is in ITO, the company’s strategy for BPO is to partner for excellence and focus on its core consultancy and ITO skills.

Challenges in the European Market

There are, however, challenges within the European market. Guy Willner, CEO of IXEurope, a European provider of managed IT solution based in London, UK, points out that both ITO and BPO industries in Europe are still fragmented. “Companies that may be big in the U.S. have had trouble entering Europe, finding they have to attack country by country. They may be good in the UK, for example, and lousy in Germany.”

Regarding ITO, Willner says that a major trend has been a move to selective outsourcing, whereby individual systems or applications are outsourced rather than entire IT departments. “This has been driven by a need to control costs and a growing desire to maintain high standards of service for business critical systems such as email, without entirely losing control over it.”

Toms at CSC expects short to medium-term growth in both the German and UK markets, as financial services there have been hit the hardest. “It’s purely economic drivers that that enforcing the case for ITO and BPO,” he says.

The evolution of both ITO and BPO is in varying stages depending on the country in question. In the UK, Germany, France, and to some extent Scandinavia and Nordic countries, says Toms, there has been a wider acceptance of ITO as a viable business option.

Predictions for 2003

Nigel Montgomery, a director at London-based AMR Research, believes that companies are increasingly looking to buy outsourced solutions based around a process area rather than a functional area, which is in turn based around the performance of a particular part of the business. “As companies across Europe move toward becoming performance-driven enterprises, BPO is going to make a lot of sense,” he says.

For ITO alone, Willner at IXEurope, is more cautious. He expects a tough 2003, based on suppliers’ obligations to immediately reduce costs for customers already in outsourcing contracts. “We don’t expect any significant new IT spend until 2004. Focus on quality, resilience and stability of supplier will be paramount,” he says.

On the other hand, Toms believes CSC’s ability to develop its ITO and BPO offerings will help it gather momentum in 2003. “We’ve recently launched an offshore BPO solution for the UK life and pensions sector and anticipate significant interest from companies in this industry,” he says.

From a broader perspective, Mackie at Morgan Chambers argues that increasingly more aspects of many businesses will become “outsourcable.” He believes virtual organizations will become more common as companies focus on their core competencies.

Outsourcing Trends in 2003:

  • BPO in Europe is seen as a significant growth opportunity that could help major outsourcing service providers compensate for any slowdown in the ITO market.
  • There is a compelling reason for BPO to boom as firms shift towards creating performance-driven enterprises, with solutions based around particular process areas.
  • ITO providers that expand into BPO can benefit from better margins, greater opportunities and revenue streams that are strong and visible.
  • Selective outsourcing of individual applications over entire departments can fulfill the business needs of controlling costs as well as maintain high standards for business critical systems without losing entire control over IT operations.

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