Six Ways BPO Looks Different in 2013

Six Outsourcing, BPOThe BPO landscape is changing as fast as the colors on the leaves as summer turns into fall. Why now? Professor Ilan Oshri, Professor of Technology and Globalization at the University of Loughborough, says the maturity of the BPO industry, experienced buyers gained with both captives and third-party service providers, and the providers use of technologies are major influencers. Oshri, the Director of the Loughborough’s Centre for Global Sourcing and Services, says  these forces “have been in play for some time now but have become quite influential recently.”

Here are six ways BPO in 2013 looks different. Buyers and providers are:

  1. Automating lower-end processes
  2. Opening new geographies
  3. Transforming higher-end processes
  4. Creating new deal structures
  5. Re-badging 2013 style
  6. Moving work back in house

A little history: BPO grew up in silos. Companies cut their teeth on outsourcing by sending pieces of a process to an outsourcing service provider. Outsourcing today, however, increasingly cuts across an organization horizontally, not vertically. Many enterprises have moved to hybrid model: The in-house department works with the shared services department that in turn works with a global business service provider. Together they provide the service to every department in the company.

Automating low-end processes

According to Xchanging’s Guy Kirkwood, the BPO landscape is bifurcating into low-end and high-end process provision. Typically, a service provider can automate the simpler work, sometimes “taking out people entirely.” Kirkwood, head of channel, says today service providers are increasingly able to automate a single process end-to-end. Automation also increases efficiency.

Opening new geographies

Even the Indian service providers, who built their business model on labor arbitrage, are now looking for what Cathy Tornbohm, vice president, BPO research for Gartner, describes as “cheaper fingers.” Kirkwood says even the Indian BPOs are offshoring to less expensive locales like China because of wage inflation and high attrition rates at home.

Professor Oshri adds, “At the same time, competition between attractive locations has intensified in recent years with about 140 countries bidding for offshore work.” He lists South Africa, Morocco and Bulgaria as three of the latest rising offshore locations.

Transforming high-end processes

After 30 or more years of outsourcing, enterprises are comfortable with it. That comfort is encouraging them to outsource ever more complex processes. “The complexity of the processes we manage is on the rise,” the Xchanging executive says.

Outsourcing buyers are keen to transform these processes, Kirkwood observes. (We define transformation as doing the same thing but more effectively.) One way to do this is to harness new technologies to drive the transformation.

Here is an example from Lloyd’s and the London market. The reinsurance market actually started 325 years ago in coffee shops where the brokers would gather to put together deals. Until recently many Lloyd’s agents carried around manila folders so they could underwrite the risk in red ink, just as the founding underwriters did. Xchanging is currently rolling out a wireless network within the City of London, London’s financial district, so agents are able to do their business anywhere with their iPads.

“This will transform the service and actually move Lloyd’s back to the coffee shops,” Kirkwood says.

Evolving deal structures

After decades of surprising large outsourcing failure rates—sometimes as high as 50 percent—the overarching attitude is changing, according to Kirkwood. Now both the service provider and the client are focusing on buyer outcomes. Kirkwood says the global market today is much more dynamic. “The outsourcing contract can—and often does—become out-of-date on day two. By year three what clients contracted for is not what they need now,” he says. Service providers today are creating contracts that allow them to spend less time writing change control tickets, much to the appreciation of their buyers, he has noticed.

This has created a major change: outsourcing deals are much more flexible. “Today, service providers can’t say ‘Our way or the highway.’ Provider flexibility is critical to successful outsourcing deals going forward,” he says.

Outsourcers are now creating new commercial models to mirror buyer needs—and not just wants. Kirkwood says Xchanging, for example, has nine different commercial models for buyers to choose from. Professor Oshri adds that “the tremendous change in how technology plays a major role in delivering certain BPO functions has resulted in an emergence of new commercial models as well as far more flexibility in how buyers consume these services.”

He observes another type of new commercial model is where clients and providers set up joint ventures “to ensure the provider delivers value beyond the one-off cost savings.”

Also, Kirkwood adds service providers are accepting more risk in their deal structures. “Gain sharing has become more attractive,” especially if the buyers are far along on the outsourcing maturity scale, he reports. That’s because enterprises that have successful shared services organizations or captive operations have already taken the excess cost out and are effectively efficient. “They ask us what else they can do,” says Kirkwood. These buyers are ready for gain sharing, he continues, because that gives both parties economic incentives to experiment and innovate.

The new kind of re-badging

Historically, re-badging happened when an outsourcing service provider added its buyer’s employees to its payroll when the buyer outsourced the process these employees handled.

Today’s buyers appreciate the cost savings and knowledge outsourcers provide. But some don’t want to ship jobs offshore. So the service provider sends its employees on site to work with the company’s existing employees. The goal: the blended group performs the outsourced business process better, faster and more efficiently.

Professor Oshri says the recent trend of re-badging “results in providers ramping up operations onshore.” For example, he says BPO providers in the UK have recently set up delivery centers in northeast England “to ensure proximity to clients while benefitting from access to local skills and an attractive cost base.”

Moving work back in house

Professor Oshri conducted a survey this year that found 44 percent of the firms surveyed back-sourced at least one offshore function during their outsourcing experience. These include contact centers (Santander) or even the entire IT department (GM.)

Reasons typically include:

  • A new CIO
  • Change in strategic direction
  • Dissatisfaction with the service provider
  • External pressures

Hopefully these changes will benefit buyers, providers and the industry itself.

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