The big buzz in the human resources (HR) world is the transaction engine. In December 2002's BPO Journal, Everest defined the term: transaction engines incorporate labor arbitrage and economies of scale into the leverage (creation of benefits) to provide cost effective solutions to repetitive activities. Repetitive activities in a transaction engine include both "automated" activities (clear rules) and "analysis activities" (some level of judgment). As a result, transaction engines can capture additional synergies through self-service and appropriately grouping processes for cross-process synergies.
This potent mix of software and labor arbitrage has created remarkable savings for companies who have outsourced their HR transactions to service providers using these engines. The $64,000 question is: do transactions engines perform as powerfully in other BPO processes? If you look at finance and accounting, the answer is: not really.
Why Transaction Engines Work in HR
Here's why. To make transaction engines work, the business process they serve has to be similar across companies and industries to produce those eyebrow-lifting savings. The service provider, who has invested significant capital in building and testing its transaction engine, can continually charge less for more as it adds companies to the engine. The scalability of the process itself means a wide variety of users keeps the cost per user low.
Employee payroll processes are fairly standard worldwide. Ditto for benefits administration.
Why Transaction Engines Don't Work Well in F&A
But finance and accounting is a different creature. Unfortunately, accounting practices do not scale across industries. Every business segment, it seems, has its own idiosyncrasies. For example, health care and manufacturing do not have the same order to cash. The processes are too unique for the scalability required for a transaction engine.
The ability to reduce customization of existing solutions is an important driver for capturing value in a transaction engine. According to Glenn Davidson, head of marketing for Accenture HR Services, "The less customization required by the client, the better the solution's economics." This is a key reason why finance and accounting transaction engines can not produce the value they do in HR.
In addition, many companies feel uncomfortable sharing their finances with others in a transaction engine setting. Some are worried about antitrust rules if the engine has participants from the same industry. Others are worried about their competitors peering inside their kimonos. Enough companies are so cautious that there's just not enough interest to encourage the service providers to invest in a transaction engine.
Fortunately, there are many ways to create value through business process outsourcing. Labor arbitrage - the ability to substitute cheaper labor with commensurate or better quality - creates huge value in this process. Combine labor arbitrage with process redesign and you have a value creation generator as significant as the HR transaction engine.
Lessons from the BPO Outsourcing Journal:
- Transaction engines are a powerful tool for HR outsourcing. They create value because of their scalability. The cost for every user goes down as more participants use the engine.
- The processes must be similar across all industries for a transaction engine to generate significant value. Transaction engines for finance and accounting aren't as effective because most industries have unique entries that make the process less scalable.
- Finance and accounting outsourcing creates value through labor arbitrage and process redesign.