Catalysts of BPO

Outsourcing is a well-trodden path for organisations in search of greater efficiency, cost savings and higher levels of flexibility in order to scale operations up or down in line with demand.

Technology-enabled business process outsourcing(BPO) is nothing new. Discrete functions such as payroll and data input have been passed to third parties for decades. However, technologies have emerged in the past five years that have allowed organisations to ring-fence and outsource many other, non-core aspects of their operations. Major enablers have included the universal use of email, the availability of high-bandwidth comms connections and the provision of web-based access and thin client access to applications – all of which promote collaboration with the external service provider.

As a result the geographical location of the service provider becomes much less important – a situation that has led many companies to seek greater savings by outsourcing to areas that have the required skill levels but are low cost, notably India, the Czech Republic and China.

Unlike traditional BPO, where the processes being outsourced were typically horizontal in nature, a key characteristic of this new wave of BPO is that many of the services are highly specific to an industry or even to an individual organisation. So, insurance companies are handing over their claims processing, electronics companies are passing over their technical support activities and banks are devolving their customer call centres to third parties.

That requires the BPO partner to have or to establish adequate levels of expertise in the specific business area they have been contracted to handle. To ensure high levels of expertise and control, some multinationals such as GE and American Express have chosen to establish 'captive' BPO units at offshore facilities.

However, these lack the ability to leverage the same resources across a number of different clients with similar needs, thereby lowering costs.

In 2003, UK companies channelled £4 billion into BPO but analysts at market watcher Ovum Holway predict double-digit growth through to 2007.

Why do it?

• Cutting costs – Traditionally, the decision to outsource business functions has been solely based on saving money. Services can be paid for on a per usage, per transaction or other flexible mechanisms tied to changing demand.
• Greater efficiency – The outsourcing of non-core processes is designed to enable internal staff to focus on aspects of the business that are strategic. This increases their efficiency, while the expertise of the external service provider (ESP) should lead to the outsourced service being delivered more efficiently.
• Capital investment – The cost of scaling up and down the outsourced service, as a result of changes in demand, can be passed to the ESP.
• Quality of service – ESPs can provide high quality manpower, as a result of more focused training and the wider experience gained from dealing with multiple customers' needs.

The BPO wave

BPO is less of an industry than a set of different (and sometimes very specialist) vendors targeting services at specific business functions, with some BPO segments maturing faster than others. Current leaders are payroll; insurance claims processing; finance and accounting admin; certain areas of manufacturing; marketing and sales call centres and cheque processing. Areas on the rise are credit card processing, HR, procurement and mortgage processing.

The market is currently moving away from conventional, utility-style BPO towards a strategic, transformational model that aims to create value as well as cut costs (see box 'Changing the paradigm').

Market analyst firm Gartner predicts that by 2010, 40% of IT-based business processes will be accessed via a shared service provided by an external party, and also suggests the rise of third-party advisors and even fourth-party firms to monitor growth and performance.

The offshore BPO market is expected to have reached $3 billion in 2004, a 65% annual increase. However, offshore contracts still only represent 2.3% of the total BPO market, says industry analyst Gartner.

Flagship BPO contracts

To tap into BPO demand, traditional IT service companies have focused on building or acquiring expertise in specific 'domains', although several specialist BPO service providers are emerging. Some examples of the largest BPO deals in 2004:

• IBM landed a seven-year deal worth £300 million with Philips to improve customer service, including warranty management, customer care and repair services. IBM expects to take more than one million calls per year for Philips and anticipates 800,000 repairs or exchanges per year.
• EDS was chosen by German technology company Infineon to take over its payroll accounting and recruitment functions for a ten-year period starting in January 2004. To reduce costs, EDS provides some of the services from its shared services centre in Hungary.
• Computer Sciences clinched one of the largest BPO deals ever in the insurance sector, a 10-year, $700 million agreement with Swiss Re Life & Health to provide policy processing services in the US and UK.

Nuts and bolts

Some fundamental technologies have been instrumental in expanding the scope and indeed the feasibility of many BPO opportunities – most related to access, communication and collaboration. But the type of technology deployed depends on the type of BPO.

Browser-based and thin-client access to business applications and data has enabled organisations to contract out customer management to third-parties – especially offshore partners.

Much faster and more reliable bandwidth has also ensured that business services can be treated at arm's length – especially important when privacy laws prevent data being passed to offshore locations.

Various business interaction tools are used to align external and internal processes – from file transfer and B2B integration to email and web conferencing.

Measure for measure

As with all outsourcing arrangements, BPO contracts need to be rigorously patrolled to gauge levels of service delivery and improvement. But that is easier for some sets of processes than others. Whilst it is clearly helpful to measure call volumes in a customer call centre or the number of mortgage applications processed in a financial services application, there are a large number of intangibles that need to be considered when assessing the success of a BPO contract. The danger is to value only what is measurable, when a company should really be attempting to measure what they value.

Placing a business service offshore will save money, but language and culture issues may have an impact on the customer's experience. Staff retention is also an issue with BPO services: as they are usually involved in the mundane tasks, the service provider's ability to deliver a relatively consistent workforce has an impact on quality of service and security.

This highlights a cardinal rule of BPO: The provider responsible for the business processes should never be tasked with measuring their own performance.

"Companies' expectations and demands of BPO providers have escalated, and the lens through which BPO engagements are being evaluated has become much more sharply focused," says Romola Ravi, a BPO-sector analyst at market research group IDC.