Business Process Outsourcing: Should you believe the hype?

It's a market that was worth £3.5bn in 2001 and is predicted to be worth over £10bn in 2005... That's an annual growth rate of over 30 per cent. These are the kind of statistics that tend to grab the headlines, and business process outsourcing has certainly had its fair share in recent times.

But is the hype justified? Is it really 'the next big thing', or just another meaningless marketing term? Should your company be looking at it - and if so, why?

Ovum Holway, whose analysts came up with the figures for the UK market above, describe business process outsourcing (BPO) as "Long term contracting out to an external company of the management and delivery of business processes."

That may sound obvious, but it's reassuring to know that this is one three letter acronym that does exactly what it says on the tin.

So is it a new name for an old phenomenon? Not really. Banks have been outsourcing cheque clearing operations for years; HR departments have used third parties to provide payroll services for a long time; both examples of BPO, a term which has been knocking around in the industry for at least five years.

Nevertheless, the hype around it has definitely grown of late, it is certainly becoming more popular - and the state of the economy has a lot to do with that.

Every company is looking to cut costs these days, and it's the one factor you'll hear mentioned most often in any BPO discussion.

Liberata specialises in working with companies in the financial services sector. Mike Lusby, business development director of Liberata Life, Pensions & Investments, said: "Cutting costs is what it's all about. Five years ago, you wouldn't have found any life and pension outsourcing deals. But we're expecting a huge acceleration in growth over the next five to eight years."

Ramkumar Akella, regional manager for Europe of offshoring specialist Infosys, said: "There is pressure on the margins of all companies in terms of increasing competition. Everyone's looking to cut costs in the first year, and then gain year-on-year productivity gains. That creates a compelling business case [for BPO]."

Les Mara, executive director of Cap Gemini Ernst & Young UK, agreed: "When we talk to companies, it is usually an FD-led discussion. They want to reduce costs, or turn fixed costs into variable costs. Given the current state of the economy, all companies are trying to do this, while improving the efficiency of their administrative processes."

The latter point is crucial, despite the emphasis on bottom line issues. As Lusby also went on to say, cost isn't the only factor. BPO allows you to focus on your core activities and get rid of those you'd deem as a chore. Lusby said: "We prefer to talk about strategic and non-strategic. No company should be interested in retaining control over non-strategic activities."

That's partly a cost issue - a service provider which specialises in a particular process or a range of similar processes will give you access to economies of scale you couldn't possibly match in-house - but it's also about gaining access to specialist expertise and, hopefully, a better quality of service.

This recognition is helping the BPO bandwagon gather pace. Companies are becoming more sophisticated in working out what's core, and what's not, and are indeed looking at issues other than cost. Philip Heggie, VP UK and Europe Global Outsourcing, Unisys, said: "The use of BPO has become a legitimate business strategy. There are numerous examples in the UK of BPO deals that five years ago would have been considered 'sacred cows'. These include finance, HR, banking back office and insurance back office processes."

But now, all these are fair game - and all have something in common. When asked if certain business processes are more suitable outsourcing targets than others, Heggie said: "Processes that are structured and repeatable are particularly suitable for outsourcing, as are processes that would benefit from the economies of scale and scope that an outsource service provider is able to provide. I'd also include processes that are core but not critical and that are usually back-office oriented, for example cheque processing and claims processing."

There are many benefits to be reaped from a healthy BPO relationship. Ovum believes that freeing up management time, speeding up time to market, management of rapid growth, and better risk management are all key potential plus points.

Gartner also thinks the first of these is crucial. In a recent BPO report, the analyst house said: "An additional driver for BPO... and the motivation of the CEO to outsourcing business processes is the need to find a way of capitalising on their most scarce resource. What is this resource? Cash? Ideas? No, it's the time of good managers."

The report continues: "Management bandwidth is a scarce resource and CEOs want to free up the time of key managers so they may work on the issues that make a vital competitive difference to the business. In most organisations the managers are busy trying to juggle broken processes, dealing with day-to-day low-value issues rather than having time for vision and leadership. If this is not the case in your organisation, as your managers are able to focus on leading the company forward, perhaps you are not a good candidate for BPO."

Whether this applies to your company or not, most analysts and industry experts warn against a blinkered focus on monetary issues. According to Gartner, European businesses wasted around E6bn on badly structured outsourcing deals in 2002, largely because so many were designed to save money in the short term and ignored longer-term business requirements. Remember, cheaper isn't always better.

And there are some other traps lurking to catch the unwary. Unisys' Heggie warns: "Failing to have a clear sourcing strategy is one potential pitfall... as is not being adequately prepared for the long, complicated procurement process involved and misunderstanding the real 'partnership' needs of each partner."

Indeed, that procurement effort should span many months. Liberata's Lusby said: "Don't under-estimate the amount of time it takes to go through the whole process."

Ovum again has something to say on the risk front. Its list of thorny BPO issues includes: supplier survival, change management, contract lock-in, security/confidentiality, decline in performance, and a loss of control - all familiar arguments to the anti-IT outsourcing brigade, but worth repeating.

Gartner identifies another potential problem. Just as the recession is affecting end user organisations, the suppliers are also having to take drastic action - and over-selling has become a very real issue. Its report advises: "Understand what BPO is - an increasing number of vendors are using it as a 're-labelling' exercise... Know the market - there are a few 'old hand' BPO vendors in Europe. Sales prowess may outstrip delivery capability."

To avoid many of these traps, Gartner has come up with a simple, three-point plan to improve the structure of an IT outsourcing deal, but which apply to BPO deals as well:

* Take a long-term view and look at your service provider as part of your company (what Infosys' Akella calls the "extended enterprise" concept) * Build deals that can cope with continuous change * Invest in the skills, resources and processes needed to manage the contract.

Sounds easy? Clearly it's not, but with some good planning, careful management and maybe a little luck, BPO could well work for your organisation.

But who will work well with your organisation? As the focus of BPO is on the BP bit and not IT, there are some new names to conjure with, although Ovum's list of the likely winners on the supply side of the equation do include the usual suspects with a background in 'traditional' IT outsourcing - hardly surprising given the IT-intensive nature of many of the processes companies are outsourcing these days. Capita on its own accounts for 15 per cent of the market, while Cap Gemini Ernst & Young, CSC, EDS and IBM are all extremely active. Unisys employs around 6,000 BPO staff.

But then the business service players are joining in (Amey, Hays, Serco); the consultancies too (Accenture, Deloitte et al); the transaction processing specialists are taking a slice of the pie (ADP, Centrefile, Ceridian); and last but not least are the new breed of pure-play BPO outfits (e-peopleserve, Xchanging).

Come 2005, Ovum reckons there'll be even more new names near the top of the supply side list: pure-play BPO outfits such as Exult; new UK entrants such as ACS and Convergys; and offshore players such HCL, Infosys, Satyam, and Tata.

So, come 2005, will your organisation be on the BPO end user list? Is it all hype, or is it the next (old) big thing? Only you can answer that... and, as ever, we'd be delighted to hear your views on the subject. Email us at editorial@silicon.com.