Business process outsourcing to threaten the old world order

IT outsourcing has changed the way firms in the UK and US do business, and it seems destined to have a major impact on companies in mainland Europe.

The most successful outsourcing service providers - a who's who list that includes Andersen Consulting, Cap Gemini, CSC, EDS, IBM, ICL, Integris, and the Sema Group - have grown fat on this change in many an IT user's mindset.

But while the rise of outsourcing is undeniable, the future pre-eminence of these suppliers is far from certain.

Two recent studies show how the market is changing.

Morgan Chambers, Europe's largest consultancy that advises on outsourcing strategies, has published a survey which shows larger service providers don't get close enough to users. This distance isn't always a problem. However, in some cases it means smaller and medium-sized providers are manoeuvring themselves into enviable positions.

The study - conducted after many of the respondents had completed their Y2K-related IT stock taking - revealed most customers of EDS and Sema Group do not feel these suppliers are 'adding value to their business'. Eighty-one per cent of each company's clients came to that dismal conclusion.

Moreover, despite frequent talk about partnership, a large proportion of the 640 users consulted consider their relationship with providers as 'adversarial'. This was the case with 41 per cent of Cap Gemini's clients and 37 per cent of EDS'.

Conversely, medium-sized providers came out more positively. No clients of ITnet considered their relationship with the firm adversarial, and 54 per cent said the company does add value to their business.

Robert Morgan, chief executive for Morgan Chambers said: "These results are not wholly surprising, and for many larger providers high-margin, commodity service provision has its place. But next-generation outsourcing is about business process outsourcing, and unless these companies address their business relationships they will lose out."

The move towards business process outsourcing (BPO) is strong. A survey of 98 senior UK executives last November by research outfit, NelsonHall, showed respondents anticipate 50 per cent growth in BPO over the next two years.

Among the processes that users expect to outsource are human resource services (up to 59 per cent by 2002), billing (up to 54 per cent), procurement/logistics (47 per cent), back office admin (59 per cent), and accounting (75 per cent). Payroll is already outsourced almost half the time.

The precise figures will all vary from sector to sector. NelsonHall believes billing will be commonly outsourced by telcos HR and accounting in the financial sector HR, procurement and logistics by retailers and HR and billing by manufacturers.

Robert Morgan added: "Users' perception is critical. The EDSs and IBMs of this world want to move to the profitable higher ground of BPO, but they have to be close to their clients if they want to do that."

Thus the enviable position of smaller suppliers who often enjoy that intimacy with clients.

Robin Bloor, founder and CEO of Bloor Research, is also sceptical the big players can succeed.

He said: "Business process outsourcing is nothing new - for hundreds of years we've been outsourcing our banking - but it is very different to IT outsourcing. Given there are specialists around who have been successfully outsourcing processes like HR, I suspect today's larger IT outsourcers won't make a success of BPO."

Mike Owen, technology analyst at Datamonitor, said: "Take something like accounting. The accounting function is so different from one vertical [sector] to another, and even from one company to another. It's not like running a data centre, for example, and won't be easy for [the larger IT outsourcers]."

However, Bloor does hold out some hope. He anticipates a real move towards an application service provider (ASP) model of using IT will happen, and it may mean those in the ASP market - whether communications, computing, or services companies - will get a foot in the door when it comes to also handling the processes the applications are used for.

But the fact that IT is now in all parts of a business by no means signals IT outsourcers will start taking care of all parts of a business.

Free versions of the reports are available from:
http://www.morgan-chambers.com/study.htm and
http://www.nelson-hall.com