Business process outsourcing (BPO) is on the rise, with traditional IT services companies moving into this space. ZDNet Australia looks at what is happening in this emerging market.
Faced with weak information technology spending, companies that provide IT services are expanding beyond their traditional role as overseers of networks, PCs, and computer help desks and are now moving into "back office" areas such as accounting and human resources.
So-called BPO, or business process outsourcing--which involves an outside company taking over various back-office functions including procurement, invoice processing, and the like--has become a vital market for IT companies as corporate spending on conventional data-centre services has dropped.
Computer services giant EDS, for example, calls "enterprise shared services"--when a company outsources several back-office operations at once--its top growth opportunity. According to the company, about 14 percent of its global annual revenue, or US$3 billion, comes from BPO. In Australia it is less than 10 percent of the company's revenue, according to managing director Don Easter, but he says EDS is expanding its BPO presence in the local finance industry.
What is BPO?
What EDS calls "enterprise shared services", Gartner calls "highly aggregated BPO offerings". In a report on the business process outsourcing market, Gartner says BPO has moved from single-process outsourcing, such as accounts payable, to become highly aggregated offerings. The example Gartner gives is outsourcing human resources, which involves payroll processing as well as administration, recruiting, training, and personnel administration.
Easter gives a broad definition of BPO, saying it's the outsourcing of part of a business process or whole of a business process, which can include CRM, call centres, management of a section in the supply chain, finance and accounting, HR and training, as well as procurement--where the services company may take over the strategic sourcing or management of suppliers.
A good example of BPO, explains Easter, is Qantas outsourcing its food and administration, or a hospital outsourcing its food and linen supply.
"Typically where EDS focuses," he says, "is financial processes, cheques, mortgages, processing loans, and institutional processes."
BPO and IT
The trend for computer services companies to move into back offices is accelerating in part because traditional business functions are now enmeshed in the computing backbone, believes Gartner analyst Rebecca Scholl. Shifting from providing IT assistance--running computer help desks, fixing and installing PCs, and managing networks--to handling payroll checks and related tasks is less of a jump than it used to be says Scholl.
Certainly EDS is expecting an increase in demand for its BPO services. The company announced in November that it planned a multimillion-dollar investment over the next five years to meet customer demand for help-desk operations and BPO services, including customer relationship management (CRM), human resources, finance and accounting, and procurement.
But Scholl warns that the transition into the growing BPO market may be bumpy for companies historically focused on IT services. According to Gartner's BPO report, many of the BPO deals resemble IT outsourcing deals because enterprises are transferring assets to the service providers.
Easter has a different view. "I think the contracts are definitely different to IT contracts and the reason why is because IT contracts over time have become very mature, there's a whole industry that has grown up about how you define an IT contract, how you measure it, what best practice is--that knowledge and understanding of BPO isn't as mature," says Easter. "So yes there will be some learning, and yes there will be some mistakes but it won't stop the underlying trend."
Gartner actually predicts that many of the first BPO deals will end up being unprofitable for the service provider because of the difficulty in working out how much to charge customers. Because it is a relatively new market the providers don't have previous deals to draw experience from.
Scholl says other possible hurdles for the service providers range from an overly technological approach and a short-term "project-based" mentality.
BPO on a roll
Business process outsourcing is not a new field, with some deals such as payroll processing in existence since the '70s, but the market is fairly immature in Australia with only a small number of BPO service providers and an even smaller number of large BPO deals.
However the market is heating up these days, thanks to companies' keen interest in cost cutting, their desire to improve business methods and their growing comfort with outsourcing arrangements.
Gartner estimates that the worldwide market for business process outsourcing grew from US$115 billion in 2000 to US$124 billion in 2001, and will expand to US$178.5 billion in 2005. According to its BPO report, Gartner believes the drivers to this growth will be:
- Enterprises desiring to focus on their core competencies
- A need for companies transform current or create environments that have been under funded, and
- A desire for enterprises to reduce transaction costs.
EDS, meanwhile, forecasts that the BPO market will grow at an annual clip of nine percent to 11 percent through 2005, with sales of enterprise shared services growing three times that rate. IT services overall will expand at a more tepid eight percent to 10 percent annually, EDS expects.
"The IT outsourcing business is very mature, it is 40 years old . . . business process outsourcing is less mature but you can clearly see that it is just a shift," says Easter. "People have a better handle on technology, they start to understand what they are good at and what they aren't good at and they start to think about how they can outsource some of those business processes to people who that is their business."
What's in it for me?
Processing insurance claims and handling student loan collections for banks may not be as glamorous as designing a new computer network architecture, but those business tasks represent a large expense that companies are eager to trim, says Lesley Pool, chief marketing officer for US-based Affiliated Computer Services, which provides both IT and BPO services.
BPO results can be more dramatic than IT service offers, says Pool. While IT outsourcing, such as farming out control of a data centre, can cut costs 10 percent to 15 percent, outsourcing a business process may shave 40 percent to 60 percent off the bottom line, Pool says. "What you're providing on the BPO side is much more valuable to the client."
One key to the savings is increased use of technology such as scanning systems that read data from paper forms and populate database fields. Whereas back-office transaction processing used to be labour-intensive, machines now do much of the work.
Outsourcing can also lead to more accurate results, says Pool. One client of Affiliated Computer Services found the accuracy of its transaction processing jumped to 97 percent from the low 60s, claims Pool. At the same time, health care claims that had taken the client three weeks to process could be done in one day by Affiliated, she adds.
The Players
Affiliated has followed the BPO money trail. Initially formed in 1988 strictly as an IT services provider, the company made a push into business process outsourcing about four years ago. Now two-thirds of its revenue comes from BPO deals. The company posted annual revenue during the last fiscal year of US$3.1 billion, and it employs more than 38,000 people.
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-Yes there will be some learning, and yes there will be some mistakes but it won't stop the underlying trend." â€"Don Easter, MD, EDS |
IT services company CSC sees the BPO light as well. While it has yet to make any waves in the Australian market, it has been busy overseas providing BPO services including claims processing, invoicing, human resources and payroll, and customer support. The company has staked out a BPO claim in the energy industry by establishing an Energy Services Center in Dublin, Ohio. The company says its agreement with an energy company with US$101 billion in revenue is the first major deal in the energy industry in which full customer service operations are being outsourced.
"As more states deregulate their power industries, CSC will be there, ready to take over back-office operations so that these companies can concentrate on their core business," CSC says on its Web site.
EDS' roots are in processing Medicare insurance claims, and the company now processes more than one billion health care claims per year. According to the company, it also supports credit card activity for two million merchants in 19 countries. EDS has about 14,000 employees working at help desks or contact centres.
In Australia it is focusing more on financial processes. EDS is managing the billing systems for both Telstra and Optus. The company made itself known as a player in the local BPO market through its 10-year $1 billion deal with Westpac. EDS processes around 750,000 mortgages and loans for the bank's Credit Services division. EDS sees Unisys--with its cheque processing services--as its main competitor in Australia.
Management consulting and technology services company Accenture also is a BPO player. It is only just entering the Australian market, focusing on taking over human resources services. According to David Clinton, managing partner Accenture HR Services (formerly e-peopleserve), 95 percent of the company's business is consulting and the remaining five percent is BPO services. Clinton sees that changing to 25 percent BPO by the end of next year, and in three years time he expects it to be 50/50.
Accenture's first BPO deal came in the early 1990s, when it outsourced finance and accounting functions for British Petroleum. Accenture now handles a variety of outsourcing tasks, such as airline ticket processing and call centre staffing for AT&T. The Victorian Government is a local BPO customer, as is Avanade, and Accenture itself.
IT services giant IBM also has a BPO strategy. Having acquired consulting and technology services company PwC Consulting last year for US$3.5 billion, IBM now trumpets its ability to help businesses run more efficiently through a combination of management advice and technology. While IBM has so far been quiet on the local BPO front, Clinton believes IBM combined with PricewaterhouseCoopers has the potential to be a major global player.
However IBM's approach to BPO is a bit different from other IT services companies, in that it focuses on processes that can be highly automated, such as developing an efficient procurement system.
"It doesn't make sense for IBM or the customer to just go after the cheaper labour play," says Dev Mukherjee, vice president for On Demand Services at IBM. If a client wants to outsource manual tasks such as call centre staffing, IBM finds a partner provider, Mukherjee states.
Warning and advice
Gartner's Scholl calls this "transformational" outsourcing, which involves improving business processes instead of just managing existing ones. Scholl, though, warns that the concept may be partly hype. She points out that service providers may not be able to continuously enhance a customer's methods over the life of a 10-year deal.
Scholl also points to the roots of IT companies as a possible obstacle to good business process outsourcing. Tech-oriented providers may focus too much on technology metrics rather than business results, and may suffer from a culture arising from short-term IT projects.
"Once they're done with the implementation, they just leave," says Scholl. "In [business process] outsourcing, you're there for the long term."
Gartner advises companies entering into a BPO relationship to comprehensively map their processes against what the provider is offering to highlight any gaps in functionality that will need to be addressed.
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