BPO: The new baby on the block

Forget outsourcing and offshoring: What`s hot on the sourcing scene right now is business process outsourcing (BPO) - and even though it`s the baby on the block in the outsourcing world, it already accounts for more than a third of the entire outsourcing market.

According to the Everest Research Institute, the outsourcing market in the US in 2005 was $362 billion. BPO accounted for $129 billion (36%). In Western Europe, research house Gartner predicts the BPO market will continue to grow at a compound annual growth rate of 9.4%, with total expenditure expected to reach $33 billion by 2008.

Unlike old-fashioned outsourcing, where companies would typically hire a service provider to run their IT infrastructure or payroll for them, BPO is a far more strategic beast. Gartner defines BPO as "the delegation of one or more IT-intensive business activities to a service provider"; a definition which places much emphasis on technology.

The beauty of BPO is simple: a company engages with a service provider that takes responsibility for delivering a business process, often improving the process while delivering strategic benefits like increased revenues or competitive advantages. The technology is secondary. If the vendor wants to run the process with a blackboard and an abacus, that`s fine too, as long as they deliver meaningful business value.

BPO is working with a client to transform a business process.

Alfons Meyer, business executive, IBM

"Where conventional outsourcing was really just getting rid of a process, BPO is working with a client to transform a business process," says Alfons Meyer, business consulting services executive at IBM SA. "In modern business, staying the same is going backwards."

Meyer says traditional IT outsourcing, like running a company`s computers and servers from a remote location, has become no more than a commodity-type function that usually goes to the lowest-cost bidder. "Now companies are saying get me a better process. Modern BPO touches every function in a company. IT outsourcing is still there, but the world has moved on."

Saving money is a prime driver behind the BPO juggernaut, but Tom Marx, CEO of Johannesburg-based project management firm Nakatomi, says it`s a strategic and proactive move for a wide range of non-core functions.

"There is definitely strategic value here, particularly in the areas of improving quality and service, instilling best practices, and having an expert on tap who will stay abreast of constant change," says Marx.

In short, outsourcing has become a management tool, freeing companies to build upon their core competencies by leaving the non-core stuff to specialised providers who will bring economies of scale, global best practices and a healthy dose of strategic savvy to the process.

"In the early days, everyone thought outsourcing was simply about saving money. We have since discovered the truth: it`s about re-routing money from non-core to core activities - and getting specialist skills, and a host of strategic benefits, into the bargain," says Patrick Makubedu, executive director at Choice Technologies.

As far back as 2001, giant US-based motor manufacturer GM was saving $3.7 million a year by outsourcing its travel-expense processes, representing a 93% cost reduction. The capital saved in such arrangements can be strategically redirected. For example, when a large South African retail operation outsourced its HR, payroll and payroll tax business processes, it was able to focus on higher-end employee-relations issues.

What is being outsourced in 2006? Name a business process. Depending on how BPO is defined, it can represent the entire economy. In the US and Europe companies are outsourcing a growing list of functions, from purchasing and disbursement, billing and collection and HR administration to fleet management, internal audit, payroll and even customer relations.

Right now, procurement BPO is quickly emerging as one of the key high-growth opportunities in the overall BPO marketplace. Although, in absolute terms, spending on procurement BPO is still small (about $2 billion worldwide), Gartner sees huge potential for growth in this sector. As a result, more suppliers are entering, or strengthening, their position in the market.

Michel Janssen, president of supplier solutions, Everest Group, predicts procurement "has crossed the chasm". While there weren`t many procurement deals this year, he believes companies are watching and waiting for the results of the early adapters.

Kevin Campbell, global MD of BPO businesses for Accenture, says interest in procurement will swell "because procurement yields immediate savings which creates a strong business case early on. And it truly fits in well with the bundling of other BPO processes."

With some notable exceptions, like the financial services arena, the BPO market is still in its baby shoes locally. Apart from the usual business processes, the South African market has a number of unique processes being outsourced. This is due, says Nakatomi`s Marx, to factors such as banking the unbanked and the public sector making its services readily available to the public.

Outsourcing is about re-routing money from non-core to core activities.

Patrick Makubedu, executive director, Choice Technologies

This has seen government emerge as one of the chief consumers of BPO services as it rolls-out giant projects like the registration of beneficiaries of social grants in rural areas and the payment of pensions.

It will not be long, though, before suppliers are branching out into other verticals. Areas like credit services processing, data management and healthcare are likely to get more attention in the next year or two, and these specialisations will spawn new entrants into specific verticals.

Peter Ibbotson, CEO at Praxima Africa Payroll Systems, agrees the South African market has been a little slower than other parts of the world to embrace BPO. He points out this is due partly to many businesses not being as exposed to global trends as their counterparts in Europe and America. SA`s move towards outsourcing will be driven by multinational companies that have relatively more international exposure than their purely local counterparts, he believes.

This belief ties in closely with two key factors driving the uptake of BPO in SA: market focus and globalisation. Companies are increasingly focusing on business activities that enable customers to distinguish them from competitors, while looking abroad to boost their revenue streams.

"Right now, BPO is very low on the maturity scale in SA, but that will change dramatically in the next three to four years," predicts IBM`s Meyer. "This will be driven by a number of factors, and we see global competitiveness as a big issue as local companies either move into Africa or even further afield."

Modern BPO touches every function in a company.

Alfons Meyer, business executive, IBM

Marx says most companies struggle with innovation, so they outsource functions like new product development. "Also, the competitive landscape is getting much more complex, and traditional industry boundaries are blurring - look at insurance and banking, for instance. Instead of building expertise from scratch, many companies are choosing to outsource."

How do companies gauge whether BPO is a better strategy than internal management? Offloading tedious functions may enable a company to focus on those which are more important, but it`s not always easy to determine what to outsource and what to keep. In fact, determining core competency is one of the biggest struggles in BPO.

Furthermore, calculating the effectiveness of BPO remains difficult. Where service level agreements (SLAs) traditionally centred on cost, efficiencies and throughput, today`s buyers want suppliers to transform the processes to add value to the business. Increasingly, SLAs will need to account for transformation and value, says Meyer. This means the proper metrics to measure the value of BPO are still being developed.

Another inhibitor on the local market is a general lack of understanding of what BPO is and what it can deliver for businesses. It would seem obvious: by reducing asset utilisation and subcontracting a process to an expert, a company obtains more controllable costs. But that`s easier said than done.

"Lots of vendors trying to position themselves as BPO providers are just doing IT outsourcing," says Andrew Briggs, head of customer interactive solutions at Dimension Data. "They`re providing an application. They`re not really responsible for a process."

BPO also poses challenges for wannabe service providers. Gys Hyman, MD of business performance improvement consultancy Ovations, makes the point that companies seeking to take on the processing of other organisations` core functions should first ensure their own business processes are thoroughly streamlined.

So how does one choose a BPO supplier? Carefully, is the short answer. One assesses the burgeoning number of BPO providers as carefully as one might choose a roommate. Basically, business and provider will be living together for a while.

Marx sees third-party advisors becoming even more important to BPO transactions. "We see a strong demand for their services because very few organisations will look for a complicated BPO transaction without hiring an advisor," he says. Since the transactions are now so complicated, buyers will look to a seasoned advisor with broad experience to guide them through the outsourcing thicket.

"Suppliers with unique industry experience will be the next wave. They will have unique offerings that address the particular needs of that industry in addition to the requisite process expertise," says Meyer.

The question is: how much is BPO changing the face of the modern IT organisation? Are we likely to get to a point where the buying and deploying of technology will simply be made obsolete by business managers who buy business services from providers?

Not likely, says Choice`s Makubedu. "BPO is being driven by business and not IT; but it does tend to focus the IT department on providing lateral IT services rather than line of business. Any business that lets its IT department outsource strategic processes is looking for trouble and I doubt that will happen."

Briggs is more pragmatic, saying it is certainly something that is on the horizon. "The technology is already less important than the performance. People no longer want their IT backbone just to be available; they need to know what performance it will deliver, and are questioning whether they want to invest in technology at all themselves."

The next step in the evolution of outsourcing, says Meyer, is business transformation outsourcing, which he predicts will be faster, more enduring and more strategic than BPO. It will see suppliers and vendors not only taking over a process, but also contracting to make dramatic improvements in key areas like profitability.

The bottom line? It`s not about relinquishing control, but about becoming secure with the idea that someone else can continue the pursuit of excellence. That way the organisation can focus on its core competencies - and stay on the cutting-edge at the same time. It`s small wonder BPO is such a tempting proposition.