The inexorable rise of BPO

CXO asked a number of industry experts for their views on how to make business process outsourcing work, and for their predictions on what the future holds for the European BPM market.

As Senior Vice President for BPO, Dr Bernd-Uwe Pagel is responsible for SAP's global business process outsourcing dealings, including solution management, sales channels and business development.
Brian Stones is Senior Vice President for ACS Europe. He has had extensive international business experience, having been based in the US, France, Finland and the UK, as well as carrying out numerous international assignments.
Les Mara, HP’s Head of BPO, EMEA, has a 25-year career in consulting, systems integration and outsourcing. He has worked in most industry sectors with many significant organisations throughout Europe on challenging business change and outsourcing programmes.
Pramod Bhasin is the President and CEO of Genpact (formerly GE Capital International Services), a high-end business services and technology solutions company serving global enterprises in numerous industries. Under his leadership, GE pioneered the business process services industry in India.

CXO. How have you seen outsourcing trends change over the last few years? What have been the key drivers behind these trends, and how do you see them developing?

BS. Aside from IT functions (desktop, helpdesk, data centres), companies in Europe have been outsourcing several business processes for many years – such as payroll, claims, mortgage processing, accounts payable, etc. Companies with large-scale transaction processing are usually the first companies to outsource – that is why the financial services industry is one of the early adopters of outsourcing. The UK government sector is also one of the early adopters of outsourcing in Europe, driven by the government’s mandate to local authorities to become more efficient.

As companies and organisations become more comfortable with the benefits of outsourcing transactional processes, they progressively start to outsource higher value-added services and more comprehensive processes – they move from outsourcing just one function to outsourcing an entire end-to-end process (for instance from accounts payable to entire finance and accounting operations, from payroll to entire HR operations). As companies move to more comprehensive outsourcing contracts, they are able to benefit from stronger economies of scale and a deeper transformation – especially when they bundle the process with the software application supporting the process (for instance, HRIS).

LM. A number of factors, both internal and external, are driving the move towards outsourcing. Markets continue to expect lower costs, regulatory authorities and shareholders require globally consistent and comprehensive business controls and acquisition and divestment activity demands an operating model which can deliver ‘speed to value’ on a reliable, repeatable basis. Add to that, increasing sophistication of customers and vendors and accelerated product lifecycles, and companies are having to re-focus their F&A resource on to key business support and partnering activities to deliver the services to support strategic objectives.

Whilst a major element of the business case mix at the moment (and for the foreseeable future), labour rate arbitrage will not in the long term be the key driver. Technology enablement, digitisation and self-service in all its forms will play ever increasing roles. This in turn, will shift the focus to other areas such as corporate data warehousing, reduced cycle times and a further move up the value-added service curve to include business analytics and other more complex areas of F&A.

BUP. The first trend is that there is more partnership between buyers and providers in large deals: buyers are becoming smarter, and choosing more carefully. They look ‘under the hood’ and work more collaboratively with the providers to build sustainable solutions from a process and technology perspective. This is a good thing.

Secondly, providers are working at achieving better financial viability. This is not a ‘land grab’ game anymore. It is a bottom line one. They are doing more reasonable and accurate pricing, and strive for leverage and scale. Standardisation and appropriate use of automation are key to it. Some are better than others at that, and certainly our partners are working hard at this and they are ahead of the pack.

Finally, one-to-many, standardised service delivery platforms (like ADP Global View) will also emerge, especially in smaller-scope BPO, where only a few processes are outsourced at once. These will be strong in automation and scale, and deliver sustainable cost savings.

PB. Outsourcing has been changing on multiple fronts, the key driver being a shift in goals. Instead of seeking just cost reduction, buyers now look for total business impact, which includes better cash management, increased profit margins, reduced interest costs, penetrating new markets and customer acquisition and retention, to name a few. With expert providers delivering these goals, higher value processes are being outsourced. Buyers have moved from migrating vanilla functions like customer contact to shipping complex processes such as analytics and F&A. We believe this trend will continue and develop into end-to-end process outsourcing from the current practice of selective outsourcing.

CXO. Outsourcing is a critical issue at so many levels for businesses, but at the same time it is still very much an evolving industry. Does this present any challenges –both to vendors on the one hand, and end-users of the outsourcing business model on the other?

LM. Thinking back to the technology boom of the late 1990s, there was certainly a lot of hype, and aspiration and achievement often seemed to bear little relationship to one another. Companies are still learning how best to leverage the outsourcing model, but the best are no longer suffering the disappointments of some early adopters – although many are still educating themselves in this area (and the outsourcing industry itself has a role to play here). This can sometimes be observed in a focus on pure labour rate arbitrage that is too narrow, and a failure to understand some of the wider benefits and the need to find the optimal blend. A solution that properly incorporates efficiency and effectiveness considerations, and balances cost reduction against value creation, is far more likely to be sustainable over the longer term.

Companies also still often underestimate the scale of the transformation and the management of change challenges. As a result, they fail to appreciate that it is not just a question of moving some activities to another party, but that the entire operating model will often need changing; that cultural issues within the organisation may also need to be addressed; and that a whole new skill set around governance may need to be acquired.

PB. Yes, outsourcing has its challenges both for the buyers and sellers. But vendors and providers have been largely successful in overcoming these challenges as the industry has matured. The major issues to overcome in outsourcing relate to culture, managing expectations and process migration.

Outsourcing stakeholders bridge the culture gap through cross-cultural training of both buyer and vendor employees. Most buyer dissatisfaction is linked to mismanaged expectations. Buyers and vendors overcome this by setting clear expectations upfront. Processes tend to break down when decoupled and moved offshore. Outsourcing players now use methodologies such as six sigma or capability maturity models to ensure smooth migration and running of processes offshore. Most importantly, the recent use of robust governance and supervisory models ensures that buyer and vendor goals are strategically aligned and that execution stays on track.

BS. Within one company, different stakeholders expect different benefits from outsourcing. Some will be looking for cost savings, others for better service levels, while others still are looking for access to new technology. It is critical that the different stakeholders align their objectives before starting the selection of outsourcing providers. Even outsourcers do not want end-users to rush towards the outsourcing selection – because in the end it will end up as a poor outsourcing contract for all parties involved.

The benefits of outsourcing that ACS identified as most critical from its client-base are: economies of scale, process transformation, better visibility over process performance, access to best practices, shorter implementation time for new technology, process standardisation, flexibility and ultimately increase in shareholder value. European companies tend to focus more on the transformational impact of outsourcing than their American counterparts.

However, outsourcing is not a simple decision. Several obstacles are still holding companies back, such as: fear of losing control, fear that service levels will decrease, uncertainty around quality of service providers, lack of benchmarks of internal process performance, employee unrest, cultural opposition to outsourcing. European companies tend to be more concerned over the employee impact of outsourcing than their American counterparts.

BUP. The main issue is that while simpler BPO such as payroll can be considered ‘just buying a service’ and hence follows a normal procurement cycle, more complex BPO should be considered like a corporate development effort, more similar to M&A. This is not the way most clients – and service providers – have looked at it so far. In the past, and in many cases still today, the contractual price has just been the result of a negotiation and did not reflect the actual cost of running the new service delivery organisation. Initially, this may be a problem only for either the customer or the provider – depending on who got a better deal – but in the end a wrong deal structure comes back to haunt both parties.

There are some core choices that affect the economics of the cost structure directly, and they should be understood and addressed. For example, what should be the scope? Is it better to start small? Where should the ‘cut’ be made between outsourced and retained processes? Should internal shared services be implemented first? What are the exit scenarios and options? How much flexibility can and should the client obtain? How much process standardisation should be achieved? What should the client team watch for during the selection phase, and what should instead be left to the provider?

CXO. Analyst predictions indicate that by 2008, 47 percent of European companies will be outsourcing or offshoring back office services. What advice would you give to CxOs that are still thinking about outsourcing their personnel, processes, functions or projects?

BUP. To ensure BPO is sustainable, organisations must allow their providers to implement best-practice processes and scale operations within – and often across – customers. This effort may require adopting the provider’s fairly standardised approach to some processes and customising only by exception. This leads to a more effective use of technology. Commercial software applications, when appropriately implemented and operated, can substantially reduce overall process costs. In fact, some studies have shown that standardised processes, based on a unified technology platform, can reduce total process costs by up to 40 percent. In addition, the right technology can streamline the transition to outsourced processes by, for example, reducing the learning curve for employee self-service; can decrease the risks and costs of ‘exit’ scenarios, enable continuous improvement, and can accommodate dynamic business change such as mergers and acquisition.

LM. Probably there are three key areas to focus on. Firstly, to have a clear understanding of what the strategic objectives are and how outsourcing can support these. As mentioned earlier, simply focusing on labour rate arbitrage is unlikely to deliver a solution that maximises benefit over the long term. Understanding at the outset what the vision and broader objectives are will help to give clarity and focus to the other elements and stages in the journey.

The second key area is to develop a comprehensive operating model for F&A that fully takes account of not only the desired objectives and the respective weightings attached to each, but which also encompasses the enabling technologies to support the vision.

The final point is to have a roadmap to achieving this that clearly identifies the stages the company will pass through to reach the ultimate goal. In our experience, we see this as the ‘Enable; Optimise, Excel, Inspire’ journey. Without this clear roadmap, and more importantly, an understanding of the timelines associated with each stage, there is the danger that an organisation never achieves its full potential, either because it fails to appreciate the ‘art of the possible’ or because failure to understand the scale of the change at the outset leads to ‘change fatigue’ once a ‘good enough’ point has been reached.

PB. CIOs planning to outsource processes should approach global sourcing as a long-term strategy. During the initial stages of outsourcing, buyers took a piece-meal approach to outsourcing. This was understandable given the nascent stage of the industry. Now, with vendors gaining experience, buyers can safely take a long-term and strategic approach to global sourcing. In real terms, this does not mean outsourcing large parts of an organisation from day one. It means that buyers should have a long-term plan and outsourcing map on which processes must be outsourced and when. After developing a plan, buyers and vendors can jointly decide on the pace of outsourcing.

CIOs must also demand more from outsourcing. They must look beyond cost reduction and get total business impact through IT consolidation, process re-engineering and identifying new revenue streams.

BS. The question of ROI in outsourcing remains elusive. Companies should focus on measuring three key groups of metrics: cost, service levels and customer service. With regards to all three groups of metrics, it is critical to establish a baseline before outsourcing and set expectations properly, which will allow for setting the appropriate cost targets and service levels. The costing of the baseline must include both direct and indirect costs to running a function (for instance, not only the direct costs included in the HR department, but also the HR costs that are embedded within business units). The provider should be responsible for delivering regular reports on all three aspects of cost, service levels and customer service – but the end-user should also be directly involved in the assessment. As part of the governance process, end-users should set up at least three levels of management of the contract:

• A strategic level that monitors whether the outsourcing contract is delivering on its strategic intent and takes into account strategic changes that may occur at the end-user or at the service provider (such as a merger, acquisition, change in ownership, etc.). The most senior people at both organisations should be involved at this level of management. Meetings will take place once or twice a year.
• A contract management level that monitors whether the contract is delivering on scope, service levels and cost. Contract managers should be involved at this level of management. Meetings will take place once a quarter.
• A country level that ensures that local issues are resolved in a timely fashion. Country managers should be involved at this level and meetings will take place weekly or monthly, depending on the stage of maturity of the contract – or on an as-needed basis.

CXO. Offshore/nearshore outsourcing is currently proving a hot topic as an increasing number of companies look to cut costs by looking overseas. What challenges/opportunities does the offshoring model present to European businesses? And what do they need to bear in mind?

PB. Rigid labour markets, privacy laws and language are very important challenges European businesses face. Global sourcing destinations such as India are proficient in English but not German, French or Italian. While this was a barrier earlier, several vendors have set up operations in Eastern Europe and Africa to provide services in multiple languages. Labour and privacy laws in several European nations make outsourcing difficult and politically challenging. But our experience shows that outsourcing players are overcoming these challenges.

BUP. Labour arbitrage can greatly help the cost structure and make the deals more sustainable. However, language, cultural, legal and ultimately control issues can crop up and dilute the savings radically. For European companies, typically more risk-averse and less accustomed to dealing with offshore than their US counterparts, it is essential that the offshored labour operates within their capabilities – and this requires appropriate design of the service delivery. For example, tier 1 requests need to be dealt with by in-country helpdesk, but the request needs to be input into the system so that it can be addressed in a conveyor-belt way and offshore clerks who have limited scope for error. Also, technology can help accommodate the language issue for web-based self-services. Other examples revolve around the checks and balances that can be introduced with the right use of technology, so that the offshore clerks delivery can be monitored and controlled appropriately.

BS. Companies should clearly identify their selection criteria and weigh them according to the importance that they want to give to each factor. In selecting a country, companies should examine a number of factors. First, they should consider the size of the labour pool, as well as its quality (for the functions and languages required) and cost (whether it is fully loaded); second, look at the quality of the infrastructure in terms of accessibility for roads, telecommunications and IT, etc; third, consider what the economic and political situation is like, and whether this is stable; fourth, examine whether the country provides a good cultural match; and finally, consider whether any economic incentives are provided by the government.

LM. Offshoring naturally brings with it the benefits of access to a significantly larger talent pool at far lower cost compared to nearshore alternatives, and whilst certain locations can become ‘overheated’ in the short term, the size of the pools and the relative ease with which new locations have opened up within short timelines indicates that this issue is manageable. This also has the secondary benefit of driving offshore centres themselves up the expertise curve, as the need to compete with new locations forces existing centres to increase the skills, range and quality of services that they offer. Of course aggregation into global centres also allows the creation of critical mass, which supports not only further efficiencies through economies of scale, but also globally consistent and standardised processes.

Clearly there are challenges to be faced and ensuring that the process touch points and handoffs function seamlessly is critical to delivering on the promises made to stakeholders, but here a virtuous circle can come in to play as the lower cost environment enables investments in technology and techniques such as Industrial Engineering and Six Sigma quality programmes, which would not be economically possible in a nearshore environment.

Untapped potential
With ACS Europe’s Brian Stones

Today, most European organisations have been selective outsourcers – both for IT outsourcing (ITO) and for business process outsourcing (BPO). This means that they prefer to outsource only small functions or sub-processes rather than entire processes. A few mega-deals in IT outsourcing were signed in 2003 and 2004, announcing the trend towards more comprehensive outsourcing. The strongest untapped potential for outsourcing in Europe is in multi-process outsourcing for non-core, yet critical administrative functions such as finance and accounting, human resources and procurement.

Based on our experience of the outsourcing market in Europe, we believe the top five trends over the next few years will be: 1) the acceleration of the adoption of BPO for human resources and finance and accounting; 2) the increasing use of external sourcing advisors to help with sourcing strategy, vendor selection and negotiations; 3) the increased partnering between software providers and BPO providers to deliver outsourcing services in a shared environment; 4) the expansion of outsourcing to Eastern Europe; and 5) greater consolidation in the outsourcing provider market.