Make an informed decision on BPO: adopt the correct strategy9 June 2012
Evaluating the use of BPO initiatives continues to be a key factor influencing an organisation’s strategic progression. Cathy Tornbohm, research VP at Gartner, reports on what will help CIOs, and sourcing and business managers to understand the key factors governing their decisions.
During the recent recession, organisations put much of their new BPO activity on pause as they waited to see what their world would look like in the future. Now, they are faced with a potential second bout of prolonged economic uncertainty and the continued risk of another post-financial-crisis recession afflicting Western economies.
Such uncertainty could push public and private sectors into more austerity. However, in 2012 one of two scenarios will occur in organisations. Some will once again go into pause mode and very few BPO engagements will occur. Others will realise the potential business benefits that a BPO provider can offer, both in terms of actual lower cost of services - and also in terms of the opportunity to perform certain actions better.
That is, organisations will start to calculate the opportunity cost of not being better at activities such as collections, procurement or logistics, and they will contract for the resultant business benefits with a specialist BPO provider.
The major tipping point for any organisation is when it can see business benefits from moving to BPO. This is different from in the past since many more BPO services are now available and are proven to reduce costs and improve processes. What's changed in 2012 is that the offshore delivery model is more established, and cloud-sourced services, mostly for point solutions, are becoming more available. This is supplemented by the additional challenge of whether the BPO industry is ready to invest in totally standardised process offerings for a wider range of processes beyond payment systems, payroll and expenses. A key question for the market is whether the standardised 'utility' model will be adopted in the tough economic climate of 2012.
Key challenges and trends in 2011
At the start of 2011, there was optimism that the economy would facilitate a return to growth. But after several years of cost containment, 2011 didn't see the BPO industry rebound to double-digit growth. In fact, economic conditions worsened as the year progressed, forcing Gartner clients to take a hard look at both their internal operations and BPO contracts.
Key challenges in 2011 included a desire to establish pricing and service benchmarks. Pricing benchmarks, for example, pertained to transparency for BPO labour costs or transaction pricing models. However, pricing is often still a function of what the provider can sustain rather than an industry benchmark standard. Service benchmarks, which provide metrics for transaction turnaround time, accuracy and other quality measures, are also not readily available in the public domain.
In 2011, BPO providers made several shifts in vertical, geographic and skill coverage via many acquisitions, either to strengthen service areas or to start to build end-to-end process capability. To this end, BPO providers made investments in procurement operations, order-to-cash processing and HR for fuller employee services (such as payroll benefit services, recruiting and learning BPO, and data mining services).
Outlook for 2012
The outlook for 2012 is as follows:
- Challenging economic factors will lead organisations to evaluate all BPO delivery models and how BPO providers can support or supplement a business activity. Increased competition in certain industries such as retail, CPG and telecommunications will cause more companies to evaluate BPO. Government bodies will want to see if BPO can supplement their services as they cut costs to pay for the deficits accumulated following the banking crisis.
- Providers are building maturity models, benchmarking tools and service optimisation models. Leading BPO providers have launched these types of process-improvement methodologies and Gartner expects an increase in these types of process methodologies in 2012.
- New offerings for cloud-enabled and cloud-sourced options will emerge as providers look for the right formulas for evolving their BPO services. BPO providers will survey existing and new clients throughout 2012 to see which types of services clients are more inclined to source in a cloud-based model (for example, clinical trials, payroll, billing or payment services).
- More cloud-delivered options will come to market for end users throughout 2012, whether for expense processing, payroll, payment systems or accounting support. Buyers must be careful to evaluate the security risks and the real value of the deal over time.
Evaluating BPO holistically in terms of total costs and process improvement benefits is key to effective adoption of BPO in 2012. This is easier said than done, however, because it is often hard for organisations to combine calculating the cost of the process - that is, the cost of the people performing the business activity, sometimes the real estate and, if applicable, underlying IT and technology applications - with evaluating the additional true process benefits of having a third party perform the service.
For example, in calculating the total cost of payroll, an organisation would first need to know the number of people currently performing the payroll task, as well as the cost of running the existing in-house payroll applications, which would provide a view of the internal cost of payroll per employee or perhaps per pay cheque.
However, to get a full picture of the total cost of the payroll process, it's important to understand the full impact of the performance of the process on the organisation. For example, in respect to processing, an organisation's cost might compare favourably with the external market's. But if payroll error rates are high, or if the pay slips are delivered late, the cost of calls to an HR help desk might raise the total cost of payroll, even before the organisation starts calculating the impact of these errors on workforce morale and productivity. Having a holistic view of the process, therefore, can help organisations arrive at a truer cost of process.
The next evolution of this, which is key in 2012, is to evaluate the benefits of end-to-end processes; both the actual cost of processing, but also the overall organisational impact. While it is inherently practical to evaluate potential BPO initiatives on a case-by-case basis, rather than attempting to 'boil the ocean' by looking at all processes at once, it's increasingly important to your efficiency and competitive advantage to re-evaluate processes in the round.
Looking at end-to-end processes (not necessarily outsourcing end-to-end processes) rather than just evaluating pieces of procedures is an important move toward achieving maximum benefit from BPO deals. This will provide the potential advantages of lower cost, less re-work between departments, better master data management and better business performance, from being able to close the books quicker in finance to being able to handle inbound customer calls.
- When crafting your BPO sourcing strategy, consider the holistic implications of the full end-to-end process and not just the point solution for a piece of process evaluated in isolation.
- Calculate the total cost of the people performing the process and the IT, and start to understand the implications to your organisation of the attendant costs of the internal ability to perform that process to a high/higher standard.
- Carefully evaluate BPO providers' services to improve the costs and supplement the performance of end-to-end process delivery.
In 2012, cloud delivery structures will have the highest impact on supplementary applications that enable delivery of BPO services such as workflow and automation tools. These supplementary applications are termed 'process enhancement technologies and services' (PETS) by Gartner. PETS is proving to be the first area of BPO to be delivered from the cloud for services such as payroll and accounts payable, as opposed to core applications such as ERP. ERP can be delivered from the cloud today, but it's very rare; fewer than ten major projects exist since organisations have invested in ERP and it runs a multitude of activities. Some PETS offerings may be sourced from the cloud, such as a service like PayPal, which is crafted using cloud technologies. Gartner's cloud forecast shows cloud-sourced BPO growing at a compound annual growth rate of 18.9% from 2010 through 2015.
Increasingly, sourcing professionals will need to evaluate externally sourced business services to understand which ones are delivered via a cloud architecture, since this will impact the attendant risks of using this service, as well as the price.
The process of evaluating the benefits of using these supplementary technologies and services has been fraught with challenges. Essentially, when buyers look to BPO, they seek transformation and innovation, and it's in these services, along with Lean Six Sigma and business process improvement methodologies, where the delivery of this promise lies. It's key, therefore, not to be too impressed with how the service is delivered (using the cloud or otherwise) but to focus on the demonstrable process benefits that will actually be delivered. From 2012 through 2014, the tipping point to look for is at what stage BPO providers craft significantly sustainable lower-cost, multitenant and standardised services:
- that are applicable across multiple enterprises that have limited to no customisation
- that buyers see the cost and business process improvement benefit in using.
It's important that buyers have a framework for evaluating the potential risks of cloud-delivered services. These include the fact that a cloud system offers a delivery model through which you can deliver only the same services - transformation and innovation aren't necessarily part of the package - and the risk is that no or limited overall process improvement occurs. In other cases, there may be no associated risks.
- Understand your business performance demands ahead of how BPO providers deliver services - either from a traditional IT stack or through pure or hybrid cloud technologies.
- Evaluate the risks to your organisation of using a
cloud-delivered process service.
The term KPO is today used as a collective noun for outsourcing support of analytical, intellectual-related processes. The risk for enterprise buyers lies in ascertaining the true level of depth in process and industry knowledge of the service provider for that specific activity. The biggest challenge for suppliers of this service is building critical mass, coupled with volume that allows the service provider to both generate good margins on the business and stay in business.
KPO addresses the following business challenges:
- gaining more business insight - whether operating in a developing economy in a period of rapid expansion or 'doing more with less' in times of austerity
- desiring more analytical insight from the explosion in data, especially in customer management, to understand consumer trends in social media
- gaining better insight into supply chain challenges in an international business, or financial insight in order to manage a business.
This is not new, of course, but the availability of viable service providers with trained staff able to work remotely, typically on an organisation's internal system, and to collate, interrogate and provide insight to this data, is on the rise.
Starting with high-end services such as financial planning support rather than transactional services of accounts payable may seem more risky, but it gives you a stronger and quicker return on investment of your time. It can help the overall performance of your corporation to improve more quickly if this is an area where you need more staff or access to cost-effective specialist skills.
- Explore what's on the market that can be delivered to your organisation better, faster or less expensively.
- Start collating rule-based knowledge processing services in your organisation to see if elements could be performed less expensively offshore. You can use dynamic BPM and, in many cases, adaptive case management capabilities from BPM providers to help you do this.
- Visit analytics processing providers to more fully understand their skills, types of projects and services, and recruiting and training regimes.