BPO: what you need to know

2 November 2012

Business process outsourcing market adoption has now reached $135bn. Cathy Tornbohm, vice-president, BPO research at Gartner, describes how best to proceed down the BPO road and how to assess successful implementation.

During the recent recession, organisations put a lot of new BPO activity on pause as they waited to see what their world would look like in the future. Now they're faced with a potential second bout of prolonged economic uncertainty and the continued risk of a post-financial-crisis recession in Western economies. Such uncertainty could push public and private sectors into more austerity.

In 2012, one of two scenarios has occurred in organisations. Some have again gone into pause mode, while others have calculated that for their circumstances the potential business benefits that a BPO provider can offer are worth pursuing, both in terms of actual lower cost of services and being able to improve process performance. In fact, organisations will increasingly calculate the 'opportunity cost' of not being better at an activity, such as collections, procurement or logistics, and they'll contract for the resultant business benefits with a specialist BPO provider. Whether you adopt BPO or not, you need to:

  • implement total cost-of-process models to calculate the cost of people, process and technology; deliver the internal processes
  • provide insight into the cost of not excelling at a particular activity
  • investigate the risk and potential benefits of using cloud-sourced BPO services to supplement core applications and compare emerging offerings.

For example, in calculating the total cost of payroll, an organisation will 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 will provide a view of the internal cost of payroll per employee or perhaps per paycheque.

But to get a full picture of the total cost of the payroll process, it's key to understand the full impact of the performance of the process on the organisation. With 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 payslips 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.

End-to-end processes

The next evolution is to evaluate the benefits of end-to-end processes, both the actual cost of processing and the overall organisational impact. While it is inherently practical to evaluate potential BPO initiatives on a case-by-case basis, rather than attempting to look 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 processes is an important move toward reaching maximum benefit from BPO deals. This will provide the potential benefits of lower cost, less rework between departments, better master data management and better business performance -- from being able to close the books more quickly in finance to being able to handle inbound customer calls.

"It’s key to understand the full impact of the performance of the process on the organisation."

You also need to evaluate providers' emerging capabilities in knowledge process outsourcing (KPO) to supplement internal skills for business performance analysis. This could include skills for analysing financial performance, sales performance or supply chain performance.

Process enhancement technologies and services (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 enterprise resource planning (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 to 2015.

"Gartner’s cloud forecast shows cloud-sourced BPO growing at a CAGR of 18.9%, from 2010 to 2015."

The key impact to sourcing professionals? It'll be increasingly part of evaluating 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 of the service.

The process of evaluating the benefits of using these supplementary technologies and services has been fraught with challenges for some time. 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 (that is, using the cloud or otherwise) but the demonstrable process benefits that'll be delivered.

Tipping point

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 with limited-to-no customisation, and that buyers see not just the cost and business process improvement benefit in using cloud-delivered services, but they also have a framework for evaluating the potential risks, such as a delivery model through which you can deliver only the same services - transformation and innovation not necessarily being part of the package - and that no or limited overall process improvement occurs.

"KPO is today used as a collective noun for outsourcing support of analytical, intellectual-related processes."

KPO is today used as a collective noun for outsourcing support of analytical, intellectual-related processes. The risk for enterprise buyers is to ascertain 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 generate good margins on the business and stay in business.

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 improve more quickly if this is an area where you need more staff or access to cost-effective specialist skills.

Figure 1. What are process enhancement technology and services?
Cathy Tornbohm is a Gartner vice-president responsible for BPO research. She specialises in BPO for administrative purposes, including human resources, finance and accounting, and procurement. Tornbohm’s research includes analysis of end-user requirements and BPO companies’ market offerings.