As modern companies seek to increase efficiency and deliver greater value to customers the pressure is on to streamline internal processes by focusing on core business activities and outsourcing technology infrastructure and systems.

In recent years the notion of outsourcing has become more specific with companies turning to third party experts to integrate, host, manage and even own technology and processes.

Business process outsourcing (BPO) rapidly grew from an attractive concept in the late 1990s to a mainstream reality with vendors making significant investment in the facilities, technology and skills to partner with a wide range of industries. Gartner believes the worldwide BPO market will  grow to $US534 billion by 2004.

Recently, Gartner conducted an online survey with 43 BPO providers to assess the maturity of the landscape - and they discovered a growing focus on mid-market companies.

In 2001, BPO providers were almost unanimously targeting Global 500 companies in the financial services sector, but as BPO gains more attention, Gartner analysts expect BPO to gain interest in other vertical markets. In 2002, 64 per cent of BPO revenues came from large clients (with more than $US500 million in revenues) compared with 75 percent in a 2001 survey. BPO companies were also looking to have a more diversified client list.

Measurable metrics

BPO is essentially the delegation of one or more IT intensive business processes to an external provider that owns, administers and manages those processes based on predefined and measurable metrics.

It is driven by long-term economic trends such as globalisation, industry consolidation, increasing competition, speed to market, shortage of skilled labour, the increasing importance of back-office functions and the need for companies to focus on their core competencies.

Traditional outsourcers have had to transform their highly customised delivery strategies into solutions that can be more easily replicated as they pay closer attention to building vertical expertise, training dedicated sales teams and developing value-based contracting skills and 'change management' capabilities.

To be successful BPOs have to juggle a client's desire for highly customisable services with the need to achieve profit through repeatable, scaleable solutions. If the BPOs offering is too customised if becomes difficult to add new clients to share a service center, suggests Gartner Group.

The goal is to deliver significant process improvements and cost reduction to clients. It's a competitive landscape and somewhat fragmented with the big five consulting firms, IT professional service companies, process and transactions specialists and IT integrators vying for customers. Solutions are mainly based around the web, shared service and hosting centers, and strategic alliances.

Fear of being controlled

The fear of loss of control - for a number of years the primary obstacle to outsourcing - is countered by the possibility retaining control through self service technologies and delivery from application service providers (ASPs).

However there remain major challenges for clients, especially in the first year when they realise how much they will be required to change to adopt to the BPO relationship. To gain the full benefits they need to adopt their organisational structure, working habits, reporting structure and sometimes their pricing and sales strategies. Both parties need to set realistic goals to avoid disappointment at both ends, says Gartner.

Manufacturing, telecommunications, financial services, energy, hi-tech and professional services are all seen as good targets for BPO services with particularly strong demand in Australia, New Zealand and Singapore.

Finance, accounting and human resources, previously outsourced in a piecemeal way. Now there are growing opportunities for comprehensive, multi-process outsourcing, which will enable economies of scale and better process integration. Demand for supply chain outsourcing and customer relationship management (CRM) will also grow significantly by 2004, according to Gartner.

A single service provider might take responsibility for people, processes, and technology, for example outsourcing human resources (HR), including simple payroll processing, benefits administration, personnel administration, recruiting, training and education.

However the bulk of the market is still designed to optimise process efficiency, reduce transaction costs and provide flexibility to users in times of economic uncertainty, says Rebecca Scholl, senior analyst for Gartner Dataquest's IT Services program.

Collaborative applications

The integration of collaborative applications and Web-based technologies into BPO offerings has accelerated this shift to more strategic outsourcing because data from multiple process interactions now can be integrated seamlessly. The emergence of providers that are delivering BPO services across a range of processes, or acting as general contractors for multiple BPO providers, confirms this trend.

However according to Gartner's latest research the BPO market remains immature, with only a few enterprises willing to give up control over several processes at once. In most cases, it takes place in a phased approach, through several contract extensions rather than 'big bang' outsourcing engagements, says Scholl.

"On the technology side, BPO providers will begin to realise the benefits of the application service provider (ASP) model for speed, reliability, predictability and reuse, and there will be a shift from BPO to the business service provider (BSP) model," she says.. "BSPs, a combination of the BPO and ASP models, seem to solve any limitations of the ASP and full-blown BPO models by reducing time to market and fostering rapid deployment."

Gartner Dataquest recommends investigating BSP opportunities because they provide a cheaper and faster alternative to full-blown outsourcing and ensure true business expertise. However, users must move slowly, determine which processes are good candidates for BSP, establish a sourcing methodology and experiment one step at a time. A solid sourcing, business process re-engineering and integration methodology will avoid disappointments in the long run.

Business benefits

Gartner says early adopters of BPO services are still trying to understand the business benefits and justify the cost. "Enterprises must systematically analyse their internal business processes, and associated external service provider offerings, to best determine possible improvements to the bottom line," says Rebecca Scholl.

As this understanding is gained, enterprises can determine the processes to be outsourced, and investigate what is and is not readily available.

In May 2002 Gartner released its BPO Market Model to help enterprises come to grips with the challenges. It segments business processes into three broad categories:

• Demand Management Processes: Demand management processes are those processes that link an organization with its customers. This category includes customer selection, customer acquisition, customer retention and customer extension.
• Supply Management Processes: Supply management processes are those processes that are focused on responses to customer demand. This category includes move (moving products or services), store (storing products or information), make/deliver (the creation and delivery of a product or service), and buy (buying materials for product or service generation).
• Enterprise Service Processes: Enterprise services are those activities that are necessary for every enterprise, regardless of industry. This category includes human capital management

Most strategic service provider deals fail because of a breakdown in the relationship between the parties. In a fast-changing world, enterprises must focus on managing the relationship and that is founded on a solid, flexible and enduring contract.

Many outsourcing deals have had problems because clients feel they are not being serviced properly, and they feel tied into a rigid long-term contract. Outsourcing companies and services customers must work together to develop contracts that are flexible to adjust to the changing demands in the sourcing industry, according to Gartner.

"Outsourcing contracts need to be negotiated to allow for adjustments during the life of the contract," says Christopher Ambrose, research director for Gartner. Most enterprises recognise that the contracting model they have today will not sustain them in the future. More flexible, creative contract options are necessary.

"Alternative pricing, delivery and solution models are now emerging that would have been unimaginable a few years ago. Matching the right type of supplier and the right type of engagement model will become increasingly important if enterprises are to get the best business value at the right price," says Mr Ambrose.

May 2003

By Keith Newman