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Business Process Outsourcing
(Transformational Outsourcing)

As the economic downturn continues, outsourcing remains one of the growth areas in the IT services and solutions sector. And within the general category of outsourcing, it is Business Process Outsourcing (BPO) that is the fastest growing segment with growth of around 30% year on year, easily outstripping any other outsourcing segment.

Analyst firm Ovum Holway predicts that by 2005, the UK BPO market will be worth £10.9 billion, representing some 24% of the total IT services market compared to 15% in 2002.

Maggi Bell, executive director for corporate services at Capita, suggests that: 'If you add up the market potential in the nine BPO markets in which we operate, it looks to us as if there are opportunities worth £65billion in the UK alone.' This figure is a mere subset of the potential UK market.

What began as a cost-saving exercise is now becoming a more extensive move to strategic outsourcing that may fundamentally change the shape and nature of individual companies and affect entire industry value chains.

This is becoming known as 'transformational' outsourcing.

'BPO is a very big beast,' explains Duncan Aitchison, international managing director of outsourcing consultancy TPI. 'Transformational outsourcing usually means some business process engineering of the service to be provided so that the basis for provision changes radically. To get the economies to work, a decent BPO proposition radically transforms the process through re-engineering, deployment of new technology and even relocation of service. However, this does not fundamentally alter the basis of the customer's business.'

Transformational outsourcing occurs when companies seek to change their businesses in some radically way; a step change designed, for example, to run leaner and faster, to meet the demands of deregulated markets, or to be better placed to carry out cross-border mergers and acquisitions.

This is rapid growth but still a small part of the overall market. 'Around 75% of the market is looking at IT outsourcing that does the same things cheaper,' says Stratos Sarissamlis, international vice-president at research firm META Group. 'Only 5% is looking at improving and enhancing their business processes although once the economic upturn happens we believe this proportion will grow as companies shift their emphasis from cost-cutting to innovation.' Aitchison at TPI agrees: 'There are transformational outsourcing opportunities but these are the lesser number.'

City analyst SchroderSalmonSmithBarney's recently published report, Business Process Outsourcing: The End of the DIY Era, underlines the fact that there are many business processes in many companies which will almost certainly end up as being considered as external services, even utilities, carried out by new service providers in the value chain. This externalising of activity will make a significant contribution to the competitiveness of the organisation.

The first processes to be outsourced are normally horizontal financial and human resources activities, where BPO suppliers have seen clear opportunities. These areas have seen the emergence of new, 'pure-play' BPO players, such as Exult and Xchanging.

'Exult took the fragmented, low value HR market and invested in technology that made HR processes available to staff on a self service basis. This not only offered an improved service but also allowed the company to collect valuable information to use in other HR initiatives,' points out Robert Morgan, chief executive of outsourcing consultancy Morgan Chambers.

'Exult then obtained $60million funding and came to market with two deals with BP Amoco and Bank of America worth $1.4billion. This changed the market; a clear example of how a BPO company can take any business function, in an old market or a fragmented one, add some innovation and make the market their own.'

In fact, Morgan Chambers advises its clients that 'any core competency that doesn't add competitive value is an ideal candidate for consolidation' - i.e. for outsourcing to a specialist company that will execute the process for a number of organisations in the same industry, achieving economies of scale that reduce costs for all.

June 2003

Update: Gartner's view in July 2003

Although several large BPO deals of over $1bn will be signed in 2003, there will be a decrease in growth linked to a period of disillusionment starting in 2004. 2004 corresponds to the 5-year mark after the signing of several early BPO megadeals. These deals will be re-negotiated, in some instances re-competed, while other late adopters will take a wait-and-see attitude.

North America makes up by far the largest market for BPO opportunities, accounting for just under 60% of the entire global market. The Western European market is picking up outside the core financial services sector and is expected to grow by about 10% in 2003, principally as a result of utilities and telecommunications.

Asia-Pacific, meanwhile, is expected to grow by about 8% this year and then to grow at double-digit levels over the next 5 years.

July 2003

Update: Business Process Outsourcing - A Case Study

Land Registers of Northern Ireland provide a service to property owners by ensuring the validity of the title, supplying accurate ownership details and providing information on the rights affecting land. LandWeb was the first ever Financially-Free-Standing Private Finance initiative involving IT, under which its developer, Syntegra, only began to receive payments once the system was being used.

LandWeb provides an automated online service, a Customer Service Centre, and an online conveyancing system LandWeb Direct, which gives solicitors access to electronic land registry information and documentation for the first time. Registered users in the legal profession and other interested parties have enhanced functionality in the form of maps and legal documents viewable on the user’s desktop.

The creation of LandWeb has provided the LRNI with numerous benefits:

  • Improved productivity and operating costs
  • Projected revenue increase of 300% to 400% over 10 years
  • Surplus revenues applied to reduce fees
  • Increased staff level over the 10 year period will benefit the local economy

As the property database grows, further business opportunities are anticipated, together with the creation of a wide-reaching community of interest via LandWeb Direct.

October 2003

Update - Goodyear saves £30m

The European arm of tyre firm Goodyear Dunlop expects to save more than £30million in the first two years after signing a 10-year business process outsourcing deal with IBM.

Under the deal, IBM will take control of much of the procurement process for indirect supplies such as telecoms, IT, business travel, advertising, maintenance and professional services. The activities of between 50 and 80 Goodyear personnel will be transferred to IBM and the resulting procurement-to-payment project will establish a consolidated system across 15 countries, with a strictly mandated procurement process.

April 2004

Update - General Motors pushes outsourcing suppliers

Recently, at General Motors headquarters, staff from outsourcing rivals Accenture, EDS, and IBM have been collectively looking for ways to standardise common IT processes such as network provisioning and configuration management.

Usually, arch rivals, the vendors want to develop standards that would save customers significant sums of money. Those that don't come to the table risk missing out on a share of the $15bn (£8.5bn) the vehicle manufacturer will spend on outsourcing in the next five years.

"We're probably the only company in the world that can force that movement, but, for good or bad, I'm enforcing standardisation of the outsourcing industry," says Ralph Szygenda, GM's chief information officer.

Few can match GM's clout, though many other companies are pushing IT service vendors to change. Vendors have little option but to co-operate: they are facing increasing demands for more accountability and lower prices, plus growing competition from offshore firms.

They're experimenting with new service and pricing models, expanding geographically, and standardising technology to improve efficiency.

Szygenda complains that the services industry has failed to standardise many processes common to outsourcing engagements. That means customers pay big process-design, set-up and implementation fees time and again for what he believes should be routine activities. Szygenda is asking the vendors to have common standards in place for about 30 processes within a year.

He thinks other business customers will benefit along with GM. "The big belief is that they can take and use this elsewhere in the industry," he says.

Another sign of flexibility is outsourcing heavyweights teaming up with offshore providers to blend expertise and lower costs. For example, IBM and India's Wipro Technologies recently joined forces to capture an outsourcing deal with one of the world's largest companies.

Others are joining forces to offer services based on emerging technologies. Last week in New York, HP chief executive Carly Fiorina and BT chief executive Ben Verwaayen unveiled a partnership to offer network and digital telephony support, to try to cash in on the convergence of corporate voice and data networks and resulting technologies such as voice-over IP.

They will sell the services jointly to corporate and small-business markets in Europe. If it works, they'll consider expanding it to North America.

"This isn't coming out of the strategy departments of our two companies," Verwaayen says. "It's a direct answer for customers who need to deal with ever-increasing demand for agility."

To capture more business and fend off competition, service providers are showing a good bit of agility themselves.

May 2004

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