Building a Case for BPO

By Everest Group

Business process outsourcing (BPO) has been a highly successful business solution strategy for several years now. Fortune 500 organizations know the value proposition of outsourcing important, non-core business processes and have adopted BPO as a cornerstone of their strategic objectives.

If you are a corporation that is accountable to shareholders, and you've not yet begun to develop and execute an enterprise outsourcing strategy, you are behind the curve and will find it more difficult to compete in a marketplace where your competitors are using BPO as a means of focusing their time, talent, and capital on their core competencies.

Yet many executives still are trying to build the case for BPO in their organizations. This is primarily because of misconceptions about what has been happening in the BPO arena and also because many executives don't understand what business processes should be considered for BPO - or why.

Lessons Learned in Recent Years

In the last two years, the volume and size of BPO transactions continues to increase; indeed, several huge BPO deals in the finance and accounting (F&A) and human resources (HR) space have changed the face of the industry.

Not unlike the IT outsourcing deals of the 60's, 70's and 80's, some BPO arrangements were painful to transition and operate effectively. This does not mean, however, that BPO doesn't work. What it tells us is companies need more expertise in structuring mutually beneficial deals for both the buyer and the service provider.

Initially, IT deals were quite rocky. In the 1960's, EDS pioneered a deal to take over the IT functions for Frito Lay. This deal became the foundation of IT outsourcing as we know it today. IBM, which excelled in data processing, quickly countered this market advance; and the IT outsourcing war began. Many more companies followed, including Andersen Consulting (now known as Accenture), CSC and Digital Equipment Group (acquired by Compaq Computer Corporation and now known as HP), among others.

While these companies were great at selling hardware and software, "renting" these services to clients was a pretty new game, and there were some early disasters.

Despite some early disappointments, IT outsourcing successes thrived; and more than just the Fortune 500 companies have have turned to some form of IT outsourcing. According to Gartner, worldwide spending on IT outsourcing services reached almost $165 Billion in 2001.

Although BPO is no longer just a trend and has now seen some striking successes, it is still in early stages of developing the characteristics that ensure win-win situations. Even so, BPO is set to change the face of business as we know it. Accenture, ACS, EDS, Exult, KPMG and PwC (apparently it's good to have an acronym for a name to compete in the outsourcing space) are just a few examples of companies that are already strong providers in the BPO arena.

BPO Shifts Risk

In lieu of the highly competitive market conditions of the last few years, we have seen an increased desire for companies to focus on their core business, and more importantly, a recognition of the necessity to implement governance on an ongoing basis for business solutions.

A good example of the need for ongoing governance is in the F&A space. With all the accounting issues of late, I predict boards of directors and C-level executives (CEO, COO, CFO, CIO, etc.) are going to want to shift accounting (don't confuse this with auditing) and other potential financial process risks, to a third party with world-class expertise in these functions. They are going to want a single neck to strangle when the books aren't correct and shareholders start complaining. Thus, BPO of F&A processes is becoming a necessity for companies.

FYI: F&A Is Not Core

Many chief financial officers have tried over the last few years to convince me that F&A functions are core to their business and that their accounting department gives them a distinct advantage over their competition. For some reason they are convinced that their set of accountants are capable of processing financial transactions better than their competition. Whether they are or not, why does it matter when a company produces widgets?

In contrast, the chief executive officers of these same companies have told me that F&A is not core to their business and their objective is to decrease costs while retaining access to critical information.

Along these lines, there are a few F&A functions that are critical and core to most businesses. Managing cash flow, budgeting, capital planning and financial analysis are strategic and unique to a company. On the other hand, accounts payable (AP), accounts receivable (AR), billing, (fixed asset) and general accounting are critical, but not core functions. Aservice provider that can process AP, AR and other F&A functions for multiple clients in the same facility can provide significant economies of scale leverage and efficiencies, resulting in lower costs.

As an investor, I would be hesitant to invest in a company whose C-level management is focused on running the best accounting shop in the business. Summary: Leave it to people whose core business is accounting.

HR: People are Core, Administration is Not

In discussions with senior executives about HR outsourcing, I often hear that people are the most important asset in a company. Thus, they are "not interested in outsourcing the HR department."

On the surface, this argument makes sense. However, if you visit the HR department of most companies, you will find they spend most of their time managing issues with third parties on behalf of their employees. Benefits administration, payroll, 401(k), and some aspects of recruiting (they aren't a valuable asset until you've actually hired them) are necessary to run a company. But a technology products company, for example, doesn't add to its top line by performing these functions.

On the other hand, team building, continuous learning (training), employee recognition and overall corporate culture should be core to a business and will create a powerful and unique organization if done properly. The HR staff members who have skills that can contribute in these areas arecore to your business; the person who administers the company dental plan is not core and should be folded into a BPO strategy.

Recently we at Everest have seen service providers gaining a lot of traction in the HR outsourcing space. Companies like Accenture, Exult and a few others have been groundbreakers for some HR functions that many companies previously considered off limits to outsourcing. While HR outsourcing is taboo to many organizations, forward thinkers are moving in this direction at a rapid pace. As more large F&A and HR deals meet with success and companies recognize the value that BPO can add, we will see these kinds of transactions becoming the norm.