CitationDownload as .RIS
Emerald Group Publishing Limited
Copyright © 2003, MCB UP Limited
Business process 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 per cent 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 per cent of the total IT services market compared to 15per cent 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 is where companies seek to radically change their businesses in some 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 per cent 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 per cent 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 transformationl 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 organisaiton.
The first such 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.