Out-Law News 2 min. read

Business process outsourcing – reality strikes


Business process outsourcing (BPO) has become a victim of hype – and companies fail to gain maximum value from it because they have inflated expectations when outsourcing several core business processes to one service company, and they also fail to create the necessary managerial structures, according to analysts.

Forrester Research surveyed 82 senior business and IT executives and held in-depth interviews with 12 early adopters of BPO. It found that while BPO initiatives may result in significant cost savings, there were many difficulties, inflexible contracts, difficulty managing vendors, and a lack of performance metrics.

According to Forrester Group Director John McCarthy, the providers are to blame for some of the problems. "Although some firms show BPO savings, vendors overstate their current offerings," he says.

Forrester predicted that no one vendor is able to completely master the complex set of skills needed to offer an end-to-end outsourcing solution, so it believes the market will split and vendors will be forced to focus on serving four individual segments of BPO:

  • Simple bulk transactions, such as credit card or stock trade processing – the easiest for vendors to master.
  • Broad shared services, including finance and administration, indirect procurement, and HR.
  • High-volume vertical processes, including policy administration, claims, and loan process applications.
  • Niche vertical applications, including environmental data reporting and chemical process control monitoring.

Rival analyst Gartner agrees. The firm says that by 2005, 70% of enterprises will use more than three sources for service delivery in key areas. But Gartner warns that fewer than 10% will have the appropriate processes and governance structures to effectively manage the multiple external service providers that contribute to common enterprise objectives.

According to Christopher Ambrose, research director for Gartner:

"As the number of sources required to fulfil enterprise IT and business demands increases, Gartner has not seen a comparable effort in most enterprises to create organizational structures, apply the necessary management resources and implement processes to manage this new environment effectively.

"As a result, the overwhelming majority of enterprises using multiple service providers repeatedly experience a collision between the interests of these sources, which diminishes the value of the service they provide to the enterprise.

"Many enterprises have not focused on creating the agile, responsive, flexible organisation necessary to effectively manage the multi-sourced environment, leaving them vulnerable to low return on service value."

Flexibility seems to be the key, and may require the company to consider not just offshore outsourcing, but offshore insourcing as well. Gartner describes this as being when companies set up their own offshore processing centres, thus retaining control over the centre and its functions, while benefiting from the cost advantage. It may also help with data security issues.

Sujay Chohan, research vice president for Gartner, commented:

"The rewards and risks of offshore BPO are just beginning to be understood. As enterprises and service providers evolve, it has become clear that there is no right model for a given company. Instead, enterprises will use parts of a model or a combination of models as they begin to explore and iron out the issues around sending business processes offshore. No enterprise will fully insource or outsource offshore. Most will use a combination of delivery models as they climb the learning curve to BPO."

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