Business process outsourcing
Within the outsourcing industry, the term business process outsourcing (BPO) is used to describe the outsourcing of a varying mix of non-core processes. Typically this mix will include finance and accounting, HR, procurement, payroll, internal audit, taxation work, customer support centres and a range of industry specific processes. To some people BPO will also include applications processing. However, I prefer the definition given by Dataquest, an American IT research company. Dataquest looks at BPO as information technology enabled business processes, i.e. those processes that are IT intensive and/or should be IT intensive and can be transformed by the application of information technology. Since almost every business process is at least supported to some degree by information technology, this definition leaves a lot of grey areas. But basically the Dataquest definition would not include catering services; gardening services, etc. because they require little or no need for IT. On the other hand they see application outsourcing as IT outsourcing because typically it is the management of that application that is involved. Onsite or remote, Dataquest argues, it is an application management function and is therefore part of IT.
However the definition is drawn, it is clear that a significant proportion of major organizations in the developed world have now outsourced a large number of these processes. What is less clear is the degree of success achieved.
In 1998 PricewaterhouseCoopers commissioned Yankelovich Partners to carry out a global study on BPO. This study covered 304 top decision making executives in 14 countries. After confirming that global competition was the main driving force for indulging in BPO, 63 per cent agreed that they had outsourced one or more of the processes concerned. Of those that had outsourced, a very positive 84 per cent claimed to be satisfied with the performance of their service provider.
Few industry insiders will be unduly surprised by the above satisfaction claims. Payroll is the most widely outsourced administrative process, it was one of the first areas to be outsourced and 97 per cent satisfaction levels have been recorded for payroll outsourcing alone in the recent past.
With the possible exception of finance and accounting, all the other business processes are less dependent on state of the art technology being used in the outsourcing than the IT function itself would be. Perhaps it would be more correct to say that the absence of the latest technology is not so transparent in some of these processes. For example, a CEO or FD may be more than happy to see that payroll costs are on a gradually reducing scale, without realizing that even greater savings might have been possible if the service provider had utilized the latest technology improvements. The client not being aware of the technology improvements being made also means that over time the provider could be passing on a declining proportion of the savings being made.
Nevertheless, few would deny that there is reasonable level of satisfaction amongst most client organizations that have outsourced business processes. This also appears to be true even where savings of under 10 per cent are the norm and where credible service providers are more thin on the ground than in the IT market.
Despite this reasonable level of satisfaction, the growth in BPO always seems to lag behind the forecasts made. On a global basis, government departments have been responsible for a significant amount of BPO, but this has never been copied to the same extent by the private sector. Some of the main service providers are handling what are very similar and essentially simple processes for a wide range of public sector clients in many countries around the world. In many cases the providers are dealing with these processes in more or less the same way that their clients did. They might have improved the service since taking it over but they are still concentrating on making the service fit in with related services for the client concerned. At some point these service providers will need to independently design process specific ways of doing the work and then set about convincing their clients of the advantages. Admittedly, it will be more difficult to do this for some processes than it is with, say, payroll, but it may be essential before major expansion in the private sector can be achieved. In time I would expect a number of service providers to offer niche services on a package basis within the BPO marketplace.
despite this reasonable level of satisfaction, the growth in BPO always seems to lag behind the forecasts made
Any client organization contemplating outsourcing one or more business processes would be well advised to build in safeguards from day one. This will include benchmarking the current service and doing it in such a way that the in and out of scope boundaries are clearly defined. The various appendices to this book outline the safeguards that should be taken when dealing with the service providers and include arguments for and against going with a sole provider or creating a competition. This latter point is particularly important in BPO because many arrangements start with the client talking to one provider about one function and end many months later in an agreement with that provider to take over a range of functions on an integrated basis. The client management may have been willing to work on a sole provider basis for the original amount of work but would have instinctively tried to create a competition if they had only realized just how much was eventually going to be outsourced to one provider. It is natural that as the talks develop the service provider will explain how the client’s competitive position can be improved by including more processes in the mix. Obviously, the client organization is not going to outsource if it is not going to benefit. However, the question remains – would they have increased the benefits obtained in the outsourcing if they had created a competition?
It has sometimes been argued that as the various elements making up BPO are not so technology dependent as IT, then the need to outsource these areas will decline when the overall economy goes off the boil. It would be surprising if this were true. Outsourcing has increased all over the world during both periods of economic expansion and decline. Clearly, most outsourcing to date has involved IT and it is easier to imagine why IT would appear as a candidate for externalization in periods of both growth and decline. Nevertheless, BPO has taken place all through the relatively high growth period of the late 1990s. As the cost savings issue is likely to come to the fore in periods of economic decline, BPO will presumably continue to be practised.
None of this quite explains why BPO always seems to grow less quickly than most observers anticipate. Perhaps the real reason for this is that many senior managers instinctively realize that until the future of their IT is really on a sound footing then outsourcing a significant number of BPO operations is tantamount to putting the cart before the horse.
It is worth looking at some of the functions included in BPO in more detail.
Finance outsourcing
One statistic that appears quite frequently in the trade press is that about 50 per cent of sizeable UK organizations have outsourced a significant part of their IT. We are also led to believe that in the average organization, IT and finance account for similar levels of expenditure. Therefore, if outsourcing was always carried out on the purely strategic basis of externalizing non-core functions; it would be reasonable to expect finance to be outsourced as often as IT.
In recent times a significant number of multinationals, including BP, Shell, National Starch & Chemical, Sears, NFC, Conoco, Lasmo and a range of public sector organizations have outsourced finance and accounting. There are many more in the pipeline and a number of SMEs have recently found suitable providers – often with IT and finance going as a package in one contract. Nevertheless, it is extremely unlikely that finance and accounting will ever be outsourced as frequently as IT. Most informed guestimates see a maximum of 15 per cent of all organizations outsourcing finance by 2005.
There are many reasons for believing that finance outsourcing will always lag behind IT outsourcing. Some of these reasons are obvious and some less obvious. Many organizations find it almost impossible to recruit top quality IT staff because their systems are old and ’uninteresting’, they cannot afford competitive salaries and promotion prospects are limited or non existent. It is difficult to imagine a direct comparison with finance, although clearly ’high flying’ accountants are more likely to be attracted to organizations experiencing high growth, etc.
there are many reasons for believing that finance outsourcing will always lag behind IT outsourcing
The factors leading to the growth of finance outsourcingare summarized below.
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The circumstances would appear to exist therefore, for a great deal of marketing and promotional effort to take place in support of outsourcing the financial function. The senior partners in at least two major providers have suggested that they would be prepared to give up the audit of a client company in order to become its financial outsourcing service provider. However, there is increasing pressure, particularly from the USA, that auditing firms should not be involved in providing other services to clients. It will be interesting to see how each of the Big Five reacts to this pressure in pursuing outsourcing deals.
Over the last few years of the 1990s, European finance directors have been amongst the most prolific attendees at outsourcing training courses and have instigated a large number of outsourcing enquiries. Experience now suggests that much of this apparent interest was done for defensive reasons, i.e. the finance directors wanted to learn as much as possible about the subject in order to stop it happening. I am aware of a number of cases where the finance director has been instrumental in involving service providers and advisers using the carrot of outsourcing the finance function, only to use his or her own special position in the organization to outsource some completely different function.
The unusual features that created IT outsourcing, i.e. having existing heavy investment in hardware and systems and needing to move to other expensive hardware and systems, can be seen as a problem peculiar to large organizations. Part of the same problem – needing to purchase and implement new financial or ERP systems – can be seen as a major reason for outsourcing finance but it is by no means the only one.
The UK government’s desire to bring competition into the public sector has led to substantial financial outsourcing contracts being signed in local government, central government and the health sector. The creation of the Private Financing Initiative (PFI) by which large scale computer and related systems can be purchased under 30 year contracts for services instead of purchasing the assets has also increased outsourcing activity over the range of IT and BPO areas. Overall this government-inspired activity must be one of the key reasons for the interest in finance outsourcing in the UK and may well have sparked desire in one or two private sector organizations.
the UK government’s desire to bring competition into the public sector has led to substantial financial outsourcing contracts being signed in local government, central government and the health sector
During the 1990s Andersen Consulting grew more quickly in Europe than the other members of what is now the Big Five. By the mid 1990s Andersen Consulting was the only one of these firms directly involved in outsourcing IT as service providers. By about 1995 the other big firms were very much aware that Andersen had gained significantly increased consultancy work in the IT area as a result of having tied clients. In other words, if they had not been involved as an IT service provider some of this work would have gone to other consultancies. They also saw that the major outsourcing service providers such as EDS had grown their consultancy teams very quickly at a time when their own growth was only moderate. Naturally, they again surmised that at least some of this growth must be attributed to the tied clients’ factor. For some providers then, growth in consultancy and outsourcing is very closely linked and for this reason we must expect some major consultancies to be continually on the look out for new finance outsourcing business.
At the time of writing, the most recent major finance outsourcing deal in the UK involved Safeway, the country’s fourth largest supermarket company, and PricewaterhouseCoopers. In this deal PWC has obtained a £60 million, ten year arrangement to run Safeway’s internal finance and accounting department from 1 July 2000. More than 350 Safeway personnel dealing with accounts payable, accounts receivable, stock and margin accounting, payroll, financial accounting and insurance and property accounting were then transferred to PWC. This contract was won after keen competition from other major accountancy-based consulting firms and is unlikely to be the last major deal of this type.
Call centres
The call centre concept is relatively new and already it is getting a very bad press. There are certainly some very bad call centres that subject the users to time-wasting ordeals. Typically the users’ problems start with a message telling them that due to the excellence of their product or service all their operatives are very busy just now, but not to worry because they are very special and are in a queue. Then while they wait they are entertained with offensive noises. Next they are subjected to numerous requests to press various digits for services they don’t want and end with a disappointing discussion with someone who is difficult to understand and cannot begin to grasp the nature of the problem.
The call centre theory is based on the sound principle of the people answering the telephones being able to access all relevant information via the PCs in front of them. Why, then, do the services appear to deteriorate the higher one goes up the technology chain? Computer manufacturers and internet service providers will argue that the complicated nature of their business means that some customers will always raise problems that are difficult to solve and that routing and other traffic problems are bound to happen occasionally due to rapid growth. Fair enough, but why is there a general perception that high tech help desks are not improving and that some of the companies have lost interest in this aspect of their service? By comparison, call centres operated by insurance companies, investment houses and banks do appear to have improved quite markedly in recent times.
Setting up call centres and operating them well is nowhere near as straightforward as some people assume. For those organizations that understand and overcome the problems involved there is considerable scope to offer outsourcing services to others. Housing associations, for example, are constantly on the receiving end of telephone calls made by their tenants and potential tenants. The average housing association is too small to set up its own specialist call centre, yet the number and type of calls are suited to the call centre concept. At the time of writing, no one has come forward with an independent call centre alternative that would spread the costs over a range of such associations.
setting up call centres and operating them well is nowhere near as straightforward as some people assume
The logic for outsourcing call centre work is compelling. Providing the service and cost are both acceptable, why go to the considerable trouble of building your own call centre from scratch when you could simply take space in an existing unit where the initial teething troubles have long since been overcome? In addition, it is much too early to assume that the typical call centre model is easily defined. Many call centres are being restructured into Contact Centres in which communication can additionally be achieved via emails and WAP phones.
The risks involved in call centre outsourcing appear to be very limited when compared to other functions and therefore it is likely that this area will see considerable growth over the next few years. However, call centre outsourcing clients must recognize that the people at the end of a telephone in a remote call centre may be playing a major part in the image the organization is projecting to its customers. For that reason they may feel the need to directly employ some or all of the supervisory staff. It will also be necessary to monitor the service being provided and to compare it on a regular basis with the service being provided by competitors.
Human resources outsourcing
Mention human resources outsourcing and you often end up talking about two different subjects. To some it means outsourcing the specific function, i.e. dealing with health and safety issues, working conditions, employee discipline, etc. within the client organization. Others use the term to describe the concept of outsourcing a group of workers, who are not already part of an outsourcing arrangement, to a specialist third party service provider.
I propose taking this latter concept first in order to get rid of it quickly. I understand that specialist IT companies have been known to transfer the employment of all non directors to human resources companies that have established recruitment skills in IT. Clearly, these client organizations take this action because they have difficulty finding and retaining qualified people. There is, therefore, some logic in transferring this responsibility to a specialist organization that in theory at least has access to many specialists. Even so, I see a potential problem here in that an organization adopting this policy may be relying on ’ contractors’ for long-term roles where a dedicated employee would be more suitable. Looking outside the IT function, it is difficult to see this concept becoming widely practised. If an organization wants to move further along the ’virtual’ road, it would, in most instances, be preferable to transfer each group of employees along with their respective functions to specialist service providers in those functions.
Outsourcing the human resources department is not that different from outsourcing any other function in terms of the problems to be faced. However, there is one factor that makes it difficult for most organizations to contemplate such action. The HR department is involved with issues that are critical to the wellbeing of the entire workforce and to outsource those responsibilities will normally be seen as a strong indication to all concerned that the management does not rate these issues highly. In addition, it is important to think about the effect on the employees being transferred. They should play the caring role in the organization. Will they care as much if they are outsourced or, more importantly, will they be perceived as caring as much? In addition, once they are outsourced, will they lose contact with the corporate philosophy or culture? Will they adjust to their new employer’s culture?
outsourcing the human resources department is not that different from outsourcing any other function in terms of the problems to be faced
Major organizations appear to be constantly reducing the number of employees on their payrolls – a process that shows no sign of slowing down. Nevertheless, for most organizations their employees will remain one of their most important assets. When redundancies abound it becomes even more important to make sure that the organization is perceived as being interested in the welfare of the remaining staff. It is natural in the period following major redundancies for employees to want to check out various elements of their benefits and sadly this often coincides with a dramatically increased workload in the HR department. In such an environment of distrust and fear even the introduction of interactive technology that allows employees to update their benefits arrangements, retirement contributions and payroll deductions may sometimes be seen as a sign that senior management does not care.
None of the above factors can be taken as proof that outsourcing the HR function is always right or always wrong. They do, however, suggest that great care must be taken before steps that cannot easily be corrected are put in place.
For major organizations the ’natural’ HR service providers will be the major international consultancies – several are actively pitching for such work. And yet over the last few decades these consultancies must have under-performed the rest of industry in HR management by a very long way. Excessive staff turnover in the HR departments of these major consultancies has been the norm for a long time and HR management has often been a sinecure for tired or failed partners. Having said that, I have to admit that if I were under pressure to outsource a major HR department I would be drawn to considering these firms. Let’s face it, these organizations employ bright people and they ought to be able to create top class HR services using the latest technology.
Finally, it is worth remembering that in most of the developed world the client is rarely able to transfer full responsibility for staff simply by outsourcing them and placing them on another organization’s payroll. Given these factors I would not expect an enormous rush amongst established organizations to outsource this function. I would, however, expect some growth in HR outsourcing companies that make most of their income from providing specialist personnel managers on a part-time basis to small companies.