The great business process handoff

Enterprises are outsourcing entire internal processes -- and reaping the rewards

During the past 15 years, standards such as Java, Windows, and TCP/IP have made it much easier to outsource various aspects of IT, spawning a huge IT outsourcing industry. But that trend may pale in comparison to the next outsourcing wave: BPO (business-process outsourcing).

Companies have offered limited BPO for decades, such as ADP’s payroll processing. But only recently have the floodgates opened. Today, companies are outsourcing a broad array of processes, including finance, accounting, and HR. The BPO industry is growing at double-digit rates, with Gartner predicting a $133-billion market for BPO this year.

“More and more people are saying, ‘Why am I buying accounts payable from a software vendor if somebody can just come and do it for x cents per check?’ ” explains Vinnie Mirchandani, CEO of Deal Architect, which helps enterprises secure offshore contracts. “They’re saying, ‘I’m tired of SAP and maybe Infosys [an India-based company] can give me the results I need at much better price points.’ ”

According to Mirchandani, BPO is the inevitable convergence of application software and services, as more companies balk at the costs of deploying software internally and prices drop for fast-maturing outsourced offerings.

But key questions remain unanswered about how BPO will play out and how enterprises can best ride the wave. Will BPO vendors eventually look like ASPs, offering open interfaces and process transparency? Or will they look like black boxes providing only limited inputs and outputs? Can BPO vendors actually deliver innovation and optimize outsourced processes, or will they just run existing processes at a lower cost? And what will the impact of BPO be on existing IT organizations?

Looking in, farming out

Beyond call-center outsourcing, which has already seen its boom, recent BPO growth has centered on four key areas: finance and accounting, such as time and expense management, credit analysis, and collection activities; HR, including payroll and benefits management; supply management and procurement; and industry-specific vertical processes, such as mortgage and claims processing.

“CFOs and CIOs are looking to outsource those areas that are noncore and can be handled by a trusted third party in repeatable and minimally invasive ways,” explains Patrick Grady, CEO of Rearden Commerce, which provides BPO-enabling technology.

A dizzying array of vendors has stepped up to meet the demand, including traditional broad-based outsourcing firms such as Accenture, Hewlett-Packard, and IBM; companies focused on a specific function, such as ExcellerateHRO and UPS Supply Chain Solutions; and leading Indian IT services companies looking to extend their labor-cost advantage.

“Companies that don’t do BPO are putting their business at risk because they’ll be at a cost disadvantage,” warns Richard Garnick, CEO of Americas of Wipro, India’s largest private employer  -- a third of whose 44,000 employees are dedicated to BPO.

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But IBM Global Services Vice President Donniel Schulman has a different view. “People have confused labor arbitrage with BPO, but it’s more than that,” he says. “This isn’t about offshore. It’s about taking over a process and adding value right away, like putting in Six Sigma and smart operational improvements. Your provider should be able to bring things to the table that you can’t do yourself.”

Both IBM and HP claim that process-specific expertise -- for example, a detailed knowledge of how revenue accounting in the energy industry should work -- trump labor costs, which IBM and HP claim to have already neutralized by setting up outposts worldwide.

“The market’s moving toward intellectual property and business content,” says Marc Schwarz, general manager at HP’s 6,000-person BPO organization. “Do I have real experience? Do I have people who’ve been accountants for years?”

But Deal Architect’s Mirchandani warns that outsourcing isn’t the same as improvement. “We’re probably in the second inning of BPO. People are just not that sophisticated,” he says. “An old adage in outsourcing has been ‘outsource an efficient process.’ If you just hand it to a vendor and expect efficiencies, I think you’re being somewhat naive.”

Leveraging technology

From the beginning, technology was the fertile ground for BPO’s growth. The expansion and consolidation of the ERP and application software markets, for example, helped standardize common enterprise processes. In turn, the rise of the Internet made it easier to farm out not just code and data but workflow and process information as well.

“The tools have evolved to allow a company like us to provide A-level services on an outsourced basis,” says Gene Long, president of consulting services at Atlanta-based UPS Supply Chain Solutions. “The big driver now is the software. It lets you outsource operations that before had to be managed uniquely by location, like warehouse performance optimization, inventory track and trace, traffic and carrier management, recognizing demand, and even returns.”

Across the board, technology is shaping up to stay at the heart of the BPO battle. Responding to cost pressure from offshore vendors, incumbents including IBM have recently announced that they plan to focus more on using technology rather than labor to deliver compelling BPO solutions.

“There’s no question that the absolute improvements over time will be by employing better technology,” says HP’s Schwarz. “It is absolutely about leveraging assets.”

But some analysts say that many BPO providers have a long way to go to leverage technology well, and that they must better use open standards and existing applications platforms. “If BPO vendors are smart, they will not reinvent the wheel,” says Mirchandani. “But especially the offshore guys, they think, Why pay Oracle so much when I can go write a custom piece of software, with my labor costs the way they are?”

“BPO is all about economies of scale and reuse,” says Rearden Commerce’s Grady, making the case for a loosely coupled, Web services-based, 100-percent-hosted BPO delivery architecture. BPO customers, he notes, may have “thousands of permutations of applications, unique business processes, and custom integrations across scores of apps. … If all you’re doing is migrating that hairball into your datacenter, someone will pay the piper.”

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In fact, BPO vendors have begun bulking up on best-of-breed software assets for their delivery platforms. For example, IBM recently acquired a company called Equitant, which had software assets and expertise in finance business processes, including working capital management, collections, credit, and invoicing.

IBM’s Schulman says the company has also built analytics tools internally, such as software that can audit outsourced employee expense reports to flag questionable items.

“It actually knows how much it costs to take a cab in New York City, so we know whether or not [the employee is] taking advantage,” says Schulman. “If you build out a robust tool like that you can save 10-15 percent on the total travel and expense budget of a corporation.”

Inside the black box

How much can enterprises actually influence which technologies or standards a BPO vendor uses on their accounts? In some cases, says HP’s Schwarz, BPO is simply a wrap-around to existing IT systems.

“There tends to be a reluctance to go off your ERP for these functions,” Schwarz explains. “In a sense, BPO is all about bolt-ons to ERPs, which allow us to provide more efficiency: business-logic types of software, better workflow, software that could take an aggregate look at a company’s customers over various business segments.”

For some regulated processes, customers may legally be required to know the inner workings of a BPO vendor’s system. “One of the challenges,” says UPS’s Long, “is being able to prove that we have processes and supporting technology that can meet or exceed our customers’ auditors’ internal-control requirements.”

But in other cases, notes Deal Architect’s Mirchandani, customers won’t be able to pry open the BPO vendor’s black box. Enterprises may specify standard interfaces and most vendors will use common processing engines. But some won’t, says Mirchandani. “It’ll be like a sausage factory. Do you really want to see what goes on there?”

IBM’s Schulman argues that at a certain level of the stack, as long as the interfaces are based on open standards, the innards may not matter. “At an application layer,” he says, “talking about features and functionality of how you process a general ledger transaction or a benefits administration transaction, the technology piece becomes less important. That’s not where the value lies. It’s in the process you’re providing, not the technology.”

Wipro’s Garnick agrees. “We see an emerging trend where customers are agnostic on the platform. They’ll come to us and say, ‘We need this output; it’s up to you what system you deploy to run on.’ ”

When major enterprise processes are outsourced, what will be the impact on IT? “Suddenly you lop off a major transaction-processing system and all you get is input and reports,” Deal Architect’s Mirchandani explains. “That ... drives certain CTOs nuts. They’ll essentially be getting results and need to monitor how that analytical stuff flows into other apps that are still owned by the organization.”

Mirchandani predicts that the role of the CIO “will become huge” in this new BPO world, as the art of vendor management and crafting SLAs begins to assume even more importance. “But not necessarily the techies,” Mirchandani adds. “The nitty-gritty IT person will lose quite a bit of power in this whole process.”

Copyright © 2005 IDG Communications, Inc.

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