Business Process Outsourcing: Out of the Back-Office

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Clients are demanding single-vendor services over savings, but global coverage is critical.

Business process outsourcing (BPO) doesn't mean what it used to.

For consultancies, outsourcing used to be a relatively straightforward proposition. The consultant would be paid to take over one of the client's back-office IT functions so the client could focus on its core competencies and make more money.

That was the idea, anyway. Things didn't always turn out as planned. Outsourcing contracts are often difficult to manage, and many clients hadn't the time or talent to do the job properly. A March 2007 report from TPI, the global outsourcing advisory firm, noted client-maintained outsourcing contracts typically delivered 28 percent less value than originally anticipated. Not that the providers were necessarily to blame. More than half the buyers interviewed faulted themselves for expecting too much.

The result was a lot of restructuring, at least until a year or so ago. Clients today frequently want more from their suppliers than cost savings; they want benefits such as operational transformation and innovation. And they're often willing to pay the price even when a supplier charges more than some of its competitors. "I've had clients with a big contract with Accenture tell me they're happy to pay a premium," says Forrester analyst Bill Martorelli. "They're not looking for savings as much as service today."

Instead of farming out selective processes—financing, accounting, HR and the like—to different vendors, clients are frequently looking to deal with a single supplier that in turn subcontracts services it can't provide. "That reduces the number of vendors," says Martorelli. "You have clients select one vendor to serve as prime and other vendors to function as semi-prime." This is sometimes called multisourcing and may include applications outsourcing as well as BPO.

It's a trend that's resulted in fewer, if larger, contracts. In a Q2 2007 report on the global outsourcing market, TPI noted a dramatic decline in contract restructurings and new outsourcing agreements for the first half of the year, but said so-called new scope contracts, in which no prior relationship between supplier and client existed, had increased in value to $245 million, up 20 percent for these same contracts in 2006.

The other relatively new demand, at least on the part of global and multinational corporations, is full coverage, meaning the vendor must be big enough to be everywhere the client is. "The vendor has to be truly global in these instances," says Martorelli.

So, which consultancies can do well in this changing and currently soft market, especially in the U.S.? Although they're coming on strong, most Indian companies don't have the reach yet to deal with global clients. "They can't do as much work in any many places as some of their competitors," Martorelli says. That leaves major players like IBM, Accenture and CSC on solid ground. Accenture, in fact, recently landed a seven-year, $185 million contract to provide Microsoft with finance, accounting and procurement services, ultimately in 92 countries and 36 languages.

This approach, in which multiple business functions are outsourced to a single provider, is analogous to what systems integration is to IT implementation, but vendors like Accenture call it services integration. And it's likely to become increasingly common.

Please send questions and comments on this article to latonm@aol.com.

This article was originally published on 2007-09-26
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