P&G Eyes New Outsourcing EraBy Edward Cone Print
Not quite ready to let an outsider like ACS handle everything from processing your payables to administering your health benefits? Ignore Procter & Gamble's precedent at your peril.
An anticipated multibillion-dollar deal between Procter & Gamble and Affiliated Computer Services (ACS) would be the largest business process outsourcing (BPO) contract to date, and one of the largest outsourcing contracts of any kind, ever.
Whether or not the deal is done, the magnitude of P&G's plan sends a clear message to CIOs and corporate strategists: Put evaluating whether to contract out the execution of a vast range of your basic business processes near the top of your to-do list.
"This deal will alert CIOs to the fact that big, dominant international companies like P&G are outsourcing business processes, and they need to do something similar if they are going to be competitive on a cost basis," says Stephen McClellan, a first vice president at Merrill Lynch in San Francisco. "Half of the CIOs we surveyed told us they don't know and don't care about BPO, but it is getting inside their realm pretty rapidly."
Business process outsourcing goes beyond the traditional outsourcing of the operations of a company's data center and information systems. Now, the contractor will be responsible for key business tasks, such as processing claims, paying creditors and OK'ing credit card applications.
This kind of work requires not just software to handle the processes, but low-cost labor to make the processes pay off. ACS, which has an extensive offshore workforce in Ghana, Guatemala, and Mexico, gets about 65% of its revenue from handling customers' business processes and the rest from more conventional information technology services. This mix of capabilities helps make it a formidable contender for large business processing contracts.
Landing P&G would establish ACS as a leader in the business process outsourcing market, catapulting the little-known Dallas company ahead of huge established competitors such as EDS and Accenture.
Some big processing jobs, like keeping track of employees, their benefits and paying paychecks, have long been contracted out to systems integrators, consultants and outsourcers, largely on a piecemeal basis, by many companies.
More-comprehensive outsourcing jobs began with the 1999 contracts between BP/Amoco and PricewaterhouseCoopers ($1.1 billion for company-wide accounting processes) and between General Motors and Arthur Andersen ($250 million to handle administrative accounting and upgrade payroll services).
But a deal of this magnitudeMcClellan estimates it at roughly $900 million per year for at least 10 yearsis a signal that the willingness to allow outsiders to handle almost any aspect of business administration has arrived. "It is the largest deal in the early history of BPO, and a massive contract by any standard," McClellan says. He compares P&G's plan to Kodak's 1990 decision to outsource its data centers to IBM, a move that jump-started the business of outsourcing information technology operations.
"This is a breakthrough for the entire BPO market," McClellan says.
And one that will be exploited by more companies than just ACS, predicts business processing analyst Rebecca Scholl, of consultancy Gartner Inc. EDS, which came of age in the late '60s by processing Medicare and Medicaid claims, is already a potent contender for handling any organization's business processes. Other outsourcers, including the former Big Five firms and IBM, also will be trying to capitalize on the potential expansion of their services.
"Companies like Accenture and PWC have been digesting their own big deals and dealing with internal problems, but they will be active competitors," says Gartner's Scholl. "EDS has the mixture of IT and BPO capabilities, and IBM will, too."
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