Business Process Outsourcing Overhyped?

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Business Process Outsourcing (BPO), in which firms turn over many
back-office functions to outside vendors, has been hyped as one of the next big things in IT, but research firms warn that cost savings garnered through such deals may not be all they’re made out to be.

Citing its recently released report, “BPO’s Fragmented Future,” Forrester Research said “firms looking to outsource core business processes like human resources, and finance and administration to gain cost savings will not find a single vendor that can manage such complex offerings.”

Forrester said that while it believes the BPO market will grow to $146
billion in 2008, the marketplace will fragment as vendors focus on
individual BPO segments like simple bulk transactions, broad shared
services, high-volume vertical processes, and niche vertical applications.

Noting that it surveyed 82 senior business and IT executives and held
in-depth interviews with 12 early BPO adopters, the Forrester said many organizations experimenting with BPO reported inflexible contracts, difficulty managing vendors, and a lack of performance metrics.

“Although some firms show BPO savings, vendors overstate their current
offerings,” John C. McCarthy, Forrester Group director, said.

Research firm Gartner , noting that firms are most likely to
utilize a combination of delivery models as they move toward BPO, suggested
that those interested in the model not ignore the possibilities of offshore
insourcing to complement outsourcing. In offshore insourcing, Gartner
explained, firms set up their own offshore captive “shared service
centers,” allowing them to retain control while providing their own data
security.

“The rewards and risks of offshore BPO are just beginning to be
understood,” said Sujay Chohan, research vice president for Gartner. “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.”

In its report, “Offshore Insourcing vs. Offshore Outsourcing,” Gartner
suggested three criteria for evaluating the use of offshore insourcing vs.
offshore outsourcing.

First, the firm said, enterprises should consider the reason for
outsourcing in the first place. “Is it to focus on our core business, to
improve service levels, to benefit from industry best practices or to
reduce transaction costs? At the present time, cost is the key driver for
offshore BPO, although cost reductions can be achieved via a captive center
if the enterprise has a large quantity of transactions. Additional cost
reductions can be derived only from a scalable, multiclient operation,”
Gartner said.

Secondly, Gartner said enterprises need to consider the specific processes
they want to outsource. It said repetitive, transaction-intensive processes
are the best choices for offshore outsourcing, but noted that many
enterprises looking at end-to-end business processing don’t want to give up
control of the process because of strategic and security concerns. In this
situation, the firm said, offshore insourcing or captive-shared service
centers are viable options.

Finally, Gartner said firms need to consider how well the function is
performed currently. If the enterprise currently has better-than-industry
benchmarks, offshore insourcing may be the best bet, Gartner said. On the
other hand, if the metrics show less-than-average process performance,
outsourcing might be the better option.

Meanwhile, Forrester found that while most of the executives it surveyed
reported their companies didn’t spend much on BPO in 2002, 52 percent said
they were considering outsourcing and planned to spend at least $1 million
on BPO in 2004. They cited human resources, customer resources, customer
service procurement and accounting as the most likely processes for
outsourcing.

The largest segment in the BPO market will be simple bulk transactions,
Forrester said, predicting the segment will grow to $58 billion in 2008.
This segment includes simple tasks like credit card or stock trade
processing, and Forrester said the segment is the simplest for vendors to
master. The firm added that ACS, Fidelity Investments, State Street and
Unisys will likely dominate the market.

The second largest segment will be broad shared services, representing $57 billion by 2008, Forrester said. This segment includes finance and administration, indirect procurement and human resources. Noting the segment requires more understanding by employees than simple bulk transactions, Forrester predicted that ACS and Mellon HR Solutions will expand into the HR side of the segment, while big IT systems integrators will battle over finance and accounting.

High-volume vertical processes will represent a significantly smaller
segment, at $6 billion in 2008, Forrester said. The firm predicted that vertical processes, including policy administration, claims and loan process applications, will remain a small piece of the segment. It also suggested that offshore IT providers and large U.S. outsourcers, including the likes of Accenture and CSC, will battle for turf in the segment.

The smallest segment will be niche vertical applications, which Forrester predicted would reach $5 billion in 2006, though it also suggested the segment would surge forward after customers become comfortable with outsourcing these tasks, reaching $24 billion in 2008. Niche vertical applications include complex processes like environmental data reporting and chemical process control monitoring, which Forrester said requires deep specialization. The firm pointed to Ingenero and RMSI as among the small BPO vendors that specialize in the area.