"If someone else can do it faster, better and less expensively - and it’s not our core business - then what’s not to like" - PricewaterhouseCoopers Business process outsourcing - a short-term hit to the balance sheet or the most effective strategy to create long-term competitive advantage? Phil Hadcroft* looks at the exciting opportunities of the BPO industry.
Business process outsourcing (BPO) - already a multi-billion dollar growth market - is gathering further momentum as the largest companies in the world, including IBM and EDS, embrace the concept of outsourcing all but their core business. Companies need to become more and more comfortable with outsourcing their non-core critical and non-critical processes, such as real estate, finance and accounting and customer communications, to professional service providers - or face the consequences of losing competitive advantage, according to experts at PricewaterhouseCoopers' BPO group. Meanwhile, Gartner Research (September 2001 data) predicts growth in BPO globally is expected to expand in value from $US120 billion in 2001 to more than $US240 billion by 2005. Business processes, real estate management, manufacturing, new product development and information technology are the key areas for growth. The greatest percentage growth is predicted in the Asia-Pacific region (117.5 percent), followed by Canada (106.1 percent), Europe (98.2 percent), United States (92.5 percent) and Japan (88.6 percent).
Gartner also forecasts that growth, by sector, will be in administration (106 percent), human resources (102.4 percent), payment services (99.5 percent), sales, marketing and customer care (94.8 percent), finance and accounting (86.3 percent) and supply chain management (84.7 percent). The bulk of the BPO market is composed of transaction-processing engagements, designed to optimize process efficiency, reduce transaction costs and provide flexibility to users in times of economic uncertainty," says Rebecca Scholl, senior analyst for Gartner Dataquest's IT Services program, in a March press release. In the property management sector, for instance, PricewaterhouseCoopers BPOs now have property and facilities management partnerships with the National Australia Bank, the Commonwealth Government and Telstra. Apart from the long-term advantages, from a business perspective there are two obvious short-term benefits to most BPO contracts. First, a significant cost gets moved "off balance sheet". Secondly, a BPO contract may obviate the need to substantially upgrade IT infrastructure.
However, corporate memories are generally short, and in time, that initial hit of "value" is forgotten. A thoughtful executive might ask: "Is it really worth giving away day-to-day control over a critical business process against the benefit of a short term hit to the balance sheet?" Your gut feeling might give you the response: Yes, but why? How do you measure the ongoing value of a BPO decision against the ultimate objective of most corporations - long-term success in terms of growth and profitability? If the business press is any guide, then corporate governance is a key definer. For example, the current debate, centred on HIH, Enron and FAI, deals primarily with one aspect of corporate governance: financial management. This debate is about the standards that we apply to ourselves. The Australian business community's collective goal thankfully appears to be aspirational - how can we ensure that we are setting the pace for world's best practice?
World's best practice is a concept that also pervades any discussion on competitive advantage. Competitive advantage, you might hear it said, is 'that thing that sets our company apart - the thing we specialise in - the thing at which we are the best in the world.' The Australian steel industry currently claims to be among the best in the world at the efficient production of steel - world's best practice steel production. The Australian wine industry claims to set the pace as the world's best practice wine makers. For each of these sectors, we are talking core business. And for each of these sectors, the claim carries some credibility because each is benchmarked against the ultimate benchmarking tool - the competitive global marketplace. The Australian wine industry is selling lots of wine into the global market and its skill base is under constant attack from offshore headhunters - so therefore the claim that the industry adheres to world's best practice is substantiated. The competitive market, with measures like market share, growth rates, and profitability, provides a real-time benchmark against which you can measure the standards of your core business.
The real dilemma for executive management, however, begins when you try to benchmark the host of critical business processes that surround your core business and upon which your ultimate performance may depend. For example, a telecommunications company may have great telecommunications products - but how can its executive team determine whether its accounts payable, billing, customer service or marketing teams really are performing at world's best practice level?
What each company requires is benchmarks. Standards that move in synch with evolving world's best practice that can be compared against the full spectrum of disciplines that constitute the company's set of critical business processes. We are driving at the true sustainable value brought to the table by the business process outsourcing industry. The BPO industry opens all your critical business processes to the scrutiny of the market. By benchmarking against a range of business process services companies, a business can achieve two outcomes:
a) Obtain objective data on how its internal processes compare to world's best practice
b) Realistically aim to ensure all its processes, not just its core business, are operating at world's best practice standards.
In this way, the value of a business process outsourcing decision (either for or against) can be objectively and sustainably measured against the key corporate objectives of growth and profitability. In turn, BPO is increasingly being considered as a business strategy for enterprises that want access to best-in-class processes and cost predictability, according to Dataquest Inc., a unit of Gartner, Inc.
BPO providers are starting to offer more strategic services to their clients by assuming full process management responsibility, providing more comprehensive services versus a number of selective process specialties, and so reducing the cost of delivering BPO, and simplifying access to BPO, according to the Gartner press release: "Business Process Outsourcing will become more strategic in 2002."
"The BPO model is now experiencing noticeable momentum in terms of wider user acceptance, new service offerings, as well as a proliferation of providers from which buyers must choose," continues Lisa Stone, vice-president, and research director for Gartner. "Some BPO offerings are very mature, and some are just emerging, and therefore remain largely untested. It is imperative that buyers understand the services they are purchasing and the associated stability of those offerings."
Certainly, companies are getting more and more comfortable with the idea of outsourcing - going beyond travel services and payroll to handing over the day-to-day management of employee education, sales, marketing, customer relations and other 'non-core' areas to professional services providers. One of the fastest growing sectors of the multi-billion dollar outsourcing market is finance and accounting (F&A) - and the day draws nearer when corporations will completely outsource this function to large, internet-driven, global processing hubs run by F&A specialists, according to experts at PricewaterhouseCoopers' BPO group.
F&A is indisputably a critical business process for any company - but is core business to very few. With everything other than the core business outsourced, companies of the future will truly have the opportunity to operate at world's best practice across their full range of processes.
* HPA is Australia's specialist business process outsourcing company. HPA focuses on critical business processes and creates client value in the design, development, deployment and delivery of critical business processes
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