The ins and outs of business process outsourcing

Business process outsourcing (BPO) is starting to receive increasing attention in various parts of the world as corporates look for ways to grow revenues without investing heavily in new IT installations. Generally speaking, BPO deals involve external service providers (ESPs) handling transactions off-site more cost-effectively and efficiently than corporates can manage. Most IT pundits have predicted that this outsourcing method will soon become a firm favourite of companies with high-volume, repetitive business processes.

Gartner believes that because the concept of the monolithic enterprise - one that owns all products, services and channels - is rapidly becoming a thing of the past, outsourcing will remain a major growth area throughout this year and the next. While traditional, cost-driven, relatively inflexible good old-fashioned outsourcing (GOFO) deals will still take place, it says that more flexible options such as BPO will become a lot more common.

Forrester Research says European IT outsourcing and BPO are expected to grow to 21 billion euro this year. While IT sourcing continues to grow at more than 20%, the growth in BPO is expected to be higher, says the research house. Gartner`s "IT Services and Sourcing Scenario" report, released in November at its Symposium ITXPO in Cannes, says the UK has seen the largest staff cuts in IT services in Europe. There has also been a strong growth in BPO and a focus on cost-cutting and deal-restructuring that has made Britain a target for offshore outsourcing ESPs.

Among the South African IT companies keen to cash in on these opportunities is Metrofile, a local business content management service provider. Paul Mullon, marketing director at Metrofile, says his company is well positioned to handle BPO deals involving non-core administrative processes for UK-based concerns.

"Our infrastructure in the UK would allow us to scan customer documentation over there and do the indexing and data capturing here. Because the cost of storage is lower in SA, we could handle that very cost-effectively over here. Scan-on-demand facilities would allow UK clients instant access to the data."

Graphic Data, the company`s UK-based operation, is already involved in processing credit card applications for the Royal Bank of Scotland. Each is scanned and captured into a database administered by the ESP. Incomplete submissions are posted to a Web portal with a trigger prompting the bank to source any missing or illegible information from the applicants, before they are returned for capturing.

Metrofile has yet to sign any local deals. "It looks like SA is taking a while to get into BPO so we`re still seeing mainly traditional outsourcing taking place," says Mullon.

It looks like SA is taking a while to get into BPO so we`re still seeing mainly traditional outsourcing taking place.

Paul Mullon, marketing director, Metrofile

The IQ Business Group is a step ahead, having secured its first "true" local BPO contract, says financial services division head Les Horne. It`s handling the back-office pension administration involving both new and existing customers for a South African brokerage organisation.

"We provide the systems that allow the front-office and customers to access required information." Horne says the contract comes with a three-year service level agreement (SLA) that is renewable annually from year four onwards. "We`ll need at least three years to see the necessary returns," he maintains.

His company is also looking at opportunities overseas. Horne says a "big potential growth area is getting to do business on behalf of local companies which are servicing international clients".

We`ll need at least three years to see the necessary returns.

Les Horne, head: financial services division, the IQ Business Group

The group is already active in the international BPO arena, having entered into a joint venture (JV) with Grand United (GU) in Australia. GU owns and operates two registered health benefit funds with an annual turnover of AU$85 million. At the beginning of last year, it began looking for a corporate solution that would create a platform for growth, with the flexibility required to expand to other areas and generate a future revenue stream. The solution had to deliver cost savings while also replacing some of GU`s existing IT systems.

The two companies launched a JV called HealthSource Australia in October 2002. The ESP`s solution promises to deliver an initial 20% saving in BPO costs and technology enhancements of around 30%. The processing activities undertaken by the JV include member maintenance, call centre services, reconciliation of payments, hospital contracts, claims processing, financial services and operations support.

Horne stresses that while cutting costs is often a primary driver for corporates going the BPO route, it`s not the only one. Others, he says, include companies getting new offerings to market quicker, being able to focus on core business, and getting access to the right IT skills set and relatively expensive IT systems normally difficult to justify within the company.

Orbys Consulting, a specialist outsourcing advisory consultancy based in London, believes the need to restructure operations (possibly resulting from merger and acquisition activities), the inability to cope with demand peaks and the global standardisation of processes may also play a role where some corporates are concerned.

Expanding on the need to access the right kind of skills, Horne says: "There`s not as great a shortage of IT professionals now, but it remains difficult for companies to source the right people and then manage and retain them. Outsourcing your business processes allows you to avoid the pain involved here.

"SA`s skills base has grown quite substantially. But while we may have sufficient skills now - which is largely due to the overall drop in fortunes in the IT industry - if we want to compete with other countries such as India, we will need to invest more in skills development."

SA`s skills base has grown quite substantially.

Les Horne, head: financial services division, the IQ Business Group

Unlike some other service providers chasing BPO contracts, the IQ Business Group uses internally developed best practices. It focuses on handling transactions related to employee benefits, such as pension funds, investments, human resources, medical schemes and payrolls. BPO is definitely a key target for the IQ Business Group. "Everyone is looking to broaden their revenue base, develop new annuity income and find a way of linking this to a client`s growth so as to sustain both its business and theirs. BPO offers a real opportunity to achieve this."

Horne says his company has committed to ensuring that this outsourcing option contributes at least 30% of the total revenue base within the next three years.

Horne stresses that building and maintaining mutually beneficial relationships is a key success factor in any BPO deal. "If you can`t work together and don`t share the same vision, then you just can`t do it."

BPO deals are almost guaranteed to turn sour when the customer is not clear about its motives and senior management is not united around a vision. Other inhibitors include poor communication, rushing and under-resourcing the development and implementation, inadequately defined specifications, and not paying sufficient attention to people issues.

The hardest people to deal with, particularly senior people, are those who feign enthusiasm then go back to the offices and do nothing.

Tony Roulstone, former business development and performance director, Rolls-Royce

Tony Roulstone, formerly a business development and performance director at Rolls-Royce, made some hard-hitting comments about human resources and change management in a presentation delivered at an EDS executive briefing in Johannesburg. Rolls-Royce commissioned EDS to assist it both to grow its business and take 25% out of its cost base.

He says: "Even in a successful programme there are things that could have been done better. There were some managers who were lukewarm about the exercise. The hardest people to deal with, particularly senior people, are those who feign enthusiasm then go back to the offices and do nothing. Not only are they themselves an impediment, but they transmit a message to their part of the organisation that it`s okay to enthuse and do nothing. Objections are fine, because you can debate them. But it`s very hard dealing with someone who says 'yes` but does nothing."

He cautions that no matter how carefully an outsourcing deal is structured and how much consideration is given to new skills requirements, not all members of staff may be retained. "Some of the current managers just weren`t up to it. It was very sad, because despite a lot of retraining and scope for learning, some of them just couldn`t get their mind around it."

Alletia van der Zandt, a financial process management subject matter expert at EDS, concurs that people issues are central to the success of any BPO deal. She cautions players in this market to take the relevant geographical influences, the cost of labour and cultural differences into account. South Africans, she says, generally aspire to "be the best" and should recognise that while using best practices is the ideal approach, it may not always be the most cost-effective approach.

"Remember that people get better at what they do over time as they get used to the job and start raising their standards. So be careful about signing long-term fixed SLAs as when companies mature, these may be difficult to renegotiate with your ESP."

Mark Ehmke, MD of local business process automation/workflow vendor Staffware, cautions that the SLAs required in BPO deals are "a lot more complex" than those governing GOFOs. These SLAs, he stresses, are "critical to success". He advises corporates to recognise that entering into flexible SLAs will allow them to achieve maximum benefit from their BPO initiatives.

Orbys Consulting makes the point that BPO contracts tend to be longer than IT contracts, and need to be more flexible. ESPs need to look at their costs carefully to make sure they can meet their clients` expectations in a manner that allows a fair profit/reward ratio for both.

Typically the cost of delivering the service in year one exceeds the current in-house costs, with outsourcing vendors expecting their costs to decline in subsequent years as efficiencies are introduced. Orbys says principal concerns differ from sector to sector, with financial services being concerned mainly with reducing process costs while companies in the retail sector place a greater emphasis on improving their use of the Internet and new technologies. While the "traditional" BPO focus has been on support processes such as accounting and payroll transactions, it has begun to move towards back-office process and customer contact management. Organisations that tend to be against the concept of outsourcing in general are the culturally paternal, those in older, less innovative sectors and those dominated by a particular inward-looking style of management.

Within the next five years, computing will become a utility like electricity, water and telephones.

Johan van der Merwe, business development executive, IBM Global Services

Johan van der Merwe, IBM Global Services business development executive, believes local corporates should take a long-term view when they choose their BPO ESPs. BPO, he says, is a bridging step to the natural end game of outsourcing - utility computing - and must be planned in that light.

"Within the next five years, computing will become a utility like electricity, water and telephones. Remote suppliers with end-to-end infrastructure and services capability will give customers access to any type of information technology or service on a pay-per-use basis," Van der Merwe maintains.

"Customers will therefore be able to slash their technology capex. And, they`ll be able to scale up and down at will - becoming extremely nimble in the face of market threats and opportunities. In other words, they`ll be equipped for on-demand business, which is fast becoming the preferred business model. So, any organisation now considering BPO must choose a supplier that can migrate it to utility computing easily and cost-effectively," says Van der Merwe.

According to Gartner, South African-based ESPs stand a real chance of securing international BPO deals, although they will have to contend with some stiff competition. It rated several companies using the following criteria: government support, labour pool, infrastructure, educational system, cost, political stability and cultural compatibility. India`s overall climate was rated as "excellent", Northern Ireland and Ireland received a "good" rating and SA, Israel and Russia were all seen as "fair".

The step from being an IT or application manager to becoming a processing manager is a big one.

Desmond Seeley, strategy and marketing GM, T-Systems South Africa

Desmond Seeley, strategy and marketing GM of T-Systems South Africa, isn`t so sure. He thinks BPO is "a bastard to get into" and that the chance that IT companies moving directly into this area will fail is "very high. The step from being an IT or application manager to becoming a processing manager is a big one. And this is where failure usually starts for IT companies."

He believes the way to go is for IT companies to support existing business process companies and deliver the infrastructure these companies need to support their clients. He also believes that those processes more suited to outsourcing are the "thin processes" - high-volume, low-maintenance processes that don`t involve a significant number of human interactions.

Seeley sees the early termination of the Standard Bank/EDS outsourcing deal as ample proof of how badly things can go wrong where BPO is concerned. Standard Bank appointed EDS in 1996 to "restructure, upgrade and manage" the operational processes within its card division. Speculation ran rife that the companies had had a major falling-out when the deal was terminated last year - four years ahead of schedule.

The official reason given was that the early termination of the agreement - it was scheduled to run until 2006 - was due to a change in strategic direction, and the recognition that "customer contact and its associated processes are core business competencies and important contributors to [the bank`s] competitive advantage, which should therefore be directly managed by the bank".

Whatever the case may have been here, Seeley isn`t the only one spooked by this turnaround. He and others who are cautious about getting into the BPO arena have good cause; the overall experience of both corporates and vendors has not been generally positive.

As Gartner puts it: "Just four years ago, 86% of CIOs worldwide said they were satisfied with their outsourcing contracts. The overall satisfaction rating for the IT services industry is now at 50%. For more than 30 years there`s been talk of partnerships, trusted relationships and delivering on promises, yet today buyers and sellers are more at odds than ever before. This industry will never really improve customer satisfaction, transform businesses, increase reliability, lower the cost of delivery or be able to tackle tomorrow`s problems unless everyone who has created the mess decides collectively to fix it."

Gartner believes that as organisations become more dependent on long-term relationships with ESPs, improved collaboration will not only be beneficial but essential. In a nutshell - the future is not about new applications, it is about new attitudes.