Many IT
professionals are familiar with the term business process
outsourcing (BPO), but knowing how to distinguish it from other
types of outsourcing requires some scrutiny—somewhat like discerning
between two political candidates with similar campaign messages.
Though some forms of BPO may include both IT management and
business operations, the approach is primarily about turning over
functions such as payroll, accounting, billing or even real estate
management to a third party.
Though these business processes may depend on IT, they are
separate functions from core IT operations, such as data center
activities or network management.
Different Skill Sets
David Schnitt, CEO of Ledgent Inc., a finance and human resources
outsourcing provider in Torrance, Calif., says the skills required
to manage technology are different from those needed to manage
business processes. An IT outsourcer focuses on IT life cycle
management and PC uptime, whereas a BPO vendor manages people and
processes.
That's why vendors "pay strong attention to employee
transitioning" when they manage a firm's business processes, says
Rebecca Scholl, an analyst at Dataquest in San Jose. "A vendor
should have a strategy for the people [it's] replacing, a
change-management strategy," she says.
The same holds true for the customer company. For instance,
Charlotte, N.C.-based Bank of America Corp. appointed Mary Lou Cagle
to head its business transformation efforts when it signed a
memorandum of understanding with Irvine, Calif.-based Exult Inc.
last October to manage the bank's accounts payable and human
resources activities under a 10-year, $1 billion agreement.
Part of Cagle's responsibilities involves putting together a team
including representatives from both the bank and the outsourcing
firm.
As evidenced by Bank of America's contract with Exult, BPO is big
business—and getting bigger. According to Dataquest, the worldwide
BPO market is expected to triple by 2004, reaching $301 billion.
It's important for companies to recognize their core competencies
compared with activities that could be handled more efficiently by a
third party, says Charles Kafoglis, a partner at
PricewaterhouseCoopers in New York.
For example, back-office functions such as payroll or accounts
receivables aren't likely to "make or break" a company, so it might
make sense to farm them out if someone else can support them more
effectively, says Kafoglis.
Mark Hodges, vice president of corporate development at Exult,
says that Global 500 firms spend between $50 million and $100
million per year in a typical BPO deal.
Hard to Quantify Savings
Quantifying savings from BPO deals can be difficult, according to
Albert Nekimken, an analyst at Input in Chantilly, Va. More often,
companies outsource to streamline processes, save time or leverage
the strengths of third-party specialists. If a company does find
savings, they're usually in the 10% to 15% range, he says.
Scholl says small companies choose to outsource business
processes to cut costs and build a function like accounts
receivables in a short time. "They need a back office cheaply and
fast," she says.
Large companies, on the other hand, traditionally choose BPO to
improve their efficiencies, says Scholl. Bank of America, for
instance, is hoping that Exult will streamline its human resources
function by creating a self-service portal for the bank's 150,000
employees during the next 18 months, according to Cagle.
Self-service human resources applications enable employees to
access and update their personnel and benefits information online
without having to involve human resources staff. Officials at the
$672 billion bank say they expect the deal to cut its annual human
resources and accounts payable costs by 10%.
Certain trends may prompt firms within a given industry to
outsource business processes, says Nekimken. For instance,
consolidation within the banking industry may make it easier for a
bank to outsource its human resources activities rather than
integrate data from the parties with which it merged or acquired.
Strategic Outsourcing
A company's decision to outsource a business process typically
supports a larger business strategy, says Nekimken. For example,
prior to announcing its BPO deal with Exult, Bank of America had
announced a corporate restructuring, including plans to lay off as
many as 10,000 employees and expand its investments in three
technology areas.
As the bank continues to restructure, outsourcing and
Web-enabling its human resources should give it added flexibility,
says Nekimken.
Examples of Business Process Outsourcing
Deals
| Date |
Partners |
Terms of the Deal |
| October 2000 |
Exult,
Bank of America |
Companies are still negotiating a $1 billion,
10-year deal. Bank of America will acquire 5 million
shares of Exult stock and an option to purchase another
5 million shares. About 800 to 900 of the 1,000 people
working in the bank’s human resources department will
have jobs at Exult. |
| April 2000 |
Nortel
Networks,
PricewaterhouseCoopers |
PricewaterhouseCoopers manages payroll, human
resources, accounts payable, employee training and other
operations in a five-year deal for an undisclosed
amount. About 1,000 Nortel Networks’ employees were
transferred to PricewaterhouseCoopers’ BPO service
centers. |
| November 1999 |
General Motors,
Arthur
Andersen |
Arthur Andersen was awarded a $250 million deal
to manage administrative accounting duties and help GM
upgrade its legacy payroll systems to PeopleSoft Human
Resources. Four hundred GM employees were given the
option of working at an Arthur Andersen service
center. |
| November 1999 |
BP Amoco,
PricewaterhouseCoopers |
BP and PricewaterhouseCoopers signed a $1.1
billion, 10-year deal to outsource accounting and SAP
financials; the consulting firm also acquired BP’s
application systems group. About 1,200 BP employees
joined
PricewaterhouseCoopers. | |
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