"Look ma. No payments system".

For large multi-nationals worried about making best use of their back office resources, a solution is beckoning. Like a fairy godmother, Business Process Outsourcing (BPO) promises to make problems disappear as if by magic. The message from BPO providers (such as Andersen Consulting, IBM and PricewaterhouseCoopers) is straightforward: the complexity of today’s business operations requires costly investment and reinvestment in training and technology, and no corporation has the time and money to achieve excellence in every aspect. Amos Tuck School professor and BPO champion James Brian Quinn says: “Strategic outsourcing allows managers to maximise returns on internal resources, provide barriers against present and future competitors, fully utilise external suppliers’ investment, innovation and specialised professional capabilities, decrease risk, shorten cycle time, lower investment and create better responsiveness to customer needs.” And companies ready for outsourcing are easy to spot. Mark Otway, a managing partner with one of Andersen Consulting’s outsourcing divisions, says key characteristics in organisations that are ripe for BPO are: a powerful business imperative; a management team that is both brave and strong; and a willingness to change. Otway points to BP, one of Andersen Consulting’s clients, as an example. In the late 1980s and early 1990s, oil was selling at $13 a barrel, when BP needed a price of at least $25, and this imperative was the spark that ignited massive change, including a programme of outsourcing. Of course, outsourcing non-core activities like catering and cleaning has been accepted for decades, and BPO providers are simply trying to redefine what “non-core” means. They ask: “Do you want to be famous for the excellence of your payments system?” because they’re certain they already know your answer. And as international businesses reply in the negative, they are signalling the end of an era of vertical integration and the beginning of disaggregation. As a result, the do-it-all company is being replaced by one which has long-term joint ventures with its business process outsourcers. “Successful companies concentrate on what they do well, on what differentiates them from their competitors,” says John Barnsley, global leader of BPO at PricewaterhouseCoopers. “Smart companies free up management time to focus on what is fundamental to their business while finding alternative ways to handle non-core functions.” Outsourcers claim they perform more efficiently and at a lower cost because of their expertise and economies of scale, so they expect to free up a company’s finances as well as management time. Savings of around 20% or more are not unusual in mature arrangements. Barnsley also believes that a BPO provider should be able to improve on the standards of service achieved internally. “It is the need to change and improve internal services which is sometimes the catalyst for outsourcing, because achieving change internally is often hampered by internal barriers of culture or politics,” he says. A company’s non-core competencies may be important, but they do not affect the franchise in the marketplace. And those, runs the argument, should be outsourced to a provider for which they are the focus and the franchise. “The management need to analyse which processes are core and which non-core. Often, outsourcers provide the board with help on this issue, which, given the upfront investment required, explains why they don’t like being in competitive tenders for the work. Management analysis is as vital as it is time consuming,” says Barnsley. Once a judgement has been made between core and non-core and the required services selected, a typical BPO contract will last for a period of between seven and 10 years. All the major outsourcers are keen to portray BPO as a long-term solution. They talk of joint ventures, alliances and partnerships, because they say BPO is much more fundamental than cleaning or catering. “BPO is not an instant fix for internal company problems, although the long-term benefits can be substantial,” says PwC’s Barnsley. An outsourcer is given a free hand to do the simple things that should have been done years ago anyway: for instance, it could simplify the chart of accounts or reduce the number of suppliers. Also the outsourcer can invest in systems and technology that were never given the go-ahead because of other spending priorities. Outsourcers are keen to draw a firm line between themselves and the client’s management. Andersen’s Otway says: “We will not take away policy decisions and management judgement from the client. It is their business. But anything up to that point we will do.” This means outsourcers will certainly be in attendance when key decisions are made. The staff involved in BPO can be located in various offices, either with the client or the provider. The main options are to: – transfer a client’s existing operational staff to the outsourcer’s employment, either on the client’s or the outsourcer’s premises; – transfer the specified non-core operation to an established centre of excellence; or – to establish a new support function at a new centre of excellence. Otway says that if it is important, Andersens will work at the client’s premises. “But we will segment off the area so that it is recognisably Andersen Consulting and not the client,” he adds. This is because, as far as an outsourcer is concerned, re-engineering the business, the culture and the mindset of the people it takes over is key to the success of the arrangement. No longer are logistics or finance departments seen as back office overheads. Their skills and knowledge are central to the success of their new employer, and they are given the technology and training so that they can do a first class job. They are expected to perform better, but have improved career prospects. The partnership concept of outsourcing does differ from traditional pricing models. The mentality of squeezing the last drop of fee income from a client is replaced by an agreement where costs savings are shared. Professional service firms may have talked about partnerships with clients in the past, but BPO is the nearest that they have come to them. It is partly because of this that outsourcers see a big market and a relationship that will be more profitable and stable than any they have so far had with clients. So BPO looks like one of those inevitable trends, a juggernaut of corporate fashion bearing down on the world’s multi-national companies and enriching global professional firms and IT giants. Compared with the fees earned for auditing, consulting or installing systems, BPO is secure, big bucks work. For Andersen Consulting it is already a $1.25bn-a-year business, employing 11,000 people worldwide. Datamonitor predicts European insurance outsourcing will be worth $1.4bn by 2003, and PwC, which only established BPO as a fifth service line in early 1997, already has ten service centres. Some of these exist to serve a single client; others, such as Rotterdam, provide international shared services for a number of European countries. How many other outsourcing factories will spring up across the globe remains to be seen. As Andersen’s Otway says: “If economies turn down, more people will outsource because it takes pressure off the management.” As well as favourable economic climates and business school philosophy, perhaps the other reason why outsourcers are keen to push BPO is because it is, as yet, untainted by failure. Their are no writs for poor consulting advice, below standard auditing or systems that fail to deliver. But for the client there are risks: the most obvious is that outsourcing may fail to achieve the promised cost reductions or productivity gains. And maybe that is the real reason why outsourcers are so keen to emphasise that BPO is a long-term business relationship and not just another deal. If BPO is too new for major problems to have surfaced yet, IT outsourcing certainly is not. Our second outsourcing feature (which starts on page 47) assesses the risks of handing over your IT department. KEYS TO SUCCESSFUL BPO Analysing the process so costs are known and cost savings of outsourcing can be determined. Defining roles and responsibilities so there are no surprises and expectations are clear. Agreeing measurable performance objectives (for example speed of processing purchases) and establishing performance incentives, both rewards and penalties, for meeting, or failing to meet those agreed objectives. Developing a detailed transition plan to ensure smooth hand-over of services. Establishing a clear dispute-resolution process to handle issues as they arise. Monitoring results for continuous improvement. Arrange long-term contracts on a yearly renewal basis, so there is an annual review of the outsourcer’s performance. Source: PwC WHAT TO EXPECT FROM THE PARTNERSHIP * productivity improvements * access to expertise * operational cost control * cost savings * improved accountability * ongoing technology investment and improvement, and process re-engineering * improved human resources – better hire and training, improved staff turnover * opportunity to focus on core business. Source: PwC.