Analytics Summary: BPO Survey
Concerns over data security and the difficulty of managing business process outsourcing projects are no match for the relentless drive to cut costs, a recent InformationWeek reader poll finds.
More than seven out of 10 companies surveyed are forging ahead with BPO initiatives, even as a sizeable minority expresses dissatisfaction with results. Perhaps even more interesting is that another small cadre of companies surveyed sees BPO not only as a cost-cutting tool, but as a way to push strategic agendas, such as transforming processes or increasing revenue.
Our research also suggests that this will be a difficult transition--and one that not all clients and vendors will survive.
That makes another key phenomenon we identified seem even more like rolling the dice. Knowledge process outsourcing, or KPO, is an offshoot of BPO that encompasses high-level business processes requiring professional judgment. Think risk management and modeling, even actuarial work. Compare that with less rigorous BPO activities, such as handling customer queries, applications, and orders, and you begin to see the schism picked up by our survey. Is the imperative to slash spending worth putting mission-critical business decisions into the hands of outsiders?
Apparently so, since BPO usage shows every sign of growing. Almost three-fourths of companies say they'll use an outsourcer in the next 12 months. Thirty percent say they'll increase their use, while just 7% will cut back, even as satisfaction is starkly split: Half are pleased, half are neutral or dissatisfied.
Non-IT managers anticipate that BPO use will accelerate at a significantly faster rate than IT professionals do, an important point because it's non-IT managers who tend to drive BPO decisions. Technology pros who think BPO isn't in their future might want to have a heart-to-heart with their line-of-business colleagues.
One thing IT and non-IT managers do agree on is that it's financial factors--cutting costs (cited by 83%) and improving efficiency (73%)--that are primarily driving BPO initiatives. The next most common factors are focusing on new projects or core capabilities. A significant number thought they'd realize savings with offshore labor. These companies might want to check the current exchange rate before spending their expected windfalls.
But back to that "strategic minority." About 20% of respondents take a strong stand that BPO is more about long-term competitive advantage than short-term, tactical gains.
This is, unfortunately, unrealistic. A minority of companies has the range of management skills needed to wring maximum value from deeper, more strategic--and significantly more complicated--relationships. The flip side of that reality is that there's competitive advantage to be had by those that can make it work.
Still, necessity is the mother of invention, and market pressures, ranging from troubles within the financial services industry to competitors' successfully tapping these strategies, may compel companies to move beyond their comfort levels with outsourcing efforts. Building deeper BPO ties with vendors, however, will take even more data sharing and complex contracts, hitting squarely on companies' biggest fears about BPO.
WHERE'S THE VALUE?
We gave readers 12 choices in an effort to get a consensus view of the most significant disadvantages of business process outsourcing. Three factors led the way: data security, difficulty of managing BPO, and tension between in-house and outsourced employees. Slightly more than half of financial services respondents selected data security, making it the top concern in the segment. IT management also cites data security most often.
In terms of how far we've come, respondents don't have a clear, unified picture of areas in which BPO providers have gotten better--and worse--over the past two years. When we asked about improvements, line-of-business managers and those from the financial services industry were most likely to say their BPO partners understand their business and industry.
When it comes to performance declines, it's people issues that keep readers awake at night. Underscoring the difficulty of retaining staff and management in BPO operations, especially in specialized areas, the difficulty of assigning and retaining quality staff for projects was cited by 32% of respondents, with retention of key people assigned to accounts coming in a close second, at 28%.
Clearly, a relentless focus on lowering costs combined with currency effects and high demand for labor in certain sectors is running up against the desire for companies to have the best staff assigned to their projects. The cliché "you get what you pay for" comes to mind ... simply put, BPO isn't as much of a bargain as it once was.
Nevertheless, companies continue to pursue BPO first and foremost as a cost-saving endeavor.
Perhaps the most interesting data point from a BPO vendor perspective centers on meeting agreed-on metrics, cited by 38% as the biggest area of improvement respondents would like to see from their BPO providers. Vendors may get a leg up on rivals if they can consistently deliver on their service-level agreements.
WHERE BPO'S HEADED NEXT
Cost cutting through additional outsourcing only goes so far. Given that outsourcing is a mature phenomenon--with organizations having made significant investments in offshore BPO capabilities--any meaningful increase in the amount of outsourcing has to press beyond the self-imposed limits and barriers with which companies have become comfortable.
• Outsourcing larger tasks: 15% of respondents said they ship out only relatively small and manageable business processes today.
• Outsourcing front-end tasks: Companies see outsourcing back-office tasks as less risky than farming out activities involving customer contact. For example, we asked respondents in financial services firms which areas were highly suitable for BPO. Tasks such as sales and client servicing, branch banking, sales and brokerage, private banking/wealth management, and customer acquisition ranked near the bottom.
• Outsourcing core competencies: The classic competence-based outsourcing strategy suggests companies retain core activities and outsource the rest. Yet only 13% of respondents say they follow that purist goal, with 36% seeing BPO as a way to off-load operations of legacy processes.
Lesson: Today's core is tomorrow's legacy.
• Migrating work from offshore captive sites: A special case of "outsourcing core competencies" involves situations where companies move from offshore captive operations (their own employees in lower-cost locations) to offshore outsourcing. About a third of companies view BPO as a way to have a more variable cost model.
• Blended outsourcing: This means, instead of an IT outsourcing provider developing systems for a client's own employees to use, or a BPO provider operating a client's systems, the vendor takes over an entire discrete process, from IT systems and execution to driving future innovations and improvements.
• Outsourcing knowledge-based work: One of the most challenging avenues of outsourcing--and certainly a major business focus for the all major BPO providers--is knowledge process outsourcing.
KNOWLEDGE IS POWER
KPO encompasses high-level business processes requiring professional judgment. Compared with BPO activities such as handling customer queries, applications, and orders, KPO can't be easily codified in set processes with instructions for just about every possible situation.
Instead, KPO tasks require judgment and industry experience. Think finance and accounting functions, like risk management and tax strategy decisions affecting the capital position of the company, that are typically performed by in-house financial professionals. We're also seeing such banking functions as market segmentation analysis and data mining to identify new business opportunities, compliance to meet anti-money laundering and anti-terrorist financing regulations, and initiatives to bolster the ability to use sophisticated internal ratings-based frameworks for Basel II risk management compliance.
These examples demonstrate that the financial services client and the outsourcing firm must share a high degree of trust to transfer custody of customer and enterprise data. Given that most survey respondents cited data security as the leading disadvantage of business process outsourcing, KPO providers will be challenged to demonstrate their ability to maintain security, not only over customer information, but over proprietary business practices as well.
They'll also be challenged to prove they can innovate, not just implement. Knowledge process outsourcing requires a combination of market knowledge, specific industry knowledge, research skills, communications ability, and insight. Yet just 14% of survey respondents say they've seen significant improvement in innovation from their BPO partners over the past two years.
From this standpoint, the burden of proof is on KPO providers.
Also of concern is the level of commitment: Outsourcing usually gets framed as a "make vs. buy" decision, but the close ties of KPO means it works more like a hire, or even a merger, where you're taking on an entire department in a single stroke.
Finally, as with a new hire, watch for conflicts between in-house personnel and the outsourcer's staff. Respondents expressed serious concerns over regular employees being let go because of outsourcing, and some said the trend to outsource is destroying innovation.
These are the same people indicating that their companies intend to continue to outsource at an increasing rate. If the past is any guide, the next wave of knowledge process outsourcing will be overhyped as a cure-all by its promoters, overplayed as a trend to be feared by those directly impacted, and overadopted by companies that haven't yet figured out how to make it work.
As with any period of innovation, this will create both disruption and opportunity for business managers. To make KPO work, client companies will need to have highly evolved relationships with outsourcers. Since this inevitably means financial institutions must contribute intellectual capital to their BPO/KPO ventures in emerging markets, they should evaluate their business partners as they would merger partners, more than just as vendors.
Even though the initial interest in outsourcing typically comes from the desire to cut costs, successful outsourcing relationships often evolve into comprehensive partnerships. Clients that recognize the full life cycle from the start will be better prepared as outsourcing relationships evolve.
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