BPO: The Next Frontier

Companies scramble for an edge by outsourcing business processes.

While researchers judge the market for IT infrastructure outsourcing to have reached a virtual plateau with an annual growth rate in the single digits, business process outsourcing is in the midst of a growth spurt.

IDC, a Framingham, Mass., research firm, predicts that BPO will grow at a compound annual rate of 10.9 percent. With $382.5 billion in annual sales in 2004, global BPO will grow to $641.2 billion in 2009, according to IDC analysts. IDCs study of the market covers eight BPO segments: human resources, procurement, finance and accounting, customer service, logistics, sales and marketing, product engineering, and training.

Many companies are calling on offshore providers for BPO service because those providers can pass along savings from low labor rates while providing, in many cases, first-class service.

A study by McKinsey & Co. that was sponsored by Nasscom, an Indian outsourcing trade association, found that India has a large proportion of BPO talent, with 28 percent of the skilled BPO workers among 28 low-cost countries.

"A global presence is important to the extent that vendors are able to tap into a global resource pool to minimize costs—this is becoming a key requirement in successful BPO delivery and a key buyer expectation," said IDC analyst Romala Ravi.

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But finding returns from sending work offshore is not as simple as inking the contract. The Nasscom-McKinsey study pointed out that customers must first document their procedures and establish performance benchmarks before sending work offshore. Further, it can take up to two years to ramp up and stabilize performance at an offshore location, according to the study. That can keep payback well below initial expectations.

With a fully outsourced business model, Procter & Gamble called on IBM to handle its HR tasks and Hewlett-Packard to handle finance and accounting chores, including accounts payable, which HP took over in June 2004.

Like many outsourcing firms, HP has been revving up its BPO capabilities at centers around the globe. The company has offices in 10 locations, including its largest operations in Bangalore, India. In addition to transactional accounts payable, which HP performs for global consumer products giant P&G, HP handles finance and accounting, HR processing, sales and marketing, and procurement processing in Bangalore.

HPs BPO work for P&G is one of six BPO relationships that are being handled at HPs Bangalore facilities. HP also handles all financial processes for a major media company; for another, HP serves as the clients controller. The center also handles HPs own accounts payable processing.

HP is not alone. Earlier this month, Accenture turned up its BPO initiatives a notch when it acquired Savista, a Wichita, Kan., BPO provider specializing in HR and finance and accounting for midsize clients.

"Its a one-stop shop for a customer. Its an integrated approach in one platform, one solution, for midmarket clients," said Kevin Campbell, global managing director of Accentures BPO organization. "We have a back end in India and a global delivery network. We can use our offshore capability to leverage their front office."

Accentures $7 billion outsourcing business is split among application development, IT infrastructure and BPO. "The overall BPO market is growing at a significant rate, and we continue to be extremely bullish," said Campbell.

Two years ago, HP rival IBM bought Indian BPO company Daksh eServices, which has 6,000 employees. Daksh had developed specialties in CRM (customer relationship management) and financial management services.

In an interview earlier this year, Electronic Data Systems CEO Michael Jordan said his company is seeking to increase the number of its BPO contracts, which are more profitable than IT outsourcing deals.

Meanwhile, top Indian players such as Tata Consultancy Services are pouring resources into markets such as financial services. TCS last fall signed an $847 million, 12-year deal with U.K.-based Pearl Group, which manages insurance and pension funds. TCS will create a subsidiary to offer BPO services to Pearl and to other life insurance and pension providers.

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