Tricks of the BPO trade

Outsourcing is already commonplace, but as it stretches from the IT infrastructure into the back office, the next major upheaval for the CIO is likely to be in the form of business process outsourcing. Patrick O'Brien quizzes two industry leaders about best practice in BPO.

A report last month from outsourcing advisory firm TPI notes that, while revenue at IT outsourcing vendors is expected to stagnate, strong client demand means that business process outsourcing (BPO) revenue should continue to see double-digit percentage growth.


It seems BPO is now winning widespread adoption, particularly in the UK where firms are offloading 'non-core' operations such as human resources, finance and accounting and procurement functions, as well as industry-specific work such as mortgage processing and pensions administration.

Yet the immaturity of the industry has also brought some problems for early adopters. Hewitt Associates, a leading human resources outsourcing provider, recently admitted that it had underestimated the complexity and therefore the cost of delivering many of its major, long-term BPO contracts. In the wider BPO industry too, there has been a higher proportion of terminations as compared to IT services deals, and earlier in the contract cycle.

Despite these problems, however, demand for BPO is stronger than ever. The question of whether or not to outsource back office functions is rapidly being replaced by questions about how to ensure it is done effectively.

To find out, CBR interviewed the CEOs of two of the key BPO vendors that offer BPO services to the UK market.

Alistair Cox is CEO of Xansa, a UK-based BPO provider that has restructured its operations to focus on offshore delivery for UK clients. It now has more employees in India than it does in the UK, and has won major contracts with UK banks such as Barclays, HBOS and LloydsTSB.

TK Kurian runs Wipro BPO, a subsidiary of India's third-largest IT services provider. Wipro BPO has over 16,000 employees and provides a number of BPO services including customer care, technical support, finance and accounting, and transaction processing.

Optimum timing
Timing a deal would seem to be crucial, but there is no obvious milestone that a company should look to as the optimum time to consider a BPO deal - as with most aspects of outsourcing, it depends on the individual circumstances of the company.

Getting board-level involvement for a deal is always crucial and Xansa CEO Alistair Cox believes the most important factor is to ensure that these sponsors, and other key personnel, have the time to effectively manage a deal.

"There is no optimal time for a BPO deal, it comes down to the bandwidth on managing change, not on what else has already been done at the company," he says.

"The best outcomes are when the client approaches the vendor early on and involves them in what it plans to do. Rather than do internal work and say 'we'd like one of these please', they should liaise with vendors to see what the options are. It allows us to get a proper understanding of the business."

Kurian also advises clients to involve vendors as early as possible. While a couple of years ago companies were more likely to think about BPO after a major systems refresh, he says that now it is advisable for the vendor to be involved sooner so they can make 'transformational' changes in one step. The alternative is going through the process changes that often accompany a systems change, then going through the same process with the BPO deal.

A BPO deal can be done "even if you have a crappy system," says Kurian, and vendors will be able to offer greater value if changes are made in one jump.

Choosing a supplier
If you're convinced of the case for BPO in your organisation, understanding which vendor to turn to is a minefield. The UK BPO market is seen as ripe for consolidation, such is the level of competition, and this may have already started with the auction of customer care vendor Vertex by its parent, United Utilities.

There are a number of specialised advisory firms that have set up relatively recently to help the process, such as Morgan Chambers, TPI, Everest and Equaterra. Are they worth spending money on?

Vendors seem genuinely supportive of such operations. "I am not averse to advisory firms," says Cox, "but make sure you really understand why you want to use them, and be clear upfront what role you want them to play. They are fairly recent innovations and some don't fully know what we do."

Advisor bias
Cox believes that some are biased in favour of vendors that they have taken the time to fully understand. Kurian is also a little circumspect. "For new buyers attempting outsourcing for the first time, advisory firms make a lot of sense. For the smart buyer, with experience, it's not so much of a problem to make a transaction without them. The main advisors are neutral, but there are some 'mom and pop shops' that are clearly biased."

CBR parent company Datamonitor offers a mixture of independent published reports covering the BPO sector, while its ComputerWire brand publishes the monthly BPO Market Report, and also offers ad-hoc IT research under the Ask ComputerWire service. Visit www.computerwire.com for more information.

If choosing a vendor proves difficult, you can start off with a pilot operation, and some even get two competing vendors on pilots to see who performs best. According to Cox, pilots are not as popular as they once were, due to the number of references available now.

"Some companies still want to use pilots, such as our client Scottish Widows, which wanted to see how it all worked first. Before, pilots were needed to convince, but now there are references for them to see, and time is money in BPO, so it's not always advisable". Kurian is more enthusiastic: "Yes, try to do a pilot. Before you try it out it's just a sales pitch."

To offshore or not to offshore?
Many companies choose to use the 'captive' route, which sees a business send some of its back-office functions outside the company to a shared services centre - perhaps offshore, though not necessarily - yet they remain 'owned' by the customer. It's a form of BPO, but some argue that it falls short of all of the benefits of 'true' BPO, where a third party takes over the business processing.

Xansa's Cox sees 'captive' BPO deals as a short-term measure. "Captives can never get the scale that vendors can offer, and they are only ever going to be able to offer limited career opportunities to their staff, who will have to do the same thing, day in, day out," he says.

Of course, both Wipro and Xansa are heavily committed to offshore delivery, as are more and more of their Western rivals. But should customers even be part of the on/offshore discussion? For some companies all that counts is the result, not the strategy or locations that the provider has used to get those results.

Cox still thinks that companies should be involved in such decisions as to what goes offshore, but that the vendor's expertise should be trusted as far as which offshore locations are used. "You should think very hard about the risks and what you are prepared to move offshore," he says.

"You can trust the industry as to where the offshore element goes though, and also understand that attitudes to offshoring will change over time [during the terms of the contract]. They shouldn't worry about where, apart from some industries such as defence where there are added sensitivities. Still, the vendor should still be happy to show the client where the work is going; it should not be secret."

Management and partnerships
Signing a deal is only the start of it, and many BPO customers have publicly regretted not spending more resources on managing the deal. There are various estimates as to how much should be spent, but Cox claims that there can be no hard and fast rules, as each contract is completely different.

Kurian admits that "no vendor likes management by the customer". It does, after all, suggest that the vendor needs to be kept on its toes with close adherence to the terms and conditions of the contract. That said, he does advise customers to spend 4% to 6% of the total contract value on internal management. "Not all of them take our advice," he says.

Meanwhile, anyone who's ever been to an outsourcing conference will have heard the mantra, "it's all about partnerships". Client-vendor suspicions need to be brushed aside and replaced by a relationship built on trust - but how is such trust built up? Cynics may regard such notions as marketing designed to cover up the inability of a contract to ensure that both parties get the expected benefits.

"If you don't get the governance right you will have problems," says Cox. "Both have to understand their obligations - who is accountable for what. The client must understand that by outsourcing he has not thrown away his obligations for the service - outsourcing is just a way of delivering the service."

While Cox concedes that it is difficult for a client to work out which vendor it will be able to build a trusting relationship with, he says that there are ways of getting a clearer picture: "Look at your personal dealings with the firm, ring up reference clients, look at the reputation of the suppliers, use reference visits and use advisers. Find out how they have dealt with delivery issues in the past."

It's not a one-way street, though, as Cox warns. "Clients should also ask themselves, 'What am I like as a client to deal with?' and 'Are we the sort of people to go to the contract as soon as there's a hiccup, and then to court?' If so, then I don't want to be the vendor."

Kurian agrees that forming a trusting partnership requires more than just an understanding vendor.

"Every customer says they want to build a partnership, and says they want to stand 'shoulder to shoulder' with the vendor. It's what the customer wants, but in reality few pan out that way. Partnerships need 'skin in the game' and there are ways, such as 'gain-sharing', of getting these into the contract."

'Gain-sharing' is where the BPO provider has certain financial incentives to help the customer either make more revenue or save on costs. Should the client achieve certain cost-savings, as measured against agreed service-level agreements, some of those savings are passed back to the BPO provider. Or if the BPO deal leads to additional sales, a percentage of those go to the BPO provider.

The role of the CIO
For many BPO deals, the CIO doesn't get involved until much later in the process, sometimes not until after the vendor has been selected. "I think there should be more CIO involvement rather than less, it's a shame not to tap into the knowledge there," says Cox.

According to Kurian, the CIO's experience of using outsourcing is invaluable and often under-utilised.

"The CIO often only gets involved in the process late or not at all," he notes, "but the CIO should be looked at as a pioneer. IT is usually the first piece that goes out, and so has experience of the cycle. He has an important role to play, and can be the outsourcing evangelist within the organisation."

CBR Opinion
BPO has been shown to cut costs or improve efficiency for many enterprises, but, as was the case with early outsourcing deals, those who rush in may see the pain of being early adopters. Research and planning is vital, with choosing a supplier and deciding which functions should sensibly be outsourced being key decision-points. Research and advisory firms are recommended for those new to BPO, but in all cases it's vital that reference customers are sought and that sufficient resources are earmarked for ongoing monitoring and management of the project after the deal is done.