BPO: developing market, evolving strategies; Business process outsourcing, or BPO, continues to gain customers, and much of it is being done offshore. Human resources is still the biggest area, with finance and accounting and procurement trying to find more traction.

Church's Chicken, a fast-food concern based in San Antonio, began a partnership this year with WNS Global Services, an Indian-based provider of business process outsourcing (BPO) services. As announced, the arrangement initially will focus on finance and accounting (F & A) for restaurants owned by Church's, functions such as accounts receivable, accounts payable, bank account reconciliation and general ledger maintenance.

WNS will also maintain the enterprise resource planning (ERP) platform that provides the technology and processing services for the F & A functions. Church's said it expects the agreement to provide it "with the resources and capital the company needs to add an additional 15 restaurants over the course of the five-year contract." Church's has more than 1,500 locations in at least 16 countries and Puerto Rico and has sales of more than $1 billion.

Also at the beginning of this year, Kimberly-Clark Co. inked a five-year contract for F & A outsourcing with Genpact, a major BPO service firm spun out of General Electric Co. a few years ago. While the terms were not disclosed, the specific areas covered were accounts payable and travel expenses, pricing administration, accounting-to-reporting and supply chain accounting.

Genpact, with 26,000 employees in India, China, Hungary, the Philippines, Romania, Poland, the U.S. and Mexico, says that its F & A practice is its largest, with 5,700 full-time associates in eight countries, many with accounting degrees.

These two examples underscore some of the key drivers of BPO, which has been growing steadily in recent years and could be a $500 billion market globally by next year, according to McKinsey & Co. It's a market both for smaller multinationals, like Church's, and larger ones, like Kimberly-Clark. As such, it's not one-size-fits all; it's customized, and it can be done in one location or several.

What is BPO, and why has it taken off? "At this point, virtually every standard business process--human resources, procurement, finance and accounting, project management, legal, research and development, customer care and acquisition--has been outsourced to some extent as Global 1000 enterprises search for new ways to reduce costs, improve processes and remain competitive," write John K. Halvey and Barbara Murphy Melby in the second edition of Business Process Outsourcing: Process, Strategies and Contracts (Wiley, 2007).

BPO really is an evolution from the major information technology (IT) outsourcing contracts that started to blossom in the 1990s. It's less of a cost play--using cheaper overseas labor to do the same work--than an effort to let a third party undertake best-practices functions (often reengineered) that aren't core to the corporation's profit-making abilities. And, yes, the work should be delivered more cheaply, after the startup costs are absorbed, sometimes far more so.

To be sure, some BPO contracts still are being justified on the labor arbitrage model. But that advantage has been shrinking in many instances, and is well below the 50 to 60 percent or even more first trumpeted about IT outsourcing. Halvey, a partner with Milbank, Tweed, Hadley & McCloy in New York and a noted outsourcing expert, says the savings on BPO often run from 30 percent down to the single digits.

[ILLUSTRATION OMITTED]

Yet, BPO is clearly central to the outsourcing movement for U.S. multinationals, which has morphed from a controversial focus on offshoring a few years ago--where jobs were essentially moved to lower-cost locations like India or the Philippines--to a more complex "nearshoring" model that might make use of a multiplicity of locations, some domestic. India remains the foremost location for BPO, followed by countries like the Philippines, Brazil and Eastern European nations like Hungary.

Offshore Locations Competing

Authors Halvey and Melby find "explosive growth in BPO being provided from offshore locations such as India, with 'pure-play' offshore service providers competing directly with U.S.-based multinationals offering increasing offshore-centric solutions." They add: "It has become more common for legacy IT outsourcing vendors to market business process services, such as internal business process management and business process transformation, as part of a comprehensive IT outsourcing deal, or separately."

Major U.S. providers of BPO include Accenture, Affiliated Computer Services, EDS Corp., IBM Corp. and Hewlett-Packard Co. (HP). Competing with them on the ground in India are such native operations as WNS Global, Wipro Technologies, Hexaware and Infosys. HP's BPO operations in Costa Rica are profiled on page 44.

FEI President Michael Cangemi, who recently toured HP's operations in Costa Rica with FEI's Committee on Finance & Information Technology (CFIT), wrote in his "President's Page" column in the May issue that "time/motion studies designed by engineers are ongoing to continually improve the work processes and reduce labor costs. It is truly a case of 'working smarter.'"

Some observers believe the BPO market will dwarf the IT outsourcing market in coming years. Joyce Bastoli, national vice president at Ajilon Finance Solutions, sees the BPO space growing steadily for at least five years, particularly as mid-sized or even smaller companies clamber on the bandwagon.

Smaller companies are now just as likely to participate in offshoring and contract for BPO as far larger firms, says the Offshoring Research Network (ORN) 2006 report, "Next Generation Offshoring: The Globalization of Innovation," a research document developed by Duke University's Fuqua School of Business and sponsored by Booz Allen Hamilton.

There's no question, however, that BPO is responsible for job losses at the client company. According to the ORN report, finance and accounting outsourcing was cited as the function most likely to lead to offshore job losses, while research and development was the function least likely to do so.

The research indicated, however, that HR, procurement and F & A will be three functions most impacted by job losses to offshoring over the next three years. Planned growth in offshoring is 50 percent or higher for these functions, and there is a higher incidence of job losses when contracts go offshore, ORN noted.

Technology: Linchpin for BPO

It's critical to understand the vital role that technology continues to play in outsourcing areas like BPO. EquaTerra, an outsourcing research and consulting firm, says companies that do BPO "fully realize the inextricable, critical role information technology (IT) and enterprise software implications play in their outsourcing success."

Indeed, BPO buyers in a recent EquaTerra survey cited the IT capabilities of external providers as vital to effective BPO programs. In fact, IT was ranked at 4.2 on a scale of 5 as being key to BPO success. "IT and BPO cannot and do not operate as islands," noted Stan Lepeak, EquaTerra Managing Director of Research.

Most European and North American respondents identified Oracle Corp. and SAP AG as the leading enterprise software vendors in terms of having a clear BPO value proposition. Many of these companies noted that they are already using software from one or the other.

"Organizations engaged in or pursuing BPO must ensure they have the skills and take the time to adequately assess their IT options when it comes to BPO ... Embedding IT requirements, needs, capabilities and key representatives from the IT group into the BPO teams from the start will improve the likelihood of success," Lepeak wrote.

Then there are systems integration issues. "As part of the BPO transaction, the BPO vendor often introduces new, state-of-the-art systems and methodologies that are specific to the business process being outsourced," write Halvey and Melby in their book. "The customer will need to consider how these systems will interrelate with the systems and methodologies being used in connection with other business processes."

Another important issue is the hidden cost of converting existing software for use in a new BPO environment. Is that assumed by the vendor or retained by the customer? If software needs to be converted, who bears the cost? Suppliers must be certain that customer's data can be used on the new systems. This could mean data conversion, either electronic or even manual direct input.

While the research is somewhat conflicting, there's general consensus that the BPO market has been maturing, and that deals are under more scrutiny by both suppliers and customers. "Customers have gotten savvier," Halvey says. "Suppliers have gotten more sophisticated about what they are willing to do, and at what price. There has been a rebalancing of the risk equation.

"A trend line I see is where deals are getting renegotiated earlier in the cycle, by both the customer and provider," he adds. "The suppliers are saying, 'This isn't working.' They're becoming more proactive" about addressing issues of scope or price.

Adds EquaTerra: "The outsourcing market is experiencing an adjustment phase, spurred by a maturing marketplace and a more sophisticated buyer community." Outsourcing is often being done on a smaller scale, and with multiple "best of breed" providers, the firm adds, calling this a "multi-pronged market readjustment."

"The large number of IT outsourcing deals and comprehensive, early-adopted HR outsourcing deals signed in the late 1990s and early 2000s are entering a natural phase of renewals and restructurings," EquaTerra adds. "In retrospect, some of the early multi-process HRO deals were not structured well for either the buyer or the provider. All these factors contribute to an increased level of renegotiations, recompetes and restructurings."

One result: a paucity of large deals. Fewer multi-process transactions have shown up lately in F & A and procurement, says consulting firm Technology Partners International (TPI), as buyers increasingly elect to outsource single processes, such as accounts payable. "These are often awarded directly to offshore providers in order to benefit from labor arbitrage," TPI says, with most of the contracts below $25 million.

Most companies active in BPO have more than one provider, says Ajilon Finance's Bastoli. Putting a contract in place usually takes at least eight months, she says, adding that her firm usually deals directly with the CFO or an executive vice president of outsourcing. Those executives, in turn, may bring in business line managers or a controller as part of the full review.

While human resources outsourcing (HRO) remains the largest piece of the BPO market--and its share may be growing--the savings aren't as visible as they might have been years ago. "HRO requires a lot of technology," Halvey says. "The IT savings have largely been realized, yet the customer still expects [substantial] savings. Perhaps customers need to adjust their thinking from savings to avoiding capital expenditures in the future, like needing a new HR system."

Halvey adds the HRO market "is not as fully integrated as we expected it to be at this point. More discrete pieces are being outsourced."

(BPO growth, in fact, is the subject of considerable research--and confusion. For more detail, go to www.financialexecutivemag.com and see "FE Online Exclusives.")

F & A, Procurement Slower to Grow

Two other BPO sectors, F & A and procurement, have also been somewhat slow to take off. (F & A includes areas such as general accounting payroll, cash management, accounts payable, accounts receivable, credit, fixed assets, contract maintenance, collections, tax and regulatory compliance, budgeting and SEC reporting.)

While concerns about data privacy or releasing core information have sometimes been cited as a barrier to F & A growth, Halvey says, "The reality is that issues of data privacy are everywhere. The issue is all the other things we've been talking about--capacity, offerings, pricing. [That growth] will happen."

"The more strategic piece of F & A is still in-house; [Sarbanes-Oxley] compliance can't go offshore," says Ajilon's Bastoli. What has happened in some cases is that companies have gone to India and built a center dedicated to F & A administration, which they staff. "They do what a third party would do, but they own it," she adds.

While procurement "is still one the things our clients are looking at, there isn't the traction we thought we would see a few years ago," Halvey says. "Again, the customer wants to outsource it, but the supplier community is still wrestling with the solution, and how to price it and how to deliver it."

The procurement space is attracting non-traditional providers like American Express Co. Following the debut of its S2S (Source-to-Settle) suite in April, American Express last month launched two new "organically developed" S2S solutions derived from its success at paring $1 billion from its own procurement costs over the past five years.

Halvey argues that "suppliers and customers are wrestling with the value proposition on all this. With IT outsourcing, things were much simpler. When you start talking about more amorphous things, the measurements are harder to get to. But metrics will develop."

Another process area that will be increasingly outsourced, Halvey predicts, is routine legal work: patent review, basic contracts and simple licenses--work that doesn't require high-priced attorneys. Overall, he concludes, "The core piece of what won't be outsourced is getting smaller and smaller."

RELATED ARTICLE: The BPO Experience

India is often considered the epicenter for outsourcing, and BPO is no different. Here's a look at the work being done there, first from a customer perspective, then from a provider. The third example profiles the Hewlett-Packard Co. operation in Costa Rica.

FOR AGL RESOURCES, BPO IS 'A LOT HARDER THAN IT SOUNDS'

If you could call your gas company with a bill-related problem and have someone fix it, quickly and correctly, would you think that person is smart and be pleased with that service--and that utility company?

That's what AGL Resources (AGLR) is banking on, since it has outsourced about two-thirds of its customer service call center operations, moving them from Riverdale, Ga., to Pune, India. The process, which began in 2005, has recently been rolled out. With the jury still out on how successful the operation is, Executive Vice President and CFO Drew Evans says, "Ask me next year."

It's highly unusual for a utility to outsource functions, but, as Evans describes it, AGLR--a Fortune 1000 company that is ranked among Fortune's 10 best-managed utilities--takes a different view. "Anything that works to reduce the rates or the burden on ratepayers is good for our company in total," he says. In the industry, companies operate on "rate-stay-outs," meaning that rates are stabilized for five to 10 years, depending on jurisdictions. So, "the only thing that we can do to stem the tide of general wage increases and rising healthcare costs is to cut out or find a more efficient way to handle these secondary functions."

The call center, he says, is an obvious area, since it's a difficult function to operate in the U.S. Outsourcing, he explains, "relieved us of the burden that we had of incredible turnover." While the staff was good, he says, some portion of it churned rapidly, presenting a constant staffing challenge.

When AGLR first considered outsourcing, it did research and due diligence. The process was led by the head of call center operations, who first identified potential companies to which it could outsource directly. Once the list was narrowed down, a delegation of AGLR executives visited a few of the companies and made the decision. After considering geographic locations, India was selected due to its "more highly educated workforce, good language skills and a growing track record," says Evans.

As Atlanta-based AGLR has grown, it had consolidated all of the call centers to one location. It owns utilities in six states, from Florida to New Jersey, distributes natural gas to approximately 2.2 million customers and receives about 3 million calls a year.

[ILLUSTRATION OMITTED]

About half of the calls are bill-related, and half require turning service on or off. Calls related to customers reporting leaks and other emergencies--about 15 percent of the calls--are routed directly to the company's domestic call center for exclusive handling by U.S. personnel, explains Evans.

Outsourcing the function, he explains, was not done merely to cut costs, but to increase customer service. Prior to outsourcing, 80 percent of the calls were answered in 180 seconds; within 18 months of the program launch, response time was down to 30 seconds.

In preparing for outsourcing, AGLR spent much time and effort and, naturally, costs ran higher than originally anticipated. The process involved educating the offshore company's employees--including shipping equipment and pipes overseas so that they could actually learn about the business they were in.

AGLR's 250 overseas employees are Indian (working for Wipro Technologies). AGLR has also outsourced some finance and accounting functions (through Hexaware Technologies) and software development design and maintenance, as well as certain engineering work (also with Wipro). Other processes may follow as progress is measured, notes Evans.

So, 18 months or so into its BPO journey, what is AGLR saving? "I'd say at the conservative end, we're saving $3 million out of $14 million, and maybe as much as $5 million, so that's 25 to 30 percent in total," says Evans. And, he adds, "We're getting an improvement in the quality of service."

Is this what he expected? Yes, he says, conceding that last year was more expensive than originally planned. Bottom line, he says that a savings of 15 to 30 percent is realistic.

Ultimately, how will AGLR measure its success? Evans says it will be based on "meeting our basic metrics of answering calls in a timely fashion." He says the company also measures the number of calls that are escalated and require a "second touch," explaining that it pays close attention to complaints logged with the Public Service Commission or letters sent to the company. "We focus more on the ones where there was some difficulty and try to improve those things."

A key to working with Wipro staff in India, he says, has been not just finding someone that speaks English well, but rather "finding someone that understands English very well." Bottom line, "if we can figure out what our customer's problem is, it's a lot easier to solve." Callers are comfortable with an accent, he says, as long as that person understands what they are saying.

The U.S. call center staff that AGLR has retained, about a third of its previous staff, is handling highly detailed calls and doing analysis based on the calls. "We've outsourced the mass-production line jobs that didn't have a lot of content," says Evans. Thus, he continues, "we're managing a workforce and employee base that thinks about what they do during their day; they're not just a group that rotates through a call center or through the payables department." He's convinced that he's helping to upgrade the job opportunities for American workers, as opposed to shipping jobs overseas.

Would he do it again? "It's a lot harder than it sounds," says Evans. But, he is very optimistic about the long-term results.

--Ellen M. Heffes

TORRID GROWTH SPURS PLANS TO EXPAND

Caliber Point is the BPO subsidiary of Hexaware Technologies, a company listed on the Indian stock exchanges. In an interview from his office in Mumbai, Ashok Bidikar, Caliber Point's president and executive director, described a company that in three years has mushroomed to more than 1,000 employees serving some 25 to 30 corporate customers from centers in Mumbai and Chennai. Two-thirds of its customers are from North America, the rest from Europe.

The company provides end-to-end outsourcing services in areas such as process consulting, transition management, shared-services center set-up, transaction processing and document management. Additional areas include payment processing, loans and mortgages, check processing, order management, contract management, financial and Sarbanes-Oxley reporting, tax management, accounting, general ledger maintenance and reconciliation.

Bidikar says that HRO is the company's strongest suit. There, it provides services ranging from payroll and recruitment to "onboarding" and relocation. In the related benefits area, it provides benefits education, medical benefits administration and 401(k) administration to North American customers.

Caliber Point has been building its finance and accounting (F & A) offering, which now consists of procure-to-pay and accounts receivable. "There is a lot of traction in accounts payable, and we going aggressively after that market," Bidikar says, adding that the company plans to move into procurement and wants to add more analytics.

"Our long-term strategy is to offer a best-practice enterprise back-office operation," Bidikar says. Caliber Point works primarily off the customer's technology platform. It has a strong relationship with SAP, but can work with other enterprise resource planning (ERP) systems such as Oracle and PeopleSoft, he adds.

Growth? Bidikar says the company has grown by more than 100 percent in each of the past two years, and expects to double again this year. It plans to add three more centers by next June in other venues--in Argentina, Brazil and Hungary--and perhaps in the Philippines the following year. Bidikar says those locations would offer different skillsets, including language skills, that would upgrade Caliber Point's capabilities.

--Jeffrey Marshall

HP's COSTA RICAN OPERATIONS: JUST A PIECE OF THE PIE

Known since it began in 1939 as an information technology provider, about 15 years ago the Hewlett-Packard Co. found a new use for its products and knowledge--it opened separate BPO locations. At first, the purpose of the external sites, which became Hewlett-Packard Services, was to serve internal HP clients at shared services centers.

Since 2003, however, it has been serving external clients; it now does work for more than 20 multinational customers in its 10 Global Business Centers located in the Americas, Europe and Asia, which give it the capability to work around the clock. HP's BPO business is one of three outsourcing service groups within HP, the others being information technology outsourcing (ITO) and application outsourcing (AO).

Outsourcing services employs about 22,000 of its approximately 156,000 worldwide workforce, and approximately 5 percent of HP's FY2006 revenues of $94.7 billion (for the four quarters ended Oct. 31, 2006) came from its outsourcing business. This was up approximately 7 percent from 2005, and the operation also experienced an 11 percent year-over-year hike in the first quarter of 2007.

Currently, HP performs finance and accounting functions that include: order-to-cash, procure-to-pay, record-to-report, acquire-to-retire and decision support and analytics. Among its customers are Procter and Gamble Co. (for which it handles accounts payable transactional outsourcing); the Sydney Opera House (it handles the CRM system and ticketing for 2,400 events annually); and Jim Beam Brands Worldwide Inc. (it manages information resources).

Bharat Jain, head of BPO Trade-Costa Rica, says that with its large footprint as a provider, HP offers clients and potential clients a "holistic approach." When a company thinks about outsourcing, he says, it is trying to fulfill many needs. He argues there is a benefit of working with one provider, rather than having multiple vendors. In fact, he says, it is customer needs that have driven HP to expand into other arenas besides F & A.

Further, he says that BPO is morphing into "KPO"--knowledge process outsourcing. He believes that almost anything can be outsourced, except functions that encompass Sarbanes-Oxley requirements, something he says that "companies are internally responsible for." BPO providers can and do provide controls frameworks and work with customers to support regulatory requirements, he says. However, when it comes to a company's strategic decisions about what to outsource, he says those "should be driven by the company's mindset rather than what can or cannot be outsourced."

As to which service center a company should use, is it the one closer to its headquarters, or should it go for the lowest labor cost? Jain says the company's logistical needs should sway that decision. In the case of a U.S. company outsourcing accounts payable, for example, scanning invoices may be best done in a closer location, like Costa Rica, to facilitate shipping the paper; once scanned, the invoices can be processed in India. Then, as in a relay race, checks can be mailed from the U.S. (assuming there are paper checks).

[ILLUSTRATION OMITTED]

"There is no single rule of thumb" on potential savings, Jain says, adding that there are many variables. However, he adds, BPO is not just about cost savings. "Many companies look to BPO to improve quality, visibility and controls, as well as gain access to best-in-class tools, technology and process expertise."

Jain says HP is looking at the broader picture of what's next in BPO. As such, he says, HP is "expanding our offerings holistically to a company so that [it] can focus on [its] core business and let us do all the other parts."

What's his opinion in the debate that offshore BPO facilities, like the one he manages in Costa Rica, are causing U.S. job losses? "I don't look at a company, especially a global company, as whether it's a U.S. company. It's a free market, and a company has the right to make decisions to be profitable," he comments. "Since customers are multinational, in order to be competitive, they need to source services where it makes the most strategic and operational sense for their business."

--Ellen M. Heffes

RELATED ARTICLE: TAKEAWAYS

* Business process outsourcing, most handled by overseas workers, has been growing, largely as an offshoot of earlier technology outsourcing.

* The market is undergoing a kind of reassessment, marked by closer scrutiny of contracts on the part of both customers and providers.

* Technology is a critical element of BPO, and the existence of good systems is deemed vital to success.

* Human resources is still the largest segment of BPO. Finance and accounting and procurement are still struggling with issues such as product offerings and pricing.