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Business Process Outsourcing (BPO) Business Models
There are three business models of BPO: transactional, niche, and comprehensive. As shown in the figure below, there are several characteristics that distinguish between these three flavors of BPO.
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| BPO
Business Model |
Transactional |
Niche |
Comprehensive |
| Number
of processes |
Transactions only, typically for 1 process |
2-4 processes |
10+ processes in a function; sometimes more than
one function |
| Invest
in client assets? |
No, migrate everything to their system |
Yes - but modest dollars and personnel take-on |
Yes - significant dollars and employee take-on |
| Hire
client's people? |
No |
Yes - but usually < 50 |
Yes, usually > 100s and often in the 1000s |
| Locations |
Work
at provider's location; very low headcount at the
client site -typically account managers and sales
people |
Mixed,
people at both client and provider locations |
Mixed,
people at both client and provider locations |
| Geographic
spread |
Multi-country |
Domestic
(> 80% of revenue) with some international (typically
Europe) |
Global |
| Contract
duration |
1-2
years |
3-5
years |
7-10
years |
|
Contract value per year |
$1-5 million a year |
$5-10 million a year |
$50-$100 million a year |
| Business
model |
Offload transactions from client,
use provider's software |
Make processes more efficient
- reduce costs, raise service levels |
Make functions more effective,
introduce best practices |
| Accountability |
For the transaction processing |
For process outcomes |
For cost savings for the entire
function plus business outcome |
| Risk-holder |
90% of the risk is still on the
client, 10% provider |
50% client, 50% provider |
30% client, 70% provider |
| Metrics |
Per transaction |
Based on outcome |
Based on outcome |
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Transaction providers handle the transactions for only one process. In payroll, for instance, they do not take over your payroll department; they only cut the checks. They do not take on your people, their contracts are short (1-2 years), and the contract values are not large ($1-5 million a year). Using transaction providers has many benefits, but the more processes you outsource, the more fragmented your processes become. In essence, you still have an in-house department to manage. In transaction outsourcing, most of the operational risk stays with the client. There might be penalties for non-performance, but these are minor because the client still retains most of the function in-house.
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Niche providers focus on two to four processes. Niche providers will hire your people, but only up to 50 or so. They will invest modest amounts of capital to release some of your asset value. For instance, they will invest money migrating assets to their system or they will buy your assets in their specialist process area. Niche providers are generally domestic, and their deals range from three to five years in length, with a yearly contract value of $5-10 million. Niche providers aim to make selected processes more efficient, by lowering costs and raising service levels. They are paid based on outcomes, such as lowering turnover or reducing hiring time from 120 days to 90 days. In niche outsourcing, risk is typically shared evenly between client and provider. Although the providers will hire your people and be responsible for outcomes, they only make limited investments in capital and only impact a few processes. Thus, clients continue to shoulder the other processes in a function.
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Comprehensive providers handle almost all the transactional and administrative processes in a function, or even several functions, such as HR and financial accounting. For instance, there are 22 processes in HR and 33 processes in finance and accounting. Comprehensive BPO prefers global deals, which are typically 7-10 years in length, and are generally over $100 million a year. These providers will buy client assets and will take on hundreds and sometimes thousands of client staff. Comprehensive providers strive to make interrelated processes more effective, so they aim to reduce the total cost of a function by introducing best practices - such as requiring direct deposit of payroll or increasing the HR-to-employee ratio from 1:50 to 1:300. They are accountable for cost savings as well as outcomes for an entire function, so clients pay for outcomes, not inputs. Comprehensive providers shoulder 70 percent of the operational risk of the in-scope processes because they are responsible for the information technology, transactions, and administrative elements of those processes. Furthermore, they invest significant amounts of capital in the relationship, and they absorb most client personnel. The risk to clients is that comprehensive BPO is new - it's only been around for two-three years - so providers are less mature, their processes less proven, and most have very few reference-able accounts. |
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