BPO Market Analysis & Trends

The Business Process Outsourcing (BPO) market is expanding globally.

Successful providers have best practices, methodologies, and industry standards that allow deals to get done quickly. The entire BPO field has learned from past deals, so we now see bigger deals with better foundations. As a result, BPO is continuing to be used in new functional areas, new industries, and across the world.

BPO has come a long way in the past three years

Three years ago, BPO meant payroll processing and benefits administration - not exciting enough to talk about at a conference. Mainly the big consulting firms were talking about it, said Scholl of Gartner Dataquest. Since then the mega-deals have become very important in shaping the new form of Business Process Outsourcing or BPO. The field has become much more segmented, complicated, and sophisticated. It will fundamentally change how businesses work.

The BPO market is growing, but not as fast as expected

Business Process Outsourcing (BPO) is still the top growth market for IT services, but several factors - the economy, the BPO adoption curve, and the technology innovation downturn - have slowed its growth. BPO is driving growth in system integration and IT services. Every single BPO engagement includes sub-components of IT consulting, application development, IT outsourcing, and process management.

The key drivers of Business Process Outsourcing (BPO) have changed

Cost savings and variable cost structures are more important. Information security, the ability to execute, and business continuity have also become more important. But strategy and transformation are less important. As are innovative financial and tax structures.

Technology management - including IT outsourcing - is moving into the hands of process-based management organizations.

Of 50 CIOs surveyed, on average, they outsourced 28 percent of their IT budget, said Bobby Cameron, Principal Analyst at Forrester Research. And they are looking to outsource 34 percent. One company has out-sourced 76 percent of its IT. This is just the tip of the iceberg. The ITO paradigm is being restructured. IT organizations used to build everything. Now an increasing amount of their work is below ground. The emerging business model is collaborative and operates at a process level. Firms specialize in their core competencies and collaborate with other specialists for the balance of the work. The technology to operate these outsourced processes - which used to be supplied by internal IT - is now provided by the process outsourcer.

The market drivers are more practical than in the past

Gartner Dataquest conducts a BPO survey every fall. In fall 2001, the top two drivers of Business Process Outsourcing (BPO) were focus on core business and reduce costs, both of which are more practical than the previous year's top driver: gain competitive advantage.

Companies are either doing BPO or not even planning to do it

There's not much middle ground at the moment, said Pierre Mitchell, Vice President of Research at AMR Research. A joint survey by AMR Research and CFO Magazine found that those doing BPO are aggressively doing it in non-core areas to save money or gain expertise. It's not about reducing headcount or reducing capital costs. Travel and payroll are the most outsourced functions, by far, ahead of outsourcing accounts payable, asset management, expense reporting, indirect procurement, recruitment, direct procurement, and warehousing. As big suppliers become committed to procurement BPO, it is growing. The top three criteria are vendor viability, domain expertise, and price. And while 64 percent of the respondents said BPO is growing (and only 2 percent said it was shrinking), only 55 percent justified Business Process Outsourcing (BPO) on return on investment - even though they should, to show that value is delivered. CFOs are involved in 90 percent of the decisions. The average contract life is one-year (41.4 percent) and three-year (28.8 percent), but 50 percent of the contracts are three-year contracts in companies with revenues over $500 million.

BPO staff will come from numerous sources

People from industry may have process experience on a large scale, but they often do not have multi-client skills, which they need because they must serve different clients in different ways every day. Some people come from consulting, but they often lack operating experience. And IT people lack domain (process) expertise. As a result, BPO providers must mix-and-match skills from these different sources.

Integrators with outsourcing expertise are gaining ground on BPO specialists.

The integrators are learning specialty areas more quickly than the specialists are learning to form outsourcing agreements and manage service delivery.

The next generation of procurement outsourcing will be procurement utilities.

These are utilities that companies "plug into" to get the procurement services they need. These utilities will have standardized processes, a common infrastructure, and a menu of procurement services. Companies will select from the menu and thereby leverage the common processes and infrastructure.

Business Process Outsourcing (BPO) expansion is going to be infinite

Providers will find ways to get to this higher-margin work. In fact, the Business Process Outsourcing (BPO) marketplace is similar to the ITO marketplace in 1992-93. That's when CEOs and CFOs asked their CIOs, "Why aren't we doing this?" In the not-too-distant future, there will be a BPO deal or series of deals that galvanizes the BPO market. When that happens, this market will grow faster than the ITO market did.