Understanding the Business of BPO

It’s not a fad and will continue to be in vogue as an increasingly global economy will force companies to retain core competencies and look for cost reductions in other functions

Business process outsourcing (BPO) is easily the latest buzzword making the rounds in the global marketplace. Heightened interest and discussions around this three-letter acronym give an impression of another fad in the making. But here’s a blinder–BPO, in some form or the other–has existed for a long time.

Opportunities in BPO for India arise from two key drivers, that is, cost management and the increasing complexity of IT environments

Source: IDC Unlike the vertically integrated companies where the mantra was 'do it in-house', new age companies are outsourcing non-core functions to external companies that specialize in particular domains

Have you ever called a toll-free number on a Sunday afternoon trying to get your credit card bill straightened out? There’s a good chance you spoke to a customer care executive. Have you ever sent a package through Federal Express or UPS? One probably might not think of these companies as BPO providers, but they handle the day-to-day logistics business process on behalf of hundreds of companies on a daily basis. The use of external specialists in areas such as finance, accounting, logistics and law goes back a long time.

What is new about BPO can be summed up in two main developments. First, as a result of technology advancements, a depressed business climate and service provider innovation, the BPO concept is being applied to business functions that were till recently deemed to be useless, unsuitable or unfeasible for outsourcing. Second, and equally important, is that client adoption and acceptance of BPO services are growing, with clients now viewing BPO as a strategic tool that can fundamentally affect how they run their businesses, how they view their identities as organizations and how well they gain competitive market differentiation. Underlying these developments is the role of technology and the ways in which it is shaping both the demand for BPO services and the economics of delivering them.

What is BPO?



BPO involves the transfer of management and execution of one or more complete business processes or entire business functions to an external service provider. The BPO vendor is part of the decision-making structure surrounding the outsourced process or functional area, and performance metrics are primarily tied to customer service and strategic business value.

Strategic business value is recognized through results such as increased productivity, new business opportunities, new revenue generation, cost reduction, business transformation, and/or improvement of shareholders’ value.

Change in corporate sourcing strategies



The rise of external business service specialists is strongly related to a change in corporate sourcing strategies. The traditional model for large companies in industries such as manufacturing, retail and finance has seen most corporate functions managed in-house. These range from research and development, engineering, purchase and production activities through to distribution, sales and marketing as well as staff functions such as finance and HR.

This type of vertically integrated organization is steadily finding itself in competition with more specialized organizations that focus on one or more core competencies. For example, the core competency of Nike can be described as design and branding of sports shoes rather than the ownership of retail outlets and the manufacture of sports shoes. In the case of oil company British Petroleum (BP), its core business is extraction and distribution of oil. If the company could buy oil at a cheaper rate from the market than what it costs to extract the oil from a well, BP might as well completely focus on distribution.

These organizations are partnering with other organizations in order to acquire “non-core” services and goods. BP, for example, is spending about $1 billion a year on a multitude of outsourcing services in areas like human resources, tax, engineering and R&D, financial services, facilities management and desktop services.

In return, a new market is created for companies that specialize in non-core functions that are “core” to them. In each functional area, there are examples of companies that have been able to grow a successful business out of managing corporate functions that are regarded as non-core by others such as Excel, Danzas, TNT Logistics and Stinnes in logistics management; Vertex, Convergys, SITEL and ClientLogic in customer care management; and ADP, Ceridian, ePeopleserve and Arinso in HR management.

Opportunities for India



The opportunities for India arise from two key drivers–cost management and the increasing complexity of IT environments.

The cost advantage of India as a base has undoubtedly been established through a decade-long experience of developing and maintaining IT infrastructure for large global corporates, thus giving India the competitive advantage.

In the early 90s, GE and American Express moved their non-core processes to India in their pursuit to go lean. This was done despite India being ranked significantly low on a basic infrastructure index, especially on the lack of good communication networks, as compared to other outsourcing destinations like Ireland, the Philippines and Mexico. These two corporate behemoths found India’s comparative advantage–in terms of a unique time-zone geographical location and access to a large pool of English-speaking workforce–too hard to resist. Around the same period, Indian IT service providers were delivering software development services to global customers on a unique dual shore model, a concept that was highly successful and which gained considerable acceptance across the globe.

Source: IDC

According to an IDC study, ‘Emerging BPO Opportunities for India’, demand for BPO services is expected to grow at a phenomenal CAGR of 54% over 2003-2006. The Indian BPO service providers’ total revenues in 2002 stood at $2.2 billion. According to the study, total employment in the BPO industry is also expected to grow at a CAGR of 32% to reach 0.6 million by 2007. The industry also witnessed wide-scale capital infusion in terms of infrastructure, people and processes, and was almost operating at 64% of the total installed capacity, which IDC predicts will improve to 78% by 2007. This is mainly due to market consolidation and maturity.

The demand for BPO services in functional areas like finance, marketing, sales, human resources and administration is expected to remain high for the forecast period of 2003-2007 as companies worldwide are on a continuous lookout for adopting effective measures to prune costs across functions.

Presently, Indian BPO service providers are providing mainly customer care and low-end data entry back-office processing services, which are necessarily only a part of a process and not the entire function itself. Though back-office processing and customer care would remain the breadwinners for Indian BPO service providers, the Indian BPO players will graduate to complete process services to help clients achieve their strategic business transformation. Moving up the value chain will help the service providers fetch better prices, improved operating margins and enduring client relationships.

Kapil Dev Singh country manager, IDC (India)