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What is BPO?

by Alan Joch, February 2008

Business process outsourcing (BPO) is becoming an increasingly popular choice even for organizations that aren't on a tight deadline imposed by a change in ownership, says Lowell Williams, executive director for HR services at EquaTerra, an IT and business process advisory firm. "When companies look at the staggering cost of buying and operating systems by themselves, they sometimes turn to outsourcing as a way, in effect, of renting a provider's system," Williams says. "You're essentially buying a system by the drink rather than owning the bar."

The top BPO solutions span finance and accounting, including accounts payable and receivable; procurement, supply chain, and workflow systems; HR; and IT, explains Williams. Unlike software as a service (SaaS) and other outsourcing alternatives, BPO encompasses the hardware and software as well as the staffing to run the entire business service.

Enterprises also can choose a mix-and-match approach by selecting a single provider or multiple providers for the various services. Oracle's contribution to a BPO solution includes a highly available and scalable data center and expertise to manage the IT solution, which either BPO service providers or enterprises can draw from. The company's range of business applications, including Oracle E-Business Suite, Oracle's PeopleSoft Enterprise, and Oracle's JD Edwards EnterpriseOne, also offer industry-leading enterprise programs for BPO providers to offer their clients. "Oracle is one of the strongest players in HR technology in the marketplace today and stands every chance of being the major provider of HR systems and services," Williams says. "In addition, it has very strong systems in finance, supply chain, and logistics. Those are tremendous assets."

Business Drivers for BPO

Six important business drivers are pushing enterprises to consider the BPO option. First, enterprises may decide to use BPO so they can focus on their core competencies within their business segment—the areas of expertise or intellectual property that help them gain a competitive edge. Essential commodity services, such as back-office operations, can be less costly and more efficient to run if they're turned over to a company that specializes in each respective area. "Companies decide to concentrate on better serving their customers by letting go of their payables, receivables, HR, or procurement functions," Williams says.

 

Similarly, BPO can mean a higher level of expertise in key business areas. "If I'm in an in-house HR department in a corporation, I may spend 20 percent of my time on compensation matters, 30 percent on benefits administration, 10 percent on learning, and the rest on recruiting and other areas. That means I'm a generalist. I may be doing compensation, but I'm not a comp expert," Williams points out. Providers of HR BPO, by contrast, can offer experts in each subgenre.

Third, BPO can give enterprises cost savings of from 15 to 35 percent, or higher, compared to internal operations, Williams adds. The reason? "As BPO providers specialize in certain niches, and provide similar services to a large number of global companies, they become process champions in those areas," says Tibor Beles, vice president for business process outsourcing at Oracle. "They can bring to the table the best practices in each process area to gain greater process efficiencies."

A fourth driver is derived from a related form of cost avoidance—enterprises don't have to invest already-tight resources for new infrastructure and staffing in response to business realignment.

Fifth, the growing number of regulations facing companies throughout the world is spurring organizations to consider BPO as part of their compliance strategy. By centralizing services, enterprises can assure that regulatory policies are being applied consistently throughout all of the various divisions. "A service provider can streamline processes across geographies and then document accurately," Beles explains. "These are all factors that contribute to effectively maintaining compliance."

Finally, and perhaps the most significant growth area for the future, BPO can help organizations undergo fundamental business transformations. Because BPO providers are experts at engineering efficient business processes, they can perform a consultancy role for optimizing internal operations. "It is not enough just to take a broken process and get the BPO provider to run it for you," Beles points out. "That may prove to be a bit cheaper in the short term, but it's certainly not better over time."

Instead, an enterprise may need a process expert to take a high-level view of the entire business system and suggest fundamental revisions. "The change is driven by the expertise of the third party that runs the process assessment, that designs the future process flows and takes the client company through the transition phase," Beles says. "That enables a company to go beyond what was possible in the past. That's when BPO becomes a strategic tool." A merger or acquisition is often a catalyst for BPO transformation to streamline process between the parent company and the new divisions, Beles adds.

The return on investment depends on which of these business challenges an organization is addressing with BPO. The relatively straightforward outsourcing of HR or finance operations could bring a return in about 24 months, Williams says. Other areas, such as procurement, may see even faster returns once the client and BPO provider consolidate information from disparate divisions and suppliers and centralize purchasing. "We had one consumer goods client that spent about $2 million in transition costs to pull everything into one place, and it saved $14 million in media buying alone in the first year," Williams says. "The payback occurred within months."

For More Information

Process Improvements Without the Pain
Five Keys for BPO Success

Alan Joch (ajoch@worldpath.net) is a technology writer based in New England who specializes in enterprise, Web, and high-performance-computing applications.
 
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