Inside This Issue. . .

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From the Gartner Files:
The Rise of BPO in 2000 – Market Trends

ProBusiness Comprehensive Outsourcing:
Generating Greater Business Value Through Consolidation

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Definitions

Business Process Outsourcing
Gartner Dataquest defines business process outsourcing (BPO) as the delegation of one or more IT-intensive business processes to an external provider who, in turn, owns, administrates and manages the selected process(es), based upon defined and measurable performance metrics. Traditionally, the processes typically selected for outsourcing are either: overhead functions/activities with no potential for competitive advantage (such as catering, custodial services and so on); or IT and/or business areas in which an end user can create a competitive advantage through partnerships with vendors that employ world-class systems and processes in a particular IT or business arena. This study focuses on the latter: the delegation of one or more IT-intensive business processes to external third parties to improve overall business performance.

BPO falls into one or more of the following six categories (see Figure 1-1):

• Administration services
• Finance and Accounting (F&A)
• Human resources
• Payment services
• Logistics and distribution
• Sales, marketing and customer care

In previous reports, Gartner Dataquest also included manufacturing services as part of BPO. This represented almost half of the BPO market opportunity. For the purpose of this report, manufacturing services are not included.

Internet-Based BPO
Gartner Dataquest defines Internet-based BPO (I-BPO) as the delivery of BPO services over the Internet, using Web-enabled or Web-native applications and infrastructure. I-BPO is a segment of the overall BPO market, and differentiates from traditional BPO in the delivery mode and in the standardization level of the process.

Application Service Providers
An application service provider (ASP) delivers application functionality and associated services across a network to multiple customers using a rental pricing model. The enterprise remains in charge of organizing and managing the business processes. Types of ASP offerings include variants based on geography, industry, application and consumer needs.

Business Service Provider
A variant of ASP, a business service provider (BSP) delivers hosted Web-native or Web-enabled applications as a business service in the form of highly standardized processes in a one-to-many model. The level of process ownership varies in the BSP model. Today, most self-defined BSP vendors only provide the technology portion of the business services (application functionality and support) but do not manage the business process. Some vendors provide additional business services (for example, inquiry services related to the business process) and perform business transactions over the Internet. In the latter case, BSP is part of I-BPO.

IT Utility
An IT utility provides uninterrupted network access to one or more standardized IT services for a predefined, usage-based fee. Examples include application services, storage services, technical support service and compute utility.

What Is Core As Opposed to Noncore?
Figure 1-2 represents the traditional way in which users have evaluated the buy-vs.-build decision. Noncore-yet-critical processes have been most frequently targeted for BPO.

As the noncore-yet-critical zone grows, the categorical distinctions implied will gradually erode. Ultimately, even core processes may be outsourced, and the idea of noncore/noncritical will disappear as competition makes all processes critical. Many vendors make the mistake of assuming that what is core business to one customer is also considered core business to another, especially in the same sub-industry. It is imperative that vendors carefully assess how each customer uniquely defines what is core business vs. noncore-yet-critical as opposed to noncore and noncritical. It is Gartner Dataquest's opinion that any process can be outsourced &150; particularly if it accelerates time to market or cuts costs.

Key Findings
Highlights of this report include the following:

• BPO falls into one or more of the six following categories: administration, F&A, human resources, payment services, logistics and distribution, sales/marketing and customer care.

• The best candidates for BPO are processes, which are noncore, yet critical to an enterprise's success.

• BPO is not a new phenomenon. Companies have been outsourcing payroll and check processing services for many years. What is new is the use of BPO as a way to generate business value.

• E-business has strongly accelerated BPO acceptance and has modified the BPO competitive landscape in several ways. The worldwide BPO market (excluding manufacturing services) will grow from $106.7 billion in 1999 to $301 billion in 2004, at a compound annual growth rate (CAGR) of 23.1 percent.

• Factors driving the adoption of BPO include macroeconomic factors (globalization, consolidation, competition and speed, a shortage of skilled labor, the strategic importance of business process), technology factors (collaborative technologies and Web-native applications), demand factors (need for fulfillment on e-commerce strategies, the rise of fast-growth companies and the emergence of virtual trading communities) and supply factors (consolidation of traditional service providers, ASP disillusionment, new entrants).

• Among the 483 respondents to Gartner Dataquest's Management Services survey, 207 or 43 percent are outsourcing at least one business process. Top processes outsourced are human resources, administration, and finance and accounting.

• Most experiments in BPO have taken place in the United States. Europe is BPO's second market in size and growth, followed by Australia.

• Up until now, BPO strategies were primarily implemented by large multinational companies that turned to outsourcing as the next logical step after a large enterprise resource planning (ERP) implementation, but demand for BPO is growing within small and midsize companies as well.

• While BPO was previously viewed with great skepticism because giving up control of critical business processes is definitely a sensitive matter, users are increasingly taking a pragmatic, albeit value-based, view to their process outsourcing decisions.

• Users identify the foremost obstacles to outsourcing business processes as being high costs and loss of control.

• When deciding to outsource the control of their business processes, users' foremost criteria in selecting a BPO provider is proven experience and the technical ability to deliver innovation.

• BPO used to be primarily directed to large corporations. While the value proposition for large companies remains valid, service providers are beginning to target the low end of the market with simple, highly standardized, Web-enabled BPO offerings.

• Key success factors for BPO include process and industry knowledge, technology and operations capabilities, clear benchmarks, dedicated sales organization, value-based contracting skills, alliances and partnering skills, financial stability, change management skills, and the ability to renovate and innovate.

Key Success Factors for BPO

Key Strategies for Success
Gartner Dataquest has developed the following list of key success factors for existing and future BPO suppliers based upon research with both supply- and demand-side markets.

• Process and industry knowledge – Gartner Dataquest has always asserted that successful BPO players will possess both process and industry knowledge. While process knowledge is by far the skill that is most recognized and demanded by end users, Gartner Dataquest believes that as the market matures, the successful vendors will also possess vertical industry capabilities. Successful vertical BPO offerings could become the process aggregators for vertically based Internet marketplaces. Examples are already under way in the financial services and manufacturing industries.

• Technical and operations capabilities – Gartner Dataquest divides requisite skills into IT-related and labor-based skills. In general, vendors must posses both the breadth of services (for example, consulting, systems integration, IT outsourcing and process skills) and the depth of skills (in other words, penetration into each line of business) to be successful in the long term. Web-enabled solutions are required to achieve the scalability and flexibility demanded by customers. ASP is becoming an integral part of a successful BPO offering.

• Cogent service models – As with any new services paradigm, buyers and sellers alike are often unclear as to exactly how to achieve and sustain services benefits, either because the benefits are still themselves unclear or contracting parties have failed to document why certain services are of value. To credibly sell and responsibly deliver BPO, vendors must be able to identify and benchmark the performance and business metrics, regardless of whether that process is outsourced or not.

• Value-based contracting skills – As noted previously, there are few vendors that have successfully tied their compensation to the success or failure of their client's business, and this is a risk that both parties are understandably wary to take. However, in their desire to be business partners with their clients, this is just the stance and contract/relationship paradigm that will distinguish vendors from true business partners. Already some vendors have built deals centered around mutual savings/profitability in the performance of one or more internal/external business processes.

• Alliances and partnering skills – It is important to note that vendors do not have to own all of the assets and skill sets themselves, but can partner for them as well, either with another vendor or directly with the customer. Service alliances – bringing vendors and users possessing process and/or industry expertise together – will continue to grow. Examples are under way in the financial services industry and in the energy sector.

• Financial strength and depth of balance sheet – As with IT outsourcing, BPO vendors must be prepared to take ownership of various capital assets. However, BPO pushes this requirement further, beyond the IT, hardware, software and personnel into the process area as well. For example, hundreds of employees transferred from BP Amoco to the three BPO vendors (PwC, Andersen Consulting and Exult) now operating the HR and F&A processes. In some cases, the vendors may actually need the resources to become process-proficient, or they may be required to take them in certain geographies (for example, Acquired Rights Directives in Europe).

• Change management skills – Whether the vendors take ownership of their client's personnel, a key factor in the success of the relationship is a solid employee transitioning plan, which involves early communication about reallocation of the client's resources within or outside the company.

• Ability to renovate and innovate – In keeping with the role of consultant for a process, BPO vendors bring to customers the idea and reality that, in outsourcing a process to a particular vendor, the customer is buying a form of insurance that guarantees that, as long as the vendor and user are working together, the process in question will be maintained at a world-class level. This implies that the vendor is amortizing its R&D expenses for process upgrades and research through the accounts or that the user and vendor have negotiated a fixed or floating fee for consulting and BPR initiatives surrounding a process.

Key success factors are examined in Figure 4-23.

Gartner's Dataquest BPOT-WW-MT-0001, 8 January 2001, R. Scholl.

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