A recent article announced: World Business Process Outsourcing Market to Reach $975 Billion by 2012, According to a New Report by Global Industry Analysts. Gartner has a more conservative estimate of $188 Billion by 2012 with 6% annual growth-still a big number. This growth of BPO is currently fuelled by cost savings, but in the long term it will be driven by competitive necessity.
BPO is not about moving business functions to other countries. In some cases, this may involve the use of lower-income personnel in other countries, but this is not the primary purpose of BPO.
BPO is not about the IT, it is about business functions that are not core to the business of the client enterprise. It's letting somebody who can do it better take care of those functions where there is no competitive advantage to doing it yourself. Hewlett-Packard is in the BPO business. For examples of BPO services, see HP BPO service offerings. Additional offerings are under development.
BPO can provide the following benefits:
- Scalability. A successful BPO provider will serve many clients so it should be able to easily accommodate changes in the scale of particular clients.
- Economies of scale. The BPO provider spreads fixed costs and optimizes resource utilization over many clients thus reducing the cost for each client.
- Expertise. The BPO provider can develop and maintain specialized expertise and invest in innovative solutions as a result of its scale.
- Management of complexity. Global operations and regulations of multiple governments have made some basic business functions very complex. A BPO provider can monitor and address these concerns for many clients and relieve clients of this burden.
- Technology independence. BPO services should be accessed through well-defined interfaces that remove technology as a client concern and enable the BPO provider to optimize the utilization and upgrades of technology to remain competitive.
These benefits are not new, but the potential value has increased. The Internet has made services globally accessible and minimized the cost and risk of accessing services. Service oriented architecture (SOA) has provided a framework and infrastructure for incorporating shared services into the enterprise architecture. Global operations and markets have increased business complexity as a result of dealing with multiple languages, cultures and governments.
The result is that clients can rely on the expertise of BPO providers and focus their attention on their core business. Enterprises will become virtual enterprises where multiple corporate entities participate in the operation of a business and many of these entities will be engaged in multiple virtual enterprises as BPO providers.
The reduction in cost and complexity for clients will become sufficiently significant to be a competitive necessity. In June, 2008, I wrote Why SOA Is a Competitive Necessity. SOA supports the consolidation of capabilities to be shared by multiple lines of business. BPO takes this a step further by providing economies of scale from sharing across many enterprises.
Enterprises that don't outsource will be burdened with higher operating costs, a greater management burden and barriers to scaling up or down in response to market demands and economic trends. At the same time, new entries into their market will be able to focus on their core business without developing all the supporting business functions. They will be able to immediately operate internationally and scale up in rapid response to business growth. Barriers to entry of new competitors will be significantly reduced.
I recently wrote, BPM is the Beginning of the End of ERP. ERP functions will be transformed by BPM, and BPO will replace client-operated ERP systems. Instead of purchasing large scale applications and adapting them to their requirements, clients will integrate outsourced services. The BPO services should be finer grained than ERP systems for more distinct business functions to enable flexibility and to enable clients to replace these services if competitors offer better value.
Of course there are risks. Contracts must be designed to define clear performance requirements and provide appropriate incentives for continuous improvement. BPO providers must maintain security that exceeds that provided by clients on their own, and ensures separation of the intellectual property and confidential data of multiple clients. Failure of a BPO provider could endanger the business of all of its clients. These concerns should be addressed through due diligence when selecting a BPO provider, through performance monitoring and through periodic audits.
Hewlett-Packard offers the following BPO advantages:
- Global reach. HP has business operations around the globe and is doing business in more than 170 countries.
- Industry expertise. HP, along with resources obtained from EDS, has expertise in all major industries and government operations.
- Optimized technology stack. As the world's largest technology company, HP can provide a full stack of leading edge computing technology to deliver high quality and performance.
- Established customer service operations. HP provides around the clock, customer service/help desk services for a variety of clients in a variety of languages.
- Scale. HP is already one of the world's largest BPO providers.
- Automation expertise. HP already makes extensive use of automation and will continue to enhance performance and quality of services based on experiences with large-scale operations in both its BPO and IT services and experience with clients in multiple industries.
The age of virtual enterprises is emerging. For traditional enterprises, it will be a major transformation over many years, while their start-up competitors will rapidly integrate and grow. It's time to start the transformation.