A quick peek at today’s
business journals might give one the impression that business process outsourcing is a recent trend in efficiency circles. While the noise and attention may be new, the idea of business process outsourcing is not. This tried-and-true practice has
been slowly gathering steam from almost 100 years. Nearly a century ago, Gelco introduced its first Traveletter, effectively outsourcing the process of travel expense payment. Fifty years later, Automatic Data Processing expanded business process outsourcing with the introduction of payroll outsourcing. In the 1960’s, EDS signed a deal to take over the IT processes of the Frito Lay corporation. And, by 1999, Gartner, a Stamford, Connecticut-based research and advisory firm put business process outsourcing revenues at $106.7 billion and expects that figure to nearly triple by 2004.
Going Mainstream
Dataquest, a Mountain View, California-based research group sees substantial growth as several business process outsourcing segments go more mainstream. The research firm predicts human resource outsourcing will climb from $26.2 billion in 1999 to $76.4 billion in 2004. Supply chain and distribution outsourcing are expected to rise from $30.9 billion to $81.7 billion in the same five years. And, over the same period, customer care outsourcing should go from $11.3 billon to $38.8 billion.
Why the sudden explosion? In a word, technology. Technology has made it easier and more cost-efficient to outsource business processes. Two recent sources put some of this growth in perspective. A research report issued in July 2002 by the highly respected Conference Board documented trends in human resource outsourcing. And the Outsourcing World Summit hosted by Michael F. Corbett & Associates highlighted trends in business process outsourcing.
The Conference Board Report
In an August article for Outsourcing Journal, Editor Beth Ellyn Rosenthal outlined several of the key findings found in the recent Conference Board report. The report was based on surveys and interviews with CFOs and CEOs from American and European companies with revenues of over $1 billion annually.
The report found that cost efficiency is one of the primary reasons companies turn to outsourcing. As stated in the report, HR departments must “do more with less” and they see outsourcing as a means to accomplish this.
Fifty-one percent of the executives polled said that they achieved all their outsourcing objectives. An additional 42 percent felt they partially achieved their objectives. And, 90 percent of the survey participants said they would outsource again.
Administrative and transaction-based tasks accounted for most of the outsourced HR functions. Eighty percent of the companies outsourced their 401k programs and 69 percent outsourced their health benefits management.
Non-transactional outsourcing is growing with companies looking for greater value creation from their outsourcing partners. This shift is reflected in the four criteria most often cited for selecting an outsourcing partner. The four criteria, in order, were: guaranteed service levels, a proven track record, cost savings, and compatible corporate culture.
Outsourcing World Summit 2002
In February of 2002, Michael F. Corbett & Associates hosted the world’s premier symposium on business process outsourcing in Lake Buena Vista, Florida. The event brought together outsourcing providers and service users.
As highlighted in an article on the FirmBuilder.com web site, the symposium quantified some of the reasons firms outsource. Cost savings accounted for 35 percent of the outsourcing decisions. However, nearly as many firms, 32 percent, chose outsourcing so their organization could focus on its core competency. Thirteen percent of organizations decided to outsource to create a variable cost structure. Improve quality, increase speed to market, and conserve capital all came in at five percent with grow revenue and foster innovation each lagging at two percent. While cost savings and variable costs tallied nearly half of the outsourcing catalysts, according to the symposium host Corbett, that mix changes after organizations initiate the outsourcing. While cost savings may often drive the initial decision, organizations quickly realize that the real value comes from outsourcing’s ability to provide a competitive edge through better focus, increased speed to market, higher quality, and greater innovation.
Today’s more competitive landscape is forcing companies to evaluate the functions they currently perform in house. As business process outsourcing continues to grow and go more mainstream, more companies are finding it easier and more effective to outsource functions that don’t help create value or differentiate their company from its competition.
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