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Accenture

By carefully selecting the right provider, organizations can use business process outsourcing to support strategic planning, introduce best practices, and position themselves as leaders in the marketplace.

Outsourcing has its detractors. Some worry about security and the potential exposure of intellectual property or business process secrets. Others fear a legislative backlash to offshore outsourcing practices or are simply uncomfortable with the lack of face-to-face interaction.

Although some organizations may have these concerns regarding business process outsourcing (BPO), they should also be aware of two realities that are far more preponderant:

• The advantages – in cost, quality, and agility – can far outweigh the disadvantages.
• Expanded use of outsourcing is an inevitable component of tomorrow’s business landscape.

In fact, dozens of surveys and research efforts point directly to the growing deployment of BPO, and to outsourcing’s contribution to superior business performance. According to IDC, the global market for outsourced supply chain processes is approximately $155 billion, and is estimated to grow 12 percent per year over the next five years.¹ Additionally, META Group reports that 70 percent of companies are believed to outsource some IT function, and that number is expected to grow to nearly 100 percent by 2006.²

Given these statistics, the popularity of BPO seems unquestionable. We will focus on the diverse range of processes that organizations choose to outsource and the numerous benefits that can result from a BPO arrangement, coupled with a discussion of the capabilities that organizations of all sizes should rightfully demand from a BPO provider.

Outsourcing Beyond IT and Noncore Functions

Payroll is generally thought of as the first (or original) function to be widely outsourced, followed by other information technology areas, such as accounts receivable/accounts payable, general ledger, and treasury and case management. According to the Outsourcing Institute, information technology remains the fastest-growing outsourcing area to date.

Close behind, however, is the outsourcing of basic supply chain functions. A growing number of companies use third-party logistics service providers to outsource a range of activities, including warehousing, outbound transportation, customs brokerage, and inbound transportation.

Organizations are also working with third parties to outsource all or part of their procurement operations. According to a survey by IDC, 69 percent of organizations currently outsource some of their procurement activities. The survey also revealed that more than 50 percent expect to increase their spending on procurement business process outsourcing within 12 months.³ Furthermore, the amount organizations spend to outsource their complete procurement operations is projected to grow by 500 percent within three years (see Figure 1).

Consider the success of Thames Water, the United Kingdom’s largest water utility. To keep its water and wastewater management systems up and running, the company requires more than 5,000 different items – pipes, valves, pumps, tanks, and so forth – to be readily available. However, the now-privatized company also needs to meet tough regulatory mandates to continually improve efficiency and reduce prices. Thames Water therefore decided to outsource its entire procurement operation to Accenture, which resulted in $150 million savings in overall operating costs, a 35 percent drop in the cost of service and materials, a 50 percent reduction in inventory, and significant improvements in customer service.

In today’s globally connected marketplace – supported by increasingly sophisticated information and telecommunications technologies, including improved networking capabilities, higher bandwidths, and teleconferencing – the range of outsourcing alternatives has exploded. However, outsourcing’s significant growth is only partly fueled by the rapid, relentless advancement of technology. Imagination and strategic thinking – the recognition that new and innovative operating models can contribute mightily to an organization’s competitive advantage – have also played a key role. In a recent Accenture survey of more than 800 health, manufacturing, retail, and travel executives in the United States and Europe, 86 percent of respondents reported that outsourcing gives them more control over business results in a variety of critical areas – the most important being the ability to plan. While cost cutting is among these critical areas, the executives also reported equal levels of control in reliability, cost variability improvements, and effective implementation of ideas.

A growing number of executives are viewing outsourcing as a tool to help their organizations control the risks that stem from business complexity. Following are six examples of leading-edge outsourcing:

Outsourcing order fulfillment – Some companies with e-commerce sites have no electronic connection between their front and back offices. Order fulfillment outsourcing providers can help surmount this problem by smoothly linking their own sophisticated supply chain capabilities with customers’ inventory and planning systems. Outsourced order fulfillment is also an increasingly popular post-M&A strategy. Following its absorption of Compaq, HP’s European Personal Systems Group needed to rapidly integrate the two companies’ pre-merger supply chains. Part of the solution involved outsourcing a large portion of the new organization’s order fulfillment operation, which enabled it to reduce costs quickly and with little upfront investment. Greater volumes currently are being managed with fewer people, and personnel expenses have fallen by more than 30 percent.

Outsourcing learning – It is generally agreed that the average productivity of knowledge workers is significantly lower than that of assembly line workers. In fact, some estimates place knowledge worker productivity in the single digits. There is also consensus that the best approach to learning improvement is one-on-one training – a difficult and often cost-prohibitive undertaking. However, the development of faster, more robust networks and advancements in online content design have changed individuals’ access to high-quality elearning material and given rise to a booming market for outsourced e-learning services. IDC estimates that worldwide, Internet-based corporate learning is growing nearly 70 percent per year – reaching $23.1 billion by the close of 2004. Early on, companies confined their use of distance learning to compliance objectives (e.g., certification) and the application of managerial soft skills. Now, however, with programs that combine e-learning content with newsfeeds, scheduled virtual events, simulations, and even long-distance competition, the entire distance learning concept has come of age.

One particularly innovative user of outsourced e-learning is Novation, the supply company of VHA Inc. (a leading health care cooperative) and the University HealthSystem Consortium (UHC). Novation recently signed a multiyear agreement with Accenture to offer Web-based, supply chain management education to materials management executives. VHA and UHC member hospitals will access the Internet-based programs hosted by Accenture through Marketplace@Novation, which will offer:

• Web-enabled supply chain knowledge (newsfeeds, Web resources, and white papers);
• Certificate of achievement program for materials staff; and
• Web-enabled supply chain collaboration through online discussion forums.

Outsourcing all supply chain functions associated with a specific product or customer segment – When AT&T entered the pre-paid telephone calling card business, it became clear that the supply chain competencies needed in this area were very different from those required by other forms of telecom service. AT&T therefore decided to outsource all the supply chain operations associated with the pre-paid calling card business to Accenture. As a result, overall supply chain costs fell by more than 20 percent; warehouse productivity increased by 25 percent; raw materials inventories dropped by 25 percent; and customer service improved. Another example is Microsoft, which outsourced all supply chain management activities associated with its Xbox video game console.

Flextronics assisted with product design and now manages the manufacturing and distribution for Xbox. Solectron takes care of Xbox repairs and warranty issues, while other third parties handle customer support.

Outsourcing post-sale service and warranty management – A growing number of post-sale service and warranty management activities are being outsourced to third-party providers, including service parts planning, inventory management, forward and reverse logistics, parts sourcing and procurement, and customer service. UPS Logistics Group, for example, manages spare parts inventory, order management, and delivery activities for a host of clients. One of these is IKON Office Solutions, which leverages UPS’ distribution center, labor, truck, and aircraft assets to deliver parts to field service personnel.

Outsourcing manufacturing and design – According to Lehman Brothers, about one-fifth of the global manufacturing market engages in some form of collaborative manufacturing. A good example is cell phone manufacturer Ericsson, which outsources the production of some $3 billion worth of mobile phones every year.

In the auto industry, virtually all manufacturers rely on complex component sets that are manufactured by their (outsourced) tier-1- suppliers. However, auto giant BMW went a step further: It now relies on Magna Steyr, a manufacturer of power trains and other automotive systems, to actually engineer and produce BMW’s new X3 sports activity vehicle.

Outsourcing customer relationship management – The Aberdeen Group predicts that by 2006, customer relationship management revenues from hosted independent software vendors will overtake licensed software.⁴ In other words, within two years, outsourcing CRM activities will be more popular than retaining these functions in-house. This is not a high-tech phenomenon; such success stories already include international machine manufacturer Ingersoll-Rand, national car retailer CARFAX, and specialty chemical company Nutrinova.

Key Capabilities

What does the proliferation of BPO opportunities and alternatives actually mean for today’s companies? Clearly, it does not mean that outsourcing a wider range of functions is right for every organization. Organizations owe it to themselves, their customers, and their shareholders to understand the broadening implications of BPO and to closely investigate its potential to improve business performance. Not surprisingly, BPO’s applicability is highly subjective. As shown in Figure 2, process management decisions are made by balancing a host of organization- specific issues, and then deciding if an outsourcing solution is worth pursuing.

Less subjective, however, are the characteristics that a company should insist upon in an outsourcing services provider. First and foremost is the need for a true partner that is prepared to take on a fundamentally strategic role by assuming some of the risks and reaping the potential rewards. That same partner should be willing to invest regularly in new capabilities, thereby ensuring continuous improvement and increased cost control. Additionally, the relationship should be contractually linked to explicit benefit targets, such as cost reduction and service enhancement. Such agreements generally are framed by formal governance structures and service-level agreements:

• Governance structures define oversight processes, help evaluate investments, frame risk- and gain-sharing policies, and articulate staffing parameters and operating specifics.
• Service-level agreements delineate operational metrics and help companies measure the success of activities. For example, the agreement might define the expected rate of step-change service improvement, the speed with which service center calls are answered, or even the way those calls are handled and logged.

Lastly, outsource-oriented companies may wish to look closely at deploying a managed supply chain operator – a separate, outside entity tasked with assembling and integrating capabilities from other third parties. Five core roles summarize the job of this new and increasingly important type of supply chain services provider:

• Architect/integrator – helps to ensure that the managed supply chain is continually improving, innovating, and assisting with the development of new customer relationships.
• Control room – formulates and assists with the development of solid, business-driven supply chain decisions.
• Resource provider – actively creates desired improvements and efficiencies in strategic areas, such as planning and customer management, as well as more traditional areas, such as transportation and fulfillment.
• Supply chain informant – takes a lead role in the accumulation, interpretation, storage, application, and dissemination of supply chain information.
• Analyst/underwriter – finances the deal (in total or in part) and guarantees dollar benefits in the form of an upfront savings figure.

Perhaps the best way to summarize outsourcing’s bright and widening future is to cite the new mind-set at Procter & Gamble, where the company aims to have at least half of its new products originate from ideas generated outside the ranks of its employees.⁵ This mission is notable because it demonstrates how much outsourcing has evolved as a corporate weapon. In its early stages, organizations viewed outsourcing as a tool for discarding noncore processes that could be executed more cheaply and effectively by a specialist. Now, however, outsourcing is being embraced for its ability to support strategic planning, introduce best practices, improve overall business performance, and position its foremost practitioners as leaders in the marketplace.

Endnotes

1 Romala Ravi, “Worldwide and US Logistics BPO Service Forecast, 2003- 2007,” IDC (March 2003).

2 “Outsourcing Desk Reference,” META Group (2003).

3 Romala Ravi, “Worldwide and US Procurement BPO Forecast, 2003-2007,” IDC (December 2003).

4 Hugh Bishop, “Worldwide CRM Spending: Forecast and Analysis, 2002- 2006,” Aberdeen Group (June 2003).

5 Eric Schonfeld, “Outsourcing Innovation,” Business 2.0 (May 30, 2003).