Business Process Outsourcing (BPO) occupies a significant IT services growth sector – although opinions on exactly how significant it is vary widely. In Europe, Gartner estimates current BPO spend to be around €19bn, predicted to grow to about €25bn by 2007. This should be viewed against a European IT market currently worth some €293bn.
This article adheres to a more conservative description of BPO, which produces the more measured market estimates noted above. The most common definition of BPO is the outsourcing of an entire business process, using software to streamline its management and to automate some manual activities. Examples of business functions where BPO has a strong foothold include:
- Customer service enquiry management.
- Foreign exchange deal processing.
- Software development.
- Hardware and software upgrade installation.
- Prospect database hosting and management.
- Payroll and employee benefits management.
Benefits of BPO
The view of the authors of this paper is that BPO and simple outsourcing should not be confused. Contracting out a document archive is not BPO. Outsourcing securities trade processing or employee benefits management is BPO.
In fact, the twin benefits of outsourcing a whole business process, but retaining transparency and control, is the essence of successful BPO. Reporting transparency allows the BPO supplier to audit and justify, without any shadow of argument, its service quality and fees; whereas management transparency allows expert managers on the client side to exercise and demonstrate real control of the outsourced process. Where BPO steps into the realm of any financial or accounting processes, such as banking or investment services, then this combination of transparency and control is essential to meeting corporate governance strictures (such as Sarbanes-Oxley for US-listed companies and the forthcoming EU Auditing Directive for European quoted firms).
BPO in Europe
What level of take-up is BPO really achieving in Europe? The analysts, as we have already mentioned, give us the financial value of the BPO marketplace – around €19bn. Yet what numerical penetration of top European companies does this represent? Is BPO currently the province of the few doing a great deal or the many doing a little?
In order to provide an insight complementary to the financial statistics output by the technology analysts, HandySoft commissioned research among the European top 10,000 companies in order to understand the proportion of these companies that see advantage in investing in BPO.
Report Findings
Our research, completed in December 2004, reveals that 48 per cent of Europe’s top 10,000 companies are actively considering BPO, but just 15 per cent of those companies have outsourced business processes. The active consideration of BPO at senior level reflects the consolidated view of technology analysts that there will be rapid growth in this market over the next four to five years.
The fact that only 15 per cent of organisations have yet taken the plunge is perhaps testimony to the cautious optimism of early BPO adoption, along with the observation that it tends to be larger organisations that most obviously benefit from BPO. Concentration, to date, has been on non-core business processes, yet some future-gazers have been including more complex activities in their BPO projections.
Industry Sectors
Looking at different industry sectors, our research shows that BPO acceptance and adoption among European companies is greatest in financial services and telcos/utilities, probably because competitive pressure is exerting the double challenge of reducing costs while maintaining – or even improving – customer service standards. Certainly, in the highly commoditised product environment of financial services and telcos, customer service is the main differentiator. Also, both sectors are gradually consolidating, through mergers and acquisitions, offering an increased level of scale of savings and service gains to potentially obtain from BPO.
Service businesses and manufacturing industry come in below average on BPO adoption. This indicates an interesting lack of awareness of the advantages a handful of leading companies in these sectors are gaining from outsourcing business processes such as supply chain management and logistics.
Other emerging examples in manufacturing include R&D, testing and software development. By far the largest single part of the service sector is retail, in which there are a number of model BPO applications, for instance in contact centres and store card services.
Geography of BPO
Looking at geographical distribution, our research reveals France to be at the European forefront of BPO adoption, with UK and Germany close behind. This is interesting as the UK is usually in poll position for outsourcing in Europe. These findings would indicate that BPO, rather than simple functional outsourcing has greater weight in the highly considered approach taken by French companies to outsourcing. In Germany, we expect the proportion to rise rapidly over the next few years to become more in line with the country’s economic presence in Europe.
The very low levels of BPO adoption in the Netherlands and Scandinavia seem to betray a cultural unwillingness to let responsibility for whole business processes out of house. It is possible that BPO will continue to have a limited foothold in these two business cultures, with greater adoption of BPM technology to implement and manage business process improvement in-house.
In-house Devotees
It is also imperative to look at the other side of the coin – namely that 52 per cent of Europe’s top 10,000 companies who are not actively considering BPO. This overall majority of major companies cannot ignore the various imperatives to streamline their business process management in order to automate and monitor business processes, capture and enforce best practice, ensure regulatory compliance and reduce risk.
In many cases, tougher financial reporting strictures (SOX, FRS, IAS, EU Directives) are providing companies with a ‘must do’ budgetary imperative to invest in new software systems that help implement obligatory compliance standards. At the same time, these companies are also taking the opportunity to explore where else that supporting technology can be applied throughout the business in order to deliver additional return on investment.
Whether corporate administration improvements or regulatory compliance is being implemented through a BPO provider or an in-house department, the underlying technology basis is usually the same – namely a category of software known as business process management (BPM).
Business Process Management
BPM helps companies and public sector bodies to implement the twin objectives of transparency and control. It is commercially critical for BPO providers to give full reporting transparency, as one of the main concerns of potential clients is loss of control through BPO. Client organisations are anxious to obtain this level of transparency as various pieces of legislation – as well as best business practice standards – require that they can demonstrate full knowledge and control over key business processes, whether managed in-house or outsourced.
In the most current example, US-listed European company managers have to demonstrably exercise internal financial control even if a process has been outsourced. As there is an EU Auditing Directive currently in draft, which is expected to be every bit as fierce as SOX, European companies who do not have a US listing – and therefore do not need to comply immediately with SOX – nevertheless ignore this issue at their peril.
Conclusion
BPO has achieved a significant foothold among larger European companies. This currently seems to represent large BPO contracts predominantly from financial services and telco/utility firms. France is the surprising leader in BPO adoption, but Germany is expected to grow very rapidly to a position that reflects its economic weight in Europe. High expectations among the technology analysts for BPO growth will inevitably expand the market for BPM software, the key implementation technology for both in-house and outsourced options.
