Expand your outsourcing horizons

The business process outsourcing market is rapidly expanding into new areas, and it is smaller businesses that potentially stand to benefit the most

The advantages of outsourcing technology requirements that are not core to a business are familiar. Many organisations need to reduce back-office costs and improve overall operating efficiencies to maintain a competitive edge.

However, media coverage of such deals may leave industry observers with the impression that they are the preserve of large, multi-national corporations with the IT budgets to match.

Ironically, smaller or mid-sized firms that have less IT expertise or budgets, but with turnovers as large as £200m, may actually have a more compelling business case for evaluating outsourcing's ability to initiate cost savings, provide process efficiency and the freedom to innovate. But that does not just include outsourcing the IT, but the people and processes that IT supports.

Internal administrative departments, such as HR, finance and accounting, procurement and customer call centres are increasingly being outsourced to third parties.

According to analyst firm Datamonitor, the business process outsourcing market is the single fastest growing area of the IT services sector. Growing at a rate of 8% annually, it is estimated to be worth £214bn today and is predicted to grow to almost £375bn by 2008.

John Willmott, chief executive of UK-based research company Nelson Hall, said, "Over the past nine months business process outsourcing has accounted for 38% of outsourcing activity in Europe, with IT outsourcing contributing 62%. So [business process-led outsourcing] is not quite dominant yet. The principal sectors remain financial services and government, though we are seeing increased HR and finance and accounting outsourcing across other commercial sectors."

But he said there was very little activity in the SME business process outsourcing space at present. "The market is very immature in regards to SME offerings. It depends how you define SME, but [this market sector] probably still only makes up less than 10% of the business process outsourcing market in general at this stage. Largely local accountants and payroll services companies serve this market. An example of a payroll company serving SMEs is MidlandHR."

Other companies that can be put in this space include Go4BPO, a provider of mortgage loan, insurance claim and outsourced data entry and transaction processing services in the UK, US and India. And Middlesex-based Damco Solutions specialises in document and data processing, content management, and legal support services for customers as diverse as local councils, legal or financial services firms and wood products manufacturers.

Another example is financial systems and outsourcing specialist BancTec. It recently announced the release of The Mortgageweb, a new automated data exchange system designed specifically for the mortgage market to automate electronic data exchange relating to the mortgage application process for financial services companies.

Rob Liddell, BancTec new product development director, said, "Our research indicates that the majority of lenders and packagers cite manual processes and data re-keying as being highly detrimental to the efficient processing of mortgage applications."

IT service providers, management consultancies and specialist business process outsourcing suppliers are all positioning themselves to gain a share of this growing market, which is increasingly merging the traditional areas of IT services and specialist business process management services.

This can make it harder for an SME to find the right provider for business process outsourcing services. Some specialist services, like payroll, are even being offered by banks as part of small business banking packages.

Willmott said, "Most SMEs want up-to-date technology, and actually, the need to refresh or update systems, and hence processes, is a more important driver in the SME market than for multinationals.

"However, the technology needs to be relatively straightforward to use and relatively low-cost to implement. It also needs to be highly modular so that it can be tailored to the specific needs of the SME."

The needs of an SME are no less specific than a large enterprise when it comes to business-to-business process management. "Suppliers have always tried to provide standard services, and SMEs are no different from any other organisation in needing suppliers to understand them and their place in their industry, as well as provide an account manager who will match the supplier's capabilities with the client's requirements," said Willmott.

"The client needs to feel special and as though the service is designed with them in mind, even if they are a small organisation," he said.

He advocated services that simultaneously offer cost reduction, service improvement and process improvement or innovation. "In general, business process outsourcing is an operations rather than technology player, so IT capability is less important than operational capability," he said.

"Nonetheless, most offerings need to be underpinned by good data capture, imaging, workflow or document distribution, and agent management technology. After that it depends on the area being outsourced."

Independent industry analyst, Derek Miers, said that from a technology perspective, SMEs are most likely to struggle to handle the choreography and orchestration of their electronic data interchange business processes. Basic knowledge of the processes involved are desirable, but not essential.

When outsourcing such core business functions, Miers said companies could consider adding to the in-house technology infrastructure with tools that can help better orchestrate the business processes being outsourced. SMEs should also monitor the service provider's choreography of them according to the service level agreement and pricing conditions of the business process outsourcing contract.

"There are those packages, like Peoplecube, N8 and Digital Fuel, which help automate and monitor workflow administration," said Miers. "They help suppliers and users in modelling the services and reporting on them. A business process outsourcing company may be providing services to 28 different companies, but needs to charge them at a granular level."

Process notation and modelling standards could go a long way to opening up the business process outsourcing market, according to Miers. "Companies should ask about the notion of process modelling protocols like enterprise data fabric, which allows for outsourcing outside the business firewall," he said.

"These standards are all about how an organisation defines the boundaries of how it interacts with other suppliers, like outsourcers', systems. Take a fresh approach to how you understand your processes before outsourcing them."

Peter Redshaw, Gartner investment services research director, said toolsets occupy only a thin slice of the business process outsourcing technology stack, and to a very low level of granularity, which need not necessarily have an impact on an SME's decision to outsource.

"If the brief is business process outsourcing, that might lead to some level of understanding of business process management technology, which is all about methodology, tools and standards. But a deal will essentially be about process workflow, which is a very specific part of business process management," he said.

Rather than pursuing a deeper understanding of in-house technology investment, Redshaw urged a pragmatic approach to business process management technology. SMEs should ensure that the benefits available offset the inevitable extra management and governance requirements involved in running a successful business process outsourcing contract.

"These are often white label services that deal with high-volume, low-value transactions. And for small firms, where it can be difficult to get economies of scale, it does not add any value to keep tweaking code to stay ahead of regulations. These deals can give access to offshore resources too," he said.

Allan Cook, director of IT strategy and outsourcing consultancy Akubra, agreed. According to Cook, the real challenge is getting the SLAs and exit strategy right.

"Setting up and automating the processes themselves comes from the workflow and business process management engines that have orchestration technologies built-in as a commodity. Focus less on the technology and more on the enablement of SLAs and contract governance."

Cook pointed out process technologies used to deliver business specific applications with a web front-end form the basis of a majority of functional and business specific outsourcing offerings.

"The outsourcers are exposing as much integration and specialisation as web services as they possibly can, to make the service as simple to use and attractive as possible," he said.

"There are some industry areas where older methods of integration are more linked to the type of technologies used on the back end. In financial services, for example, applications are probably built on mainframe technology.

"Any business process outsourcing service should be able to display the process exchange inside a browser and handle authentication," said Cook.

Cook pointed out that the design of the contract is actually much harder than the design of the technology. "When considering whether to outsource a process, it is more about the risk associated with outsourcing and the cost than what technology is involved - interoperability and workflow have been around for some time."

Outsourcing, regardless of what size of company, is now less about technology and more about service and cost. "It is not a technology problem you are solving, it is a business one. The technology is just there to plug the companies together now," said Cook.

Finding the right service provider is the most important consideration. And in a rapidly expanding market, where large organisations have laid the groundwork for exposing some heavy technical processes to non-technical users using web standards, the SME's choice is likely to be greater than ever before.

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