Don't turn your back on business support

Business support services are now of vital importance to both IT users and IT services vendors, argues outsourcing and IT...

Business support services are now of vital importance to both IT users and IT services vendors, argues outsourcing and IT services analyst John Willmott.

Business support services - where a company outsources a significant part of its business operations to a third party - have been well known since the late 1980s, when BP signed a milestone contract with Accenture (then Andersen Consulting) for the provision of accounting services. By the early 1990s, local authorities had begun to outsource aspects of their core operations to specialist vendors such as Capita, CSL and ITNet.

However, after an initial flurry of interest in business support services, also known as business process outsourcing (BPO), the majority of IT services vendors - and users - turned their backs on the market.

Within the vendor community, there were two major reasons for this. First, in periods of high IT services growth, such as the enterprise resource planning (ERP) boom of the mid-1990s and the short-lived e-business services boom of the late 1990s, IT services vendors felt more comfortable investing in their traditional markets. Second, while IT services companies are experienced in handling the idiosyncrasies of IT staff, many were less comfortable employing armies of clerical personnel.

From a user perspective, the emphasis was on outsourcing non-core support services. This somewhat timid approach slowed down market acceptance of business support services. Organisations rarely take a "make or buy" decision just to save 10% on a standard process.

The case for outsourcing business support services
So why should IT
"Outsourcing contracts are attractive to vendors because they guarantee a recurring revenue stream over the years."
John Willmott
services companies now change their minds and invest in developing business support services capability, and why should users consider putting essential operations in their hands?

The answer is that the nature of business support services has changed in recent years, making them more critical than IT services. The emphasis is now on outsourcing mainstream processes in order to improve customer service or operational capability.

The bulk of recent outsourcing activity has been in areas that could lead to a major transformation in the provision of customer services and in customer retention. For example, Lloyds TSB and Barclays have outsourced their cheque processing to a joint venture set up by the two banks and IT services company Unisys. Abbey National has outsourced its mortgage, insurance and loan administration services. In all cases, these are highly important areas of the business, rather than non-core activities.

Business support services are attractive to users because they are more direct in their delivery of business benefit and return than IT services. Their impact is easier to measure and they also meet the needs of the market in difficult times.

Contrary to popular opinion, most executives understand that cutting costs for the sake of it is more likely to lead to business failure than success. Organisations are instead looking to protect their customer bases by actively improving their customer service.

Business support services are an effective means of achieving this goal since they permit speed to market, a focus on service effectiveness rather than IT technologies, focus on the client's customer, payment by results rather than upfront investment, and the use of shared infrastructure for improved efficiency.

Business services: the vendor's view
From the vendor perspective, the immediate future will see the market for business support services growing at up to five times the rate of the IT services market. In the first half of 2001, the IT services market grew at around 10%, though this rate will probably be closer to 5% - or less - in the second half of 2001. Organisations which spent heavily on IT during the Y2K years and in countering the dotcom threat are now adopting a more cautious, incremental approach to IT projects and are looking for a demonstrable return on IT investments.

On the other hand, the market for business support services will grow at a minimum of 30% in 2001. For example, the contracts mentioned earlier from Abbey National are worth around £600m in new business alone.

Capita, which was one of the first vendors to make the major shift in emphasis from IT services to business support services, has averaged over 30% revenue growth for the past five years. In the first half of 2001, Capita grew its revenues by 55% and captured new orders equivalent in value to its entire orders in 2000. Not many IT services companies can demonstrate similar figures.

At the same time, the investment community has been quick to recognise this trend, so the valuations of vendors in the support services sector are currently treated more favourably than IT specialists.

In response to the deteriorating economic environment, IT services companies have increasingly been targeting outsourcing contracts. Outsourcing contracts are attractive to vendors because they guarantee a recurring revenue stream over a number of years and offer a level of immunity from the recent spate of project cancellations, the bulk of revenue being obtained from ongoing operations and support services.

Business support services also offer recurring revenues from multi-year contracts from the provision of business services that are even more indispensable to the business than IT services.

In order to be successful in delivering the new-style business support services, vendors need to demonstrate their ability to satisfy the client's customers through operational services and not a desire to promote IT for IT's sake.

In fact, one might say that BSPs offer a valuable business service, while ASPs exhibit a more questionable desire to promote technology.

John Willmott is managing director of NelsonHall, an analyst company specialising in business process outsourcing and IT services. He has analysed developments in business process outsourcing for the past decade.

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