The first wave of business process outsourcing (BPO), 20 years ago, enabled many organisations to cut their costs by up to a third. Outsourcing companies could be more efficient and achieve economies of scale by performing similar back-office tasks – typically HR, finance and procurement – for a number of clients.
By the turn of the millennium, outsourcers had begun offshoring to India and the Philippines, where cheaper labour enabled them to deliver further significant cost reductions.
But since 2007, the potential cost savings of outsourcing have been shrinking. In that year, 87 per cent of US and European organisations reduced their costs by at least 10 per cent, according to research by Gartner, the consultancy.
In 2010, just 58 per cent of companies managed this. The financial advantages seem to be flattening out, says California-based Robert H. Brown, Gartner’s research vice-president, BPO.
Not surprisingly, some outsourcers have struggled to survive. Convergys wrote down $273m at the end of 2008 on a business with $60m revenue. And in March last year it sold its HR management arm for about $100m to NorthgateArinso of the UK.
Hewitt Associates, a UK consultancy, which bought Exult, an HR outsourcing company, in 2004 for $613.5m, found the contracts it was signing difficult to fulfil. Within three years it wrote down almost $920m.
Mike Gammage, vice-president for product marketing at Nimbus, a software company, agrees that BPO cost-savings are dwindling. But this does not mean it is on the way out, he says. “Providers such as IBM, Accenture, HP, Capgemini, Tata Consultancy Services, WNS and Wipro are making money and expanding.”
Moreover, process management has become fashionable. “It used to be seen as a boring back-office, career limiting overhead, whereas now it’s become worthy of attention,” Mr Gammage says.
Seeing the cost-benefits of BPO in isolation is misguided, because it depends what an organisation is trying to achieve, says Tim Palmer, who leads PA Consulting’s BPO services. “Some companies use BPO because they can’t afford to invest in, say, an HR application. By outsourcing they save on the wage bill, but the main advantage is that they don’t have to build and maintain the system themselves.”
Other motivators include a desire to shed non-core activities, or to access specialist knowledge. “The latest wave of cost cutting is in the creation of ‘service centres’ that can run standard applications for a number of companies,” says Mr Palmer. These often include learning-administration, HR helpdesk, performance management, payroll and accounts payable.
Cloud computing is seen as the latest big opportunity to cut costs, by enabling BPO to be provided online, on demand. “This is the next generation of thinking, but is not yet a reality, although some companies do claim to offer it,” Mr Palmer says.
Saving money with BPO now tends to mean working in a more standardised way. Outsourcing companies look for work that is scalable and repeatable. They avoid complexity and systems that need customising for individual clients.
This was the experience of Mike Dunlop, when, as HR director of Sun Microsystems, he signed a five-year global contract in 2005 with Hewitt Associates. It worked well for standardised processes, he says, but proved more difficult in areas such as employment relations, where regulations vary between countries.
“The scope of the initial contract was too ambitious and both sides realised it, so we brought some back in-house,” he says. “Many outsourcing contracts hit similar problems after a couple of years.”
Renegotiating contracts in these circumstances can be expensive, says Mr Dunlop. “The big question is where you draw the line about what you give to somebody else and what you continue to do in-house.
Big multinationals still have many legacy terms and conditions, practices and policies that make it hard for them to take advantage of the outsourcing opportunities, says PA’s Mr Palmer.
“Smaller, more nimble companies are better able to do so,” he notes.
The continued focus on financial savings by BPO buyers is driving providers to look at other low-cost areas such as central America, says Gartner’s Mr Brown.
Other providers, such as Cognizant of the US, are investing in automation. They are using software to take humans out of the equation, replacing call-centre staff with interactive voice response to drive more efficient process management.
BPO providers should make processes better rather than cheaper, says Mr Brown. “The focus needs to be on analytic services and knowledge processes, not about cost reduction, but getting better insight.”
External fund administration: ‘We would not consider bringing it back in-house’
Cost saving was not the main reason for European Credit Management’s decision to outsource its fund administration activities.
Shedding “non-core” activities was another important motive for the London-based institutional asset manager.
“Our business is fixed-income investments – we manage $14bn of investor funds,” says Steven Blakey, ECM’s chairman.
“We wanted to focus on that, rather than on fund administration. Managing complex securities and derivatives requires significant in-house infrastructure Given the changing environment, we felt it was time to outsource.”
Using an independent third party was also a way to provide transparency to investors, as required by regulations after the Madoff investment fraud and the financial crisis. In addition, ECM thought moving to an outsourcer would expand career opportunities for middle- and back-office staff, who had been with the company since it was founded in 1999.
In 2009, ECM invited 10 outsourcing companies to bid for the full outsourcing of administration, including infrastructure and 50 staff.
After a nine-month evaluation, ECM chose GlobeOp, which offered potential savings of several million pounds over the first few years.
The decision was not driven by price alone, says Mr Blakey. “Fund administration for our asset class is complex and involves a degree of expertise which the larger providers didn’t necessarily offer.”
ECM also liked GlobeOp’s “entrepreneurial nature and record of adopting sophisticated technology to serve the hedge fund industry”.
Hans Hufschmid, GlobeOp’s chief executive and co-founder, describes the company’s technology as “integrated, scalable and industrial strength.”
Its central database, in two US data centres that mirror each other, can be sliced and diced in different ways for individual clients, for example, showing all trades between Brazil and Russia over the past two months.
GlobeOp was keen to expand its workforce and recruit personnel – the ECM staff represented a large new resource. “This type of team lift-out is cutting-edge,” says Mr Blakey at ECM. “Not many service providers pitch to take on 50 specialists in this business. At GlobeOp they can move to working on other projects,” he says.
ECM’s fund administration and data systems are handled by GlobeOp’s operations in London and Mumbai, India, not at ECM’s offices in London’s Mayfair district.
Although ECM has outsourced the vast majority of its business processes, it has kept eight managers in compliance, HR and marketing, who report to the chief operating officer and chief executive. This offers a level of protection against the risk of fully outsourcing key business processes.
Wells Fargo, ECM’s major shareholder, also outsources some of its fund administration. It is quite an industry norm, says Mr Blakey.
“Our move to outsourcing is intended to be permanent. We would not consider bringing it back in-house.”