-BPO contracts are not awarded in 30% of evaluations; vendors need to improve offshore location mix and delivery capability; sourcing managers need to be cost-effective in their evaluations-
Levels of BPO contract awards in North America over the past two years have not matched industry expectations. The value of BPO TCV (total contract value) awarded has declined by approximately 50% in North America from a peak of $15.4Bn in the 12-month period ending September 2004 to $7.5Bn for the 12-month period ending September 2006.
Some of this decline can be attributed to political factors, but capability factors are also critical. NelsonHall research has now identified that no action is taken in one-quarter of sourcing evaluations where BPO and use of captive centers are evaluated, and BPO contracts are not awarded in 30% of instances where BPO is evaluated.
Sourcing managers expect that the level of BPO contract awards arising from sourcing evaluations will increase in future. However in order for this increase in activity to occur vendors will need to meet sourcing manager expectations by improving their BPO delivery capability. In particular, they will need to meet the following conditions:
- Improved process operations knowledge
- Proven cost reduction capability
- Improved offshore location mix and delivery capability
Eighty per cent of U.S. sourcing managers state that lack of process operations knowledge within the vendor has led to rejection of BPO. Contrary to popular expectation, sourcing managers select BPO over use of captive centers to achieve access to superior expertise, particularly process expertise, to drive an increase in service quality. Where cost reduction is required without an accompanying improvement in existing processes and service quality, then U.S. sourcing managers will often favor use of captive centers in order to minimize cost and avoid payment of margin to vendors. So superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present.
The research also identified that vendors are frequently failing to justify the levels of cost reduction promised during the bidding focus. Vendors are offering cost savings but two-thirds of sourcing managers have rejected BPO as a sourcing option because of a lack of belief in the vendor’s ability to deliver the cost savings promised, which again can be attributed to a failure to demonstrate deep process operations knowledge.
Vendors also need to improve their offshore location mix and delivery capability and should not impose locations on their clients. India and China seem destined to be the major offshore powerhouses for the foreseeable future, but both these locations currently have limitations and vendors need to offer a wider range of geographic options as well as enhancing their capabilities in India and China.
At the moment it is difficult to find locations with high all-round skills. While India scores highly with U.S. sourcing managers in terms of process transfer and take-on skills, it lags behind Latin American countries such as Brazil and Mexico in terms of cultural compatibility. However these Latin American countries, like China, are perceived by U.S. sourcing managers to lag behind India in the development of industry-specific process knowledge.
Within this environment, NelsonHall believes that it is critical that sourcing managers are well prepared before they undertake a detailed sourcing project. Rather than just approaching their usual vendors with requests for information, sourcing managers need to understand the key dynamics of each BPO market and its relevance to their own company.
In particular, before they commit major expense, sourcing managers must undertake an initial screening exercise and understand for the specific service under consideration:
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The dynamics of the market they are entering
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The dominant pattern of service delivery for the service category under evaluation – the dominant delivery pattern is currently different for each BPO service type, so what works for HR outsourcing will typically be inappropriate for F&A outsourcing or customer management services
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The implications of these delivery styles for ongoing investment in any existing shared services centers
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How delivery styles might change during the life of a contract and the financial implications of such a change
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The key and emerging vendors in that space – the market is still highly fragmented and there is no such thing as a general-purpose BPO vendor. Choosing from the usual suspects means a high likelihood of inappropriate process operations knowledge and delivery capability leading to “no action” and wasted expenditure
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The nature and potential magnitude of the benefits that can be achieved – again these vary significantly by service type
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The nature and potential magnitude of the risks of service adoption.
As a result of the wide fragmentation of delivery approaches and success factors for BPO, prior due diligence becomes an essential prerequisite to any major sourcing investment.
John Willmott is CEO of NelsonHall. John is a frequent speaker on BPO and assists organizations in understanding the true shape of the BPO market and the success factors involved in BPO from both buy-side and supply-side perspectives. You can find NelsonHall at www.nelson-hall.com. |
