like Accenture and IBM. These suppliers would be ideally positioned in an environment requiring deep business-process expertise across multiple functions, not to mention frequent deals also requiring a combination with ITO services.
Impact of Full-service Outsourcing
Besides providing a source of growth for well-positioned outsourcing firms, full-service outsourcing transactions will cause some re-shaping of the more mature ITO market. We anticipate the BPO market growth will cannibalize some of the traditional ITO market, particularly the application-management segment, as new BPO deals will encompass certain activities that historically fell into the purview of ITO deals.
Our tracking of BPO contract signings has uncovered a meaningful amount of outsourcing arrangements involving the outsourcing of business processes in combination with IT/application services. Our research suggests these “combination BPO/ITO deals” occur in 83% of HRO deals, 35% of FAO deals and 22% of industry-specific BPO deals (for example: claims processing in the insurance industry).
This trend towards combining BPO and IT services within a single contract has important implications for vendors:
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Traditional IT outsourcers will experience some encroachment as BPO players increasingly overlap into the ITO realm |
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Given the demand for “combination deals,” ITO firms that are successful in building distinctive business-process capabilities have an opportunity to carve out leading positions in targeted segments within the BPO market. |
Another key trend that will have an impact on the marketplace is the emergence of proprietary technology solutions. Many HRO and PO service providers have developed proprietary technology solutions to provide end-to-end technology and process solutions for their customers. While ERP solutions still remain dominant, we have started to see increased adoption by buyers of these integrated proprietary technology and process solutions. For example, in HRO, within the small buyer segment of less than 15,000 employees, the share of proprietary technology solutions has grown from 38% of cumulative transactions in 2003 to 48% of cumulative transactions in 2005. Even in the larger buyer segment of greater than 15,000 employees, the share of proprietary technology solutions has grown from 12% to 25% over the same period. This market also continues to evolve towards hybrid (ERP + proprietary) solutions as ERP and proprietary suppliers create new value propositions to compete in the marketplace.
C-level Strategic Priority
Given the impact of full-service outsourcing market on the industry and individual companies, it needs to become a C-level strategic priority. We are starting to see a strong emergence of this trend with many buyers investing in an enterprise-level sourcing strategy to maximize value capture and minimize risk.
C-level executives should focus on:
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Ensuring that enterprise-level objectives are achieved, and not just functional objectives. Given that the HR, F&A and procurement functions overlap in the areas of accounts payable and payroll, deciding how best to source across these functions needs to be done at a level above the functional areas to ensure that enterprise-level priorities and objectives are addressed. In addition, these full-service areas also encroach into the IT domain of organizations as they impact the choice of technology and the manner in which it should be sourced |
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Understanding that these functions have an impact on the brand. Full-service outsourcing is more transformational in its impact on an organization than single function outsourcing. Outsourcing will have an impact on the brand of the company (as the outsourcer will now be in close contact with the key customers and suppliers), and therefore needs to be managed at a C-level to ensure that the brand is further enhanced through the outsourcing solution |
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Focusing on change management. For success in full-service outsourcing, a high degree of change management is required. For example, the biggest challenges faced by buyers, who have outsourced these functions, are how best to transform their retained organizations and to build the buyer-supplier relationship into a truly transformational program. For organizations to succeed in this endeavor, C-level leadership, intervention and support are often required. n |
