NelsonHall, the Business Process Outsourcing (BPO) analyst firm, states that the levels of BPO contract awards in North America have not matched industry expectations over the past two years. The value of BPO Total Contract Value (TCV) awarded has declined by approximately 50% from a peak of $15.4 billion in the 12-month period ending September 2004 to $7.5 billion for the 12-month period ending September 2006.
This is because BPO contracts are not awarded in 30% of instances where BPO is evaluated. Some of this decline can be attributed to political factors, but capability factors are also critical, says Nelson Hall.
“Most of the respondents are mature customers, and their current inaction could be attributed to the fact that customers are looking for the next level of value from outsourcing relationships after incurring initial cost-savings,” says John Wilmott, CEO, NelsonHall, speaking to Global Services.
Indeed the compulsion to derive business value from outsourcing has increasingly captured center stage in outsourcing discussions. As outsourcing becomes strategic to organizations, more and more outsourcing initiatives are being driven by the CEO’s office, as they are no longer pet projects of the CFO, CIO or the HR Manager.
Hence organizations are taking a closer look at the specialized skill sets of outsourcing suppliers. Domain knowledge and the ability to work in tandem with the business interest of customers have become key parameters in winning contracts.
Customers have also realized that in order to derive a strategic advantage, outsourcing cannot be a piecemeal initiative but has to be an integrated effort, for which the supplier has to bring in a high level of business understanding.
Service providers will thus have to improve their process operations knowledge, prove their cost reduction capability during bidding and improve their offshore location mix and delivery capability in order to regain the expected momentum of BPO contracts.
The research finds that 80% of the sourcing managers in the U.S.A. state lack of process-operations knowledge at the supplier’s end as the reason to reject BPO. Contrary to popular expectations, sourcing managers select BPO over 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, sourcing managers in the U.S.A. often favor captive centers in order to minimize cost and avoid payment of margin to suppliers. Therefore, superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present.
Providers also need to improve their offshore location mix and delivery capability and 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 do currently face limitations, and suppliers need to offer a wider range of geographic options apart from enhancing their capabilities in India and China.
At the moment, it is difficult to find locations with an overall appeal. While India scores highly with sourcing managers in terms of process transfer and take-on skills, it lags in comparison to Latin American countries such as Brazil and Mexico in terms of cultural compatibility. However, these Latin American countries are perceived to be lagging behind India in the development of industry-specific process knowledge.
