Business-Process Outsourcing Grows

Companies are increasingly outsoucing entire departments and the related IT operations

InformationWeek Staff, Contributor

January 11, 2002

8 Min Read

If you want something done right, do it yourself. But if you want something done right for less money, then outsourcing may be the way to go. Companies are increasingly outsourcing key business functions and their related IT operations, and the trend is expected to accelerate in 2002 and beyond.

Business-process outsourcing means delegating back-end administrative functions that are necessary to run a business but don't provide a competitive advantage. An airline doesn't sell tickets based on whether its employees can access their vacation time over the Web. What counts for airlines, banks, and other businesses is their ability to differentiate themselves in their industries.

Companies have for years been catching on to the value of outsourcing business processes such as benefits-administration, billing, payroll, training, logistics-management, and human-resources functions. And the market is expected to continue its healthy growth, fueled by mergers and acquisitions that create redundant systems and new application requirements.

Business-process outsourcing is on target for substantial growth over the next few years, says Rebecca Scholl, a Gartner Dataquest senior analyst. While the market for business-process outsourcing services will reach $128 billion this year, this total will rise to about $234 billion in 2005, Scholl says.

Toronto's Canadian Imperial Bank of Commerce signed a $156 million contract last June to outsource human-resources operations to EDS Canada. The bank was looking to consolidate two HR systems as a result of restructuring. It was using a legacy application simultaneously with a PeopleSoft 7.5 HR application, which led to problems because managers weren't certain which application had their employees' records.

It made sense to put all of CIBC's 45,000 employees worldwide on the same HR system, but researching, purchasing, and implementing such a system would have cost the bank "tens of millions of dollars," says Hugh MacDonald, VP of strategic alliance management with CIBC's human-resources division. "This type of project wasn't necessarily how we wanted to spend our capital, because it wouldn't bring in revenue," he says.

CIBC looked at the larger outsourcing service providers from the outset because of the complexity of its HR system, which manages employee relations, payroll, and benefits administration. CIBC chose EDS in March because of its willingness to handle a variety of HR-related tasks. EDS also extended job offers to 200 CIBC workers.

"It's always a hard message to tell people that you've outsourced their jobs," MacDonald says. EDS worked with the bank to transition employees from CIBC's offices to an EDS facility in Toronto over three months.

Business-process outsourcing, much like IT outsourcing, is fairly independent of economic cycles. Outsourcing grows in bad times because companies want to cut costs, and it grows in good times because companies want to focus on growth, Gartner's Scholl says. Globalization, competitive markets, and mergers and acquisitions are the primary stimuli for business-process outsourcing.

Business-process outsourcing also provides young companies with a much quicker time to market. QualSure Insurance Corp., a Sarasota, Fla., insurance company, has been outsourcing HR functions to Computer Sciences Corp. since its inception in January 2000. The damage that Hurricane Andrew caused in 1992 when it ripped through Florida put some insurance companies out of business and caused others to cease writing certain policies. The state stepped in and formed the Florida Joint Underwriting Association to write insurance policies for people who couldn't find policies in the private market. But Florida didn't want to stay in the insurance business long term and soon began looking to refer business to insurance companies. Nemwill, Siebels Bruce, and U.S. Reinsurance formed QualSure with nine employees as a way to jump on this opportunity.

Outsourcing claims processing gives QualSure more flexibility, marketing director Brown says

QualSure's management decided it needed to focus on ways to grow the business rather than on day-to-day operations such as claims processing, says Jim Brown, QualSure's director of marketing and policy processing. The company looked at IT capabilities as much as at business processes. CSC, which had been doing both for the Florida Joint Underwriting Association, won QualSure's business.

CSC's role is to qualify customers, ensure that policy premiums are paid, distribute copies of contracts to customers, mail payments, and operate a customer-support call center. Although QualSure won't discuss the terms of its contract with CSC, Brown says he's paying fair market value for the services. Business-process outsourcing provides flexibility, Brown says. "You also need to be able to collapse an organization when necessary, if, for example, an opportunity dries up."

But business-process outsourcing can be expensive in the short term because of the amount of research it takes for the service provider to analyze the aging processes and technology of prospective clients. Other impediments to business-process outsourcing are the relatively small number of major service providers in the business and reluctance of employees to be outsourced along with their work, Scholl says.

In all, MacDonald says the contract with EDS won't save CIBC money in the near term. The key benefits will come as EDS develops HR services, such as an integrated-response system and self-service Web portals, both projects that CIBC wasn't likely to implement any time soon because they're tangential to its banking business. EDS will also migrate CIBC's HR system to PeopleSoft 8.0 throughout 2002, without the need for CIBC to purchase, implement, or train employees on the new application.

The bank's contract with EDS has met expectations to this point, and MacDonald attributes this largely to a management team that CIBC established to oversee the transition. Even though a contract is essential to spelling out the responsibilities of both parties, it's equally important for the alliance management team to meet with EDS weekly to ensure that CIBC's goals are communicated and met, MacDonald says.

Business-process outsourcing is big business for EDS, which derives about $3 billion, or roughly 14% of its revenue, from hosting clients' claims-processing, call-center, financial, and human-resources applications. Large companies such as CIBC, Delphi Automotive Systems, and General Motors generally outsource one or more of these functions to EDS when they realize that it pays to focus on more strategic areas of their core business.

The latest trend in business-process outsourcing is for companies to outsource entire departments, rather than individual processes such as billing or payroll, says Elaine Moore, an EDS VP. "By outsourcing an entire department, companies can devote more resources to their core businesses, bring products to market faster, and run with lower overhead," she says.

The average business-process outsourcing contract is valued between $200 million and $700 million and lasts for about seven years, says Bret Bero, a partner at Accenture who worked on the company's joint launch last year with British Telecommunications plc of e-peopleserve, a separate company that provides human-resources outsourcing services. The typical transition time from internal operations to an outsourced service provider is 12 to 18 months, taking into consideration the amount of time it takes to assimilate employees, applications, and data.

By outsourcing business processes, companies can get a firm assessment of the cost of running their operations. In many cases, clients are looking to save at least 15% of what it would cost to do the work themselves, says Mike Beebe, president of strategic business development for CSC, a service provider that derives $850 million to $900 million in annual revenue from business-process outsourcing.

It's been a particularly difficult year for telecommunications service providers such as Avaya Inc., which last October spun off from the ailing Lucent Technologies Inc. Having let go of about 5,000 employees earlier this year, the Basking Ridge, N.J., provider of networking services needed to find a cost-effective way to keep its remaining employees well trained but found it difficult to continue funding its Avaya University learning-services division's network of research and training services in Denver.

In October, Avaya signed Accenture to a multiyear contract to manage Avaya University. Accenture will provide Avaya employees, business partners, and clients with learning services, including Web-based E-learning and traditional classroom training.

"Our leadership knows we need to invest in certain areas to be prepared for when the market turns around," says Ronald Kitlas, Avaya's VP of worldwide human resources and a key liaison with Accenture on the outsourcing contract. Avaya trains and certifies its employees, partners, and clients to service, sell, or use its products.

When searching for a service provider to take on business processes, companies find that there are niche providers, as well as the usual suspects in the outsourcing industry, such as CSC, EDS, and IBM Global Services. Companies can target a service provider for a specific function, or they can sign a contract with a large service provider that covers multiple func-tions. As with selecting a software or hardware vendor, "it comes down to a choice between best of breed and a package of services, and everyone's got a different opinion of what's right for them," says Steve Grossman, senior VP of application-process outsourcing for PricewaterhouseCoopers.

One reason for the healthy growth of the business-process outsourcing market is advancements in the underlying technologies, Accenture's Bero says. "HR technology hadn't previously been in place for it to be properly outsourced," he says. Now that application developers such as PeopleSoft have reengineered their software to be Web-enabled, companies can access outsourced applications with minimal disruption to their IT systems.

A lot of work needs to be done to prepare a business-outsourcing plan. Companies must identify the cost of performing these processes in-house, select a service provider, design a contract, and determine service-level agreements. But for those companies looking for predictable costs, business-process outsourcing is an attractive option.

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