Taking the Measure of Outsourcing Providers

Successful outsourcing of back-office business functions requires knowing not only your company’s needs but also the 12 core capabilities that are key criteria for screening suppliers.

Senior executives frequently express dissatisfaction with back-office processes and functions in areas such as human resources, information technology, indirect procurement, finance and accounting, perceiving them as too costly to operate, limited in their capabilities and frustratingly slow. Some of the largest companies — particularly those that have grown through mergers and acquisitions — are saddled with disparate and poorly performing processes that only major investments in dollars and management capacity can correct. Even if senior executives agree to commit the necessary management time and other resources, many are skeptical about creating the proper environment for back-office success.

Not surprisingly, rather than address these challenges themselves, many companies are choosing to outsource some functions and areas — in some cases, even their entire global back offices — to business-process outsourcing providers. One example of a BPO provider is call centers; increasing numbers of companies are outsourcing their service support function to either local or offshore providers that can handle it more efficiently and at lower cost. More recently, companies including BP Plc and Bank of America NA have decided to outsource the transactional side of their human resources activity.1 This trend toward outsourcing of business processes continues to gather steam as companies seek alternative and improved ways of leveraging their assets.

Some BPO providers speak of the “transformational” impacts that upgraded processes can have on client business performance.2 Suppliers can furnish companies with more than simply expertise. Some provide upfront capital to convert cumbersome, decentralized human resources and administrative systems into shared utilities, which they then deliver through new offices, new business processes and Web-enabled technology. In addition to setting the stage for internal efficiencies, BPOs can provide opportunities for other benefits. Recently, for example, the London-based Society of Lloyd’s, the global underwriting group, worked closely with London-based Xchanging, a major business-process outsourcing firm, to revamp its policy administration and claims processing capabilities. The subsequent changes allowed Lloyd’s to achieve substantial cost savings and service improvements; it has since partnered with Xchanging to sell services that grew out of their business relationship to external customers, creating a new stream of profits.

BPO has become a large and diverse market in recent years, populated by an increasing number of providers. Organizations interested in exploring the potential benefits of outsourcing business processes need to look carefully at their own goals and be clear about what supplier capabilities they need.

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References

1. For an account of Bank of America’s outsourcing of HR activity to Exult (which agreed to a merger with Hewitt Associates in June 2004), see P. Adler, “Making the HR Outsourcing Decision,” MIT Sloan Management Review 45, no. 1 (fall 2003): 53–59. For a broader discussion of theory and practice in HR outsourcing, see D. Dell and H. Munson, “Outsourcing HR in the Power Utilities and Energy Industry,” research report E-0006-04-RR, Conference Board, New York, June 2004.

2. For an introduction to the transformational approach, see J. Linder, M. Cole and A. Jacobson, “Business Transformation Through Out-sourcing,” Strategy & Leadership 30, no. 4 (2002): 23–28; and J. Linder, “Transformational Outsourcing,” MIT Sloan Management Review 45, no. 2 (winter 2004): 52–58.

3. See, for example, M. Lacity, L. Willcocks and D. Feeny, “The Value of Selective IT Sourcing,” Sloan Management Review 37, no. 3 (spring 1996): 13–25; and D. Feeny and L. Willcocks, “Core IS Capabilities for Exploiting Information Technology,” Sloan Management Review 39, no. 3 (spring 1998): 9–21.

4. For definition and analysis of the “winner’s curse” phenomenon across 85 outsourcing contracts, see T. Kern, L. Willcocks and E. Van Heck, “The Winner’s Curse In IT Outsourcing: Strategies for Avoiding Relational Trauma,” California Management Review 44, no. 2 (winter 2002): 47–69.

5. Exult quickly won significant add-on contracts, including a $700 million deal with Prudential Financial Inc. and a $600 million deal with International Paper Co. See M.L. Cagle and K. Campbell, “Taking HR from Cost Center to Revenue Generator at Bank of America” (presentation at the 2002 Outsourcing World Summit, Orlando, Florida, February 18, 2002).

6. For discussion, see M. Lacity, D. Feeny, and L. Willcocks, “Transforming a Back-Office Function: Lessons from BAE Systems’ Experience With an Enterprise Partnership,” MIS Quarterly Executive 2, no. 2 (September 2003): 86–103.

7. M. Lacity and L. Willcocks, “Global Information Technology Out-sourcing: In Search of Business Advantage” (Chichester, U.K.: John Wiley & Sons, 2001).

8. Lacity, Willcocks and Feeny, “Value of Selective IT Sourcing.”

9. Feeny and Willcocks, “Core IS Capabilities.”