Forrester cautions against BPO hype

Vendors are exaggerating their capacity to offer end-to-end business process outsourcing (BPO) services, Forrester Research is warning IT managers and CIOs.

Forrester surveyed 82 senior IT executives and had in-depth interviews with 12 BPO early adopters and found that BPO vendors are making promises they can’t keep regarding the breadth of their capabilities. That in turn is causing problems for their clients, including strained interaction with the service provider over inflexible contracts and difficulty in measuring the provider’s performance, Forrester said in a statement Tuesday.

CIOs and IT managers need to know that there isn’t a single vendor that can offer a comprehensive end-to-end menu of BPO services, according to Forrester. Instead, vendors tend to be strong in one or more BPO segments, and CIO and IT managers need to know vendors’ BPO strength areas. Forrester has identified four major BPO service segments:

• Simple bulk transactions, such as processing of stock trades or credit card transactions. Of BPO services, this type is the easiest for providers to master. It is also the largest BPO segment, with forecasted revenue of $58 billion in 2008, when overall BPO revenue is expected to be $146 billion, according to Forrester. Vendors that will stand out in this segment include Affiliated Computer Services (ACS), Fidelity Investments, State Street and Unisys.

• Broad shared services, such as human resources and finance and administration, which demand more sophisticated skills from vendors. This is the second-largest BPO segment in terms of revenue with expected revenue of $57 billion in 2008. Forrester expects ACS and Mellon Financial’s Mellon HR solutions to dominate in human-resources services and for IT system integrators to lead in finance and accounting.

• High-volume vertical processes such as the administration of insurance policies and the processing of loan applications, which will remain a smaller segment with $6 billion in revenue in 2008. Vendors battling here will include Accenture and CSC.

• Niche vertical applications involving complex processes, such as reporting of environmental data, that require deep knowledge on the part of the BPO vendor. It is expected to generate revenue of $24 billion in 2008. Smaller specialists are expected to lead in this segment, including Ingenero and R.M. Software India (RMSI).

Despite the growing pains, companies are expected to increase their spending on BPO to enjoy the advantages and cost savings it can offer. Overall, BPO revenue will hit $146 billion in 2008, according to Forrester estimates.