BPO adds new weapons to IT outsourcers’ arsenals

In a tough economy, IT outsourcing providers are seeking to tap every possible market for third-party services. One of the hottest – and perhaps the most controversial – is business process outsourcing, or BPO.

In a nutshell, BPO is the practice of hiring a third-party vendor to provide all of the staffing, services and technology surrounding a particular business function. In most cases, BPO focuses on specific back-office functions – such as payroll, benefits management, billing or accounting – that are essential to the business but do not offer a competitive advantage if they are done internally.

BPO is not a new idea – outsourcing providers have been using the term since the mid-1990s and enjoying revenue from BPO services for even longer. With the recent drought in IT spending, however, outsourcing providers are putting an increasing number of their eggs in the BPO basket – some 14% of EDS’ revenue is from BPO services, and the company expects that figure to increase in the coming year.

As outsourcing companies invest more heavily in BPO services, they also are expanding the list of services available under the acronym. For example, many large IT outsourcing vendors have developed customer service offerings that enable enterprises to hand over their call centers and other service functions to a third party.

After more than a decade of existence, is BPO finally catching fire? Anecdotal evidence suggests that there is plenty of smoke. In December, Motorola signed a $650 million, 10-year deal with Affiliated Computer Services to outsource many of its human resources functions. Procter & Gamble’s much-ballyhooed outsourcing contract, which has yet to be awarded, includes BPO elements such a payroll and benefits administration. Even telecommunications services vendors – long known for their reluctance to outsource – are now getting into the act, as providers such as Nextel and Telecom Italia are handing over key functions such as customer service and payroll.

The move toward BPO clearly is paying off for IT outsourcing providers, but enterprise IT managers definitely should look before they leap into the growing pool of BPO vendors. The most important reason for this caution is also the most obvious: IT outsourcing vendors know IT, but they may not understand the enterprise’s back-office processes.

Benefits administration is one function where the outsourcing process may break down. While the outsourcer may be well versed in the operation of benefits software and systems, most companies have longstanding processes – even a corporate culture – that surround the fulfillment of benefits. While an IT outsourcer might be able to efficiently accomplish the same tasks that an internal benefits department would, it might not be able to carry over the processes and attitudes that helped to draw employees to the company in the first place. Enterprise executives should not only examine the IT skills of a prospective outsourcing vendor, but also its ability to “fit in” with the corporate culture.

Customer service is perhaps an even more bottom-line-critical function to watch. An outsourcing vendor might have strong service desk and call center tools, and it might meet response time goals, but if the enterprise’s key processes and culture are not conveyed, then there is a risk of losing customers. Not all IT outsourcing vendors are capable of providing strong, personalized levels of customer service that’s equivalent to those from the enterprise’s own internal staff.

Dependencies often also play a role in BPO. For most enterprises, it is difficult to separate functions that are interrelated, such as accounting and billing. In these cases, it is essential that the BPO provider be able to tie its systems and processes in with other back-office components that are not outsourced. Again, not all BPO vendors can provide this level of integration.

There’s an old saying that if all you have is a hammer, then everything looks like a nail. As enterprises work with IT outsourcing vendors on BPO, they should be careful that their non-IT business processes are not all hit with the same IT-centric hammer. Otherwise, they run the risk of seeing key business processes – either internal or external – pounded beyond recognition.