SENDING THE WRONG MESSAGE
Janet Walker, a director of resource strategy at American Express, says she’s not too surprised to see cost savings playing a secondary role at companies that are outsourcing or considering to do so.
“For us, it is certainly a factor—it would be absurd not to be—but to focus on that sends the wrong message to employees and even customers and shareholders,” she points out.

Rather, she says the big benefit to outsourcing is that it enables you to smooth out your spending on employees, so you don’t wind up ramping up when a major project is being planned and firing scores of people once the project is completed.

“Outsourcing enables us to have flexibility and protect our core employee base,” Walker adds. “Things change quickly. You must adapt quickly.”

Walker also points out that outsourcing enables companies to hire a number of highly trained workers that they couldn’t otherwise afford. “They bring you expertise that your company can learn from by working with them,” she says.

RISE IN BUSINESS PROCESS OUTSOURCING (BPO)
To John Fischer, an outsourcing pioneer, cost-cutting’s diminishing role in the outsourcing process also reflects the rise in popularity of Business Process Outsourcing (BPO) and the gradual erosion of information technology (IT) as the dominant area to outsource. “People used to think of outsourcing their data center or network,” he explains. He calls traditional IT outsourcing, which entails simply running a company’s computers and servers from a remote location on their behalf, a commodity-type function that usually goes to the low-cost bidder.

BPO is a value-added function that companies have been seeking out more and more in the past few years to provide them a competitive advantage. This ranges from anything from hiring companies to make widgets faster to processing insurance or medical claims faster or efficiently to running a company’s accounts payables and pensions. “Now companies are saying, ‘get me a better process,’” Fischer explains. “It touches every function in a company. IT outsourcing is still there, but the world has moved on.”

In general, the BPO market is estimated at $180 billion and is expected to grow by 10% to 12% annually over the next five years, according to one published report.

Gartner Dataquest recently said BPO is the fastest growing component of the IT Services and Sourcing market in Europe with an estimated compound annual growth rate of 14.7% between 2000 and 2005. As a result, it expects the BPO market in Europe will reach $38.3 billion in 2002 and $64 billion by 2005.

In another recent report, Gartner Dataquest pointed out that BPO in general is increasingly being considered as a business strategy for enterprises that want access to best-in-class processes and cost predictability. “BPO providers are beginning to offer more strategic services to their clients by assuming full process management responsibility, providing more comprehensive services vs. a number of selective process specialties, reducing the cost of delivering BPO, and simplifying access to BPO,” it added.

IT STILL POPULAR
To be sure, IT (55%) is still the most popular area to outsource, according to the 2002 Outsourcing Index. At companies with between 5,000 and 9,999 employees, IT greatly outranks any other function currently being outsourced or under consideration for outsourcing, cited by 68% of respondents compared with just 42% that singled out administration.

And, according to IDC, global IT outsourcing (which doesn’t include application services, consulting services, business process management, network management and desktop outsourcing) will grow from a $56 billion industry in 2000 to an estimated $100 billion in 2005.
The compound annual growth rate for such services will exceed 12%, far greater than the maximum projected growth rate of total corporate IT budgets of 5% per year, it added.

However, IT is no longer the number one priority among small and many medium-sized companies. Some 54% of respondents from companies with fewer than 500 employees and 51% of respondents from companies with 500 to 999 employees said they are currently or considering outsourcing administration functions—mostly administration information systems—while only 50% of them cited IT.

After IT and administration, the four most popular areas to outsource are many tasks that can be classified as BPO—distribution and logistics (22%), finance (20%), human resources (19%), and manufacturing (18%).

GMAC Mortgage’s Pallesen says his company’s five most common outsourced tasks are non-IT functions that have little to do with his company’s core, strategic function of financing loans. He has hired outsiders to manage the company’s travel services, maintenance and facilities, real estate-both securing and managing, a number of what he calls general services, and office supplies. For example, outsiders make travel reservations and arrangements for employees, provide maintenance and security at his facilities and manage the vast inventory of office supplies.

“As companies move to improve quality and customer service, they can only focus on what they do best,” says Pallesen. They are outsourcing what they admit they are not good at. “Not everything (companies outsource) is BPO,” he adds. “Rather, it’s the ability of companies to recognize their faults.”

Not surprisingly, the number one task that manufacturing firms said they outsource is manufacturing. As a contrast, IT tasks were singled out by just 38% of the respondents from this industry.

Other findings from the survey:
• Altogether, survey respondents curently spend or expect to spend, on average, $17.2 million on outsourcing. But, this statistic is misleading given the skew to larger companies. The median is closer to $2 million.

• A majority of outsourcing buyers are still at the first of four phases of the outsourcing process. In fact, 37% of respondents are still trying to define the strategy.

• Survey respondents said the three most important factors for successful outsourcing are selecting the right vendor (63%), ongoing management of the relationship (46%), and a properly constructed contract (40%).

• The three most important factors in selecting an outsourcing vendor are price (65%), commitment to quality (51%) and flexible contract terms (39%).

• Of the five most common problems associated with the outsourcing process, time and expertise were each mentioned most often (44%), followed by budget (33%), bandwidth (20%) and access to service providers (15%).