07 Oct 2013 BPO – the enabler of best practice

The nature of business process outsourcing has evolved and changed. In the past, it was simply about reducing cost – shipping jobs abroad where skills were cheaper. And while that rather unsophisticated body shopping model is not yet entirely a thing of the past, it is unlikely to feature significantly in the future because alternative, better business models have emerged and matured that do much more than reduce the operational cost for business. They allow business to make a quantum leap to best practice.

The old BPO model

It made sense in the late 1990’s. Labor arbitrage paid off. It was cheaper to employ talent in India than it was in North America and Europe and many back office functions like accounts payable could operate much more efficiently if they were outsourced.  The business case was simple – pay a third (or less) for the same level of skills in a business function that could be geographical placed anywhere in the world. Why would you not outsource?

The whole point was to derive improvements in efficiency and effectiveness – in simple terms, “do more for less”. But actually, what got delivered was “do the same for less”.

Businesses were seduced by the savings. In the haste to deliver a bottom line result, business process improvements were seen as something for another day and dysfunctional operations were lifted and shifted delivering the same dysfunctionality, just cheaper. Once outsourced – out of sight, out of mind – business process improvements are much more difficult to deliver.

It’s easy to see with hindsight but it was always going to end in tears. As the Asian economies became better at taking on back office functions, so wages began to rise. Costs increased and attrition rates became uncomfortable but more than that technology advancements put the whole business case in question. Concepts like AP automation, automation of accounts payable processes through the use of e-invoicing, scanning etc. can deliver the efficiencies greater than labor arbitrage savings putting into question why any business would want to outsource at all.

But this is far from the end of the BPO model. The old business case may be unrealistic but the new business model is allowing BPO firms to thrive.

The new BPO model

It’s not exactly rocket science which is why it astounds me that some of the bigger BPO firms, the dinosaurs, have been slow to respond but the combination of technology enabled best practice and low cost talent provides a compelling BPO proposition.

AP automation is a great example. Whereas a $1 billion spend business might have needed 20 people in their AP department 15 years ago, by applying best practice like e-invoicing, they could get that team down to half a dozen or less. And if that is then outsourced to a cost efficient and expert BPO firm adept at offering this kind of service to lots of other business, that represents a double saving. And herein lies the problem for the dinosaurs. Their body shopping business model was based on FTEs. The application of best practice reduces FTEs. To sustain the old model would require reducing their profits and that’s not an easy transition to make. The new BPO firms are much wiser. They recognize that their raison d’etre is to deliver efficiency and effectiveness – that means reducing costs – reducing their revenue. It may be counter intuitive but it works and the new shared reward contractual model is gaining ground and as it does, the solution vendors are taking advantage.

Last week, I spoke to OB10 President, Paul Frederick who explained that only 2 years ago, OB10 had just over 10% of their buyer revenues using OB10 through a BPO. Now, that number is over 30% and growing rapidly.

“It’s about BPOs moving away from the old labor arbitrage model and moving toward a model where clients contract to business outcomes. Our approach of contracting to performance-based service level agreements (SLAs) supports this requirement as we can commit to the percentage of invoice transactions converted to electronic in the first 18 months.”

The opportunity to access the power of best practice through a BPO is compelling. For a business, instead of struggling to adapt and evolve their business, instead of the pain of IT implementation and change management, they can make a quantum leap – a step change in effectiveness and efficiency.

BPO has a bright future.

Pete Loughlin can be found on twitter @peteloughlin