BPO: developing market, evolving strategies; Business process outsourcing, or BPO, continues to gain customers, and much of it is being done offshore. Human resources is still the biggest area, with finance and accounting and procurement trying to find more traction.

• Author: Marshall, Jeffrey

Church's Chicken, a fast-food concern based in San Antonio, began a partnership this year with WNS Global Services, an Indian-based provider of business process outsourcing (BPO) services. As announced, the arrangement initially will focus on finance and accounting (F & A) for restaurants owned by Church's, functions such as accounts receivable, accounts payable, bank account reconciliation and general ledger maintenance.

WNS will also maintain the enterprise resource planning (ERP) platform that provides the technology and processing services for the F & A functions. Church's said it expects the agreement to provide it "with the resources and capital the company needs to add an additional 15 restaurants over the course of the five-year contract." Church's has more than 1,500 locations in at least 16 countries and Puerto Rico and has sales of more than $1 billion.

Also at the beginning of this year, Kimberly-Clark Co. inked a five-year contract for F & A outsourcing with Genpact, a major BPO service firm spun out of General Electric Co. a few years ago. While the terms were not disclosed, the specific areas covered were accounts payable and travel expenses, pricing administration, accounting-to-reporting and supply chain accounting.

Genpact, with 26,000 employees in India, China, Hungary, the Philippines, Romania, Poland, the U.S. and Mexico, says that its F & A practice is its largest, with 5,700 full-time associates in eight countries, many with accounting degrees.

These two examples underscore some of the key drivers of BPO, which has been growing steadily in recent years and could be a $500 billion market globally by next year, according to McKinsey & Co. It's a market both for smaller multinationals, like Church's, and larger ones, like Kimberly-Clark. As such, it's not one-size-fits all; it's customized, and it can be done in one location or several.

What is BPO, and why has it taken off? "At this point, virtually every standard business process--human resources, procurement, finance and accounting, project management, legal, research and development, customer care and acquisition--has been outsourced to some extent as Global 1000 enterprises search for new ways to reduce costs, improve processes and remain competitive," write John K. Halvey and Barbara Murphy Melby in the second edition of Business Process Outsourcing: Process, Strategies and Contracts (Wiley, 2007).

BPO really is an evolution from the major information technology (IT) outsourcing contracts that started to blossom in the 1990s. It's less of a cost play--using cheaper overseas labor to do the same work--than an effort to let a third party undertake best-practices functions (often reengineered) that aren't core to the corporation's profit-making abilities. And, yes, the work should be delivered more cheaply, after the startup costs are absorbed, sometimes far more so.

To be sure, some BPO contracts still are being justified on the labor arbitrage model. But that advantage has been shrinking in many instances, and is well below the 50 to 60 percent or even more first trumpeted about IT outsourcing. Halvey, a partner with Milbank, Tweed, Hadley & McCloy in New York and a noted outsourcing expert, says the savings on BPO often run from 30 percent down to the single digits.

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Yet, BPO is clearly central to the outsourcing movement for U.S. multinationals, which has morphed from a controversial focus on offshoring a few years ago--where jobs were essentially moved to lower-cost locations like India or the Philippines--to a more complex "nearshoring" model that might make use of a multiplicity of locations, some domestic. India remains the foremost location for BPO, followed by countries like the Philippines, Brazil and Eastern European nations like Hungary.

Offshore Locations Competing

Authors Halvey and Melby find "explosive growth in BPO being provided from offshore locations such as India, with 'pure-play' offshore service providers competing directly with U.S.-based multinationals offering increasing offshore-centric solutions." They add: "It has become more common for legacy IT outsourcing vendors to market business process services, such as internal business process management and business process transformation, as part of a comprehensive IT outsourcing deal, or separately."

Major U.S. providers of BPO include Accenture, Affiliated Computer Services, EDS Corp., IBM Corp. and Hewlett-Packard Co. (HP). Competing with them on the ground in India are such native operations as WNS Global, Wipro Technologies, Hexaware and Infosys. HP's BPO operations in Costa Rica are profiled on page 44.

FEI President Michael Cangemi, who recently toured HP's operations in Costa Rica with FEI's Committee on Finance & Information Technology (CFIT), wrote in his "President's Page" column in the May issue that "time/motion studies designed by engineers are ongoing to continually improve the work processes and reduce labor costs. It is truly a case of 'working smarter.'"

Some observers believe the BPO market will dwarf the IT outsourcing market in coming years. Joyce Bastoli, national vice president at Ajilon Finance Solutions, sees the BPO space growing steadily for at least five years, particularly as mid-sized or even smaller companies clamber on the bandwagon.

Smaller companies are now just as likely to participate in offshoring and contract for BPO as far larger firms, says the Offshoring Research Network (ORN) 2006 report, "Next Generation Offshoring: The Globalization of Innovation," a research document developed by Duke University's Fuqua School of Business and sponsored by Booz Allen Hamilton.

There's no question, however...