Business process outsourcing: the reshaping of global corporations to enhance shareholder value.

Few, if any, companies have the resources to develop and maintain best-in-class capability in every aspect of their businesses. Companies simply can't excel at everything. Boards of Directors recognize that global corporations must streamline their operations in order to compete more effectively. With the board's encouragement, leading-edge companies are deciding what core competencies they must perform in-house and what are candidates for outsourcing. If a discussion of business process outsourcing has not yet taken place in your boardroom, it's only a matter of time before it will. To facilitate such a discussion, Price Waterhouse has prepared the following special report.

The practice of business process outsourcing - that is, the delivery of specific business services by expert outside providers - is rapidly gaining acceptance as a necessary strategic weapon to increase shareholder value. Many senior corporate executives, however, do not yet really understand its potential impact.

Most major companies have already embraced strategic partnering as a way to achieve improved productivity, greater flexibility, and lower costs. Their long-term objective: to clear the decks of non-core activity and focus internal resources and energies on business functions that are central to their primary corporate mission.

Collaborative research done by the Outsourcing Institute and Dun & Bradstreet on outsourcing usage shows rapidly growing trend lines. Their joint quarterly Outsourcing Index projects a robust 35% growth in the U.S., from $80 billion to $108 billion, in contracted outsourcing for the 12 months ending June 1997. Interestingly, contract manufacturing accounts for a mere 11% of this total; information technology currently represents the lion's share of outsourcing - about 22%, worth roughly $17 billion.

Misunderstandings exist

Despite the evidence of increasing usage and acceptance, Price Waterhouse has identified considerable misunderstanding about the nature and payoff from outsourcing. For example, several months ago Price Waterhouse invited a group of senior-level executives from Fortune 1000 companies to a roundtable discussion to examine the entire topic of business process outsourcing. The session's key findings showed the following:

(1) a wide lack of recognition of the potential business benefits of business process outsourcing;

(2) significant concern over the possible loss of "control" over outsourced functions; and,

(3) concerns over potential hazards caused by poorly structured contracts with external service providers.

These appear to be major hurdles to understanding and embracing the outsourcing of non-core business functions.

"It is quite a jump, after all, to consider business processes that are as sensitive as financial management and human resources to be eminently outsourceable. This is particularly true if one is still at the stage of defining as 'non-core' such functions as mailroom operation or cafeteria food service," said Jagdish Dalal, Price Waterhouse partner. "Yet, the marketplace is moving well beyond restrictive visions as new strategic partnerships emerge, with the promise of creating greater value and nimbler corporate enterprises."

Top candidates

As business process outsourcing gains momentum and the pressure grows to increase shareholder value, the range of candidates for outsourcing widens considerably. Some of the most likely (and feasible) areas for strategic partnering include: 1) finance and accounting, 2) internal audit, 3) tax compliance, 4) human resource administration, 5) resourcing of goods and services, and 6) real estate management.

For example, a leading property and casualty insurer recently retained Price Waterhouse's new Global Business Process Outsourcing Services unit to conduct a 10-year, multimillion-dollar project to outsource its accounting and financial reporting functions as well as other financial and management operations. Price Waterhouse also will manage accounting support for the insurer's third-party insurance administration business.

And a major international oil company contracted Price Waterhouse to perform a five-year, multimillion-dollar finance and accounting services project for its operations in Colombia and Venezuela.

How wide, really, is the range of processes that are being considered for strategic outsourcing by farsighted global corporations? And how much is actually beginning to happen versus how much is just "company-of-the-future" rumination? Research now underway at Price Waterhouse, involving a...