BPOs: The Road Ahead

Date:   Tuesday , December 27, 2005

It is the BPO blitzkrieg and itís not a short-term phenomenon. The global BPO market is expected to swell to $146 billion by 2008. But by all accounts the BPO market has a fragmented future.

The largest segment in the BPO market will be simple bulk transactions and the segment will grow to $58 billion by 2008 worldwide. Bulk transactions include simple tasks like credit card or stock trade processing. The second largest segment will be broad shared services, representing $57 billion by the same year.

Shared services include finance and administration, indirect procurement and human resources. Policy administration, claims, loan applications and other high volume vertical processes are projected to become a $6 billion sector. More complex and specialized vertical applications such as monitoring chemical control processes and environmental data reporting will reach the $5 billion in annual sales, but increasing customer confidence will also kick start the overdrive of the segment, with the vertical application BPO market reaching $24 billion.

All said and done, I strongly believe fragmentation in the industry is on its way up. And no one vendor will manage all the opportunities. There are firms looking to outsource human resources, finance and administration, claims processing and niche processes like environmental data reporting, chemical process monitoring.

However, no single company can claim mastery over all of these functional areas; monopoly is ruled out and organizations will not outsource all processes to just one company. There are the pros and cons to this situation. Advantages are the specialization, which means a more effective way of how the business is executed in an all round manner. The downside is definitely the disparate processes of the company, which are outsourced to different partners resulting in non-uniform outputs.

Clients begin their hunt for a BPO partner by analyzing the best options - business process outsourcing or business process insourcing (captive units). They could look to set up a captive unit by themselves or in association with a service provider. Both insourcing and outsourcing can complement each other. If the data and processes are strategic and security concerns are of high priority then setting up a captive unit and going in for offshore insourcing would be ideal. Insourcing requires greater investment. On the other hand companies that have investment concerns can outsource to top-notch BPO partners and leverage the experiences that the BPO partners bring. In both cases it is a deeply entrenched mutual association.

Company that seeks to outsource must ask itself the question Ė is it to focus on the core business, or to improve the service levels and reduce transaction costs or is it just because it is an industry best practice? Labor Arbitrage is a key driver that attracts many companies to an offshore unit. If the organization has large volume transactions and the transactions are scalable then setting up a captive unit is ideal but in case of the reverse situation a third party BPO partner is preferable.

Outsourcing has its own issues like Sarbanes Oxley or SOX. Questions on how SOX is going to affect are just beginning to befuddle regulators. There may be cost-savings and other benefits for a company by outsourcing and/or offshoring business process, particularly finance functions, to outsourcing suppliers. However, it is clear that the responsibility to maintain effective internal control over reporting is not delegable by public company management. The failure to discharge these responsibilities due to knowing or willful non-compliance is subject to personal fines and/or imprisonment terms.

Therefore, SOX compliance is extremely vital for BPO companies in any offshore location. Hence, awareness of SOX among employees of BPO companies is imperative through robust risk management practices. In terms of SOX compliance, the one area that the BPO companies are doing well is recording and processing. However gray areas include identification and detection of fraud, non-routine and non-systematic transactions.

Data security concerns can be addressed through robust data and workplace security measures. There are enough security software packages to sew this problematic hole. Awareness through education among employees on how data security lapses could be disastrous for the company, leading to loss of customers could be vital and such breaches would surely be far and few.

The choices and the pitfalls before the outsourcers have got a lot of attention. What about outsourcees like India? How long will the labor arbitrage last? Rising salaries in India is a sign of things to come. Rising salaries of Indian BPO employees could erode its competitive advantage. The cake may go to Sri Lanka, Vietnam, Bangladesh or China soon. How soon? Only market forces will be the deciding factor and the economic guillotine will fall on the costlier service provider.


Raju Iyer is a Founding Principal at Intellisys Technology which provides Information Technology Solutions and IT- Enabled services. Prior to Intellisys, Raju worked in IT consulting spanning various continents and industries, excelling in all facets of systems development and project management. He has a Masterís degree in Computer Science from Illinois Institute of Technology, and an MBA degree from Chicago.