While most of the books and research about IT outsourcing (ITO) are less than ten years old, ITO has actually been around in some form or the other for decades. When mainframes ruled the earth, the services of these expensive behemoths were often made available through time-sharing. Hiring contract programmers is also a thirty-year old phenomenon. Service bureaus, like Automated Data Processing, have been in the payroll business for decades, and have expanded more recently into accounting.

Similarly, data center facilities management has been available for decades. Ross Perot’s Electronic Data Processing and the big accounting firms entered the systems planning, design, and turnkey software businesses more than thirty years ago, and network sharing is also decades old. From the birth of business data processing in the 1950s and 60s, companies with specialized skills have offered computer-based information systems support and services.
Similarly, business process outsourcing (BPO) is not just another management fad or a recent trend. In some ways, the beginnings of business process outsourcing (BPO) can be traced back to the Second World War, when engineering and quantitative analysis tools were introduced to improve the manufacture and distribution of war materials. These quantitative and analytical techniques were based on the notion that scientific methods could be used to measure, analyze and improve any business process.

After the war management started applying these tools more generally in industry, starting in manufacturing, with the aim of increasing quality control and the quality of products. Over the decades since, operations research, system analysis and quantitative methods have been gradually applied to virtually all types of business problems and business processes. In the 1980s, the term ‘business process reengineering’ (BPR) was born as a new way of describing the systems analysis and process redesign techniques of earlier decades. At its most simple level, these techniques recognize that each organization operates based on a set of definable processes. And having defined them, it is possible to look within each process to find ways of improving efficiency.

Just as the concept of BPR was taking off, the information technology revolution exploded. Companies realized that hiring IT expertise in-house and paying for continuous upgrades to hardware and software were anything but efficient. As a result, almost overnight, a huge market for outsourcing IT was born.

It was a combination of the success of BPR and a maturing of the approach to IT outsourcing that saw BPO as the logical next step. While BPR is about improving processes within a single enterprise, in one sense, BPO simply applies that same logic along the company’s value chain, or across an entire industry’s value chain. Consequently, a BPO supplier can usually harvest economies of scale that a single company within an industry can not.

Meanwhile, IT outsourcing moved on for some companies from just a way of achieving immediate cost savings, to also becoming a strategy akin to mergers, acquisitions, alliances and partnerships. And as more companies gained outsourcing experience, they also reached a greater level of understanding about the importance of relationship management. It used to be that companies thought they could just hammer out a contract, beat the supplier down in price and force the best deal possible for the buyer. Now the experienced, knowledgeable outsourcing buyer realizes that instead of immediate cost savings, the objective is to achieve sustained benefits for the life of the outsourcing agreement. Sustained long-term benefits come from positive relationships that emphasize continuous improvement of performance and of the relationship.

Many enterprises have become a lot smarter in recent years about their use of capital, and the suppliers of capital have become much smarter about where they invest. Investors want to invest in companies that focus on what they do best and outsource the rest. It comes down to the difference between “core” and “context.” The first step to achieving a competitive advantage is to focus management attention and energy on what the company does best—its core business—because everything else suddenly becomes context. Capital investors are insisting that management focus on the core and get someone else to do the context work. If you’re not the best in the world or one of the best at a particular process, the best advice is to find someone who is.

BPO is being enthusiastically embraced by enterprises worldwide. Gartner Dataquest calculates that organizations around the world will spend about $128 billion this year for BPO contracts, a figure slated to more than double by 2005. That report notes that the forces driving the adoption of BPO include:

• macroeconomic factors (such as globalization, consolidation, competition and speed, a shortage of skilled labor, the strategic importance of business processes);
• technology (collaborative technologies and web-native applications);
• demand (the rise of fast-growth companies and the emergence of virtual trading communities); and
• supply (consolidation of traditional service suppliers, ASP disillusionment, and new entrants).

All of the above factors work in interrelated and reinforcing ways to account for the phenomenal increase in offshoring over the last decade. The upswing also coincides with a period in which business conditions are stretching the abilities and resources of internal staffs. Internal staff must struggle with ongoing operations while at the same time implementing new processes and systems. It is therefore advisable to find outside assistance and expertise from advisors who can help coach and assist during the outsourcing lifecycle.

In summary, BPO and outsourcing are not just another management fad. While ITO is not new, and the origins of BPO date back to World War II, both types of outsourcing have taken on increased importance in the thinking and strategies of business leaders around the world. in large due part to the underlying changes in the global economy and the resulting competitive pressures. The slowing global economy fuelled more interest in offshore outsourcing in the past few years, as companies looked to increase efficiency and reduce costs significantly. Offshore outsourcing also does well in good times when companies outsource to suppliers that can provide the infrastructure in the global region targeted for expansion. Clearly, offshore and domestic ITO and BPO constitute a new business model, a “mega-trend” that will likely influence the way many successful businesses are run well into foreseeable future.