Consider the Source

Pulling the Renegotiation Levers

Dale Hearn of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Of the many factors that come into play during sourcing decision-making, financial drivers within the existing contract are critical.

Companies must decide whether to renegotiate their contract with their current provider (re-source), choose a new service provider, or bring the services back in house (in-source). Several clients that I worked with over the past couple of years made a conscience decision to renegotiate with their current service provider based solely on the overall financial implications of the deal.  For more information, check out my colleague's whitepaper.

Service levels, client satisfaction surveys, balance of trade issues, and executive relationships all had an impact in renegotiations, but the most important factors for these clients were based on the NPV (net present value) and profit margins over the term of the deal.

Straw Man Arguments of Offshoring

Today's guest blog comes from Paul Duckham, Senior Advisor, TPI.

Should a U.S. bank spend another US$2-3 million tweaking its mature IT systems to squeeze another 5 percent productivity gain out of its U.S. operations, or just move the processes offshore, with the potential for 40 percent saving?

The above surely sounds like a straw model argument; obviously the better business case wins out every time, doesn’t it? Well, not always.

The portfolio of IT projects often takes on the characteristics of ancient law – it must not be questioned or changed. Most of the time this is good since constant churn in the project list causes a huge waste of resources as people start and stop project work.

But when considering BPO opportunities and whole processes outsourcing, shouldn’t everything be fair game?

Now Entering the Ring...

Last week, the founder and chairman of Affiliated Computer Services (ACS) teamed up with private-equity firm Cerebus to make a buyout offer for the business process firm (ACS's Announcement ). Some observed that private-equity was again looking to cash in on the growth of global outsourcing (Cerebus and others last year bid for firms such as CSC). But the offer was also proof the vast capital of the various public and private markets are circling the same dream – to create formidable competition for the juggernauts of IBM and Accenture in the business process outsourcing universe.

It's not surprising, from our perspective, that the hungry private-equity firms have set their sights on ACS: If they really want to own an outsourcing player, ACS’ size, footprint, trajectory, and top-tier clients provide a solid foundation for an owner that has a vision of global expansion. After all, ACS is one of the earliest leaders in business process outsourcing, serving clients with some of the strongest brands in the world. It is a company founded on the principle of managed services, meaning it avoids the temptations of consulting and systems integration. It also is one of the earliest leaders of offshoring, having considerable operations in lower-cost delivery locations.

Keane’s pending acquisition by an astute management team, backed by Citicorp, is yet another beat on this same drum. Genpact, the darling entrant of the BPO provider dance card, is rumored to be planning a public offering in the near future, taking its story to the public markets in order to raise capital. Another version of the same strategy? Probably?

It’s worth the price of admission to watch these forms take shape and see what impact they will have on business process outsourcing.

Arise, Verticals

Alrighty … The “horizontal” BPO of outsourcing SG&A (sales, general, and administrative) functions such as HR, finance and accounting, call centers and procurement hasn’t reached the take-off velocity many -- including yours truly -- had expected. What’s up with that?

We recently reported on 2006’s full-year contract award metrics. We counted more BPO contracts awarded than ever before. But 2006 was the second consecutive year of double-digit percentage decline in the total contract value of the BPO contracts awarded.

We’re in the middle of a tremendous number of BPO evaluations, with clients of all sizes and industries. This visibility tells us that the core outsourcing business model isn’t the issue affecting slow growth of BPO adoption. Rather, it’s client concern over the service provider landscape.

With so many providers swimming in the outsourcing waters, some clients feel there is no critical mass or expertise. Even the largest and most successful BPO providers are struggling to deliver on the promise of standardized processes, world-class automation, seamless global delivery and end-to-end integration.

The net effect is that many clients chose to do BPO tactically. They contract for discrete processes rather than a broad scope of functions. And they get the benefits of BPO largely through labor arbitrage rather than through real transformation of the business functions.

Those dynamics aren’t the sort of motivators to prompt service providers to continue to invest in their BPO offerings. What to do? Well, we’re seeing a fair degree of bet-hedging, with providers electing to go down the path of “vertical industry BPO.” A vertical BPO focuses on providing various functional services in a limited number of industry domains. Healthcare, financial services, manufacturing and retail are examples of vertical BPO domains. The providers focus on processes that are specific to those industries.

Will that confuse and diffuse the outsourcing market? Or is vertical BPO the answer to the needs of today’s discriminating corporate buyer? We shall see.