Monday, May 03, 2004

Market Analysis

Business Process Outsourcing: Two models that work

Business process outsourcing has become much more of an obvious trend recently in companies both big and small. The reasons vary, from a wish to achieve economies of scale, to the access that it allows to technology infrastructure without the need for companies to build out their own, to the requirement to gain access to specific category expertise.

Some of the most common examples have been around for years. For example, large companies have long outsourced travel requirements to travel firms that are not only experts in their field, but the can also negotiate better deals with commonly used airlines or hotel chains. Other examples are employee benefits or payroll and accounting - during the Internet boom, many such service providers developed outsourced packages specifically aimed at the needs of start-up companies. Procurement, inventory management, logistics, customer service through outsourced call centres and subcontracted manufacturing are yet further examples of business processes that are commonly outsourced.

With the outsourcing of core business processes, finding the right partner is of paramount importance. All companies that offer outsourcing services must be able to demonstrate that they have the required process expertise and, if the process outsourced is of strategic importance, deep domain expertise is essential.

In addition, companies should look for the value-added services that are offered - for example, where companies wish to outsource procurement or inventory management, or are looking for a firm that can manage supplier networks and supplier enablement for them, outsourcing of the processes involved can be of invaluable help in smoothing the project management and encouraging take-up among suppliers. For such support, the firm offering outsourcing services is better positioned if it has a global reach.

Another point to be remembered is that you can't improve what you can't measure - if business processes are to be outsourced, change management will be required and strict guidelines should be put into the outsourcing contract with regard to service delivery and performance levels.

One company offering business process outsourcing services with strict delivery levels built in is Xchanging. The firm offers outsourcing for human resources, procurement, accounting and settlement, and customer administration. Some of its customers have actually outsourced their entire back-office business functions to Xchanging.

The value proposition that Xchanging offers is the ability to cut costs without companies needing to build their own infrastructure, as well as access to proven process expertise. The firm achieves this high level of expertise by consistently hiring resources that are experts in their fields in terms of being active practitioners, rather than consultants. It's people have all run business departments themselves and now have their own P&L for their specific category at Xchanging - and therefore the firm is offering high levels of category expertise as well.

Xchanging uses a purely gain-share model - no gain, no pain, and no consulting fees. To develop robust performance metrics, the firm always begins with an assessment of existing conditions in a company and develops a plan as to where the company would like to go. Those savings that are identified form the basis of the agreement that the companies then enter into - the savings are shared by the companies in joint venture agreements and Xchanging is measured on its performance relative to the initial plan.

To do this, it has at it's disposal a wide range of performance metrics that it uses - and these go way beyond just achieving hard cash savings, but also measure the quality of the processes as well. For example, if Xchanging has been tasked with managing a company's fleet of cars, the firm will measure such things as how long a proposal for renewal of cars takes and will measure the quality of the proposal against accepted norms to ensure that wastage is driven out of the processes involved. By driving out the inefficiencies, savings can be made in administrative costs as well as price - and those additional savings can be passed on to the client.

According to David Oates, marketing director at Xchanging, such outsourcing models will become much more prevalent in the future, as evidenced by the falloff that many vendors have seen recently in their software licence sales. Companies such as IBM have already seen this change in the market and are adjusting their services accordingly, using their own procurement teams to manage service delivery for their clients. The model seems to working for Xchanging - in business for only four years now, the firm has already expanded to more than 1,000 resources.

Another model that appears to be gaining traction is one espoused by Ulogistics, part of the UMECO group in the UK. Specialising in the aerospace industry, it is working with customers in the industry to manage their in-bound supply chain. To do this, it is working across its customers' global supplier networks to increase visibility, ease supplier roll out and help its customers to change their processes for supplier integration so that suppliers can manage inventory requirements on behalf of their customers.

As such, Ulogistics fulfills many of the requirements for effective business process outsourcing - it has deep domain expertise, specific process expertise, is helping companies reduce their infrastructure costs, and is providing value-added supplier management services globally.

Ulogistics is offering customers access to We Supply's technology, a vendor of on-demand supply chain management solutions, and building its own processes on top that are specific to the needs of the aerospace industry.

Chris Turner, managing director of Ulogistics, states that the company has no ambition to enter other industries, but will remain focused on aerospace. However, it appears likely that We Supply may team up with experts from other vertical industries at some point to develop specific expertise in other sectors.

Such developments could prove to be a serious challenge to the large integrated suite vendors that are developing specific industry expertise on a software licence basis - the outsourced model could provide access to outsourced business process services specific to their industry at lower cost, with lower levels of investment required and with service levels that are specific to the needs of their particular firm.

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