Karen Ikeda is a partner at sourcing advisory firm TPI. She tackled the topic of “scoping the right deal for your organization” at IDC’s Outsourcing Forum West.
The year 2005 saw “the most contracts signed every in a broader market,” she said. However, the actual total contract value (TCV) dropped to $78.5 billion in 4Q05. The wider spread of global application delivery (offshoring) is having an impact on TCV.
Most renewals are currently happening on the IT side, since most business process contracts aren’t that old. At the same time, IT is flattening out while BPO is growing.
Ikeda noted that many companies aren’t being as public about their contracts in the BPO space as they might be in IT areas. And typically the value of the deals isn’t nearly as sizable in BPO — unless there’s a “lot of technology built into that engagement.” Other factors play into that reduced size. Global sourcing is part of it — labor arbitrage takes expense out. Also, more small to mid-sized buyers are adopting BPO, and the deals tend to be smaller.
What is meant by business process outsourcing? For some companies, it means “the people resources,” she said. “In other cases, clients are saying…the key enabler is application support.” The ultimate dream? To “get rid of everything. ‘I just want to buy the service.’”
Ikeda said a total solution doesn’t exist yet in BPO. Human resources is an exception, with a full complement of on-demand services available through outsourcing.
On the topic of choosing the right scope, Ikeda said the place to start is by asking what it is you’re trying to accomplish — beyond the “generic platitudes: ‘We want to be best in class.’” You have to work through what that means for your organization.
At the same time, she said, most deals are functionally driven; fewer come from the “C suite” itself. The challenge with the former is that most functional leaders are hesitant to admit that their processes need cleaning up, which often goes part-and-parcel with outsourcing initiatives.
Decision-making tends to get bogged down when the team is in place to start implementing change in the organization, but the executive in charge hasn’t really sat down and figured out, “How will we know if we get there?”
Ikeda said TPI advises taking a process view, not a functional view, but it’s a rare deal where that actually happens. “Often you’ll see in many announcements: pay-to-procure,” she said. “You’ll find out that maybe [that organization] is actually just outsourcing AP. [But] they believe they’re taking a process view.”
Why does that happen? Because the drivers for so much of the process aren’t owned by a single division. For example, an order-to-cash process may involve functions driven separately by sales, supply chain and finance.
In initial discussions with providers, the advisory firm recommends starting broad, since “it’s a lot easier to take scope out than to add scope in…[during] the deal evaluation process.”
One area where Ikeda sees change coming is software licensing. In most deals, she said, clients still own the license for their applications. It’s still an asset on their balance sheet. Now, software companies such as Oracle and SAP are rethinking their licensing process — particularly in how they can license for multi-client environments.
In many ways, BPO is a “greenfield” undertaking. Best practices are still being written — and are likely to change every six or eight months. Clients can have great influence over service providers by helping shape the discussion, since there are no clear answers around these processes yet and vendors are still quite flexible.
IDC will be hosting its East coast outsourcing event in New York at the end of March. You can learn more here:
