Outsourcing to a bright future?
According to the latest Morgan Chambers report, 56% of the FTSE
100 now outsource to some extent and a third of outsourcing deals
are now in the Business Process space. Is outsourcing going to be a
mainstay of company strategy, or merely a stopgap in an
increasingly difficult market?
Outsourcing takes place when a company transfers the ownership of a
business process to a supplier, traditionally this has been the
Information Technology (ITO) process. The important distinction
between an outsourcing deal and any other business relationship is
that in outsourcing, control of the process is determined not by
the Client, but by the supplier. The Client dictates what it wants
to gain from the relationship, but it is left to the supplier to
set the strategy to accomplish the implementation and delivery.
Over the last five years, the outsourcing market in the UK alone
has been worth £22.9 billion. A third of this figure has been
generated from Business Process Outsourcing (BPO) deals. It is
estimated, the BPO market will expand dramatically over the next
24-36 months.
Emerging BPO companies are challenging the traditional business
model of sole-source deals to create larger, joint ventures and
virtualization deals, which are making a dramatic transformation to
Clients in the medium to long term.
Outsourcing the back-office functions has evolved from the Andersen
Consulting (now Accenture) model of Business Process Management and
Shared Service operations. Traditionally they found this to be most
successful within the Finance and Accounting (FAO) functions of the
global oil and gas suppliers.
However, it is not just in the FAO space where suppliers are
capable of generating exceptional return on investment for the
Client. The Human Resources function is now ripe for this type of
re-engineering. Indeed a major VC and Private Equity firm, General
Atlantic Partners, specialises in backing firms offering this type
of service.
Whilst the majority of technology and consulting firms have been
laying-off employees at an almost unprecedented rate, the
outsourcing companies are using the downturn in the market and an
acceptance by Boards of the value of outsourcing, to build market
share, expand their focus of operations and increase their focus
from generalist professional services to pure-play outsourcers.
Given the state of the market at the start of 2002, ITO and BPO
deals will become more important. There will be increased activity
in the UK and within continental Europe and those organisations who
can best address this increased activity can, we believe look
forward to a rosy future.
Guy Kirkwood, who is a Partner with Antiphon, has worked within the
outsourcing market for seven years. He says: "Now is the time for
corporations to bring outsourcing to the fore. With increased
competition and in a stationery or declining market, concentrating
on core activity becomes ever more vital. ITO and BPO deals offer
corporations the virtuous cycle of decreasing costs, increasing
EBITDA and subsequent increase in shareholder value."
"What attracted me to the outsourcing market in the first place was
a frank exchange with one of the most successful salesmen ever in
the ITO market. On completing each deal, he spent his commission on
shares in the new client. He consistently trebled his money. There
are not many opportunities in this market for suppliers or
individuals to say that."