IntroductionDuring the fourth quarter of 2005, EquaTerra fi rst conducted a market study to assess the role and importance of information technology (IT) – both as a collective set of technologies and a key organization business unit – to the success of business process outsourcing (BPO) efforts. EquaTerra placed specifi c emphasis on enterprise software applications as a major component in an organization’s IT portfolio. The 2006 market assessment focused on the opinions of key executives making line-of-business BPO decisions in buyer organizations. The fi ndings from this market assessment were published in the second quarter of 2006.
Our original market assessment fi ndings illustrated that these BPO decision makers were very positive about the role of IT in general and enterprise software in particular in supporting BPO efforts. They clearly recognized that while BPO was focused on “business process,” it was not advisable to disassociate it from the underlying IT applications and systems. BPO buyers also had clear preferences on the commercial enterprise software vendors they would like to use in their BPO efforts. Commercial software vendor preferences, however, typically were based on strategic IT investment decisions that had been made prior to, and separate from, BPO decisions and investments.
The overall challenge, however, is not so much appreciating the value of IT and enterprise software to BPO. Rather, it is determining how buyers should account for IT in BPO efforts and establishing the appropriate role for the IT group to play as part of the BPO team. While most study respondents, for example, felt IT was important to BPO success, many felt their own IT groups could do more to support BPO efforts.
EquaTerra recognizes that the IT and enterprise software markets, as well as the BPO market, are very fl uid and dynamic. For this reason, EquaTerra conducts the market study annually. This whitepaper presents fi ndings from the 2007 study update, as well as a reinterpretation of our original fi ndings based on these new results.
BackgroundG2000 organizations undertaking BPO efforts have a variety of factors to consider when developing and implementing a strategy and plan of action. Some obvious points are the reasons to pursue BPO, the business processes to outsource, expected process improvement and cost-saving goals, and BPO service provider selection. Beyond these critical and high-level issues lie numerous additional details organizations must factor into their decision-making processes.
The current and future IT systems and application environment is one critical area organizations must evaluate when assessing BPO opportunities. This is especially the case with core enterprise applications, such as those embodied in legacy, proprietary and commercial enterprise software and integrated Enterprise Resource Planning (ERP) systems. These systems play a key role in the business operations of any organization that has deployed them. While they represent IT systems, it is diffi cult to separate them from the business processes they support when it comes to outsourcing.
Organizations must address many elements of their ERP and related enterprise software applications when pursuing BPO. These include:
• Measuring and benchmarking current cost levels, and accurately estimating cost levels and savings potentially gained from outsourcing.
• Determining how underlying IT systems enable and/or constrain business process performance and how outsourcing will impact performance levels.
• Defi ning a means to compare and contrast the current enterprise software environment to that provided by BPO service provider candidates, particularly if the providers under consideration advocate a proprietary or semi-proprietary ERP environment.
• Understanding the capabilities of the enterprise software environment that supports ongoing outsourcing management and governance needs, as well as the costs to provide this support both in terms of operational
Assessing the Role of Information Technology (IT) & Enterprise Software in BPO
expenses and any required software enhancements or upgrades.
• Defi ning the outsourcing scope from the perspective of the enterprise software environment. This involves mapping the business process elements being outsourced against the underlying software applications support. Typically, the IT components do not map cleanly to the business functions being outsourced, creating challenges in terms of extracting the relevant IT applications.
Many organizations struggle to address these points for various reasons, including:
• BPO typically is driven by business units
- BPO efforts are nearly always driven by business unit and executive management. The key BPO decision makers often are not IT-literate or interested enough in IT issues to adequately represent the fi rm’s enterprise software interests in a BPO effort. In many cases, the IT group and CIO play only a supporting role in BPO decision making and are not always in a position to fully address BPO challenges. Also, organizations that have undertaken massive and often disruptive ERP implementations may have negative lingering memories of those efforts (see Figure 1), which can skew perceptions of the current environment.
- BPO buyers also can suffer when the IT group is involved but takes a narrow, negative, or overly technical approach to their role. Buyers must assess candidate BPO service providers’ IT application and system capabilities and the fi t of these systems into their own IT environment, architecture and strategy. The IT group must avoid, however, getting stuck “under the hood” of the service provider’s IT platform micro-assessing or second guessing IT components or investment decisions.
• BPO is focused on cost reduction and process improvement (the end goals) and often not enough on the means, of which IT is one
- BPO decision making typically is driven by efforts to reduce costs and improve process performance levels, not specifi cally to address IT issues. These BPO goals are impacted and enabled by the IT environment, but also are dependent upon non-IT elements like strategy, people, resources, operational locations, and process
defi nitions and operating models. IT considerations can get lost in the shuffl e if decision makers do not adequately understand IT’s role.
• BPO decision makers may not understand the Impact of outsourcing decisions on IT
- Many BPO decision makers tend to focus on the outcome of the BPO effort and not on how the organization gets there. For example, while event-driven employee self-service portals are often highly sought after by Human Resources (HR) professionals considering BPO, their focus generally is on how the portal performs and not on the underlying applications and systems enabling that performance. BPO buyers may not fully understand that the capabilities viewed in a service provider demo may or may not work in their own IT environment or the time, effort and cost that may be required to achieve those capabilities. This is not to imply that HR professionals or other business unit representatives should assume the role of the IT expert and attempt to vet service providers’ IT capabilities. The organization’s BPO decision makers, however, must ensure that someone is playing that role and can connect the dots between business and IT. This ideally would be representatives from the IT group, as well as third-party advisors, or potentially representatives from key strategic IT vendor partners.
The underlying IT and enterprise software operating environment, its strengths and weaknesses, costs, and supporting vendors’ capabilities and future direction are all critical elements for organizations to analyze in any BPO decision-making process. This holds true for existing and future environments of the BPO service provider. The process becomes more complex due to the dynamic BPO service provider IT environment. (e.g., current client burden, service offering plans, retirement of other offerings, strategic relationships).
EquaTerra originally undertook the market study against this backdrop. We conducted a second market assessment update in the fourth quarter of 2006 and fi rst quarter of 2007. This whitepaper will review, interpret and analyze the results of this ongoing market assessment.
1. Current BPO investments and future investment plans.
2. BPO success factors
• Biggest factors impacting BPO success
• The importance of information technology to BPO success
• The importance of outsourcing management and governance to BPO success
3. Assessing the Role of Enterprise Software in BPO
• Perception of enterprise software vendors’ “value proposition” relative to BPO.
• Enterprise software preferences in BPO efforts and factors driving these preferences.
• Enterprise software licensing preferences in BPO efforts
4. Key sources of advice on IT and enterprise software for BPO
5. Willingness to adopt BPO service providers’ standardized processes
Both studies survey organizations in North America and Western Europe (see Appendix for full survey demographics). All respondent organizations have 5,000 or more employees and over US$1 billion in annual revenue. The 2006 study surveyed a total of 126 respondents engaged in human resource and/or fi nance and accounting outsourcing.. EquaTerra expanded the 2007 update to include buyers of procurement outsourcing for a total of 154 respondents.
Study Highlights
• BPO investment and expansion plans: Existing human resources, fi nance and accounting, and procurement outsourcing levels remain strong as do
plans for future BPO investments, though expansion plans tempered somewhat in 2007 compared to 2006.
• Information technology and enterprise software’s importance to BPO success: Line-of-business BPO decision makers clearly continue to recognize the importance of IT and enterprise software to BPO success. Outsourcing management and governance capabilities also are viewed as important.
• Biggest factors impacting BPO success: Service provider quality remains the leading factor cited. The collective IT capabilities of BPO service providers clearly are recognized as critical to BPO success. The cultural fi t between the buyer and the service provider, as well as creating a collaborative ”win-win” relationship, also are deemed important – more so in 2007 than 2006.
• Enterprise software vendors’ “clear vision” for BPO: SAP and Oracle remained far and away the leading enterprise software vendors that possess a clear vision relative to BPO. They also were the preferred software applications to support BPO efforts.
• Sources of advice for IT issues and needs related to BPO: The internal IT group was the leading source of advice for line-of-business BPO decision makers on IT issues related to BPO. Outsourcing consultants and enterprise software vendors also were frequently cited as sources of advice.
• Standardization around supplier best-practices: While most buyers do not consider standardization among the most important factors required to ensure success, they are ready to consider some sort of standardization, particularly for HR.
Current BPO Investments and Future Investment PlansStudy respondents were required either to have already undertaken BPO or be actively involved in a current effort. For the purposes of this study, EquaTerra defi ned business process outsourcing as follows:
“Business process outsourcing, or BPO, is the act of transferring responsibility for a signifi cant part of a business process and the respective process results to a third-party service provider. Mostly, BPO also includes the transfer of responsibility for all systems and technology related to the business process.”
The long (and sometimes sordid) history of commercial ERP systems
The decision to migrate to a commercial ERP environment (e.g., Oracle, PeopleSoft, SAP) constituted a major event for many G2000 organizations over the past decade. Commercial ERP implementation and expansion was often driven by and paralleled other major life events of the mid to late-1990s.These include initiatives such as business process reengineering, Y2K remediation efforts, and the often elusive pursuit of “e-commerce.” In addition to the pains and also significant costs of implementation, most organizations were ill-prepared for the ongoing “care and feeding” ERP systems required.
And that was just the beginning. As one EquaTerra client executive noted “Another issue has been the rapidness of change in technology. It often seems that as soon as organizations put a stake in the ground with one ERP system, there are constant changes… not to mention the burden of updates, upgrades, and maintenance activities, which always seem to be under-planned.”
So while most buyers are satisfied with ERP investments in the long run, it was not a painful process to reach where they are today.
Additionally, the focus of the study was primarily on SG&A related process areas (e.g., fi nance and accounting/F&A, human resources/HR, procurement) though some respondents did include information technology outsourcing (ITO) and some front offi ce (call center, customer relationship management outsourcing, etc.) in the mix.
Based on this BPO defi nition, 84 percent of total respondents described themselves and their organizations as currently engaged in BPO. The remaining 16 percent were actively evaluating BPO. These levels are similar to those in the 2006 study.
Respondents cited HR and F&A as the two process areas most frequently outsourced (see Figure 2). The other areas selected included ITO, call center, and industry specifi c BPO such as payment processing, as well as “knowledge” process outsourcing services like engineering. These levels were similar to the 2006 study fi ndings*. Procurement outsourcing was listed by 24 percent of respondents, down somewhat from the prior year’s study, though not signifi cantly. In terms of geographic differences, European respondents were more likely than North American respondents to have undertaken HRO (71 percent vs. 52 percent respectively). Respondents that had not already undertaken BPO but were actively engaged in doing so, also most commonly cited HR and F&A.
* Note that throughout this paper when year-over-year 2007 vs. 2006 comparisons are made, we use only similar sample profi les of HR and F&A respondents to keep the comparisons representative.
The 2007 edition of the market study also surveyed BPO buyers on their organizations’ current implementation levels for shared services operations. Levels of shared services usage, as expected, were higher than for BPO. HR and F&A were the
functional areas in which respondents had most frequently implemented shared services operations (see fi gure 3). There were no signifi cant variations based on geography.
Respondents overall were positive about their future BPO investment plans (see fi gure 4). Just two individual respondents in the overall survey indicated that their organizations planned to curtail or eliminate existing BPO efforts. Respondents overall most frequently indicated they planned to expand BPO usage into new business units, divisions or geographies. This was followed closely by expanding into process areas currently outsourced and into new process areas. Maintaining existing BPO investment levels was the next most frequently cited direction.
Future investment plan citations were lower across the board in 2007 than 2006 for comparable samples (i.e., HR and F&A respondent classes polled in each year). This may represent a slight cooling in the BPO market, a trend EquaTerra has found in other research studies. It also is a function of the survey sample in that each respondent in general selected less options in this multiple answer question in 2007 than in 2006, leading to lower overall response levels. Given this point, it is important to view the ranking of the responses as well as the absolute levels.
Relative to differences by respondent type, European respondents were more likely than North American to indicate plans to expand BPO into new process areas (40 percent compared to 20 percent) while North American respondents were more likely to maintain existing BPO investment levels (23 percent compared to six percent) though numbers for both groups were low. Procurement respondents were the least likely to maintain current BPO investment levels (11 percent) compared to HR and F&A respondents (21 and 23 percent respectively).
Key Buyer Take Aways
• BPO remains pervasive in the marketplace, and future demand remains positive, though tempered year over year. It has become a mainstream strategic tool for organizations to employ to support process improvement and/or cost-cutting efforts.
• The scope of BPO is expanding beyond functional areas initially targeted and more often comprises “multi-tower” efforts.
• The future expected growth of BPO is consistently strong in North America, as well as Europe, and across the functional areas of human resources, fi nance and accounting, and procurement.
BPO Success Factors
Biggest Factors Impacting BPO Success
Respondents in both years of this market study were queried on what they viewed as the biggest factors impacting the success of BPO efforts. Respondents could select up to fi ve choices from a list of 14 factors (13 in 2006). In both studies, each respondent selected on average 4.4 factors. Figure 5 illustrates the combined rankings of the success factors for HR and F&A respondents.
The quality of the BPO service provider was the leading factor cited over the life of the study and in each individual year, surpassing the next closest factor by over 15 percent and being the only factor cited by a majority of respondents. Rankings that included all respondents from 2007 generally were in line with the rankings in Figure 5. The need and desire for service provider quality, however, is somewhat self-evident. The additional responses to this question highlight how buyers further defi ne what goes into that quality assessment.
A key point to note is that two IT related factors were listed in 2007 - 1) quality of the BPO service provider IT applications and systems and 2) the ability of service providers to leverage IT – while just the fi rst of these two responses was listed in 2006. Combining the two responses provides a fuller accounting of the importance given to a BPO service provider’s IT capabilities as a factor impacting BPO success. The cumulative total for 2007 HR and F&A respondents that selected one or the other of the IT factors was 42 percent, placing the combined response in fourth place overall.
There are two other interesting points to note in these fi ndings. One is that BPO line-of-business decision makers are placing a strong emphasis on some of the “softer” aspects of the BPO effort, such as the cultural fi t with the service provider and the need to develop a collaborative “win-win” relationship between the buyer and service provider. EquaTerra is a strong advocate of embedding these principles and concepts into a BPO effort and relationship, and views them as critical success factors. Historically, however, buyers have not always placed enough emphasis on these points, so it is positive to see this growing. The challenge remains to determine how to embed these principles into a contractual working relationship, as well as maintain their emphasis throughout the life of the BPO effort. This is where ongoing outsourcing relationship management and governance play a key role.
A second point of focus is the relatively low emphasis given to the BPO service provider’s abilities to meet cost reduction and process improvement goals. Achieving these goals are typically two of the main reasons why buyers undertake BPO efforts. EquaTerra interprets these rankings, however, not to mean that buyers today care less about saving money and improving process performance, but rather that they are more focused than in the past on how to achieve the goals. The emphasis is more on the key means – like collaborative
15%
19%
23%
29%
33%
34%
35%
37%
42%
42%
44%
44%
62%
0% 10% 20% 30% 40% 50% 60% 70%
Customer Adopting Stndized Processes*
Sourcing Process/Selecting Right SP
Ability of SP to Leverage IT*
Ability to Meet Reg. Requirements
Quality of SP's IT Apps/Systems
Ability of SP to Meet Process Imp. Goals
Ability of SP to Meet Cost Reduction Goals
Ongoing Outsourcing Mgmnt/Governace
Quality of Contract/SLA's
Transition Process
Cultural Fit with SP
Collaborative/Win-Win Relationship
Quality of SP
Biggest Impact on BPO Sources: 2007 & 2006 Combined
48% of respondents selected one orthe other of the IT related responses
service provider relationships and IT to some extent – to achieve the “ends” of BPO, which are cost reduction and process improvement.
There were multiple variations of the success factor rankings based on geography and the respondent’s business unit across the two years of the study (see Appendix for details). Emphasis on meeting process improvement and cost reduction goals, for example, fell off in 2007 compared to 2006 for HR and F&A respondents. North American respondents in 2007 were more focused on the quality of the service provider than European respondents. Overall, though, the rankings of the success factors generally were in line across the multiple constituencies.
The Value of Information Technology to BPO Success
Respondents in both years of the study also were asked how important they perceived IT is to BPO success. The 2006 edition of this market study assessed the perceived value of IT overall (software applications, infrastructure, IT professionals, etc.) to the success of a BPO effort. Figure 6 illustrates the overall positive rankings respondents gave to the role that IT plays in BPO success.
IT was ranked 4.2 overall on a scale of one to fi ve (one being not important, fi ve being very important). Specifi c dimensions of IT supporting BPO all scored in the 3.7 to 4.0 range led by IT’s importance in helping to meet quality, maintenance and improvement goals.
Study respondents were asked a slightly different question in 2007, with the focus being on the importance of the BPO service provider’s IT solution to the success of BPO. Both the 2006 and 2007 questions focused on IT, last year’s from the
more general perspective and this year’s from the perspective of the BPO service provider. The goal for 2007 was to get an absolute ranking of the importance of a BPO service provider’s IT solution vs the relative ranking of its importance as illustrated in Figure 5.
Figure 7 shows that service providers’ IT solutions were recognized as important to BPO success, though at slightly lower levels than overall IT was in 2006. In both scenarios, however, IT’s importance was recognized as key. Respondents across both geographies and all lines of business in 2007 generally ranked the IT solution as equally important. When asked specifi cally why, survey respondents elaborated on the following points.
• “IT should provide a seamless interface between client and outsourcer’s systems. Client users should effectively not be able to ‘feel’ that services are provided by a third party.”
• “[IT should provide] controls, audit trails, and security to enforce the business rules as confi gured along with the reporting and analytics to enable continuous improvement in quality and effi ciency.”
• “Without a successful IT infrastructure, basic business processes are a ‘non starter’... therefore, the basic uninterrupted IT platform is the most important attribute [of a BPO effort].”
• “IT has to be a partner with business and the BPO fi rm.”
• “IT is critically important to assess the impact [of BPO] on current operations.”
• To have successful BPO, you need ‘people, process and systems.’ And without the third leg, then things will fall over and you can’t really have an offering.”
An EquaTerra client executive reminded, however, not to overemphasize the role IT can play to support outsourcing efforts:
“IT is an enabler but it is not the highest priority; it can contribute more in terms of standardization, effi ciency of processes and process improvement.”
The Value of Outsourcing Management and Governance to BPO Success
Outsourcing management and governance also is another critical set of BPO success enablers. EquaTerra defi nes outsourcing management and governance as the people, processes and software based tools that perform or support any of the following activities:
1. Service quality management (performance, satisfaction)
6. Communication management (business requirements, relationship alignment)
Respondents across the board in 2007 gave outsourcing management and governance high marks (see Figure 8) in supporting and enabling BPO success. While IT can play a key role in supporting an organization’s governance efforts, IT in itself is not a substitute for adequate and skilled resources and solid programs and processes. Additionally, just as there are multiple dimensions to governance, there are different types of IT requirements needed to support it.
The larger and established enterprise software vendors are mostly in the early stages of formulating, developing and
deploying additional capabilities to better support BPO governance. SAP, for example, has continued to advance its strategy and product capabilities to support buyers’ service level management needs. Also, many software vendors specifi cally in the OM/G tools space support both buyer and service provider needs. These include Digital Fuel, Janeeva and Oblicore. EquaTerra itself has launched an outsourcing management software solution in partnership with Microsoft.
Respondents offered several specifi c examples of how IT can help support OM/G efforts and the role of OM/G itself in supporting BPO.
• “Relative to governance, IT can enable open and continuous communication on performance to service levels, incidents & problems, support, and future solutions.”
• “It can help with total support, collaborative efforts, and an understanding of goals, objectives and cost savings we are trying to achieve.”
• “What is needed are automated, real-time dashboards on performance and ability to slice & dice the information to different countries and business units.”
Key Buyer Take Aways
• BPO buyers consistently view service provider quality as the biggest factor impacting BPO success. They also increasingly are focused on other critical factors like the cultural fi t with the service provider and the need to develop a collaborative relationship between the buyer and service provider. While these two points are critical success factors, buyers must focus on how to make their achievement actionable.
• BPO buyers place strong emphasis on the IT capabilities of candidate BPO service providers as critical factors impacting BPO success. These fi ndings reiterate the need for active and hands-on involvement of the IT group in the BPO process to ensure service provider IT capabilities are adequately assessed and mapped to buyers’ needs.
• Outsourcing management and governance is recognized as very important to achieving success with BPO efforts. Through governance, people, process and software system buyers can manage progress towards BPO goals, drive the effort and relationship in the right direction, and ensure progress is maintained.
Perception of Enterprise Software Vendor’s BPO “Value Proposition”
The next section of this market study assessed respondent opinions and preferences relative to enterprise software solutions supporting and enabling BPO efforts. Enterprise software was not strictly defi ned as part of the study, though respondents were provided a representative list of enterprise software vendors. The emphasis was on Enterprise Resource Planning (ERP) applications and vendors, enterprise desktop applications that support business applications and middleware, and function-specifi c applications to support business processes like procurement and sales and marketing. The focus was on assessing which of the vendors in these product classes has exhibited a “clear value proposition” relative to BPO, which vendors BPO buyers would ultimately prefer to use in a BPO effort, and what dynamics surrounded their usage regarding software licensing.
Table 1 illustrates responses to the question of which enterprise software vendor respondents felt had demonstrated a clear value proposition relative to BPO. The totals represent combined responses for both years of the survey for HR and F&A respondents. The arrows highlight trending in responses for 2007 compared to 2006 as follows:
• 2007 results increased against 2006 survey fi ndings
• No change or change not statistically signifi cant
• 2007 results decreased against 2006 survey fi ndings
The totals in Table 1 also compare responses for North American vs European respondents. The appendix has total responses for all 2007 respondents.
SAP and Oracle were the clear leaders in terms of exhibiting a clear value proposition for BPO. SAP was somewhat stronger among European respondents and Oracle among North American respondents. IBM Software, despite its relationship to IBM as a BPO service provider, fared lower than SAP or Oracle and had response levels in line with those of Microsoft. While Microsoft’s software is commonplace in organizations undertaking BPO, the fi rm does not have a strong position or message concerning BPO from a software perspective. Microsoft has, however, been making moves in the outsourcing management and governance software solution and tools space. IBM Software and Microsoft were weaker in Europe than in North America in both years’ samples but also declined in North America in 2007 compared to 2006.
Functional-specifi c software vendors like Salesforce.com (sales/marketing) and Ariba (supply chain/procurement) fared low among the HR and F&A respondents polled and also in Europe. Ariba, IBM Software and Microsoft all ranked stronger among North American HR and F&A respondents while both Ariba (26 percent) and IBM Software (37 percent) were stronger among procurement line-of-business BPO buyers on both continents in 2007. There were no major variations on perceived software vendors’ clear value proposition based on the size of the organization in which the respondent worked.
Enterprise Software Preferences in BPO Efforts
A new question was added to the 2007 market study to assess BPO decision makers’ preferences for candidate service providers’ IT solutions. The intent was to gauge the degree to which buyers had a predetermined preference for specifi c types of IT solutions (employing specifi c software vendors’ applications, supporting specifi c architectural models or approaches, etc.) and in general how important they felt the service provider’s IT solution was to the success of the BPO effort.
Respondents could select from four options:
1. Service providers will not be considered unless they support a specifi c IT solution.
2. Service providers with different IT solutions will be considered, but we have clear solution preferences.
3. Service providers with different IT solutions will be considered as long as they meet some predefi ned criteria (e.g. interfaces to our retained IT landscape).
4. Do not care for the IT solution/it does not matter in our decision making.
Figure 9 illustrates the responses selected to this question for the entire 2007 sample. As this question was not asked in 2006, year-over-year comparisons are not included.
Slightly over one-quarter of all respondents preferred a predetermined IT solution. Typically this was based on the existing enterprise application suite deployed within the respondent’s organization. This is not surprising given the scale and sunk costs associated with these investments, particularly when they involved commercial ERP software systems. Few large, global organizations, however, have totally standardized on a single set of enterprise software applications outside the desktop with Microsoft. Refl ecting this reality, the two most commonly cited responses highlighted that buyers had preferences and defi ned selection criteria, but were open to considering more than one IT solution. Relatively few BPO decision makers “didn’t care” or felt that the BPO service provider’s IT solution did not factor into their selection and decision-making processes. The results did not differ much between segments (HR, F&A, procurement).
Buyers selecting BPO service providers must strike a balance between two competing needs when assessing BPO service providers’ IT solutions. One is the practical need to leverage existing IT investments, recognizing the signifi cant time, effort and strategic thinking that went into those
investments. The other is the need to consider new and potentially better or more cost-effective IT solutions that a BPO effort and service provider potentially could provide. The provider’s choice of an IT solution will have a long-term impact on different dimensions, such as the basis for standardization-based economies of scale and the long-term viability of the provider. Buyers also must account for the fact that only portions of overall business functions are being outsourced and retained elements still require support. While there is no right or wrong preference, buyers must perform a thorough self-assessment of their IT needs regarding BPO to determine how to balance each need.
Based on their answers to the above question on preferred IT solutions, BPO buyers were then asked which enterprise software solution they would prefer or consider for their BPO efforts. Buyers that selected “service providers will not be considered unless they support a specifi c IT solution” or “service providers with different IT solutions will be considered, but we have clear solution preferences” had the following preferences for enterprise software solutions.
Table 2: Preferred Choices for BPO Software Solutions
EquaTerra concludes that these buyers have stronger predefi ned preferences for IT solutions to support BPO efforts. These respondents were more likely to slightly favor SAP overall, especially among European and HR line-of-business respondents. While SAP’s strength in Europe is not surprising, its HR strength is more notable given Oracle’s PeopleSoft acquisition. The sample sizes are relatively small though when broken down to this level (for example, 26 of
the total 84 respondents to this question were from Europe and 30 were in the HR business unit). All other choices, including a preference for proprietary or semi-proprietary BPO software platforms, scored low. The point on semi-proprietary platforms is interesting to note in that several leading BPO service providers tout such a platform at least to some degree. Respondents to this question could only select one of the software choices as an answer.
Next, respondents were asked why they preferred the enterprise software vendor selected (see Figure 10). Though they had the option to select multiple answers, nearly all chose just one.
Over one-half of respondents indicated they preferred the software vendor selected because using its products was prescribed in their organization’s corporate IT strategy. It makes sense that the buyer would attempt to support and refl ect their existing IT strategy in a BPO effort. The second most commonly cited reason was that the software is already in use regardless of whether it’s part of the corporate IT strategy. This also is not unexpected given the need and desire to leverage existing software investments.
Buyers displayed little appetite for selecting a BPO software option based on the desire to migrate to that software vendor’s platform or because they felt that the BPO service providers considered had exceptional competencies in a particular platform. On this latter point it is important to note that buyers clearly value and prioritize a BPO service provider’s skill in supporting a specifi c software platform. It is nearly always the case, however, that the buyer desires the service provider to support the existing software
environment, not that service provider selection drives migration to a new platform or environment. There were no major variations based on the respondent’s geography or business unit. Rankings for the top three reasons cited also were the same in 2007 as in 2006.
Interviews with study participants further highlighted the allegiance buyers have to their existing enterprise software vendors and environments. Demonstrated skills and experiences supporting the vendor’s applications typically were key decision-making criteria in selecting a BPO service, a consideration EquaTerra also routinely sees in buyer sourcing efforts. The allegiance, however, was based on a desire to support and maintain the existing enterprise IT architecture and platform, not because buyers necessarily felt their existing enterprise software platform was the best suited for BPO. Indeed, several respondents interviewed indicated they could not clearly differentiate major enterprise software vendors based on their specifi c capabilities to support BPO. Their selection of “clear value proposition” was driven by their existing vendor relationships more than by the vendors’ specifi cally articulated BPO capabilities. Product attributes that won the initial business, such as scalability, support for global operations, and specifi c functional capabilities, also are all valuable for many BPO buyers.
While it is important for BPO buyers and decision makers to account for existing enterprise software investments and respect existing IT strategies, they also must ensure they give appropriate consideration to new software alternatives as part of a BPO effort. BPO can provide a vehicle through which organizations can introduce new and improved IT capabilities to support a business process. It is also potentially a means to enable positive change in the existing IT environment. For example, supplier consolidation and rationalization can reduce the number of disparate or higher cost/lower performance legacy systems and provide access to next generation software and platform capabilities.
The provider’s IT choice also has signifi cant long-term implications. It builds the basis for the provider’s capability to leverage both best-in-class processes and technology investments across the client base. It serves as the basis for a deep and seamless integration between the provider and the customer, thereby impacting the cost and quality of
Reasons for Preferring an Enterprise Software Vendor - 2007
daily operations once the outsourced processes are up and running, The combination of these factors helps the provider increase the sustainability of the offerings, giving the buyer stability and security. The key is to understand and account for the benefi ts and costs of these opportunities, which is why the IT group can play a critical role in the BPO decision-making process as it relates to enterprise software.
Buyers that selected “service providers with different IT solutions will be considered as long as they meet some predefi ned criteria (e.g. interfaces to our retained IT landscape)” were then asked which enterprise software solutions they would consider for their BPO efforts. Note the wording was “consider” compared to “prefer” above. It is critical to note that respondents had the option (but not obligation) to select multiple answers to this question vs selecting just one in the table 2 question, hence the citations total more than 100 percent (see Figure 3). The sample size for this question was also smaller, making some of the comparisons more directional than statistically signifi cant.
Table 3: Software Solutions Considered for BPO
EquaTerra interprets that these buyers are more open to different enterprise software solutions to support their BPO efforts. Here Oracle fared slightly better than SAP, but overall respondents gave more enterprise software vendors consideration, which is expected with buyers less predisposed to a specifi c enterprise software solution
Enterprise Software Licensing Preferences in BPO Efforts
All respondents were queried about their preferences on holding the licenses for enterprise software applications in a BPO effort. The two main options for a buyer is to maintain
ownership and control of the enterprise software license themselves or have the BPO service provider hold the license. Respondents could select from four options regarding enterprise software licensing. Figure 11 represents combined HR and F&A responses for this question for both years of the market study. There were no signifi cant changes between the HR and F&A group. The total sample for 2007 and the ranking of the responses was the same for both 2007 and 2006 overall.
BPO buyers showed a slight preference overall for having the BPO service provider hold the enterprise software license. This was followed closely by continuing to hold the software licenses themselves. A large percentage of respondents, though, had no preference or “did not know” their preference relative to software licensing.
Control and fl exibility were the common reasons cited by respondents for preferring to hold the software license themselves. Buyers also wanted to guard against disruptions if the BPO service provider exited a market segment or was acquired, or the buyer made a decision in the future to bring outsourced work back in-house. Also, commonly cited was the practical reason that the enterprise software in question supported other, non-outsourced business processes.
As one buyer noted, “We are maintaining the license internally because our use of the software extends past potential BPO efforts and we want to maintain leverage [with the software vendor.]”
Another buyer highlights similar points, but also felt they have greater leverage with the enterprise software vendor, an opinion expressed by several larger, global buyer
organizations. “We have a stronger buying power with vendor due to our overall ERP software purchases. We want to maintain operational fl exibility to pursue other BPO or in-house options if needed.”
Respondents also were asked in both years’ market studies why they would prefer to have the BPO service provider hold the enterprise software license. Table four illustrates these preferences for both 2007 and 2006 for HR and F&A respondents. There were no signifi cant changes between the HR and F&A group. The total sample for 2007 and the ranking of the top four responses was the same for both 2007 and 2006 overall.
Table 4 - Reasons for BPO Service Provider to Hold Software License
“One stop shopping” was the commonly cited reason in both studies for the BPO service provider to hold the license. This was followed by balance sheet considerations. One stop shopping grew in importance for European respondents year over year, while balance sheet considerations declined for North American respondents, though sample size when cut to this level is somewhat small. Getting a better deal via the service provider or leveraging the service provider’s platform also were ranked, with the latter reason slipping year over year.
The dynamics and costs of enterprise software licensing in a BPO effort are changing and becoming more dynamic as BPO becomes more prevalent. Major BPO service providers are pushing software vendors for pricing concessions and changes in overall software licensing models as they gain scale and clout as major holders of software licenses. Vendors are responding with their own approaches while simultaneously enhancing software platforms to better support BPO and, in some cases, expanding their own service offerings. EquaTerra’s collective opinion is that SAP has made
more positive progress in terms of revising its licensing model to better support BPO. Oracle, however, has been focusing more intently on this area over the past 12-18 months. Buyers should monitor these developments and assess how they impact their own situation.
Key Buyer Take Aways
• Buyers generally have clear ideas on their preferences for enterprise software environments to support their BPO efforts. Leading ERP software vendors SAP and Oracle are cited most frequently as having a “clear value proposition” relative to BPO. While there is strong allegiance to commercial software vendors in BPO, most evidence shows it is based on prior decisions made on the software’s merits as an enterprise application suite, not on its specifi c capabilities to support BPO, though those initial considerations are equally important in BPO.
• BPO buyer preferences for enterprise software are strongly infl uenced by pre-existing decisions on what enterprise software is included in the corporate IT strategy and what software already is in use in the organization. While it is critical that buyers account for their current IT investment environment, they also must recognize opportunities to modify and improve their enterprise IT capabilities though a BPO effort.
• Buyer preferences for BPO IT solutions, based on commercial enterprise software applications, remain strong even though BPO service providers continue to push semi-proprietary software solutions or add-ons. Buyers must clearly assess the profi le of BPO service providers’ IT platform to understand the commercial and non-commercial/semi-proprietary components that comprise it.
Key Sources of Advice on IT and Enterprise Software for BPOThe fi ndings from this two-year market study highlight that BPO line-of-business decision makers recognize the importance of information technology overall and enterprise software in particular to the success of BPO efforts. A key issue, though, is how they respond to this recognition. Buyers need to educate themselves on their existing IT and
2007 - HR and F&A respondents only Total N Am Europe HR-Total FA-TotalOne Stop Shopping 55% 73% 70% 73% 71%Balance Sheet 32% 23% 20% 23% 21%Better Conditions via BPO SP 29% 19% 60% 41% 14%Leverage BPO SP's Platform 11% 15% 60% 32% 21%Other 0% 0% 0% 0% 0%
Total Respondents 36 26 10 22 14
2006 Total N Am Europe HR-Total FA-TotalOne Stop Shopping 63% 78% 27% 40% 22%Balance Sheet 47% 52% 36% 22% 30%Better Conditions via BPO SP 34% 37% 27% 20% 15%Leverage BPO SP's Platform 34% 33% 36% 13% 26%None of the Above 11% 0% 36% 4% 7%
enterprise software operating environment, understand what change could occur as a result of undertaking BPO and how to ensure that the change is for better, and determine how best to assess the IT capabilities of the service provider candidates. These needs create an educational requirement for the typical business unit decision maker.
A new question was added to the 2007 market study to better understand how BPO decision makers were educating themselves on the IT issues related to their BPO efforts. Figure 12 illustrates the common sources of advice that respondents sought when assessing the IT and enterprise software dimensions of BPO.
BPO buyers’ internal IT groups were the clear leading source of advice sought on IT as it relates to BPO. It was the only source cited by a majority of aggregate respondents. Individual groups of respondents all ranked the internal IT group fi rst, with the exception of European respondents that placed it second behind outsourcing consultants. Outsourcing and management consultants collectively were the next two leading sources of advice.
There were two classifi cations for independent software vendors/ISV’s: BPO specialists and their sales representatives and/or account teams. Separately, these two choices ranked near the bottom. However, counting respondents that selected one or the other choice raises the total to 28 percent, below internal IT groups and consultants but above BPO providers and IT analysts as sources of advice. IT industry analysts fared relatively low. While these groups potentially
have extensive IT related knowledge, they are not as active in the BPO space and are not a typical source of advice sought by line-of-business professionals in HR, F&A and procurement.
Though it is positive to note that BPO business unit buyers value and seek the advice of the IT group, it does put the onus on the IT group to respond accordingly and adequately. Once the IT group gets a seat at the BPO decision-making table, it must earn its right to stay there by showing it can add value to the process through a strong understanding of IT needs to support BPO and a solid process for vetting BPO service providers’ IT capabilities.
The same holds true for enterprise software vendors. They must ensure that the strategic BPO product direction, as well as specifi c BPO capabilities, are well understood by the client facing account teams. Feedback from respondent interviews in this study and other EquaTerra experiences suggest that often the enterprise software vendor’s account teams are only peripherally involved in BPO efforts and do not always have a strong message around their products’ BPO capabilities. There are obvious questions, though, as to whether a BPO service provider might prefer to exclude the ISV’s account team and/or whether the buyer adequately reaches out to include the ISV.
While enterprise software vendors, particularly SAP, are taking strategic BPO messages and value propositions to market, these efforts are not always reaching key business unit BPO decision makers. EquaTerra sees that buyers are more likely to recognize that SAP has developed a corporate BPO strategy over other enterprise software vendors and view that as a plus. This strategy and its meaning, however, must consistently make it down to account teams and key business unit decision makers. What this means for all enterprise software vendors is that they must develop and promote new technical product capabilities (e.g., governance, service level management, management tools) and deployment models (more compelling licensing models, etc.) that support BPO. They also must highlight existing product capabilities supporting often large, global BPO efforts.
Sources of Advice for IT Issues Related to BPO
13%
22%
24%
26%
40%
42%
58%
0% 10% 20% 30% 40% 50% 60% 70%
ISV's Sales Rep.
ISV’s BPO Specialist
IT Industry Analysts
BPO Provider
Management Consultant
Outsourcing Consultant
Internal IT Department
28% of respondents selected one orthe other of the ISV responses
• Business unit BPO buyers view the internal IT group as a key source of advice on IT issues relating to BPO. IT groups can play a key role in making IT related BPO decisions and assessing BPO service providers’ IT capabilities, but need to be ready to step up to the challenge or line-of-business decision makers will look elsewhere for help.
• BPO buyers are casting a wide net in seeking advice on IT as it relates to BPO, leveraging external consultants for support and also turning to enterprise software vendors. ISVs must work to ensure client facing account teams are fl uent in their fi rm’s overall BPO position and collective product capabilities supporting BPO to adequately satisfy buyer educational requirements.
• BPO buyer teams must work to defi ne the representative roles that each internal and external constituency will play in BPO sourcing and ongoing management efforts. While utilizing multiple sources of advice is recommended, buyers need a process to coordinate, leverage and manage support they receive from external sources.
Willingness to Adopt BPO Service Providers’ Standardized ProcessesFinally, respondents to this year’s study were asked about their willingness to transform existing processes across the HR, F&A and procurement functions to meet the best-practice standards proposed by the service provider. That is, adopt the service provider’s process model vs maintaining their own current process model.
It is also important to note that the adoption of standardized processes was not deemed critical to BPO success overall. This factor ranked last of those impacting BPO success in the 2007 study (see Figure 5 above). This is unfortunate because many challenges and problems BPO buyers and service providers face today are in part rooted in trying to enable too much customization and/or too little standardization and consistency across systems and processes. There is a real cost to both enable and support customization. Real ineffi ciencies
and inaccuracies can occur with non-standardized processes. Regulatory compliance costs and risks also can rise if adequate standardization is lacking.
Increased adoption of standardized processes potentially can lead to more successful BPO efforts for buyers by enabling them to leverage the service provider’s process effi ciency and economies of scale models. Standardization also could ease transition costs, pains and timeframes. Service providers would benefi t for similar reasons, as buyers also potentially achieve higher margins through standardization and process optimization. Their challenge, however, is that the lure of attempting to create “best-of-breed” processes is strong for both buyers and service providers. These best-of-breed solutions often are more expensive, have little leverage across multiple buyers, and prove diffi cult to maintain in a market-leading manner.
While adopting standardized processes was not ranked as a critical BPO success factor, respondents did show a willingness to – theoretically at least – adopt standardization within certain processes across functional areas addressed. These fi ndings indicate that while BPO buyers may not embrace standardization up front, there are opportunities to introduce greater levels of standardization over the life of the BPO effort. Table 5 illustrates process areas across each of the functions and the percentage of total respondents by function that indicated a willingness to standardize that process.
Procurement - Procurement IT 25% 25% 24% 26% 19% 26%
Total Respondents 141 96 45 57 52 27
Table 5: BPO Buyer Willingness by Process to Adopt SP’s Standardized Models – 2007
While all respondents were asked to select which processes they would be willing to standardize, the emphasis is on processes in each respondent’s own functional areas because that is where their opinions count more. This is highlighted by the coordinated colors in Table 5. Overall, HR respondents showed the greatest willingness to adopt BPO service providers’ standardized processes. This is likely a function of the relative greater maturity of the HRO market compared to that of FAO or procurement outsourcing, as well as the fact that key leading HRO service providers tout more standardized application models. Overall, though, the gap between willingness to adopt standardized models as part of a BPO effort and actually doing so remains large.
Key Buyer Take Aways
• BPO buyers do not view the adoption of BPO service providers’ standardized process models as a key factor impacting BPO success. It is not uncommon, however, for lack of standardization to negatively impact BPO efforts, both from a process effi ciency and cost as well as a service provider profi tability standpoint.
• BPO buyers in the HR business unit were the most open to potentially adopting BPO service providers’ standardized process models in their functional area. This is a result of the HRO market’s relative maturity and the go-to market strategy of some of the leading HRO service providers.
• While there always will remain a need for some level of customization, BPO buyers should more seriously explore where standardization can bring them greater benefi ts and improved costs, especially for processes that typically do not offer opportunities to create competitive differentiation.
ConclusionInformation technology plays a critical role in any BPO effort. It is the backbone that supports the transactional operations of outsourced business processes, as well as analysis, tracking and quality control efforts. IT is critical to supporting outsourcing management and governance efforts.
Given the importance of IT, organizations engaged in or pursuing BPO must ensure that they have the skills and take the time to adequately assess their IT options when it comes to BPO. This involves understanding the capabilities of their existing enterprise software environment to support BPO efforts and the future direction of their strategic IT vendors. Buyers also must assess and understand candidate BPO service providers’ IT application system capabilities, as well as their ability to support the buyer’s strategic IT vendor platform and systems. This includes reviewing current and likely future software licensing models and costs. Embedding IT requirements, needs and capabilities – and key representatives from the IT group – into BPO teams from the start will improve the likelihood of success for any organization undertaking BPO.
Organizations embarking on BPO also must strive to leverage existing investments and technologies. This is important not only from a cost standpoint, but also to maintain comfort levels associated with familiar IT applications and systems used in the past. That being said, organizations need to have decision-making processes in place to determine when it makes the most sense to move on to new platforms and technologies. This also should involve seriously assessing the value of potentially adopting service providers’ more standardized process models to improve effi ciencies, reduce costs and leverage best practices.
About EquaTerra EquaTerra (www.EquaTerra.com) is focused solely on providing global corporations with outsourcing and in-sourcing advisory, research and governance services that enable them to achieve services delivery excellence for their administrative processes. EquaTerra’s advisors average more than 20 years of industry, service provider and process experience with functional leadership in Finance & Accounting, HR, IT and Procurement, and have been involved in over 600 global business transformation, outsourcing and outsourcing management projects.
For more information on EquaTerra’s public sector capabilities, please contact Glenn Davidson at: [email protected] or +1 202.904.2311; or go to: www.EquaTerra.com.
For more information on EquaTerra’s research and knowledge services, please contact Stan Lepeak, at [email protected] or + 1 203.458.0677.
The information and charts below provide detailed information about the respondents of this study, including their: geography, BPO usage, industry representation, title, BPO decision-making role, and organization size and revenues.
Responses broken out by respondent geography and line of business unit (HR/Human Resources, FA/Finance and Accounting, and Prc/Procurement). Note that some samples for break-outs by process are relatively small limiting statistically signifi cant comparisons to total or larger samples and should be viewed as directional only.
Total N AmN Am - HR,
FA EuropeEur. - HR,
FA HR-Total FA-Total Prc-Total
In what areas of your organization do you currently use BPO? (Please select all that apply.)
When deciding to partner with a specifi c BPO service provider how important of a factor was/will be the enterprise software platform used by the service provider? (Please select only one.)
Must Support Specifi c Solution 26% 24% 22% 32% 28% 29% 19% 33%
Whose advice would your organization seek relative to assessing the information technology platform and related deployment options for BPO? (Please select all that apply.)
Ability of the service provider to meet cost reduction goals 27% 25% 21% 31% 27% 23% 23% 44%
Ability of service provider to leverage information technology 21% 25% 25% 13% 18% 21% 25% 11%
Ability of service provider to meet process improvement goals 26% 24% 24% 29% 27% 28% 21% 26%
Customer adopting standardized best-practice processes as set by the outsourcing service provider 14% 13% 11% 18% 24% 18% 12% 4%
Ability of client and service provider to meet regulatory compliance requirements (e.g., Sarbanes Oxley, Basel II, HIPAA)
19%
23% 22% 9% 12% 16% 23% 11%
Other 0% 0% 0% 0% 0% 0% 0% 0%
Respondent Total 149 104 76 45 33 57 52 27
How important is the IT solution used by the BPO provider for the success of BPO engagements? (Please rank on 1-5 scale with 1 being not at all important and 5 being very important.)
3.73 3.73 3.78 3.74 3.61 3.77 3.68 3.96
Respondent Total 147 104 72 43 31 53 50 26
How important do you feel that outsourcing management and governance is to the success of an outsourcing effort? (Please rank on a 1-5 scale with 1 being not at all important and 5 being very important.)
In which of the process areas listed below would your organization be willing to transform existing processes to meet the best-practice standards proposed by the service provider (i.e. adopt the service provider’s process model vs. maintaining your current
