BPO Value Proposition Is Starting to Change

Customers, not providers, are determining HRO offerings. Find out how, why, and what you can do to keep up.

by Mark Hodges

BPO providers have enjoyed a boom in business during the last five years as the U.S. economy has endured a recession. Most BPO providers have positioned cost savings and economics as their primary value proposition to their prospective clients. Why? Because it has been incredibly effective. The opportunity of capturing cost savings of 20 to 30 percent over the lifetime of the outsourcing contract has been extremely compelling to corporations looking to dramatically reduce their cost structure.

WHAT DO YOU WANT TO REAP?

Interestingly, during the past two years, EquaTerra has observed its clients rank cost savings as the third most important BPO provider selection criterion, not the first. The number-one decision criterion is confidence in the providers ability to achieve the desired future state for the business function in question. The second most important deciding factor is the chemistry and cultural fit of the BPO providers delivery team. If cost savings can only attain the third position during poor economic times, where is it likely to be ranked if the economy improves?

KEEP GROWING YOUR BPO If the U.S. economy continues to improve, it wont be long before prospective BPO buyers begin placing other decision criteria above the financial case. During economic growth, expect prospective buyers to look for new capabilities, flexibility, and increased capacity from BPO providers.

There are qualifications that corporations may seek during times of good economic performance that they would be willing to pay someone else to provide as opposed to building themselves. In response, BPO providers may enhance their offerings to include improved self-service applications and automation, robust workflow, and flexible IT infrastructure. Other areas of focus may include industry and process best practices, improved quality through Six Sigma techniques, multilingual skills, and processing centers that operate seven days a week in multiple geographies, 24 hours a day.

Economic growth requires corporations to add capacity across a number of dimensions. BPO can provide extra capacity for joint ventures, entry into new geographic markets, and the launch of new lines of business without the internal fixed cost. Adding capacity can materially impact speed to market as wella benefit corporations appreciate when they are racing for market share in crowded markets. Growth objectives often fundamentally change how capital is allocated in a publicly traded corporation away from internal projects and toward market facing products, services, and ventures. This change in capital allocation drives BPO growth, but the value proposition is different than what BPO providers often communicate today.

PLANTING FOR NEXT SEASON

During the last two quarters, EquaTerra witnessed certain BPO buyers sign agreements with financial benefits representing less than a 10 percent annual cost savings. Why? Because the providers introduced new capabilities and added extra capacity.

If this becomes a trend, BPO providers will have to quickly reposition their sales proposition accordingly. Selling the benefits of new capabilities and extra capacity will be challenging at first, but actually delivering these benefits will be even more difficult. Supplying cost savings via a BPO service-delivery model is straightforward because the improvement levers are clearconsolidation, documentation, rationalization, automation, offshoring, economies of scale, etc. Delivering the promise of flexibility, industry best practices, and other transformed service delivery mechanisms is much more difficult than delivering pure cost savings. Some BPO providers will not be able to make this change and stories bemoaning the unfilled promises of outsourcing will likely follow and be retold in the public eye.

Cost savings and compelling economics will always be important decision criteria, but they are not likely to be the decisive criteria during good economic times.