The strong growth of BPO market activity continues.
EquaTerra surveys those on the front lines of the BPO and ITO industries-its own advisors and industry service providers-on a quarterly basis to gain in-the-field insights into sector trends and projections. The results of our most recent “Pulse Surveys,” covering Q2 2005 activity and projections for Q3 2005, were released in July 2005. Here are some key findings.
Of the polled advisors, 72 percent reported an increase in demand for BPO and ITO services in Q2 2005, a decrease from the 83 percent rate reported in Q1 2005; 28 percent cited flat demand, an increase from 17 percent in Q1 2005. For the third straight quarter, no advisors felt demand had decreased. Of service providers polled, 75 percent reported a pipeline increase in Q2 2005 over Q1 2005, while 25 percent cited flat pipelines.
Within HRO, payroll and benefits administration were cited as the two areas with strongest demand, by 80 percent and 66 percent of advisors, respectively. These two areas swapped positions from Q1 2005. HR IT remained strong (58 percent), followed by compensation administration (31 percent). These results were similar to those for service providers polled, though compensation fared lower (13 percent), and recruiting (38 percent) and learning and training (25 percent) fared higher with service providers.
Within FAO, AP was again cited as the leading sub-process area by an overwhelming 95 percent of advisors. After AP, AR/credit and collections (70 percent), travel and entertainment (56 percent), and general accounting (41 percent) were the most active areas and retained their positions relative to the Q1 2005 surveys.
Both the outsourcing sales cycle and time-to-contract continued to stabilize in Q2 2005 over Q1 2005. EquaTerra defines time-to-contract as the period from the release of the RFP to actual contract signing.Time-to-contract remained the same according to 74 percent of advisors, representing a modest increase over the last two quarters (64 percent in Q1 2005 and 59 percent in Q4 2004), 20 percent cited a decline in time-to-contract (versus 30 percent in Q1 2005), and 6 percent noted an increase.
In our experience, the average length of the sales cycle is nine to 12 months, while time-to-contract is typically four to five months. However, sales cycles vary significantly depending on process areas, clients, providers, and advisors. Sales cycles are much more variable than time-to-contract.
There is much debate in the BPO industry over different models by which to deliver services and the degree to which process “transformation” is a desired and viable element of BPO. While the concept of transformation is compelling to buyers, there is uncertainty over what it means, and how BPO can enable its achievement.
EquaTerra polled advisors on which delivery models buyers preferred for BPO services-ranging from the traditional lift and shift through transformational outsourcing, including an option to transform first and outsource later. Outsource and transform were cited as the leading model by 36 percent of advisors, followed by the more incremental outsource and continuous process improvement at 30 percent. Outsource and maintain or lift and shift lagged at 18 percent, while transform first and then outsource–arguably the safest but most challenging approach–came in at 16 percent. These findings closely mirrored our Q1 2005 results.
Investment and skills in the form of people and processes to adequately perform relationship management and governance (RMG) for outsourcing arrangements is one area where buyers and service providers are often lacking. The general rule of thumb is that organizations should spend 3 to 5 percent of the annual cost of an outsourcing engagement on RMG, the bulk of which is personnel cost.
EquaTerra advisors reported similar RMG spend levels for Q2 2005 over Q1 2005: 44 percent (compared to 51 percent in Q1 2005) cited that buyers were spending in the favored 3 to 5 percent range, while 28 percent reported higher spend levels (compared to 20 percent in Q1 2005). These higher-than-normal levels are in part due to the use of a sourcing advisor who can help buyers define and rationalize this investment. They are also a result of the maturity level and outsourcing experience of the buying organization and the process areas involved. Its important to note that the recommended and preferred RMG spend also varies based on the size of the deal, its complexity, whats being outsourced, and the degree of multishore components.
The bottom line to all these numbers? The outsourcing industry is experiencing healthy yet slowing growth, and HR, F&A, and IT are all strong performers.