Multi-process HRSourcing

Study: Many Potential Buyers Stay out of Market over Concerns about Delivery

BPO contract awards in North America during the past two years have not matched industry expectations as the market continues to show signs of slowing growth, a new study released from NelsonHall has found. The value of BPO TCV (total contract value) awarded has declined by approximately 50 percent in North America from a peak of $15.4 billion in the 12-month period ending September 2004 to $7.5 billion for the 12- month period ending September 2006.

Some of this decline can be attributed to political factors, but capability factors are also critical. NelsonHall research has now identified that no action is taken in one-quarter of sourcing evaluations where BPO and use of captive centers are evaluated. Contracts are not awarded in 30 percent of instances where BPO is evaluated.

Sourcing managers expect that the level of BPO contract awards arising from sourcing evaluations will increase in future. However, for this increase in activity to occur vendors will need to meet sourcing manager expectations by improving their BPO delivery capability. In particular, they will need to meet the following conditions:

—Improved process operations knowledge;
—Proven cost reduction capability;
—Improved offshore location mix and delivery capability.

Eighty percent of U.S. sourcing managers state that lack of process operations knowledge within the vendor has led to rejection of BPO. Contrary to popular expectation, sourcing managers select BPO over use of captive centers to achieve access to superior expertise, particularly process expertise, to drive an increase in service quality. Where cost reduction is required without an accompanying improvement in existing processes andservice quality, then U.S. sourcing managers will often favor use of captive centers in order to minimize cost and avoid payment of margin to vendors. Therefore, superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present.

The research also identified that vendors frequently fail to justify the levels of cost reduction promised during the bidding focus. Vendors are offering cost savings but two-thirds of sourcing managers have rejected BPO as a sourcing option because of a lack of belief in the vendor’s ability to deliver the cost savings promised, which again can be attributed to a failure to demonstrate deep process operations knowledge.

Vendors also need to improve their offshore location mix and delivery capability and should not impose locations on their clients. India and China seem destined to be the major offshore powerhouses for the foreseeable future, but both these locations currently have limitations and vendors need to offer a wider range of geographic options as well as enhancing their capabilities in India and China.

At the moment, it is difficult to find locations with high all-round skills. While India scores highly with U.S. sourcing managers in terms of process transfer and take-on skills, it lags behind Latin American countries such as Brazil and Mexico in terms of cultural compatibility. However, these Latin American countries, like China, are perceived by U.S. sourcing managers to lag behind India in the development of industry-specific process knowledge.

Tags: Multi-process HR, Sourcing

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