Business Process Outsourcing in the Digital Age

In an age of rapid digital transformation, what is the role of outsourcing for activities such as finance, HR, procurement or IT? Until now, many organizations have seen business process outsourcing (BPO) as a good way to significantly enhance their cost base and capabilities. However, digital transformation is upending assumptions about the future of work and the speed and cost of getting there. Is BPO yesterday’s solution?

In our view, BPO continues to be very relevant for companies looking to improve their back-office operations. Digital transformation can be complex and risky, and outsourcing partnerships can provide the expertise and commercial structure for bringing about the radical change that digital promises. Not all organizations will have the scale or skills to make digital work without a long-term partner.

The BPO landscape, however, is changing. In fact, the entire sector is undergoing a major transformation in terms of capabilities and expectations, as this report explains.

Digital: A New Business Landscape

There has been much discussion about digital transformation: how it is changing the way companies deliver vital business processes such as finance, HR, IT, procurement and operations, and how it is elevating the potential for performance improvement.

The Hackett Group’s digital transformation framework highlights six trends that are reshaping today’s business services environment, making the need for back-office transformation more urgent than ever.

Most of the debate around digital transformation is about organizations tapping into these benefits directly, building up capabilities in-house in shared services and global business services (GBS) organizations. Few are talking about the role business process outsourcing arrangements have to play in this new digital landscape.

The Tide is Turning: BPO is Becoming Digital

The Hackett Group’s view is that after a slow start, many players in the BPO market are coming to grips with digital-age expectations and becoming true digital partners. Consider these examples:

• Case 1, Radical resizing with RPA – In one recently negotiated finance BPO deal, the supplier agreed to reduce the service headcount by 50% over three years through the systematic implementation of robotic process automation. In essence, the client and supplier are dramatically transforming the labor/technology mix of a major deal, enabled by a new digital technology. This rate of change is totally different to the norm for “old BPO.”
• Case 2, Payment by results for customer contact services – Rather than pricing a customer-contact service in terms of calls handled or hours worked, some contact-center BPO deals are being realigned to focus on payment for business outcomes – such as revenue generated. For example, the provider will only receive payment if and when its agents generate incremental revenue from customer calls. To make this happen, the contact BPO provider must rapidly bring to bear the integrated applications, information, and insights necessary to sell and cross-sell through their customer-contact activities. In other words, the outsourcing partner isn’t just providing people; it is providing people empowered by analytics and insights derived from digital data.
• Case 3, Predictive crime prevention through analytics – Building on a long-term operations outsourcing relationship, a BPO developed a new analytics capability for the client, a police force. Using new predictive analytics technology and techniques to crunch through crime and incident data gathered as part of the main outsourcing arrangement, the partnership enabled the client to predict crime hot spots. This fed directly into daily patrol activities to preempt burglaries and maximize the impact of policing spend. In this case, the BPO provider is using brand new technology to completely change the delivery of a public service.

These are game-changing examples of BPO delivery, driven by the new possibilities and expectations of the digital age. At present, these examples are still the exception rather than the rule. Many existing BPO deals are old-fashioned labor-heavy, tech-light contracts. But the rate of change is accelerating, and these examples show that BPO can be a key part of digital transformation, not a barrier.

Two forces – changing client expectations and supplier competition – are the primary drivers for this acceleration of digital BPO. Today’s companies don’t just aspire to see value from emerging technology through their outsourcing arrangements. They are starting to demand it.

In addition to changing expectations, supplier competition is also heating up. Many BPO suppliers have been building up their digital assets, expertise and experience in order to stand out in the market. In an otherwise commoditizing BPO marketplace with falling margins, suppliers that are not able to offer clients good answers to their digital challenges are now beginning to find themselves on the sidelines in BPO bids and renewals. One indicator of this is that BPO providers are restructuring their businesses, acquiring specialist skills or setting up training academies in areas such as analytics, social, mobile, digital marketing and design thinking. BPO organization structures are changing to respond to buyers such as chief digital officers or heads of automation.

Value Drivers For Current and Next-generation Contracts

The Hackett Group’s 2020 Business Process and IT Outsourcing Study assessed the importance of certain outsourcing value drivers for the current and next contract cycle. While value drivers are shifting back to a focus on labor arbitrage, clients also expect more innovation through digital technology. With respect to current contracts, access to low-cost and skilled labor and freeing up internal resources are the primary value drivers.

In the study, technology and information-related value drivers were of lesser importance for current contracts but will increase significantly in importance in the next renewal cycle as clients begin to understand emerging technologies better and expect them to deliver innovation and value. Companies are prioritizing these value-adding capabilities over tools that primarily drive transactional performance and improvement. Also customer-centricity, a key tenet of digital transformation, increases significantly in importance.

Why BPO and Digital?

Underlying continued appeal of business process outsourcing is the fact that digital transformation is not easy. It requires specialist knowledge of new tools and techniques, expertise in the complex business of change and transformation, deep insights into the process in scope, and the discipline and nerve to take on uncertainty and risk – as the outcomes of digital transformation are not guaranteed.

A BPO partner provides an alternative route to digital transformation than “going it alone” or working with a short-term implementation partner (as opposed to an outsourcer that also provides “run” services). A BPO partner can combine deep digital experience – both specific technical skills, as well as the bigger picture of applying large-scale digital change.

Ultimately an organization’s route to digital transformation will depend on a complex mix of factors and quite possibly include a blend of these three different routes. The key is that BPO offers an alternative option where the learning curve is particularly steep and the client has the skills needed to make a complex outsourcing relationship work.

The Changing BPO Landscape

Business process outsourcing will remain a relevant, often compelling, option for companies pursuing digital transformation – but it will not be BPO “as usual,” for several reasons:

• Market. The BPO marketplace is in a state of flux. “Traditional” BPO organizations still dominate the market, but many others, including start-ups specializing in areas such as robotic process automation or analytics, are joining them. Moreover, this market is evolving continuously as the giants move to establish their own cutting-edge technical capabilities, some by acquiring smaller companies or forming alliances. Outsourcing buyers should expect this marketplace to continue changing as rapidly as the pace of technological change, itself.
• Scoping. There will be changes to where the red line is drawn between a company and its outsourcing partner. In some cases, automation and the focus on developing new strategic capabilities will result in work being brought in-house; in other cases, it will be the opposite. As the economics and mechanics of finance, HR, IT and procurement delivery change, so too will the handoffs between client and supplier. For example, in finance transaction processing, after automating activities in AP reconciliation or master data management, it may no longer make economic sense to outsource the remaining supervisory roles related to this work. Alternatively the opposite could be true, with automation resulting in a pocket of work that now can be handed off to a BPO provider. The key is that digital transformation is changing the border between in-house and outsourcing services.
• Contracting. As outsourcing becomes as much about buying technology and innovation as it is about buying people, companies negotiating BPO deals are finding themselves navigating uncharted water. Future outsourcing arrangements may involve a more complex mix of partners, bringing technology vendors into the picture alongside the client-supplier relationship, either as subcontractors or as partners. Sometimes all of this may be invisible to the client. Digital will, however, require clients to become very familiar with players and capabilities in new market segments.
• Contract duration. The business landscape is changing rapidly, so signing long, fixed deals becomes ever less attractive. Expect to see shorter contracts and/or contracts with more built-in flexibility. Deals will be less “static,” with more specification of how the nature of services can flex over the term of the contract. For example, the concept of robotic process automation is only a few years old and didn’t exist when many current BPO deals were signed. Digital BPO deals need to be able to take advantage of such new opportunities “in flight.”
• Resourcing levels. Digital BPO deals will be less people-intensive and more technology-intensive. Technologies such RPA and cognitive automation take on the workload of many transactional tasks and some judgmental tasks. Research by Aecus Limited (now a Hackett Group company) found that RPA-powered BPO deals signed today include contractual commitments by suppliers to provide year-on-year headcount efficiencies three times higher than the long-term historical level. BPO deals will require significantly lower staffing within a few years, as per Case 1 above.
• Total cost/price per transaction. BPO pricing levels haven’t changed much over the past decade, but this is starting to shift dramatically, driven by the factors above. The total cost of finance, HR, IT, procurement and operational activities will drop significantly, reflected also in a lower cost per transaction. In this environment, BPO companies will shift their focus away from maximizing gross service revenue to increasing the profitability and business impact of their services to clients (e.g., helping clients to increase quality, satisfaction and revenue growth).
• Location. In turn, increased automation may also challenge the concept of offshoring, as automation reduces the relevance of locating resources in low-cost locations. As automation reduces the overall size of BPO deals in terms of headcount, the remaining resources will be increasingly focused on high-value expert roles. Labor rates will continue to be important, but the BPO value proposition will be less focused on lowest-cost labor and more on insight, expertise and technology.

by Martijn Geerling and Paul Morrison of The Hackett Group
Available for download with permission.