BPO Deals in the Downturn

With top-line prospects dimming, companies are taking another look at outsourcing their back office functions to cut costs and protect profitability. We asked Archstone Consulting principals Mark Schmeling, CFO advisory services practice leader, and Maureen Piche, business process outsourcing (BPO) practice leader, for their insights into the BPO option now.

BF: As companies respond to the downturn, are they stepping up their purchases of F&A outsourcing services?

Maureen Piche: The largest companies have been outsourcing some or all of their back office for a few years now. They were the early adopters, either through pure outsourcing or captives. We're now seeing more of the Fortune 500 and mid-tier companies seriously considering it, if they're not already in the process. Outsourcing has become a game changer; as soon as one company outsources and significantly reduces its operating expenses, its peer group feels the pressure.

Given the recent economic trends, outsourcing is a strategic imperative for many companies. They can't afford to get stuck in strategic review mode. The clock is ticking.

Business Finance: How quickly can a company push through, say, a limited F&A offshoring project -- fast enough to make a tangible difference within the likely duration of the downturn?

MP: It depends on the complexity of the processes and systems as well as multi-national complexities, but a limited F&A deal could be aggressively executed in, say, three to six months. And the transition would take about six to eight weeks before you'd realize any benefit.

But there are risks inherent in rushing to contract. Proper data gathering, detailed statements of work, service level agreements and due diligence are critical for a successful BPO contract. Rushing the process usually ends in post-contract negotiations and resolution of issues, at which point much of your negotiating leverage has been eliminated.

BF: Given that transactional volume in some processes might decline because of the slowdown, isn't that a good reason to hold off on a deal for now?

Mark Schmeling: One of the key aspects of any outsourcing initiative is to provide a flexible back office that accommodates business cycles -- up or down. That helps companies increase or decrease resources according to market conditions.

Most contracts incorporate a range of transaction volume, and within that range the supplier can't change the pricing; they have to meet the contractual SLAs. If the volumes move drastically lower -- or higher, when business recovers -- there are mechanisms built into the contract to capture that. A properly negotiated contract that includes those mechanisms along with pre-negotiated rates to calculate the impact of any changes should make a company feel comfortable that the planned economics will be achieved, regardless of transaction volumes.

BF: Is there a chance that some of the BPO providers themselves might disappear because of the downturn?

MP: We may see some consolidation among the smaller Tier II or Tier III providers, but market downturns are usually strong conditions for outsourcing.

We do see three major challenges for the BPO providers. First, they need to keep finding new supplies of cost-competitive, educated, and multilingual talent. The supply and demand factors are already driving up rates. So now we're seeing Vietnam and the Philippines begin to emerge as new pools of talent, as well as a critical element of a "follow-the-sun" service strategy.

The second big challenge is in ensuring process and protocol standardization as they expand around the world. Who and where a call is being answered should be virtually transparent to the customer.

And the third is in moving up the value chain of services. Up till now, the predominant services being outsourced have been routine transactions such as A/P and payroll, IT infrastructure management, application development, help desk, and so on. We're now seeing the demand for more value-based services such as category management for procurement, application management, legal services, and engineering services.

BF: If there's a need for bigger cost reductions now, is there a stronger case for taking a more transformational approach rather than doing a bare-bones type of deal?

MS: The answer really depends on the starting point for a particular company. If you've already transformed your back office through shared services and standardized processes and technology platforms, then a lift-and-shift approach is appropriate -- you can still achieve some respectable cost savings purely from labor arbitrage, and then incorporate other productivity improvements over the life of the contract.

However, many companies still haven't gone through that type of transformation. Because of multiple acquisitions over the past several years, or just lack of attention, their back offices are still decentralized, running non-standard processes on different platforms -- or spreadsheets. These organizations can greatly benefit from a transformational type of structure that includes the labor arbitrage benefit compounded by process and platform standardization.