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Business Process Outsourcing: Taking the Lead with IT

Companies that have decided to outsource debate the best way to proceed. Should they outsource their IT departments first? Or, should they outsource a particular business process and carve out the IT that powers it?

At Everest, we believe there's a clear answer to that question. BPO processes will lead the charge. History explains why.

In 1965 the U.S. Congress debated a piece of legislation that eventually created Medicare, a health insurance program for people over 65 and citizens with certain physical disabilities. While the debate raged, Ross Perot, the founder of EDS, an IT and BPO services provider now based in Plano, Texas, had his staff work on developing an integrated system to process the anticipated health insurance claims that would result from this system for Texas Blue Shield.

Congress created Medicare on December 29, 1965. The new Act assigned Medicaid administration to the nation's Blue Shield plans.

The law went into effect three days later, on January 1, 1966. The state of Texas was ready, thanks to the EDS software. It paid its first Medicare claim on January 4. The other 49 states had a problem; they now had a need to process these claims but did not have the tools to do so. EDS stepped into the breach, contracting to process claims for a fixed fee that was well below the states' estimated cost.

Say hello to business process outsourcing. The process came first, leaving the underlying technology to the discretion of the service provider. EDS was able to speak with C-level executives about a serious business problem and had a cost effective, ready-to-implement solution.

The Growth of ITO

As service providers felt the pressure to grow revenues, these companies first turned to system integration. Later, they sold their technical expertise, installing and operating IT infrastructures and developing applications to grow their business and ITO was born.

Businesses realized that operating an IT infrastructure was not core to their value but essential to their operation. They were comfortable outsourcing their IT infrastructures to an expert who would guarantee their computers would work at least 99 percent of the time. Similarly, keeping large staffs of programmers and continually educating these employees was an expense that people preferred to buy as a professional service on an as needed basis. ITO grew in popularity and eventually became an accepted business practice addressing operational efficiency issues. This was a reasonably compelling value proposition as long as IT operational problems impacted business operations.

Today, however, computer reliability is no longer a problem. Once you have constant, continual uninterrupted service, you stop thinking about it. ITO's success has made it a commodity. Currently, dozens of different service providers have similar IT offerings. There are buyers who are still shopping, but about 75 percent of the market has already outsourced some aspect of its IT. They can now relegate the effort to their purchasing departments.

BPO Gets to the Core of the Business

Today, BPO addresses an enterprise's fundamental challenge: How do its executives take a process that's important to the company's operation and make it more effective and at the same time lower the cost? This is the same issue that occurred with IT. In the current economic environment, everyone needs cost savings, but they also have significant processes that need to be more efficient and effective.

Several provider firms are coming to market with offerings that promise to meet all these needs, just as EDS did in the late '60's with healthcare claims processing. Service providers are offering to reduce the cost and improve the service levels of key processes such as finance, accounting, human resources (HR) and purchasing, etc.

Service providers specializing in BPO can now talk to a company's leadership about what's important to them. BPO providers are promising solutions to real problems that C-level executives can relate to. Today, firms like Nike have become huge successes without owning a manufacturing plant. Nowadays it doesn't seem strange to outsource your accounting.

What's the Best Way to Outsource a Process?

However, in our modern world almost every process relies on an IT enabler. Companies regard the degree of integration across processes as a good thing. They invested in ERP systems to gain efficiencies across the enterprise. If a company is using an enterprise resource planning (ERP) system, then the process selected to outsource is probably being supported by the ERP system.

On the other hand, the service provider usually has a common system designed to achieve the gains its customers desire. A BPO outsourcing initiative has to protect those gains.

This produces an inherent conflict. For example, how do you outsource HR if your HR module is part of SAP but your HR service provider uses PeopleSoft or Oracle? An interface is the only way to link the two systems. Interfaces create additional points for failure, Buyers have to do a tradeoff analysis before deciding on a course of action. To date, there is no preferred solution to this problem.

Maybe the Darwinian process will force service providers to become experts at Oracle, PeopleSoft and SAP, operating all three seamlessly. Or perhaps someone will invent a universal adaptor, and the interface issues will go away.

The jury's still out on this question. BPO is still in its infancy, so time will settle on an accepted best practice. But the marketplace has already determined that BPO is driving IT decisions, not the other way around.

What is clear is that gaining efficiencies, while reducing cost, is of interest to C-level executives. These goals will cause BPO to drive IT decisions, not the other way around. Serious executives are always interested in new innovative solutions to real world problems. Just like in the '60's.

Lessons from the Outsourcing Journal:

• BPO is driving IT decisions. Two big reasons for this: ITO has become a commodity and BPO addresses profitability and survival questions for C-level executives.
• What's the best way to pull IT out of an ERP system when outsourcing a process? The market has no clear-cut answer...yet.

Publish Date: February 2003

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Copyright © 2003 - Everest Partners, L.P.

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