HOME | ABOUT US | CONSULTING | RESEARCH INSTITUTE | JOURNAL | EUROPE | PAPERS | SUPPLIERS | FOCUS AREAS | EVENTS | NEWS | CONTACT US

Current Stories
More Stories

Shared Services for General and Administrative Functions: Deciding Between Internal and Outsourced Models

Secrets to Mid-Market HR Outsourcing Success

Refining the business process outsourcing process: the value of talent management

How a Tight Collaboration Between Software Vendor, BPO Provider and Customer Improves BPO Service Delivery

BPO: The Year Ahead- A Perspective on Evolving Worldwide Requirements

Best-of-Breed, Software-on-Demand, and Integrated ERP Suites - What is Best for BPO?

An Investor's Guide to BPO Economics

Location Optimization - Perspectives on Delivery Center Locations for BPO - Central & Eastern Europe (CEE)

Consolidation in the Utility Industry

Best Practices: Selecting a BPO Service Supplier

Emergence of the Mid-Market in Business Process Outsourcing

Key Challenges in Transitioning BPO Projects

Business Process Outsourcing: Taking the Lead with IT

In Part 2 in December's BPO Outsourcing Journal, we defined the term "transaction engine." Transaction engines have emerged in BPO to provide solutions to repetitive activities. These engines incorporate labor arbitrage and economies of scale into the leverage (creation of benefits) provided by the solution. Additionally, repetitive activities in a transaction engine include both "automated" activities (clear rules) and "analysis activities" (some level of judgment). As a result, transaction engines can capture additional synergies through self-service and appropriately grouping processes to capture cross-process synergies. Here is a profile of the different types of transaction engines that are emerging.

The Landscape of Transaction Engines

Transaction engines should be analyzed using two primary dimensions:

1. Maturity of the solution provided by the transaction engine.
2. Relative importance of labor arbitrage to improve the overall value proposition of the solution.

The maturity of a transaction engine relates to the degree to which the solution has been "packaged" to become a standardized and repeatable platform across multiple customers (versus being highly customized for each customer). To become mature, a solution must identify the critical components of the processes that can be used across different customers and then build the solution to provide this platform. The more mature the solution, the greater the benefit to buyers of the solution because:

• The supplier's solution can be used "off the shelf," eliminating the need to invest in building a solution for the next customer and more efficiently spreading the benefit of ongoing investments in the solution to all customers of the solution.
• More of the process can be built around principles of self-service, which further improves the value proposition. Self-service can both decrease the cost of the process (e.g., shifting work to employees or customers) and improve the service levels of the solution (e.g., information is more readily available, transactions can be completed quickly and easily).
• A common platform provides additional opportunities to aggregate the procurement of services and products (e.g., tax filing, COBRA administration, employee benefits) within the solution, thereby helping achieve greater purchasing power on behalf of all customers of the solution.

Not surprisingly, transaction engine solutions often reach maturity when focused on an industry with common issues, conventions and sub-processes around which the solution can be built. Accordingly, finance and accounting (F&A) solutions, which must often reflect the differences of industries (e.g., revenue recognition rules, accounting conventions), are typically not as mature as human resources (HR) solutions, which focus on processes that tend to be more common across industries (e.g., maintaining employee records, payroll, managing benefits).

Depending upon the labor content in the scope of work, labor arbitrage becomes more or less important to developing a powerful transaction engine. In some cases, the relatively small share of labor in the overall cost structure of a transaction engine suggests little, if any, offshore labor components. For those processes with significant labor requirements, effectively utilizing offshore approaches has become a strategic imperative.

Given this understanding of the two primary dimensions that help define transaction engines, we will now review four examples of transaction engines.

Example #1: TPA for Life Insurance Policies

Third-Party Administration (TPA) for servicing customers of life insurance policies is among the oldest and most mature of transaction engines, although historically not broadly utilized. This is on the verge of changing significantly.

For many years life insurance companies have used TPA suppliers to take over "closed book" policies (often acquired during a merger, bankruptcy or market exit) or to provide the initial support for entering new markets that do not yet warrant significant investment on the part of the insurance provider. This modest use of an outsourced TPA solution was driven by the economic case in which transition costs generally outweighed the modest ongoing cost savings. The exceptions were situations in which investment was required regardless of who supported the ongoing solution.

Since TPA has a tremendous component of labor, the emergence of labor arbitrage is fundamentally changing the ongoing cost structure, thereby altering the economic case to favor outsourced solutions.

Example #2: Human Resources

HR transaction engines are reaching maturity, although they typically do not merit the same level of offshore labor arbitrage as TPA. The rapid emergence of broad, multi-process HR solutions has been aided by the fact that companies have outsourced a subset of the broad solution processes--like payroll and benefits administration--for some time. The solutions of Accenture and Exult are the furthest along on this path.

Exult's myHRSM toolkit has basically reached "plug and play" status for those companies willing to implement a solution that can be shared basically "as-is." This solution is highly automated and built upon self-service principles, thereby limiting the amount of labor content required to deliver the overall solution. Exult conducts much of the application development and maintenance of the solution offshore but operates its call center support in the United States.

Kevin Campbell, Exult Chief Operating Officer, says, "While each client has different needs for its self-service HR applications, we've found large employers desire many of the same functions. myHR's flexible tool kit allows us to quickly enhance the employee/manager experience without re-inventing the wheel each time. And because we have experience implementing self-service across multiple clients, we apply the cumulative lessons learned to continually enhance the speed and ease of use of each new implementation."

Indeed, the ability to reduce customization of existing solutions is an important driver for capturing value. According to Glenn Davidson, head of marketing for Accenture HR Services, "The less customization required by the client, the better the solution's economics."

Besides those suppliers that already have leverageable, multi-customer solutions, other suppliers are in the process of aggressively building their own solutions. A good example is ACS's acquisition of Motorola's business. Over time, ACS will seek to take this customized solution and convert it into a more broadly applicable option.

Example #3: Finance and Accounting

No mature transaction engine has yet emerged in the F&A space, although a number of solutions are starting to take form. For example, IBM is currently serving a number of customers out of its Tulsa operations center. The typical solution supports accounts payable, accounts receivable, general ledger, financial reporting, and other processes.

F&A transaction engines should emerge more slowly than their HR counterparts for two reasons:

1. Many F&A processes are specific to individual industries, thereby requiring a longer timeframe to develop sufficient scale within an industry.
2. A significant portion of F&A processes contain significant labor components, thereby compelling providers to eventually establish offshore capabilities. In some cases this is being done from the inception of the solution, in other cases providers are evaluating how to move existing solutions offshore.

As an example of the industry-specific nature of F&A solutions, many providers are creating "revenue cycle management" capabilities for the healthcare industry. The solutions seek to dramatically shorten the cycle time from provision of services to reimbursement from insurance companies while also capturing a higher yield of reimbursement--clear value add to the bottom line.

Other industries for which specific solutions are being discussed include the oil and gas sector (complicated mineral rights and revenue recognition issues) and the railway sector (tracking the financials off hand-offs of freight between different railroads).

Example #4: Procurement

Many F&A transaction engines are being developed with an end goal of reaching deeply into procurement processes to create even more leverage from the solution. These solutions are clearly amongst the most nascent in the marketplace. However, Everest Group has seen the potential for tremendous value creation from these solutions--in some cases exceeding $100 million per year. The nature of procurement functions suggests that these solutions have the potential to mature rather quickly (comparatively easy to leverage across industries), but will not be significantly impacted by labor arbitrage (automated nature of solutions minimize the labor component of the process).

Typically these solutions are designed to address two issues: the cost of the item being purchased and the cost of procurement transaction itself. Although few in number, these solutions can generally be utilized across industries, thereby gaining tremendous purchasing power for the provider and providing broad visibility into demand for balancing the flow of goods and services. This allows the outsourcing provider to reduce the total cost of the item being purchased.

Additionally, by implementing a highly automated transaction interface, the provider gains the benefit of a lower cost purchasing interface. This interface, often in a self-service arrangement, provides two other ancillary benefits that help drive down the cost of the purchased items.

The first ancillary benefit is that the automated interface facilitates analysis of spend, thereby supporting negotiations with vendors, aggregation of spend across vendors, and many other efforts focused on decreasing the cost of purchased materials (e.g., capture of volume discounts). The second ancillary benefit is that the self-service nature of the automated engine facilitates greater compliance from across the organization, thereby ensuring benefits of vendor relationships are captured and bring even more volume into the system.

Transaction engines are powerful new solutions, although the maturity of different transaction engines varies widely. Potential buyers of outsourcing services should carefully investigate which options are available to them and how the engines might mature to provide increased benefits over time.

Lessons from the Outsourcing Journal:

• Transaction engines can be characterized by their degree of maturity and the relative importance of labor arbitrage in the solution.
• Solutions that must be created for specific industries develop differently than those that have broad application across industries.
• Third-party administration of life insurance policies and HR are two areas in which solutions are most mature, while F&A and procurement are much earlier in their development.

Publish Date: March 2003

For more information...
Printer friendly...

Related Articles
Part 1: What's Driving the Growth of BPO?: The Impact of Labor Arbitrage
Part 2: What's Driving the Growth of BPO?: The Emergence of Transaction Engines

Copyright © 2003 - Everest Partners, L.P.

[Previous Story] [Next Story]