Back-office bump: Business process outsourcing ramps faster on globalization trends
Globalization of key business processes in finance and other back-office areas is expected to continue to see strong growth over the next three years, with companies increasing their use of offshore resources by more than 50 percent.
These findings are part of a Hackett Group 2008 Globalization Performance Study , said to be one of the first to capture the same information from companies using leading business process outsourcers (BPO) and those operating their own captive shared service centers in India and other low-cost labor markets.
The study confirms companies can generate fairly comparable cost savings with either globalization approach, with most companies driving cost reductions of 25 percent to 50 percent. But Hackett’s research also spotlights some stark differences between BPOs and captives. BPOs ramp up twice as quickly as captives, and are twice as likely to exceed expectations for on-time service delivery levels. As a result, BPOs also see much faster benefits realization, showing a five-year Net Present Value that is more than 50 percent higher.
BPOs fall far short in their goal of driving innovation, the study found. Captives are significantly more successful, but still show room for improvement. According to Hackett, companies need to change the way they plan for, contract, and implement BPO services initiatives to improve performance in this key area.
Atlanta-based Hackett’s research also found that globalization remains a largely cost-driven process. While process improvement, the ability to focus on the core business, and quality were all cited as “Important” decision drivers, only cost was identified by the study group as being “very important”.
According to Hackett research, a typical Global 1000 company (with $23.4 billion in revenue) can generate annual savings of nearly $200 million by taking a lift-and-shift approach to back-office globalization while implementing transformation efforts.
“With this study, we began from the assumption that globalization has become a mainstream practice over the past five years, and is now an integral part of most large companies’ service delivery model strategies for their G&A operations,” says Hackett Chief Research Officer Michel Janssen. “So we wanted to take the unique approach of designing a study that could capture the same information from both BPOs and captives. In the end we surveyed almost 50 companies in a diverse array of industries. More than 70 percent of them had revenue greater than $5 billion, and they were globalizing a range of different functions, including finance, procurement, HR, and customer service.
”We found several strong pieces of good news in our results,” continues Janssen. “First, companies expect to significantly expand their use of offshoring over the next three years. By 2010, these companies have told us that nearly a third of all their transactional staff in finance will be based in low-cost labor markets. Our study also found both BPOs and captives are capable of generating rather dramatic, and fairly comparable, cost savings.”
Hackett also recently launched a new Service Center Benchmark designed to help BPOs and captives objectively assess the efficiency and effectiveness of their operations in relation to both their peers and other service delivery models. The benchmark center helps companies better understand the drivers of overall and process costs, FTE usage, and value in their service center. It enables companies to reduce costs and improve service through the use of relevant best practices employed by world-class companies identified in Hackett’s ongoing benchmark programs and other service centers.
Companies also can use the benchmark to evaluate how location is impacting performance, and what the impact would be of moving to lower-cost geographies. Finally, the benchmark can help companies evaluate the benefit delivered by their current service delivery model, and build a business case for more extensive use of shared services, offshore captives, or additional outsourcing.