Outsourcing: A Review of Trends and Some Management Issues

Article excerpt

Trends in outsourcing show that it is not only for the 'back offices' of banks and insurance companies, but that to be effective it has to be properly managed and founded on an appropriate relationship between client and provider.

Outsourcing is going from strength to strength with the Management Consulting Association reporting an upsurge of consultancy spend on that activity in the third quarter of 2003 of more than 20% of total income of the Association's membership.

Engaging in BPO (business process outsourcing) is akin to the 'make or buy' decision that managers are familiar with. The difference being that instead of deciding to make or buy a widget there is a contract with an external organisation to take responsibility for the provision of services of a business process or function. To take an example from a company which is a household name, BT has outsourced its property operation valued at £2.38bn to take it off the balance sheet and reduce its debt mountain. Telereal, the outsource provider bought 5,800 properties from BT, most of which were leased back on a contract to run for 30 years. Staff were, at the same time, transferred from BT to Telereal.

Trends in BPO

Trends in BPO may be analysed in terms of its extent, the functions involved and geographical destination.

That BPO activity is making increasing demands on the management consultancy industry has already been mentioned. It has also been reported that more than half of 'The Times top 100 companies' have chosen to outsource routine business functions. In the retail financial services sector 20,000 jobs have already reportedly moved to India with a further 40,000 in life and pensions and general insurance and 60,000 in banking likely to move in the next three to five years.

In the US the picture is the same, with a compound growth of more than 30% over the last five years. Sanmina-SCI Corporation (an electronics contract manufacturer with IBM as a client) has shown growth well in excess of that industry overall, and is able to provide considerable 'economies of scale' to companies in the electronics sphere.

BPO outside manufacturing has been made possible by improved computing and communications technology. Unsurprisingly early outsourcing activity focused on routine operations such as transaction processing like funds transfer - credit cards, mortgage handling, insurance policy administration and electronic banking helpdesking are prime examples.

A more recent trend has been along what is known as the 'knowledge continuum' or 'value chain' and embraces tasks which are non-routine and nearer the core of a business.

The outsource provider Evalueserve, which is headquartered in Bermuda undertakes projects involving the evaluation of the commercial prospects of inventions, provides research for hedge-fund databases and industry developments for a market research firm among others. Interestingly though, a recent review of HR activity in the UK revealed that some of the jobs had come back 'in-house' as technological developments have made for more effective e-HR within organisations.

Outsourcing offshore is an important trend in BPO with India frequently cited as the overseas destination. India is a major provider of IT-enabled services, particularly in the call centre industry and has seen the level of business grow dramatically over the past four years (70% during 2001 - 2002 amounting to an income of $1.46bn). Revenue is expected to rise to $16.94bn by 2008 with the country having captured 10% of the global market and employing possibly over one million people. Lower cost and improved quality are 'drivers' at the transactions end of the knowledge continuum. Labour costs are a fraction of what they are in the UK and the US and India has a large number of high quality English speaking university graduates.

Other countries also offer offshore outsourcing potential including Barbados, China, the Czech Republic, Mexico and the Philippines. …