Business Process Outsourcing

Computerworld - Many IT professionals are familiar with the term business process outsourcing (BPO), but knowing how to distinguish it from other types of outsourcing requires some scrutiny—somewhat like discerning between two political candidates with similar campaign messages.

Though some forms of BPO may include both IT management and business operations, the approach is primarily about turning over functions such as payroll, accounting, billing or even real estate management to a third party.

Though these business processes may depend on IT, they are separate functions from core IT operations, such as data center activities or network management.

Different Skill Sets

David Schnitt, CEO of Ledgent Inc., a finance and human resources outsourcing provider in Torrance, Calif., says the skills required to manage technology are different from those needed to manage business processes. An IT outsourcer focuses on IT life cycle management and PC uptime, whereas a BPO vendor manages people and processes.

That's why vendors "pay strong attention to employee transitioning" when they manage a firm's business processes, says Rebecca Scholl, an analyst at Dataquest in San Jose. "A vendor should have a strategy for the people [it's] replacing, a change-management strategy," she says.

The same holds true for the customer company. For instance, Charlotte, N.C.-based Bank of America Corp. appointed Mary Lou Cagle to head its business transformation efforts when it signed a memorandum of understanding with Irvine, Calif.-based Exult Inc. last October to manage the bank's accounts payable and human resources activities under a 10-year, $1 billion agreement.

Part of Cagle's responsibilities involves putting together a team including representatives from both the bank and the outsourcing firm.

As evidenced by Bank of America's contract with Exult, BPO is big business—and getting bigger. According to Dataquest, the worldwide BPO market is expected to triple by 2004, reaching $301 billion.

It's important for companies to recognize their core competencies compared with activities that could be handled more efficiently by a third party, says Charles Kafoglis, a partner at PricewaterhouseCoopers in New York.

For example, back-office functions such as payroll or accounts receivables aren't likely to "make or break" a company, so it might make sense to farm them out if someone else can support them more effectively, says Kafoglis.

Mark Hodges, vice president of corporate development at Exult, says that Global 500 firms spend between $50 million and $100 million per year in a typical BPO deal.

Hard to Quantify Savings