I spent the day yesterday discussing BPO, Business Process Outsourcing, an area I haven’t touched on for a while.
BPO is a logical extension of Business Process Re-engineering, Business Process Improvement and Business Transformation, and are major contracts of faith as the outsourcee is cutting out a major part of their business. Not a platform, but a whole process including employees, technology, buildings, offices and more in many cases.
What is the rationale?
For the outsourcer, it’s to take over a slice of business and get customers locked into an annuity business. For the outsourcee, it’s to reduce costs and ensure part of the business where they have limited expertise is looked after by the expert.
However, because of the specialisation in process, BPO is a really fragmented market. For example, looking around the landscape of BPO providers, it’s pretty clear that there are divides along regional, national and business sector specialisations.
This fragmentation is obvious as a firm cannot bid for outsourcing business processes where they have no knowledge or expertise. As a result, BPO is a market full of niche firms that support specialist processes in areas where they have traditional focus and expertise.
For example, take Unisys’ biggest BPO contract: IPSL, Intelligent Processing Solutions Ltd. Created in partnership with Lloyds TSB and Barclays a decade ago, the aim was to provide a cheque clearing firm for UK banks. Ten years later, that’s what it does for most of the UK banks, except Royal Bank of Scotland who went with EDS.
The rationale for getting into cheque processing was clear for Unisys, as they had provided cheque processing solutions for years before and were easily qualified to offer a service for running this business therefore.
They also thought this was a great deal – a $1 billion contract for ten years. Hence, it was a no-brainer to get into BPO for cheque processing and the contract was not only their biggest, but also viewed as extremely lucrative and long-term. It was great for an annuity business. However, once negotiated, they discovered how fraught with challenge and issue such contracts become.
For example, five years later, the firm was struggling and found it had created a business with margins pretty much shot to pieces. Trying to renegotiate mid-term is not a good move, and the banks who were co-owners and co-founders played hard ball in re-negotiating the contract terms before end of contract.
This is pretty typical of BPO contracts, where the vendors enter the deal with rose-tinted glasses. They think it’s a business they know well and can lock-in the customer to long-term contracts. Years later, the contracts are handcuffs and the customer has the vendor locked in.
Meanwhile, when contracts come up for renewal, it begs the question: where else can the outsourcee go? Who else knows this business as well as the incumbent specialist?
For all these reasons, the BPO market has been growing, but the landscape is fragmented with firms such as Xchanging specialists in securities processing and First Data in cards processing.
That’s why there are no global leaders in this space as it is a market based upon pure specialisation in those business processes and trust in the provider’s knowledge of that area. Once that trust is in play to outsource a key business area, such as cheque, cards or securities processing, it would be very unusual for a change in policy or provider.