In an economic downturn, the natural reaction of most companies is to cut costs. Following the largest global recession for a generation, revenues for many have dropped so severely that overheads, especially labour, must be reduced immediately.
However, for companies with some financial flexibility, there is another way. By applying tighter scrutiny to investments and only implementing initiatives that generate immediate return, companies can position themselves to leap ahead of competitors when the upturn comes.
In an ideal world, companies would do both. Business Process Outsourcing (BPO) provides a way to address both objectives, generating immediate cash while improving business flexibility, operational health and scalability for the future.
Re-Setting Expectations
Today’s economic reality is clearly far removed from the strong and sustained growth we experienced at the start of the decade. Real growth will be harder to achieve, even after faith returns to markets, and in many industries expectations need to be quite dramatically re-set.
Businesses facing the toughest challenge are those with inflexible operational models, such as manufacturers, while those that can respond quickly to changes in demand or supply are in a better position to adapt and survive. In this environment, BPO’s ability to offer a fast, efficient route to flexibility and scalability has meant that the industry has continued to grow, despite the downturn.
BPO: Spending Less To Gain More
BPO involves handing over all or part of a particular business process to a service provider who has access to greater scale, cost efficiencies and technological capabilities, giving a valuable advantage in the marketplace while freeing up an organisation’s internal resources to focus on core capabilities.
BPO has been called “back-office outsourcing” because it often involves processes related to traditional back office functions such as finance, accounting, payroll, and HR. However, in recent years a growing number of analytical, knowledge-based functions have begun to be outsourced, contributing to the industry’s overall growth. These tasks include: claims processing and fraud detection for insurance companies; store operations for retail companies; and clinical data management for pharmaceutical companies.
But how can a company decide if a business process should be outsourced? The first step is to look at how competitors perform in the same area. Aggressive benchmarking and comparison can help companies to assess whether their organisation is the same, better or worse than its rivals at a particular function, and therefore determine what is most beneficial to outsource. As a result of the downturn, many companies that are currently looking to rationalise costs have already started this process.
Generating Immediate Cash
The first benefit that BPO offers is immediate cash and a longer-term advantage. On that critical level alone, a BPO strategy can prove attractive.
Decreased demand has had an impact on the revenues of many companies, damaging their ability to repay debt and support overheads. BPO gives them a mechanism for immediately increasing cash flow. Traditionally, the return on outsourcing was a long-term consideration, often measured in years, if at all. Indeed, a recent survey[1] we commissioned revealed that less than half of CIOs and CFOs have ever tried to quantify the financial contribution of outsourcing to their businesses. Today, because of greater efficiencies and the ability of the large providers to offer global delivery of outsourced projects, cash flow improvements routinely happen within months. In our experience, clients can now save in the range of 30% to 60% off their baseline costs within the first year.
For example, we worked with a leading video rental company that was going through significant restructuring in response to market changes such as the rise of video-on-demand in PCs and TV. With in-store traffic declining, a rapid reduction in overheads was required, so our aim was to achieve a major decrease in retail store support costs within six months.
By outsourcing the systems that provide live, 24/7 support to stores in areas such as merchandising and point-of-sale systems, we were able to achieve immediate cost savings of more than 40%. We were also able to introduce productivity gains through process centralisation, improvements in workflow and call queuing, providing additional savings of 10%. As a result, the company has been able to reinvest funds into its own direct-to-consumer initiatives, strengthening its positioning in the rapidly changing consumer entertainment space.
But what about the upfront investment in BPO? After all, the transition of knowledge associated with any BPO initiative involves execution costs for both the client and the outsourcing partner. To alleviate this, providers can now structure contracts so the cash flow benefits start immediately without an undue capital burden. With larger BPO projects it is often possible to arrange payments over the life of an outsourcing contract, allowing for more cash flexibility. Furthermore, the outsourcing partner may sometimes be willing to recoup transition costs by bundling them into the price of services rendered, which are often hourly resource-based or transaction based.
Scaling To Demand
Another challenge for companies as we come out of the downturn is the agility to respond to unpredictable market conditions without knowing when demand will return, or by how much. Having fixed overheads is costly during quiet periods, and conversely, service suffers during peaks of activity. Utililsing transaction-based pricing provides a solution for companies to manage these fluctuations in demand more effectively.
One example is claims processing, which can be costly when done in-house. Because an outsourcing partner can share work from many customers across its entire workforce, it can absorb fluctuations in volume and maintain a steady demand profile, meaning that it can charge a fixed fee per claim. Similar approaches have thrived in areas such as airline seat pricing and healthcare claims processing, where seasonal spikes are common. This way, costs that were once fixed can become variable.
Even though BPO is a well established practice, there is still a tremendous amount of potential in the back office realm. In banking, insurance, retail, manufacturing and healthcare there are still many fixed processing costs being paid, regardless of volume. Those costs can be ‘variablised’ by a BPO partner, providing a powerful competitive lever during critical periods.
New Levels of Value
There are a number of other major advantages that make BPO even more valuable as the world economy slowly comes out of recession.
Firstly, BPO is an obvious way to improve business performance. In addition, given the sophistication of today’s BPO organisations, even more value is being uncovered each year as discipline, quality and speed continue to be improved by competition in the marketplace.
Service-level agreements have also improved. In the early years of outsourcing, SLAs were normally stick-driven agreements which penalised performance that fell below the agreed-upon level. Today, they resemble stick-and-carrot agreements that offer financial incentives when vendors exceed expected performance. As a result this makes outsourcing partners an extension of the client’s own workforce, working together to achieve beyond the agreed level. When that happens, both parties benefit.
Time to market has also decreased dramatically, because providers are now able to offer global delivery of projects, with resources covering practically all global time zones. Routinely, the same work is now done in India, Eastern Europe, Mexico and China. While companies working in-house have a window of eight hours during the work day, a global outsourcing organisation can perform the same task around the clock by as many trained people as are needed. That’s at least a 300% advantage in processing speed.
Positioning To Win
Many of the benefits of BPO that generate immediate advantage also help strengthen companies for the future. Low-cost operations, greater flexibility and scalability, faster time to market, greater discipline, round-the-clock processing, continuous technology development and new profit centres are all ongoing. To be able to take advantage of these possibilities in the aftermath of an economic downturn can be an extraordinary advantage as the inevitable upturn becomes reality.
Leaders don’t stop investing in their future. According to BusinessWeek magazine’s 2009 Innovation Survey, many multinational companies, including Microsoft and GE, continue to maintain aggressive R&D spending through the downside of business cycles. BPO can yield both the cash and human resources needed for future-looking initiatives, so businesses should consider now the potential benefits that can be realised. Reallocating an organisation’s best talent to revenue-generating projects, or ones that will help drive market-share gains when the upturn comes, makes a lot of sense, especially if they can save money in the meantime.
