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Are Companies Considering the Risks of BPO?

In our recent study of Business Process Outsourcing Trends, we identified a number of other interesting trends.  First, roughly 50% of companies surveyed have continued to maintain their current back office functions locally insourced, and have focused on improving these processes through continuous improvement.  A second group (roughly 25-40%) have developed consolidated and technology-enabled service centers, especially for functions such as IT, voice services, accounting, HR, and legal.  Of the remaining companies, roughly 16-20% have actively pursued offshore but insourced centers, with legal services of contracts being the most prevalent of these.  A number of new BPO providers now provide contract management services, especially for minor back-office services such as NDA’s, patent processing and terms and conditions.  Only a small minority of companies (6-8%) have actively engaged third-party offshore BPO partners to manage their back-office functions.  This suggests that there is still a lot of room for growth for providers of back-office BPO service providers.  Although significant outsourcing has occurred in certain segments such as financial services and hotel/travel services, much of this activity has focused on the major banks and global players, with significant room for activity on the part of mid-sized companies.

Risks of BPO

By far, the biggest risks to outsourcing include the hidden costs of outsourcing, the loss of visibility and control of processes, and the potential impact to customer satisfaction and push-back from customers.  Organizations struggle to deal with the latter issue, as it becomes increasingly difficult to mask the fact to a customer that they are dealing with a third party in a low cost country location.  This issue can be overcome with significant training and localization of outsourcing centers.  Despite the importance of this risk, only 27% of firms had any type of formal plan in place to manage this issue.

Loss of visibility to the process is a risk that is also difficult to mitigate.  The only solution here is a deliberate and longitudinal effort to transition processes in a defined and sustainable manner.  There are also unforeseen consequences when individuals in a center are asked to suddenly change uniforms and work under a different boss.  Again, only one-third of firms had formal plans in place to address loss of visibility and control, a fact that may explain the number of botched BPO events that occurred in previous years.

Hidden costs are another component of BPO that are a major risk and which are often not considered in the initial business case development.  Here again, firms have not taken this seriously, and have relied on “informal” planning to take care of these issues.

Together, these data provide a sobering picture:  while organizations recognize the risks to customers, increased costs, and loss of control of processes, most have not adopted formal risk plans to address these!  This suggests that there is still a relative lackadaisical approach to transitioning processes, and there may be room for unexpected costs that prevent business case projections from materializing.  Indeed, our case studies also suggest that this is the case, as the payback period for many outsourcing deals fail to materialize due to unexpected costs arising.

It is also surprising that there was a low recognition and planning for other BPO risks such as loss of core competence, public reaction, and changes in tax regulation.  The most common forms of risk planning involved plans to reduce the loss of customer data and internal business data.  While this is certainly a valid concern, the issue of public reaction against the brand, impact on company culture, and customer satisfaction are relatively low on the planning spectrum.  This suggests that there is still a somewhat naïve approach to BPO in use, and that the area is still in a nascent stage.  Our data also found that managers feel the risks are especially prevalent on a regional basis, with Asia, Africa, the Middle East, and Latin America high on the list of risky places to outsource business processes.