The business process outsourcing (BPO) market is one that is still relatively immature, particularly when compared to the IT outsourcing (ITO) market. Often businesses that enter into a potential BPO deal have a relatively limited knowledge of procuring those services and as a result use specialist advisors such as TPI, Everest, KPMG (who acquired EquaTerra in early 2011), Nelson Hall etc to advise them on the procurement of those services.
One of the implications of this is that the market for BPO services is very well understood and well analysed, and that tenders when they come to market are usually to be well structured and well planned, which allows us to analyse trends as they apply to that market.
Size of the market and the likely growth
The market analysis by TPI for 2009, published in 2010, (the 2011 market analysis, for 2010 is still being collated), is a good source to see these trends for Procurement BPO.
If we look at deals in excess of $25m total contact value (which I believe makes up 80-90% of the market by value), the total value of contract awards (TCV=total contract value) in the IT Outsourcing (ITO) and BPO markets in 2009 was approximately US$74.5B. The BPO portion of this is approximately 25% at approximately $18.5bn. That is approximately $18.5bn of BPO contracts were let in 2009, which will run over the course of the life of the deals, typically over 3-7 years.
The table below shows this analysis in more detail:
Table: Contract Volume and Award Value by Contract Scope, TCV >$25M (TPI 2010)
The most mature of the BPO markets are customer contact outsourcing (CCO), financial services outsourcing (FSO), human resources outsourcing (HRO) and finance and administration outsourcing (FAO). Each of these four markets has matured beyond a point of critical mass of supply and demand, and can be said to have reached the “Tipping Point”.
The phrase “Tipping Point” was popularised by Malcolm Gladwell in his book, The Tipping Point: How Little Things Can Make a Big Difference. In this “must read” book (published by Little Brown), Malcolm Gladwell talks about the point at which a trend which may only have a short life span tips and becomes an epidemic on a global scale, i.e. in commercial terms how a fashion or trend become permanent feature of the business world.
Each of the larger four markets BPO finance & administration, customer contact, financial services and HR have passed the point at which they have tipped and are here to stay, and are all forecasting healthy growth rates for the next five years.
The BPO Procurement market is starting from a smaller base. TPI Momentum’s analysis of the 2009 BPO Procurement market is $778m (see table below), showing Annual Contract Value (ACV) for deals over $25m. The market and has been growing at between 30 and 40% over the last five years. Forecasts for the next five years are also varied with no consensus on the expected growth rates.
Table: Cumulative ACV of Active BPO Contracts by Service Line ($US Millions)
What services are included in a Procurement BPO deal?
Procurement BPO deals typically have one or more of the following components (unsurprisingly aligned to the services that a typical procurement department will provide):
- Strategic sourcing – the negotiation of new contracts with suppliers, typically in accordance with the commodity or the overall procurement strategy.
- Many providers offer this service local to the client, where buyers are close to the client and familiar with the supply market. Some offer this service from low cost locations and some offer a hybrid of this model with a local front office supported by Centre of Expertise (COE) in a low cost country (typically Far East locations such as The Philippines, China or India).
- Category management – the development and execution of category strategies, management of the contracts and suppliers and tactical sourcing, to ensure that the benefits identified are delivered through active compliance management. This is often not differentiated from strategic sourcing in Procurement BPO deals.
- Many providers deliver this service locally on site with the business, supported by regional delivery centres although some deliver this from low cost, typically Far East locations.
- Tactical procurement (spot buying) – the management of spot buying for high value and unusual items through a buy desk. This is usually augmented with a front office which supports employees and supplier contact in local languages.
- This is typically provided regionally from regional deliver centres in Eastern Europe, Latin America and Asia Pacific.
- Transactional procurement – the management of the requisitions and PO process plus master data management and query management that supports employees and supplier contact in local languages.
- This is typically provided regionally for voice contact and regionally or in a low cost region for transactional elements.
- Compliance management – active reporting on and management of compliance. Often involves interaction with HR to drive changes in, or compliance to, HR policies.
- Compliance reporting is typically executed in low costs locations; often compliance consequence management is done locally in concert with the category managers, finance and HR.
- Reporting – provision of management information for sourcing, category management, compliance management and supplier management. This is typically delivered from a low cost Far East location.
As the BPO procurement market matures, the services that are being bought are growing up the value chain, with current interest in strategic procurement outsourcing from companies through the world.
The business case for BPO Procurement differs from traditional Finance & Administration (F&A)
The business case for traditional Finance & Administration business process outsourcing is well proven; typically the service can be delivered as effectively, i.e. with no worsening in quality of service, and more efficiently in a lower cost location, typically with an improved system of controls.
The majority of the business case is a combination of efficiency, centralisation, standardisation, process improvement and automation coupled with labour arbitrage benefits of low cost locations. The combination of these levers can often bring benefits of 40-50% on original cost.
However, the business case for procurement is about sourcing and compliance savings, i.e. effectiveness savings (doing it better or in the case of procurement buying the same or better for less), which can dwarf the efficiency savings (doing it quicker or cheaper). Also the efficiency savings in procurement are often less (perhaps 20-30%) as the resources will need to be located across regional locations, to support language requirements, not just in Far Eastern low cost locations, hence average saving will be less than the 40-50% above.
Figure : Example BPO Procurement Business Case
I therefore believe that a most portion of the benefit from outsourcing can come from sourcing savings and in particular through better compliance management.
However, it is critical to approach the design of the outsource in a way that maximises the efficiency (process) savings and maximise the (sourcing) effectiveness savings. You can construct a business case for Procurement BPO on efficiency savings, but you will sell it to the business on effectiveness savings.
The group of eligible suppliers is growing
In my personal opinion, in early 2008 the only credible global providers of BPO procurement services were Accenture and IBM. Since then, the market has been maturing through partnership, merger and acquisition and organic growth.
- Having acquired IBX, the European procurement services and SaaS technology business in 2010, Capgemini signed a deal with Kraft to outsource all of category management, operational procurement and eProcurement for North America indirect spend, combining the provision of Procurement BPO with on demand technology.
- GenPact has had a successful partnership with ICG Commerce since April 2008, which has brought two powerful players together to market,
- In addition to GenPact, the other pure play Indian providers are placing great focus on procurement, with most of the pricing deals aggressively to win business and grow their practice.
- Niche players, such as Xchanging, are also performing well in the market, with L’Oreal outsourcing strategic procurement spend to Xchanging in the last month.
As a result, the BPO Procurement supply market is maturing and there are more eligible suppliers who will compete for potential business, which makes it easier for customers to move into the market, confident about supplier price and capability.
2010 and 2011 has seen the announcement of a number of key new contracts in Procurement BPO, with several customers being prepared to outsourcing large areas of strategic sourcing spend, and with many others outsourcing operational procurement and spot buying. There are also several European and US based corporates currently in the market to outsource some or all of their indirect procurement activities, hence we will see more announcements in 2011 and 2012, some potentially of very large scale.
Whether this results in a Tipping Point of for Procurement BPO will depend on whether CPOs and their chosen BPO solution provider, can provide a compelling proposition to their business that locks in the sourcing value required, whilst at the same time developing a business case that is self funding on cost, which also offers the flexibility to enhances the business’ ability to survive in this difficult market.