Finance: What's Next in Global Business Services?
HfS Research and KPMG’s Shared Services & Outsourcing advisory team led a webinar earlier today that reviewed the results of recent surveys and provided some helpful analyses to F&A leaders evaluating the efficiency of their sourcing strategies. While cost savings are still on agendas, of course, for many of the second and third generation ITO/BPO customers, the focus is now well beyond that.
The traditional outsourcing model for cost arbitrage is generally gone; in its place is a focus on improving the capabilities of core services. What's new about this is that the F&A function is being used to make a firm more competitive and to drive innovation through its operations.
In terms of cost reduction levers, we were shown a chart which outlined BPR as accounting for 10-25% of potential cost reduction; automation accounting for 10-60%; location 10-65%; IT operations 10-20%; and continuous improvement 3-8%. In other words: traditional low hanging fruit tends to be around leveraging labor arbitrage and automation, which is where the big savings are. As we move forward and as many firms have taken steps to lock in these savings, continuous improvement is one of the areas from which we can expect to drive further value.
And while traditional drivers for outsourcing focused on talent, cost reduction, labor arbitrage, and technological upgrades – i.e. cost, emerging drivers are: risk mitigation, better customer experience, cloud impact, big data/analytics, and innovation; in other words the focus has shifted firmly to "value." In the same vein, where in the past the focus was on process and transaction, today it is on leveraging analytics, knowledge, and industry- or process-expertise. It’s about really understanding what's going on in the business. Supporting this shift is the fact that 43% of companies are looking for "increased global flexibility from outsourcing, meaning the capability to scale for growth opportunities [SSON has been covering similar trends in our interviews with leading buy-side practitioners].
What is noteworthy is that industries going through the greatest "secular" change – i.e. the biggest upheaval in their known business parameters – are more focused on leveraging outsourcing solutions over inhouse shared services to benefit from the capabilities on offer in support of adapting to the new market environments or regulations. The entertainment/media/publishing industry, for example, which has undergone tremendous upheavals, is looking to outsourcing to help it adjust (33% pro-outsourcing, vs 13% pro-shared services). Similarly, the financial industry, which has experienced enormous changes in terms of regulation and compliance, shows a 25% reliance on outsourcing and only 11% reliance on shared services. On the other hand, the consumer packaged goods industry, where business is relatively unchanged, has 31% relying on shared services, and only 18% on outsourcing.
When we look at newer, first-time buyers of BPO, what's interesting is that functions like "procurement and sourcing" are leaning towards outsourcing [22%] versus shared services [15%]; this results from the relatively low level of FTE involvement and higher automation factor within procurement. By comparison, the relatively labor-intensive F&A processes show a fair balance of 17% for shared services and outsourcing. Where "expertise" is recognized as a value-add factor, there's a tendency to lean on outsourcing with specialized BPO partners to leverage knowledge services.
Another interesting trend is the shift from off shoring to nearshoring, in support of scalability as well as to rebalance the sourcing equation. Some of the limiting factors for offshoring work, according to a recent survey between HfS Research and the London School of Economics, relate to the lower levels of satisfaction clients are experiencing with "non-US" staff services. When it comes to factors like "understanding my business", "taking initiative", "being innovative", and "cultural understanding" … offshore/non-US staff scored significantly worse across the board than onshore staff. This is not news: for a long time we've been aware of the fact that although the transactional and cost-based elements of offshored work are significant, when it comes to cultural issues, business understanding, and customer relationships onshore service has tended to outweigh offshore service. What’s happening now is we are witnessing a backlash – slow but steady.
What’s also emerged is that BPO is no longer seen as a single, dominant solution. Rather it's now recognized as a vehicle enabling global finance to run successfully. The HfS/London School of Economics survey shows buyers to be, on balance, happier with a hybrid framework than only outsourcing or shared services models. The hybrid approach, in fact, outperforms across every of the following sectors: driving data transparency, driving compliance and regulation, freeing up the retained function for added value work, etc.
And some more good news: contrary to generally held expectations, the F&A market is nowhere near reaching maturity. Today, even in functions like payroll and P2P, which lend themselves easily, and with obvious advantage, to BPO, 40% of payroll is still run in-house, and 50% of P2P is still inhouse. The same goes for recruiting and staffing functions. The conclusions drawn are as follows: Companies that build shared services are not necessarily reaping all the rewards as hoped, despite their significant investments. Many are still struggling to transition all the work into shared services that they want. That, in part, explains the adoption of outsourcing in what we term "hybrid" solutions. In other words: if you can't get to where you want with your shared services then implement outsourcing to get you there.
What's also been a bit disappointing is achieving the "innovation" that customers hope for. Similarly, more than 30% of organizations profess themselves as disappointed in achieving technological innovations as a result of outsourcing, whereas when it comes to achieving cost cuts, 95% are satisfied with results.
Comparing BPO across large enterprises (US$3bn+) and the mid-sized market (US$1-3bn), what stands out is that the midmarket outperforms the high end in terms of its satisfaction with outsourcing results. This is generally because the midmarket has taken outsourcing on wholeheartedly, not piece by piece – as tends to be the case with enterprise adoptions. As a result, the benefits are more impressive. Also interesting is that large enterprises are relying more on advisors to help steer their BPO activities. The percentage of US3bn+ enterprises looking to advisors for support in their BPO decisions has doubled from 26% in 2010, to 50% today.
Finally: who are the big players? Well, no great surprises there. Despite the growth of smaller and niche BPO providers, IBM and Accenture together still account for 40% of the total F&A BPO market (IBM has 16%, Accenture 25%). Genpact has 11% of the market, and, also noteworthy: Capgemini’s recent aggressive approach has paid off as he firm ties Genpact in third place, also with 11% of the market. Perhaps unsurprisingly, with IBM and Accenture being so influential, a quarter of all outsourced contracts are single-sourced (ie relying on existing relationships), three quarters are now put out to competitive bidding. Contracts are smaller in size (average US$18millio) than in the past, but this level has stabilized after dropping.
If you have the time it's well worth 60 minutes to watch the webinar.