Global BPO Index from NelsonHall reveals increasing emphasis on procurement, HR and F&A; industry-specific services seen key to future market growth
Boston — October 19, 2006 — Global business process outsourcing activity picked up in the third quarter, overcoming a disappointing first quarter so that global BPO contract value increased two percent in the first nine months of 2006, according to a report from BPO analyst firm NelsonHall.
The findings came in NelsonHall's recently released "3rd Quarter Global BPO Index," the latest edition of the firm's ongoing monitor of the health of the BPO market.
The level of contract activity in the third quarter of this year exceeded those in Q3 for each of the three previous years, the report states. However, the health of the BPO market is currently much stronger in Europe than in the United States. In the first nine months of 2006, NelsonHall's research shows that the level of BPO activity in Europe was high, growing by 34 percent, in contrast to the level of activity in North America, down 26 percent.
Increased Emphasis on Support Functions
The significant change in the BPO market lies in the increased emphasis on outsourcing the support functions of procurement, human resources (HR) and finance and administration (F&A). In the 12 months ending September 2005, these functions accounted for 24 percent of BPO contract value, yet in the 12 months ending September 2006 they accounted for 36 percent of BPO contract value.
NelsonHall suggested that this is partly good news for the BPO industry and partly bad news. The good news is that the BPO contract value awarded for "back-office" processing has grown by 36 percent over the past 12 months. The bad news is that the BPO contract value awarded for industry-specific processing services has decreased by 28 percent over the past 12 months.
This points to a significant change in emphasis by buy-side organizations, according to NelsonHall. Over the past 12 months companies have put less emphasis on the transformation of customer-facing and industry-specific delivery capability and a greater emphasis on removing cost and improving the quality of information from support functions.
Back-office Functions Come to Fore
This emphasis is particularly marked in North America and is a factor in the decline in contract value there. Outsourcing the support functions of HR, F&A and procurement accounts for 40 percent of BPO contract value in North America, compared to 31 percent of BPO contract value in Europe.
Partly this reflects economic realities, but it also reflects the maturity of the BPO industry, NelsonHall said. HR outsourcing delivery, for example, has undergone a considerable change in the past 12 months, with a major emphasis on service standardization and improving the financial viability of the delivery model. And F&A outsourcing is immediately financially viable in its present form, which is essentially a labor-arbitrage model.
Capgemini's acquisition of 51 percent of Unilever India Shared Services Limited also demonstrates that the commercialization of existing back-office shared service centers is still a significant factor in the market and can be expected to continue.
Manufacturing, Retail See Increases
Driven by this overall increase in outsourcing of support functions, new sector patterns are emerging, NelsonHall reported. Specifically manufacturing and retail combined to account for 27 percent of BPO contract value in the past 12 months, compared to 13 percent in the prior equivalent period.
The same delivery maturity has not yet been achieved consistently across the outsourcing of industry-specific processes, and different processes are at different stages of outsourcing maturity, leading to the recent decline in contract activity in this area. Nonetheless, increasing maturity is already emerging in some key areas of industry-specific services, and as BPO matures across a wider range of industry-specific processes, NelsonHall believes that these segments will contribute to higher growth for the industry as a whole, in contrast to the views of some observers such as TPI.
For example, life policy administration, like HR outsourcing, has gone through its first-generation phase, and vendors are increasingly beginning to build second-generation utility services. Growth is returning to the market, as evidenced by CSC's recent contract to administer 1 million policies for a North American life insurer. Additionally, healthcare BPO activity has continued to demonstrate strong growth and now accounts for 7 percent of BPO contract value globally.
Another BRIC in the Wall
NelsonHall also sees growth within the Brazil, Russia, India and China (BRIC) countries. Here BPO activity is emerging in support of industries where new infrastructure is being built and new services need to be brought to market, typically customer management and industry-specific services in support of industries such as banking, telecom and airlines.
Overall, then, NelsonHall believes that the BPO market still has considerable growth drivers in the medium-term, with the pattern of growth determined by the relative stage of development and maturity of BPO in each process area. Support functions are currently at a relatively high level of outsourcing maturity, but industry-specific BPO services will continue to mature and will become a major source of long-term BPO market growth across both mature and emerging economies.
Additional Articles of Interest
— For technology company Calix, communication is key to getting the most out of its business process outsourcing relationships. Get the full story in "'P' is for 'Partnership' in BPO," in the August/ September 2006 issue of Supply & Demand Chain Executive.
— Procurement business process outsourcing is a growing trend, but best practices for BPO success are still being written. For insights on how to ensure your BPO project meets its goals, read "Five Success Factors for Procurement Business Process Outsourcing," sidebar to the cover story "Rising to the Challenge of the Outsourced Supply Chain" in the October/November 2005 issue of Supply and Demand Chain Executive.
Boston — October 19, 2006 — Global business process outsourcing activity picked up in the third quarter, overcoming a disappointing first quarter so that global BPO contract value increased two percent in the first nine months of 2006, according to a report from BPO analyst firm NelsonHall.
The findings came in NelsonHall's recently released "3rd Quarter Global BPO Index," the latest edition of the firm's ongoing monitor of the health of the BPO market.
The level of contract activity in the third quarter of this year exceeded those in Q3 for each of the three previous years, the report states. However, the health of the BPO market is currently much stronger in Europe than in the United States. In the first nine months of 2006, NelsonHall's research shows that the level of BPO activity in Europe was high, growing by 34 percent, in contrast to the level of activity in North America, down 26 percent.
Increased Emphasis on Support Functions
The significant change in the BPO market lies in the increased emphasis on outsourcing the support functions of procurement, human resources (HR) and finance and administration (F&A). In the 12 months ending September 2005, these functions accounted for 24 percent of BPO contract value, yet in the 12 months ending September 2006 they accounted for 36 percent of BPO contract value.
NelsonHall suggested that this is partly good news for the BPO industry and partly bad news. The good news is that the BPO contract value awarded for "back-office" processing has grown by 36 percent over the past 12 months. The bad news is that the BPO contract value awarded for industry-specific processing services has decreased by 28 percent over the past 12 months.
This points to a significant change in emphasis by buy-side organizations, according to NelsonHall. Over the past 12 months companies have put less emphasis on the transformation of customer-facing and industry-specific delivery capability and a greater emphasis on removing cost and improving the quality of information from support functions.
Back-office Functions Come to Fore
This emphasis is particularly marked in North America and is a factor in the decline in contract value there. Outsourcing the support functions of HR, F&A and procurement accounts for 40 percent of BPO contract value in North America, compared to 31 percent of BPO contract value in Europe.
Partly this reflects economic realities, but it also reflects the maturity of the BPO industry, NelsonHall said. HR outsourcing delivery, for example, has undergone a considerable change in the past 12 months, with a major emphasis on service standardization and improving the financial viability of the delivery model. And F&A outsourcing is immediately financially viable in its present form, which is essentially a labor-arbitrage model.
Capgemini's acquisition of 51 percent of Unilever India Shared Services Limited also demonstrates that the commercialization of existing back-office shared service centers is still a significant factor in the market and can be expected to continue.
Manufacturing, Retail See Increases
Driven by this overall increase in outsourcing of support functions, new sector patterns are emerging, NelsonHall reported. Specifically manufacturing and retail combined to account for 27 percent of BPO contract value in the past 12 months, compared to 13 percent in the prior equivalent period.
The same delivery maturity has not yet been achieved consistently across the outsourcing of industry-specific processes, and different processes are at different stages of outsourcing maturity, leading to the recent decline in contract activity in this area. Nonetheless, increasing maturity is already emerging in some key areas of industry-specific services, and as BPO matures across a wider range of industry-specific processes, NelsonHall believes that these segments will contribute to higher growth for the industry as a whole, in contrast to the views of some observers such as TPI.
For example, life policy administration, like HR outsourcing, has gone through its first-generation phase, and vendors are increasingly beginning to build second-generation utility services. Growth is returning to the market, as evidenced by CSC's recent contract to administer 1 million policies for a North American life insurer. Additionally, healthcare BPO activity has continued to demonstrate strong growth and now accounts for 7 percent of BPO contract value globally.
Another BRIC in the Wall
NelsonHall also sees growth within the Brazil, Russia, India and China (BRIC) countries. Here BPO activity is emerging in support of industries where new infrastructure is being built and new services need to be brought to market, typically customer management and industry-specific services in support of industries such as banking, telecom and airlines.
Overall, then, NelsonHall believes that the BPO market still has considerable growth drivers in the medium-term, with the pattern of growth determined by the relative stage of development and maturity of BPO in each process area. Support functions are currently at a relatively high level of outsourcing maturity, but industry-specific BPO services will continue to mature and will become a major source of long-term BPO market growth across both mature and emerging economies.
Additional Articles of Interest
— For technology company Calix, communication is key to getting the most out of its business process outsourcing relationships. Get the full story in "'P' is for 'Partnership' in BPO," in the August/ September 2006 issue of Supply & Demand Chain Executive.
— Procurement business process outsourcing is a growing trend, but best practices for BPO success are still being written. For insights on how to ensure your BPO project meets its goals, read "Five Success Factors for Procurement Business Process Outsourcing," sidebar to the cover story "Rising to the Challenge of the Outsourced Supply Chain" in the October/November 2005 issue of Supply and Demand Chain Executive.
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