Globalization of Back-office Processes Seen Growing More Than 50 Percent by 2011

Hackett Group study comparing BPO and captives finds similar savings; BPOs ramp faster, but challenged at driving innovation; firm debuts Service Center Benchmark offering

Atlanta — September 4, 2008 — Globalization of key business processes in finance and other back-office areas is expected to continue to see strong growth over the next three years, with companies increasing their use of offshore resources by over 50 percent, according to results of a new study completed by strategic advisory firm The Hackett Group.

Hackett said its "2008 Globalization Performance Study" is one of the first to capture the same information from companies using leading business process outsourcers (BPOs) and those operating their own captive shared service centers in India and other low-cost labor markets. The study confirms that companies can generate fairly comparable cost savings with either globalization approach, with most companies driving cost reductions of 25-50 percent.

But Hackett's research also spotlights some stark differences between BPOs and captives. BPOs are able to ramp up twice as quickly as captives and are twice as likely to exceed expectations for on-time service delivery levels. As a result of the faster ramp-up, BPOs also see much faster benefits realization, showing a five-year net present value that is more than 50 percent higher.

BPOs fall far short in their goal of driving innovation, the study found. Captives are significantly more successful but still show room for improvement. According to Hackett, companies need to change the way they plan for, contract and implement BPO services initiatives to improve performance in this key area.

Cost the Top Driver

Hackett's research also found that globalization remains a largely cost-driven process. While process improvement, the ability to focus on the core business and quality were all cited as "Important" decision drivers, only cost was identified by the study group as being "Very Important."

Hackett also today announced its launch of a new Service Center Benchmark designed to help BPOs and captives objectively assess the efficiency and effectiveness of their operations in relation to both their peers and other service delivery models.

According to Hackett's research a typical Global 1000 company (with $23.4 billion in revenue) can generate annual savings of nearly $200 million by taking a lift-and-shift approach to back-office globalization while implementing transformation efforts.

"With this study, we began from the assumption that globalization has become a mainstream practice over the past five years and is now an integral part of most large companies' service delivery model strategies for their G&A operations," said Hackett Chief Research Officer Michel Janssen. "So we wanted to take the unique approach of designing a study that could capture the same information from both BPOs and captives. In the end we surveyed almost 50 companies in a diverse array of industries. Over 70 percent of them had revenue greater than $5 billion, and they were globalizing a range of different functions, including finance, procurement, HR and customer service.

Significant Expansion Seen

Janssen said that Hackett found several strong pieces of good news in its results. "First, companies expect to significantly expand their use of offshoring over the next three years. By 2010, these companies have told us that nearly a third of all their transactional staff in finance will be based in low-cost labor markets. That's over 50 percent more than we see today. Also, our study found that both BPOs and captives are capable of generating rather dramatic, and fairly comparable, cost savings."

According to Hackett Finance Advisory Practice Leader Bryan Hall, the study also identified significant differences between the two approaches, and real opportunities in several areas. "BPOs can ramp up to full speed in only 13 months, less than half the time that it takes captives, as they have staff and facilities already on the ground as well as recruiting channels that are positioned to expand their operation as necessary," Hall said.

"As a result of that faster ramp-up time, BPOs realize benefits for their companies much faster, with higher net present value, dramatically accelerated payback time and reduced risk. In part due to the contractual nature of the relationship with BPOs, they are also better at on-time service delivery, exceeding customer expectations more than half the time, over twice as often as captives."

Dissatisfaction with Innovation

According to Hackett Globalization and Outsourcing Practice Leader Julio Ramirez, innovation is one area where both BPOs and, to a lesser extent, captives have a significant opportunity to improve performance. "Only 17 percent of all responding companies using BPOs said they were satisfied truly satisfied with their BPO's ability to innovate," Ramirez said. "While a much larger percentage — 46 percent — of all companies using captives made the same claim, this is clearly an area that both types of organizations can target for investment.

"The weakness of BPOs in particular in this area is something we've seen for several years, and it hasn't improved. A large part of the problem stems from the way companies outsource," Ramirez continued. "Companies jump in and begin by selecting a BPO without first developing a comprehensive strategy that addresses the key innovation issues of how outsourcing will drive the company closer to targeted performance objectives and what transformation work is needed before, during and after the transition to the service provider."

Consequently, Ramirez said, these missing steps result in a service delivery contract that does not incent the BPO to innovate by implementing best practices and achieving transformation objectives. But without an approach that integrates transformation, it's almost impossible for companies to achieve world-class performance."

Service Center Benchmark Launched

The Hackett Group also announced the launch of a new Service Center Benchmark designed to help BPOs and captive shared service centers for finance, procurement, HR or contact centers objectively assess the efficiency and effectiveness of their operations in relation to both their peers and other service delivery models.

Hackett said its Service Center Benchmark is designed to help companies better understand the drivers of overall and process costs, full-time equivalent (FTE) usage and value in their service center. It enables companies to reduce costs and improve service through the use of relevant best practices employed by world-class companies identified in Hackett's ongoing benchmark programs and other service centers.

Companies can also use the benchmark to evaluate how location is affecting performance, and what the impact would be of moving to lower-cost geographies, according to Hackett. Finally, the benchmark is intended to help companies evaluate the benefit delivered by their current service delivery model and build a business case for more extensive use of shared services, offshore captives, or additional outsourcing.

"To truly assess performance, companies need the ability to make an apples-to-apples comparison between their operations and others, despite differences in service delivery models, countries of operation, and even the scope of processes involved," said Ramirez. "That's precisely what we're offering with this benchmark. It's a highly effective tool enabling companies to identify improvement opportunities and also evaluate options such as moving service centers to a low-cost labor market or outsourcing."