BPO a No Go? No Action Taken in 25 percent of U.S. Sourcing Evaluations

Business process outsourcing contracts not awarded in 30 percent of evaluations; vendors must improve location mix, delivery capability, NelsonHall says

Business process outsourcing contracts not awarded in 30 percent of evaluations; vendors must improve location mix, delivery capability, NelsonHall says

Boston — October 31, 2006 — Levels of business process outsourcing contract awards in North America over the past two years have not matched industry expectations as nearly one-third of BPO sourcing evaluations have failed to result in any action, according to a new study from analyst firm NelsonHall.

In a report on its research into factors inhibiting the adoption of BPO in North America, NelsonHall said that vendors need to improve offshore location mix and delivery capability.

The total contract value (TCV) of BPO awards has declined by approximately 50 percent in North America from a peak of $15.4 billion in the 12-month period ending September 2004 to $7.5 billion for the 12-month period ending September 2006, the analyst firm reported.

Capabilities Critical

Some of this decline can be attributed to political factors, but capability factors are also critical. NelsonHall research has identified that no action is taken in one-quarter of sourcing evaluations where BPO and use of captive centers are evaluated, and BPO contracts are not awarded in 30 percent of instances where BPO is evaluated.

Sourcing managers expect that the level of BPO contract awards arising from sourcing evaluations will increase in future. However, in order for this increase in activity to occur, vendors will need to meet sourcing manager expectations by improving their BPO delivery capability. In particular, they will need to meet the following conditions:

  • Improved process operations knowledge

  • Proven cost reduction capability

  • Improved offshore location mix and delivery capability
Process Proficiency Preferred

Eighty percent of U.S. sourcing managers said that a lack of process operations knowledge within a vendor under consideration has led to the rejection of BPO. Contrary to popular expectation, sourcing managers select BPO over use of captive centers to achieve access to superior expertise, particularly process expertise, to drive an increase in service quality.

Where cost reduction is required without an accompanying improvement in existing processes and service quality, U.S. sourcing managers will often favor use of captive centers in order to minimize cost and avoid payment of margin to vendors. Therefore, superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present, NelsonHall said.

Caution on Cost Reductions

The research also identified that vendors are frequently failing to justify the levels of cost reduction promised during the bidding focus. Vendors are offering cost savings, but two-thirds of sourcing managers have rejected BPO as a sourcing option because of a lack of belief in the vendor's ability to deliver the cost savings promised, which again can be attributed to a failure to demonstrate deep process operations knowledge.

Vendors also need to improve their offshore location mix and delivery capability and should not impose locations on their clients. India and China seem destined to be the major offshore powerhouses for the foreseeable future, but both these locations currently have limitations, and vendors need to offer a wider range of geographic options in addition to enhancing their capabilities in India and China, according to the analyst firm.

At the moment, it is difficult to find locations with high all-round skills. While India scores highly with U.S. sourcing managers in terms of process transfer and take-on skills, it lags behind Latin American countries such as Brazil and Mexico in terms of cultural compatibility. However, these Latin American countries, like China, are perceived by U.S. sourcing managers to lag behind India in the development of industry-specific process knowledge.

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.

— Supply management executives are discovering fresh value in group purchasing organizations and unlocking new savings through buying consortia. Get the full scoop in "Not Your Grandfather's GPO" in the August/ September 2006 issue of Supply & Demand Chain Executive.