In the first post in this series, I wrote at length about the emerging knowledge processing outsourcing (KPO) market and how it is beginning to impact the overall BPO environment. In this post, I'd like to continue to relay some of Phil Fersht's observations from his SIG presentation last week. Perhaps one of the more intriguing figures from his research at AMR that he shared is the mix of outsourcing work and where it's being done. Today, 70% of BPO strategic sourcing work involves some component of on-shore resources. But this number drops to 23% when it comes to P2P. Currently, 77% of P2P BPO engagements leverage offshore resources (this number drops to 33% for strategic sourcing). But both P2P and strategic sourcing are growing in absolute and relative numbers. 2008 saw a "20% increase" in overall BPO expenditure as well as a rising number of deals.
According to Phil, in 2008, there were 42 new large procurement BPO deals (in Phil's words, primarily "large indirect outsourcing deals"). This number represented an approximate 30% increase from 2007 (which saw 33 new deals). From an industry split perspective, 35% of these new outsourcing contracts were in manufacturing, 13% high tech, 15% energy and utilities, 15% retail/CPG and 9% financial services. What's most curious from a technology perspective is that only 15% of these deals bundled in technology as part of the relationship. But what types of technology are companies using in BPO situations is quite fascinating indeed. In looking at CPG buying trends for procurement outsourcing, Phil noted that 83% of BPO deals that use technology rely on installed software/licenses, 10% SaaS models and 7% BPO (outsourced technology as part of the engagement).
Chances are that in the current environment, we'll see a mix of onshore and offshore deals. Thanks to the protectionist leanings in Washington, don't expect to see significant offshoring in industries where the government is meddling with its own dollars and influence (e.g., financial services / healthcare). But even in these markets, I do believe we'll see a continued trend to outsource what is non-core in procurement. Procurement is not following the traditional outsourcing lifecycle however. In this regard, Phil notes that "markets start with lift and shift usually, but with procurement it is different -- strategic sourcing teams initially focus in-house or with onshore outsourced resources and then building bridges with offshore for indirect."
But how will this trend look in the future? Phil sited a research study featuring data from interviews that EquaTerra conducted with 60 BPO managers to suggest that we might be headed to an environment that focuses less on customized business processes. When asked the question, "In which areas listed below would your organizations be willing to transform existing processes to meet the best practices standards proposed by the service provider," the results are telling. For contract administration, 48% of respondents were willing to transform their own processes to those of their chosen providers. For procurement IT, strategic sourcing, and tactical sourcing/spot buying, the numbers drop to 45%, 41%, and 46% respectively. But for catalog management, supplier management and category management, they rise to 59%, 51% and 56%.
All-in-all, this suggests to me that companies are increasingly willing to give up process control in at least some areas of procurement if BPO providers can prove they can introduce more than just efficiency and low-cost labor into the equation. Will this be the tipping point for procurement BPO? In my view, this one observation very well might signal that a major shift is coming.