BPO

Enterprise Operational and IT Cost Takeouts: Re-think BPO

Paradoxically, one of the areas of IT cost takeout and recovery that we see enterprise clients most interested in pursuing is business process outsourcing (BPO) – which tends to be adopted in order to reduce operational and IT costs. But as businesses rethink how they work, BPO is ripe for rethinking as well.

Many opportunities for rethinking and reconsideration exist in most BPO, but four tend to come up the most frequently. For each, I have noted typical percentage ranges of cost change that I have seen negotiated over the past few months. Any actual amounts of spend reduction can vary widely, of course; your mileage may very, past performance is no guarantee of future results, etc.

  1. Services usage and associated expenses. If and when staff are laid off, reassigned, or furloughed, every relevant services contract should be examined for potential pricing and cost changes. That applies whether the contract is based on number of users, amount of use, or any combination. Look at associated software/SaaS, IaaS, and related services costs as well. Effective negotiators should see cost reductions proportional to staff or usage reduction.
  2. Three may be a crowd. We often see third-party contractor and services expenses included in BPO agreements. Changes in enterprise BPO use usually change the need for, and cost of, third party contract services. I have seen clients reduce overall BPO cost by as much as 10 percent through reduction of third-party roles.
  3. Scope creep. Any project manager is familiar with “scope creep,” but it is not always as apparent when contracting for and managing BPO. Scope creep in BPO refers to the expansion of services use beyond the intended applications, processes, and/or user groups. This can inflate usage costs well beyond original expectations, and wreak havoc with departmental budgets. Audit BPO use by user, by functional group, and by department, and compare the results against departmental budgets and spending – and against the BPO contract terms. Savings of up to 15 percent are not unusual.
  4. Contract leakage. The difference between the value expected per the contract, and the value realized from the services used, is the “leakage.” It is rarely intentional, but it happens, because real-world business conditions and operations vary over time. As part of the audit noted above, assess BPO outcomes versus costs of producing said outcomes – the enterprise’s own costs if known, and any market/industry competitive benchmarks. If the BPO contract is based at all on process outcomes, compare what is being measured versus what is stipulated. The percentage cost savings in this area are among the most variable, and could range from a few points on up to above 20 percent, depending upon contracted terms and the existence of outcome-linked pricing.

These Circumstances Are Audit Triggers

Any of the above circumstances should be enough to (1) trigger an internal audit of services use, and (2) enable renegotiation of existing BPO contracts and relationships. And put bluntly, BPO providers face the same types of challenges that most businesses face right now. Most will at least consider some renegotiation. They may accept lower margins on some services; they may provide more service at no additional cost; they may reduce current pricing and/or extend current pricing beyond the current contract.

Strategically, this is likely a good time to re-think enterprise use of BPO overall. The current global drive toward digital workplaces is reshaping enterprise business structures, operations, and cost models. Previous and current BPO initiatives may not work in emerging digital markets.

 

Disclosure

The views and opinions in this analysis are my own and do not represent positions or opinions of The Analyst Syndicate. Read more on the Disclosure Policy.