Everything Must Go: Business Process Outsourcing

Last year, General Motors was the world's leading travel agent — or so it would seem. The automaker sent more than 100,000 employees on the road, and that's just in the United States. Its peripatetic workforce racked up an eye-popping array of expenses for airfare, hotels, fleet transportation, entertainment, communications, and other business needs, most of them paid for via four different corporate-card accounts. The mountain of data produced by all that activity required a veritable company-within-a-company to process, flag questionable expenses, and record everything in the general ledger.

Does a company that designs and builds cars really want to devote so many internal resources to the management of corporate travel? In December 1998, GM said no, and shifted the burden to Kirkland, Washington-based Captura Software Inc.

GM is not alone in moving its noncore business processes to outsource service providers. Many companies are following suit, outsourcing a growing list of functions that includes purchasing and disbursement, order entry, billing and collection, human resources administration, cash and investment management, tax compliance, internal audit, payroll, and customer relations. A survey conducted by CFO magazine and AMR Research found that business process outsourcing, or BPO, has already become popular among companies of all sizes for a variety of reasons, and will likely gain steam in the months ahead.

Saving money is a prime motivator, of course, but advocates claim that strategy also enters into the equation. "Outsourcing has moved up the food chain," says Frank J. Casale, CEO of The Outsourcing Institute, a Jericho, New York--based professional association of more than 26,000 outsourcing executives. "It is no longer seen solely as a cost-cutting measure, a last-ditch effort to save money and perform financial triage."

Casale contends outsourcing has become a management tool, freeing companies to build upon their core competencies by leaving the noncore stuff to specialized providers. "There is definitely strategic value here, particularly in the areas of improving quality and service, instilling best practices, and having an expert on tap who will stay abreast of constant change," he says.

The institute estimates that 36 percent of all companies with sales of more than $50 million outsource today, up from 29 percent in 1996; among CFOs responding to our survey, the percentage was significantly higher. Altogether, outsourcing (both BPO and traditional IT) represents some $345 billion in resources that lie outside corporate boundaries, indicating that what was once considered a project-based tactical move is now a standard business practice. "Companies are fed up with managing complicated, messy things outside their core function," says Christine Ferrusi Ross, an analyst with Forrester Research in Cambridge, Massachusetts.

Increasingly, companies are deciding that plenty of things look messy, which is why analysts believe the BPO market will grow faster than the more traditional IT outsourcing market. "Look at the tax laws, for instance," says Ross. "There are thousands of tax jurisdictions in the U.S., constantly changing their rules. Same thing with employee compensation, benefits, and recruiting — what you can and cannot do legally is exhausting, and costly to monitor and manage." Enter BPO, which, she says, can not only alleviate the headaches but also provide "strategic benefit."

Motives and Measurements
But is outsourcing truly strategic, or is it simply a way to rent what you don't want to own? Moreover, how do companies gauge whether or not outsourcing is a better strategy than internal management? Outsourcing consultants concede that because most forms of BPO have been around for a few years at most, calculating their effectiveness is almost impossible. "There's really no way to measure it in an apples-to-apples comparison," says Rita Terdiman, vice president and research director at Gartner, the Stamford, Connecticut-based technology research firm.

John Hagerty, a vice president in the financial services practice of Boston-based AMR Research, says the proper metrics to measure the value of outsourcing are only just being developed. "But even without measurements," he says, "there's no question that outsourcing noncore business functions is a successful strategy. How do I know this? Well, for one thing, I'm hard-pressed to think of any company that has junked its outsourcing strategy. I don't see people abandoning it, because the reasons to do it are too compelling." That's particularly true for CFOs, because, as Hagerty says, "by reducing asset utilization and subcontracting a process to an expert, a company obtains more controllable costs."

GM, for example, estimates it will save $3.7 million a year by outsourcing its travel-expense processes to Captura, representing a 93 percent cost reduction. "We'll be able to take half the people out of the back-end T&E management process alone, from 23 employees down to 11," says Michael Osment, CIO of GM's enterprise activities group. "We're also saving several hundred thousand a year by eliminating paper receipts, and that doesn't even count the people administrating this. Ditto the savings on postage, imaging costs, copying, and just plain keeping track of everything." Even though GM is keeping half its staff, savings will also accrue from substantially reduced or eliminated internal IT support, hardware cost purchase savings, hardware maintenance savings, early corporate-card payments, and better vendor rates.

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