Business Process Outsourcing Popularity Grows in SMB Market (Executive Summary) Executive Summary

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1 Business Process Outsourcing Popularity Grows in SMB Market (Executive Summary) Executive Summary Publication Date: 30 January 2003

2 Authors Robert H. Brown Mika Yamamoto Krammer This document has been published to the following Marketplace codes: ITSV-WW-EX-0268 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 Business Process Outsourcing Popularity Grows in SMB Market (Executive Summary) BPO has taken hold among SMBs, a market that Gartner Dataquest estimates was worth nearly $15 billion in the United States in 2002 alone. Despite the general perception that strategic and tactical BPO are chiefly the domain of large, multinational organizations, an increasing number of SMBs are adopting it, especially for back-office enterprise services such as HR. This document provides vendors with an analysis of SMB user wants and needs pertaining to BPO services adoption in Findings of a User Wants and Needs survey in North America are presented, specifically, how SMBs use BPO, where their planned investments are in the coming 24 months, how they select BPO vendors, and their attitudes toward relationship management and contract engagement styles. The document is intended for use by BPO services vendors targeting the North American SMB market. Back-office enterprise services are by far the most popular processes to outsource among Gartner Dataquest's North American respondents and are a strong reflection of their stated desire to focus on their perceived core competencies. HR outsourcing tops the list for present or planned activity for SMBs. Finance and accounting services are either outsourced or planned for outsourcing by 48 percent of small business respondents, compared with only 25 percent of midsize businesses. These findings are from Gartner Dataquest's survey of 150 respondents identified in the third quarter of 2002 as being involved in evaluating, planning or deciding whether to outsource one or more business processes. Among this set of respondents, 73 percent were SMBs. This report reflects the attitudes, behaviors and priorities related to these 110 SMBs. Payroll is the hottest process of HR outsourced by Gartner Dataquest's SMB respondent base more than 80 percent of SMBs are outsourcing it either fully or partially. Benefits administration is also a relatively popular area to outsource. Among finance and accounting functions, treasury and cash management outsourcing (either full or partial) represents the most similar buying behaviors between SMBs, where 18 percent of small business respondents and 27 percent of midsize respondents are outsourcing. Nearly all respondent categories ranked given vendor selection criteria uniformly high, indicating that when it comes to BPO, which is perceived as a strategic business undertaking, respondents want it all. Customer service rated especially high. Surprisingly, referenceable accounts and cultural fit rated lower. Gartner Dataquest strongly cautions vendors not to treat this issue as "relatively unimportant" doing so would be a huge mistake. We believe that the lower priority reflects that these criteria are almost "a given," when it comes to vendor selection. Across the board, CFO and CEO/president top the list of influential people when SMBs select BPO vendors. Only 30 percent of small business respondents and 41 percent of midsize respondents stipulate business performance metrics in outsourcing contracts, as opposed to 88 percent of large businesses, which indicates a lack of internal performance measurements against which to benchmark BPO. As a result, fixed-price contracts are the top engagement style preferred for SMB BPO contracts. Significantly, the larger the organization in Gartner Dataquest's SMB and large business sample, the more "savvy" they are to the idea of contract renegotiations and vendor management Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

4 2 Business Process Outsourcing Popularity Grows in SMB Market (Executive Summary) Key Findings The following are some of the key findings of Gartner Dataquest's 2002 SMB BPO User Wants and Needs survey: SMB buyers are bullish on back-office BPO. Enterprise service processes are where the majority of SMBs use BPO; 85 percent of small businesses and 73 percent of midsize businesses outsource or plan to outsource some portion of enterprise services through This represents the "sweet spot" of the SMB BPO market (to the near exclusion of all other process areas). HR outsourcing tops the list for present or planned activity in this sector. Focus, service and speed are three requirements for SMBs. The primary drivers for pursuing outsourcing are widely agreed on by SMBs and large businesses to be focusing on core business, improving service levels and shortening implementation times. Drawbacks to SMB BPO: security, dependability and value. Small and midsize respondents rate, in descending order, dependability or service, concerns about data security, and lack of perceived value as the chief inhibitors to outsourcing. BPO is seen as a strategic undertaking by SMBs. Across the board, the top influencer for BPO in the survey sample was the CFO, followed closely by the CEO/president. In a list of possible BPO influencers, respondents were asked to rate on a scale of 1 to 7 (with 1 = very low influence and 7 = extremely high influence) the level of influence these roles had on BPO decision making. CFOs rated an average of 6.20 among midsize business respondents and an average of 5.52 among small business respondents. CEO/president rated 5.23 and 4.92 among midsize and small business respondents, respectively. Customer care counts with SMBs. Customer service rates especially high as an SMB BPO vendor selection criterion, which reflects Gartner Dataquest's observance that customer retention and CRM are among the top priorities of SMB business executives. On a scale of 1 to 7, customer service rated 6.37 and 6.29 among small and midsize business respondents, respectively, the highest rating of any given selection criterion. Process expertise also rates high as a vendor selection criterion, 5.82 and 6.13, respectively, among small and midsize respondents on the 1 to 7 scale. But this may be "par for the course" among a bevy of qualified BPO competitors vendors should understand the nuances related to SMBs in their specific vertical industry for clearer differentiation. SMB respondents rated "allows us to focus on our core business" as the top attitude toward their BPO provider. On a 1 to 7 scale (with 1 = very low agreement with statements about outsourcing and 7 = very high agreement with statements about outsourcing), small businesses rated it a 5.59 and midsize businesses rated it a SMBs want straightforward BPO engagement models. Fixed-fee contracts are the top-rated BPO payment method among SMB respondents. Business-based metrics are not popular, but cost reduction is. A minority of SMB respondents 30 percent of small businesses and 41 percent of midsize businesses used business metrics in their BPO contracts. When business metrics are used, the majority of respondents 75 percent of small business respondents and 91 percent of midsize businesses favor costcontainment or reduction clauses, reflective of the conservative modus operandiofsmbs:costscomefirst Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 January 2003

5 Business Process Outsourcing Popularity Grows in SMB Market (Executive Summary) 3 Offshore offerings are not mainstream among SMBs. None of the respondents were using offshore BPO. Gartner Dataquest believes this is due in part to ignorance on the part of SMBs about the benefit that offshore BPO can bring to the smaller enterprise. Also, many offshore vendors are not targeting SMBs, compounding the lack of education that SMBs have about the benefits of offshore. Gartner Dataquest also believes that SMBs' fear of losing control, including lack of proximity and concerns about data security, may override superior offshore cost-benefits. SMBs are less "savvy" to the idea of contract renegotiations. Nearly half of large business respondents have changed the terms and conditions on their largest contract in dollar value since the initial contract was signed, whereas 26 percent of small businesses and 35 percent of midsize businesses had done likewise. For the full report, see the Gartner Dataquest User Wants and Needs, "Business Process Outsourcing Popularity Grows in SMB Market" (ITSM-NA-UW-0109) Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 January 2003