Business Process Outsourcing (BPO) in Germany. A Trend Analysis by

Transcription

1 Business Process Outsourcing (BPO) in Germany A Trend Analysis by 2006

2 Trend Analysis EDS and the EDS logo are registered trademarks of Electronic Data Systems Corporation. All other logos, identifiers, trademarks or service marks used herein are the property of their respective owners. EDS is an equal opportunity employer and values the diversity of its people Electronic Data Systems Corporation. All rights reserved.

3 BPO in Germany Preface In our modern economic environment with intensifying competition, business processes become ever more complex. Corporate areas such as human resources, finance & accounting or procurement involve high cost. In addition, ongoing globalisation requires flexible processes that can be quickly adjusted to changing business requirements. Can Business Process Outsourcing (BPO) the outsourcing of one or several business processes to an external IT service provider be an adequate answer to this changing environment? Does BPO really support companies in lowering their cost and, at the same time, improving their service quality? Can companies speed up reaction with the help of BPO and thus act more flexibly? This trend analysis on the German BPO market examines these issues. Why did we do this trend analysis? Over the past few years, the concept of BPO has been linked ever more closely with traditional IT functions. Business processes of all kinds have used IT as a tool for highly available, secure, and flexible provision. Today, the German BPO market has a volume of 1.7 billion and the trend is pointing upwards. Until 2009, PAC expects an average annual growth rate of 17%. This makes BPO one of the growth drivers of Germany's IT services market. This underlines the need to better understand users' attitude towards BPO. What arguments do they see for and against the outsourcing of business processes? What are their fears and expectations regarding this form of outsourcing? This trend analysis gives you valuable insights into users' views on BPO, encouraging you to find out more about this subject. We hope you will enjoy reading this document. Joachim Langmack Managing Director EDS in Germany Christophe Châlons Managing Director Pierre Audoin Consultants (PAC) GmbH Page 3

4 Trend Analysis Table of Contents Preface 3 Table of Figures _ 5 1 Executive Summary _ 5 2 Introduction 7 3 Business Process Outsourcing (BPO) in Germany Definition of BPO _ Quantitative Dimension of the German BPO Market _ 8 4 Evaluation of the User Survey Descriptive Features _ BPO Decision Makers in User Companies _ Experience with IT Outsourcing Issues and Solutions for Different Business Processes Human Resources Finance & Accounting (F&A) Procurement _ Approaches to Business Process Optimisation _ Arguments for BPO from Users' Point of View Arguments against BPO from Users' Point of View Selected Criteria for Choosing an IT Service Provider _ Optimisation Methods and Pricing Models for BPO Concepts _ Optimisation Methods _ Pricing Models 25 5 Conclusion and Outlook _ 28 6 Questions to EDS on the Subject of BPO _ 30 Page 4

5 BPO in Germany Table of Figures Fig. 01 Market Volume and Market Growth BPO in Germany _ 9 Fig. 02 Returns by Number of Employees Fig. 03 Returns by Revenues 2005 _ 11 Fig. 04 Returns by Sector 11 Fig. 05 Decision Makers for the BPO Strategy _ 12 Fig. 06 Experience with IT outsourcing _ 13 Fig. 07 Detailed experience with IT outsourcing 14 Fig. 08 Criteria to Define BPO _ 15 Fig. 09 Conflict between Cost and Quality in Service Delivery _ 16 Fig. 10 Approaches to Business Process Optimisation _ 19 Fig. 11 Arguments for BPO _ 21 Fig. 12 Arguments against BPO _ 22 Fig. 13 Criteria for Selecting an IT Service Provider 24 Fig. 14 Methods of Measuring Efficiency and Maturity of Business Processes _ 25 Fig. 15 Favored Pricing Models 26 Page 5

6 Trend Analysis 01 Executive Summary BPO decision making takes place at top management level The survey confirms this picture: More than half of those questioned (57%) consider the management board as BPO decision makers; only 16% see this responsibility with 'traditional' IT executives. IT outsourcing in Germany is gaining in maturity 69% of the companies taking part in our survey have already gained experience in IT outsourcing. This result underlines the level of maturity IT outsourcing has reached over the past 15 years. A uniform definition of BPO exists on the market today Nearly all those questioned (over 90%) agree that BPO refers to the transfer of one or several business processes to an external IT service provider. Moreover, 70% of respondents favorably rate the criterion 'assuming full responsibility of the business process'. This result reflects the growing maturity of BPO in Germany. The BPO business, which has so far often been transaction-oriented, meets with more and more acceptance as an integral business model. HR is considered by respondents as offering the highest potential for optimisation One question asks for those business processes that cause the most problems in terms of excessive cost, inadequate cost transparency, and insufficient quality. A total of 60% of all respondents named human resources management the most frequently mentioned area. Other issues are Customer Relationship Management and Supply Chain Management. Page 6

7 BPO in Germany When it comes to solving the problems of excessive cost and insufficient quality, outsourcing is rated higher than internal Shared Services Centres (SSC) The results of the survey underline the fact that the outsourcing of business processes is preferred to the setting up of an SSC. This proves that the benefits an external IT service provider can offer become more and more predominant. Cost savings and the concentration on core competencies are important BPO drivers Nearly half of the respondents consider the concentration on their core business a very important reason for BPO implementation. This reconfirms the fact that the tendency towards reducing the vertical range of administration follows the trend to reduce the vertical range of manufacture. Cost savings also play an important role in BPO decisions. Almost 40% of those questioned see a reduction in business process cost as well as in the relevant IT cost as a very important factor in favor of BPO. Transparent offerings are essential for provider selection Nearly all respondents think a transparent offering is important or very important when selecting an outsourcing partner. Another finding is the fact that the majority of those questioned deem existing business relationships less important or even not important. Benchmarking is the most important tool for process controlling In our survey, benchmarking ranks at the top when it comes to measuring the degree of efficiency and maturity of processes. More than three quarters of those questioned use competitive comparisons to derive best practices and apply them to their own company. Utilisation-based pricing models are favored; profit sharing is on the rise So far, most BPO contracts include pricing per unit (e.g. number of employees per payroll, etc.). This pricing model is based on output figures similar to MIPS selling in the 'traditional' IT area (MIPS = Million Instructions per Second). Profit sharing models are currently being developed; they take into account prices per unit as well as BPO's positive influence on the outsourcing company's business. Page 7

8 Trend Analysis 02 Introduction With this trend analysis, PAC and EDS want to draw readers' attention to a specific topic in the IT services area: Business Process Outsourcing (BPO) the externalisation of an entire business process or of individual sub-processes. EDS has commissioned PAC to carry out this analysis. It is based on a user survey performed among 82 decision makers in German companies with more than employees in the period August-September PAC has for some years been analyzing the German BPO market and has already published two market reports on this subject. The purpose is to provide readers with an overview of the BPO topic. This analysis mainly targets administrative decision makers that want to become familiar with this type of outsourcing, its pros and cons. About PAC PAC is the leading European market research and strategic consulting firm for the Software and IT Services Industry. We advise IT suppliers as well as users on developing successful end-to-end growth strategies in Europe and in the U.S. through planning, development, implementation, and ongoing support. This is done through market analysis as well as consulting engagements. Headquartered in Paris, we have been supporting over 300 clients worldwide for 30 years. We manage our clients through a specialized local network with subsidiaries in Munich, New York, London and Bucharest. The Munich office was established in About EDS EDS is a leading global technology services company delivering business solutions to its clients. EDS founded the information technology outsourcing industry more than 40 years ago. Today, EDS delivers a broad portfolio of information technology and business process outsourcing services to clients in the manufacturing, financial services, healthcare, communications, energy, transportation, and consumer and retail industries and to governments around the world. Page 8

9 BPO in Germany 03 Business Process Outsourcing (BPO) in Germany 3.1 Definition of BPO While in the beginning, outsourcing was strongly infrastructure-oriented ('Facilities Management', i.e. outsourcing of data centres), the externalisation of applications has become a serious option. Today, Business Process Outsourcing (BPO) is the ultimate form of outsourcing. Infrastructure, applications, and process management are outsourced, IT and processes merge. BPO is the ultimate form of outsourcing PAC defines BPO as follows: The IT service provider assumes within a long-term contract complete responsibility for the process or sub-process. It includes the management of the underlying infrastrcuture, applications as well as employees, thus replacing the office clerk at the client's company. IT outsourcing is gradually moving towards BPO. One example: For reasons of cost and efficiency, banks want to concentrate more on their core competencies and are thus focusing on customer-oriented processes such as consulting, sales, information, and customer care. This means banking is moving away from universal banks with a broad range of manufacture in their back-office towards lean, more sales-oriented banks. This requires a thorough breaking up of value chains. Within the scope of their sourcing strategy, some banks today already define the processes that are not part of their core competencies. Under Business Process Outsourcing contracts, they hand them over to specialized outsourcing partners. IT is thus losing its central role at least in the backoffice area of banking. Instead, we now find Service Level Agreements (SLA) that clearly define the services to be provided and the price to be paid. IT outsourcing is gradually moving towards BPO Page 9

10 Trend Analysis 3.2 Quantitative Dimension of the German BPO Market The German market for Business Process Outsourcing (BPO) is gathering momentum The German market for Business Process Outsourcing (BPO) is gathering momentum. In the past few years, outsourcing was the fastest growing sub-segment of the IT services market with respect to the externalisation of IT infrastructures and applications; now, as a logic evolution of the outsourcing trend, business processes are tackled. Companies review all their processes and determine, with the help of relevant criteria, which of them are suitable for outsourcing and which are not. In 2005, the BPO market had a volume of nearly 1.7 bn In 2005, the BPO market according to PAC's definition had a volume of nearly 1.7 bn. Until 2009, we expect an average annual growth rate of 17%. Firstly, this is due to the fact that, compared to the Anglo-Saxon hemisphere, this subject is lagging behind in Germany, and 'young' markets generally grow faster. Secondly, BPO meets with growing acceptance in Germany. Many companies are examining its potential, discussing the benefits of this innovative concept with BPO providers. Fig. 01 Market Volume and Market Growth BPO in Germany Market Volume [M ] Growth [%] Page 10

11 BPO in Germany Evaluation of the User Survey 04 The following analysis of user behavior concerning BPO shows what business process-related problems users have identified in their companies, how they approach these problems in line with their individual sourcing strategies, and what are the reasons for and against BPO. A total of 82 decision makers at business and IT level were questioned. The target group in a narrower sense included corporations in Germany with more than 1,000 employees from all sectors. 4.1 Descriptive Features Number of employees 2005 Fig. 02 9% Returns by Number of Employees % 22% 15% 1,000-2,000 staff 2,001-5,000 staff 5,001-10,000 staff >10,000 staff Page 11

12 Trend Analysis Fig. 03 Revenues 2005 Returns by 1% 5% Revenues % 65% 16% m m 501-1,000 m > 1 bn Not stated Fig. 04 Which sector does your company belong to? Returns by Sector 3% 4% 7% 8% 9% 12% 2% 26% 16% 13% Discrete Manufacturing Retail & Wholesale Services Process Manufacturing Transport Insurance Banking Public Sector Telecommunications Utilities 4.2 BPO Decision Makers in User Companies More than half of those questioned (57%) consider the management board as BPO decision makers As BPO refers to the outsourcing of business processes whose actual function is not based in the IT department, the relations between IT service provider and customer change. The survey confirms this: More than half of those questioned (57%) consider the management board as BPO decision makers; only 16% attribute this responsibility to 'traditional' IT executives. This supports PAC's assertion that BPO decisions are made by the top-level management. Page 12 1 For banks, the balance sheet total was considered instead of revenues.

13 BPO in Germany Who is responsible for BPO decisions in your company? Fig. 05 3% 5% 2% Decision Makers for the BPO Strategy 16% 1% 57% 16% Management board CIO CFO Head of operating department No clear responsibilities Others Not stated According to this, BPO is a management concept, no pure IT concept. It is normally the top management that makes decisions about the long-term outsourcing of one or several business processes to an external IT service provider, which in its purest form also includes people transition. The purpose of BPO is to boost a company's competitiveness and innovation. BPO is to boost a company's competitiveness and innovation 4.3 Experience with IT Outsourcing More than two thirds of the companies taking part in our survey have already gained experience with IT outsourcing. This result underlines the level of maturity IT outsourcing has reached in Germany over the past 15 years. IT outsourcing is well established among end users Have you already gained experience with IT outsourcing? Fig % Experinence with IT outsourcing 69% Yes No The next graph shows in which fields of IT respondents have gained experience. The findings confirm the statement made in the introduction: infrastructure-related outsourcing projects have existed longest on the market. Regarding central (data centre) as well as non-central IT (desktops), more than 40% of those questioned have already done outsourcing. Page 13

14 Trend Analysis Application-related outsourcing was named by 1/3 of respondents (33% have already gained experience with the outsourcing of applications). The gap to infrastructure outsourcing is therefore with 6% no longer significant. For instance, 39% of respondents have gathered experience with desktop outsourcing. This means, in turn, that customers have been much more open-minded about the IT outsourcing topic since the beginning of the new millennium; they understand the benefits it offers on both levels (infrastructure and applications). This positive experience with IT outsourcing is a crucial factor for pushing the BPO topic in Germany. Fig. 07 Have you already gained experience with IT outsourcing? Detailed experience with IT outsourcing Help desk outsourcing Data centre outsourcing Desktop outsourcing Outsourcing of applications (excl. SAP) Storage / backup outsourcing SAP outsourcing 0% 50% 100% Yes Planned No Not stated 4.4 Issues and Solutions for Different Business Processes Figure 8 presents the requirements on BPO services and interviewees' expectations concerning BPO. Over 90% of respondents agree that BPO denotes the transfer of one or several business processes to an external IT service provider. BPO meets with more and more acceptance as an integral business model Moreover, 70% of respondents favorably rate the criterion 'assuming full responsibility of the business process'. This result reflects the growing maturity of BPO in Germany. The BPO business, which has so far often been transaction-oriented, meets with more and more acceptance as an integral business model. Page 14

15 BPO in Germany Which criteria do you consider crucial for the definition of Business Process Outsourcing? Transfer of one or several business processes (corporate functions) to an external service provider Fig. 08 Criteria to Define BPO Service provider takes over complete responsibility for the process(es) Service provider takes over underlying infrastructure and applications Service provider takes over employees Long-term contract (more than 5 years) 0% 50% 100% Yes No More than half of all respondents also consider other criteria such as 'transfer of employees', 'long-term commitment', and 'transfer of relevant IT operations' as integral elements of a BPO deal. This proves that a generally accepted basic definition of this term exists on the market. Human Resources Fig. 09 Logistics / SCM Marketing, Sales Conflict between Cost and Quality in Service Delivery Customer Care / CRM Billing Finance & Accounting Procurement Controlling 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Excessive cost Inadequate cost transparency Insufficient quality 60% of the respondents mentioned human resource management, due to inflated cost as well as a lack of both cost transparency and quality. Additional business areas that cause above-average problems for companies are customer relationship management and supply chain management. Page 15

16 Trend Analysis Human Resources In Germany, the outsourcing of payroll processing to external IT service providers has been popular since the early 1990s. There is considerable cost saving potential in this strongly cost-driven area of BPO, since economies of scale can be realized. What about other HR areas, however? Germany is generally rather reluctant about outsourcing other HR functions such as recruiting, applicant management and training. In most companies the internal cost for HR administration are not explicitly known In this context it is interesting to know about the general trends in the HR environment. In most companies the internal cost for HR administration are not explicitly known process costing is mostly still in its early stages. There are differences of up to 100% between the various departments of a company, depending on wage structure, qualifications, etc. In this respect the degree of cost optimisation is higher in industries facing a lot of competition (manufacturing, retail) than in industries that are not too cost sensitive (e.g. utilities). One indicator for this is, e.g., in which department HR controlling takes place in the HR or in the financial department or in both. In industries that are labor-intensive (e.g. retail, services, public) or show a high degree of labor fluctuation (e.g. hotel and restaurant industry, building industry), HR administration (+cost) usually plays a more important role, thus being of more significance to decision makers. The HR environment is opening up to BPO. The implementation of activity-based costing for better cost control or the realisation of employee self services are two indicators for rising cost consciousness among HR executives. In general, PAC expects awareness of HR as a corporate value to be on the rise (the HR department as a business unit). Global companies are looking for HR BPO providers such as EDS with global service centre capabilities Global companies are looking for HR BPO providers such as EDS with global service centre capabilities that are supplemented by a network of local offices on five continents. Companies today require comprehensive domestic and global HR delivery through systems and processes that can generate economies of scale to reduce or eliminate the need for future investments in technology that quickly becomes obsolete. However, while in the past, companies just handed over some parts of payroll processing to external providers, they nowadays call for higher savings, more process improvements and better integration to make sure that these deals support their business goals. What they want is a long-term business partner relationship and not just an IT service provider arrangement. They want a business partner that can maximize the integration opportunities available across many HR processes and can redesign several HR processes to trigger an ongoing stream of process improvements. The aim is to deliver enhanced service levels to employees and to lower cost. In fact, it is easier for process Page 16

17 BPO in Germany improvements to be delivered when companies outsource more than just individual transactions or functions. This means customers need to outsource entire processes or several specific HR processes to derive maximum benefit Finance & Accounting (F&A) Choosing from the problem areas given, a total of one third of all respondents named F&A. The case for BPO in F&A is becoming more compelling, as cost pressure on companies intensifies. In many German companies, F&A departments lack efficiency and are thus too cost-intensive. According to PAC, an average of 40% of F&A resources are tied up in transactions of no strategic importance whatsoever. F&A departments lack efficiency and are thus too cost-intensive Risk management and controlling remain the two strategic pillars of an F&A department; a company's future survival increasingly depends on far-reaching methods of analysis. Transaction-oriented accounting for accounts payable and receivable is of little relevance and is thus very well suited for outsourcing Procurement Nearly one third of those questioned consider their own procurement processes as problematic. Employing BPO in some areas of procurement can be an adequate solution here. Individual parts of procurement, especially regarding indirect goods, up to entire purchasing departments are outsourced to external IT service providers. In this context, there are considerable differences in general outsourcability between the procurement of auxiliary supplies and that of strategic system components. Transfer of separate procurement channels to external IT services suppliers Auxiliary supplies are of little strategic value. The procurement process involves hardly any know-how about the actual core business. For system components, things are different. Here the supplier's engineering capabilities are of strong significance to further product development. This is why a close relationship with the supplier as part of a company's supplier management remains crucial. Like for all other functions, the outsourcing of procurement processes makes it possible to realize economies of scale on the part of the IT service provider and thus to reduce prices through quantity discounts. This means an IT service provider can become the central interface for a company's strategically oriented inhouse purchasing department. The external procurement of non-critical goods improves cost transparency and offers considerable cost-cutting potential. Page 17

18 Trend Analysis Approaches to Business Process Optimisation Internal optimisation is the main approach to tackle the issues. 90% of those questioned named it as a solution. Fig. 10 Approaches to Business Process Optimisation How do you meet these challenges? Internal optimisation of the process Optimisation of the process with the help of external consultants Outsourcing Set up an internal Shared Services Centre Others Not stated 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Among the sourcing options given, process optimisation with the help of external consultants was selected by nearly 70%. Within a project framework, external consultants work for a pre-defined period of time on optimizing specific business processes. Respondents rate the outsourcing of business processes higher than the setting up of an own Shared Services Centre (SSC) Moreover, respondents rate the outsourcing of business processes higher than setting up an own Shared Services Centre (SSC). This reconfirms the trend that companies are increasingly aware of the benefits an external IT service provider can offer. It is true that the establishment of an in-house SSC makes it possible to boost efficiency to a similar extent. However, companies often reach an impasse with their own SSC, as they offer little flexibility, making it difficult to generate future innovative value contribution for their 'internal' customer. Due to a lack of experience, internal SSC often find it more difficult to flexibly adapt to a constantly changing business environment than external IT service providers. Basically, we distinguish three different operating models: 1) Establish an in-house SSC The SSC bundles and centralizes in one (sometimes several) place(s) tasks, functions, or activities that used to be performed in the same or a similar way by several entities. The company's core units then share the utilisation and cost of such an SSC. Page 18

19 BPO in Germany 2) An SSC as a joint venture between customer and IT service provider The joint venture model makes it possible to share the risk between two parties and to make maximum use of both partners' core competencies. Drawbacks are the more complicated control of the SSC as well as difficulty in clearly defining responsibilities and decision-making. There is a rather high risk for the partners to blame each other for mistakes. 3) Complete outsourcing to an IT service provider Cost and risk are minimized for the outsourcing client and are mostly taken over by the IT service provider. This way, companies can gain quick access to established infrastructures and keep the risk low, while normally being able to realize greater benefits at an earlier time than with the internal SSC model. Historically speaking, there used to be no clear favorite among these three approaches. However, the trend increasingly moves towards in-house SSC being sold or transferred to BPO IT providers. This tendency is in line with a specifically German trend: the sale of so-called 'IT-GmbHs'. In the long run, PAC expects a similar increase in the sale of internal SSC to external providers, which will then take over the centralized execution of business processes. PAC sees three main reasons why companies opt for the outsourcing of business processes to external providers instead of setting up and operating inhouse SSC. In the long run, PAC expects a similar increase in the sale of internal SSC to external providers Firstly, building up and operating an internal SSC is a complex task that requires the right combination of experience, skills, proved best practices, and suitable technology. Already established, industrialized SSC operated by BPO providers, on the other hand, minimize time-to-value and offer considerable economies of scale. Secondly, newly established centres rarely work with optimum efficiency after the transfer of services has been completed. This means additional technologies as well as further optimisation measures are necessary to enhance process automation and, in the end, create potential for reducing the need for resources. Investing in process improvements does have its limits. Return on investment takes rather long given the high cost of reengineering resources. By using a BPO provider's reengineering capacities, however, the benefits of optimisation and reengineering can be realized earlier on. Finally, optimized SSC call for continuous investment and constant service improvement in order to maintain cost savings and competitive advantages. Established BPO providers can offer these sophisticated solutions as a standard, splitting the cost among several clients. The providers of BPO services are able to benefit more strongly from shared services solutions than companies with their own SSC. This is due to the fact that they invest in capabilities, processes, and infrastructure that are part of their core business. Page 19

20 Trend Analysis 4.5 Arguments for BPO from Users' Point of View In this question about arguments in favor of BPO, respondents could rate the criteria given according to 4 grades (1 = very important, 4 = not important). Fig. 11 How would you rate the following arguments for BPO? Arguments for BPO Concentration on core business Reduction of business process cost Reduction of IT cost Higher cost transparency Transfer of employees or job cuts Non-existent / insufficient internal kow-how Quality improvement in the business process Quality improvement in the IT environment Faster adjustment to technological change Cope with the shortage of qualified staff Faster adjustment to strategic change Access to new technologies 0% 50% 100% 1 = very important = not important Concentration on the core business For almost half of all respondents, concentration on the core business is a very important reason for implementing BPO. This reconfirms the fact that the tendency towards reducing the vertical range of administration follows the trend to reduce the vertical range of manufacture. Cost savings Cost savings also play an important role in BPO decisions. Almost 40% of those questioned see a reduction in business process cost as well as in the relevant IT cost as a very important factor in favor of BPO. Improved cost transparency Service quality This also involves the criterion of improved cost transparency, which can be reached through a fully transparent BPO concept. Based on detailed service level agreements, the IT service provider reports at regular intervals on the service quality delivered. Issues around the quality of service provision were also given as significant reasons for BPO. At IT as well as business process levels, customers expect marked improvements. Page 20

21 BPO in Germany Another factor is the ability to adapt more rapidly to technological change; this was deemed very important or important by more than half of the respondents. Classic IT service providers have their core competencies in the selection and implementation of state-of-the-art technologies; in this area, they act as professional partners for their customers. Ability to adapt more rapidly to technological change Providing highly available and solid infrastructure and selecting optimum applications are an advantage of the cooperation between companies and external BPO providers. This way, BPO clients can free up resources for the strategic development of their core competencies. Moreover, finding the right degree of cost reduction and quality improvement after intense analysis is among the main requirements on IT service providers and customers involved in BPO projects. 4.6 Arguments against BPO from Users' Point of View How would you rate the following arguments against BPO? Fig. 12 No cost advantage Business process is too strategic Arguments against BPO Dependency on provider Legal problems (data protection, BaFin, etc.) Insufficient process competence of providers Insufficient (data) security Weak confidence in outsourcing providers Reversibility is difficult or impossible Necessary adjustment of processes to the infrastructure Insufficient technological competence of providers (systems consolidation, interfaces, etc.) Acceptance by customers Transfer of employees or job cuts 0% 50% 100% 1 = very important = not important Page 21

22 Trend Analysis The arguments against BPO illustrated in Fig. 12 are rated as very important or important by more than 50% of respondents. Nearly half of them believe that no cost savings can be achieved through BPO measures. Clear definition of requirements in terms of price and quality The rating of cost saving potentials is ambivalent; in fact, when asked for arguments in favor of BPO, almost three quarters of the respondents considered them important. This means that potential customers should clearly determine their requirements concerning price and quality. The BPO project's strategic aim should be as transparent as possible. In their portfolios, BPO service providers offer highly variable service levels that can be precisely adjusted to customer requirements. Business process is too strategic Another important argument against BPO is the fact that a business process is too strategic. Companies are still reluctant about handing over the management of HR or procurement processes, for instance, to external providers; this is seen as involving too much loss of control. From PAC's point of view, this hesitation is in many cases unjustified, as the exact definition of service level agreements ensures maximum transparency of the processes; moreover, each BPO contract signed should be based on a real partnership. The following arguments against BPO were also seen as very important or important by at least 50% of those questioned: Dependence on the service provider; Legal problems; Lack of trust in outsourcing providers; Inadequate process capabilities of providers; Reversibility is difficult or impossible to achieve. The trend towards complete automation and thus towards cutting staff numbers is unstoppable. This explains why the issue of employee transfers/job cuts is considered the least important argument against BPO. Page 22

23 BPO in Germany 4.7 Selected Criteria for Choosing an IT Service Provider Transparent offering Flexibility Price / pricing models Technological know-how Fig. 13 Criteria for Selecting an IT Service Provider Specific process know-how HR policy (change management) / ability to integrate employees Willingness to take over risks References Business Process Re-engineering capabilities Specific industry know-how International provider/ global player Innovation Broad services portfolio ("one-stop services") Awareness / image on the market Existing business relationships 0% 50% 100% 1 = very important = not important Not stated The criteria that play a major role when choosing an IT service provider show that there is still need for action particularly on the provider side. For instance, nearly all users consider a transparent offering as important or very important. Here uniform, standardized Service Level Agreements (SLAs) may help, for instance, as they create an unprecedented level of transparency. Transparent offering Also worth mentioning is the fact that a majority of respondents deem already existing business relations less important or not important. PAC sees need for action on both sides. On the one hand, users too rarely appreciate the benefits of a long-term cooperation ('partnership' instead of 'customer-supplier-relationship'); on the other hand, most of the providers still have not managed to convince their customers of these very benefits. Already existing business relations Page 23

24 Trend Analysis 4.8 Optimisation Methods and Pricing Models for BPO Concepts Optimisation Methods Benchmarking In our survey, benchmarking ranks at the top when it comes to measuring the degree of efficiency and maturity of processes. More than three quarters of those questioned use competitive comparisons to derive best practices and apply them to their own company. Fig. 14 How do you measure the level of efficiency and maturity in your company? Methods of Measuring Efficiency and Maturity of Business Processes [%] Through benchmarking Through Key Performance Indicators (KPI) Others Not at all Not stated Key Performance Indicators (KPI) More than half of all respondents also use so-called Key Performance Indicators (KPI). This involves defined measurements for individual processes, which the process owner can optimize through continuous monitoring. This leads to systematic and constantly monitored process enhancement. A link between benchmarking and KPI may be created through obtaining best practices as a basis for fixing measurements or for assessing the level of optimisation. This means both models are interlinked, but they can also deliver valuable information for process optimisation when used separately. Moreover, under 'Others', various additional methods for optimizing processes were quoted, such as Six Sigma or the use of Balanced Scorecards. Overall, 93% of those questioned employ tools for measuring and optimizing processes. This indicates companies' general maturity; they are already investing into continuous and systematic process optimisation. The majority of companies are thus highly aware of inefficient business processes. Page 24

25 BPO in Germany Potential BPO clients should benefit from this awareness to step-by-step discuss with potential IT service providers the advantages of BPO for process optimisation Pricing Models So far, most BPO contracts include pricing per unit (e.g. number of employees per payroll, etc.). This pricing model is based on output figures similar to MIPS selling in the 'traditional' IT area (MIPS = Million Instructions per Second). Guaranteed unit cost with a fixed maximum/minimum For customers, this means a change from fixed cost to variable cost. The IT service provider's task is to provide an efficient and flexible infrastructure and organisation. With this form of pricing, customers agree to pay BPO IT service providers a flat fee per unit of work. Change from fixed cost to variable cost Which pricing model do you prefer for charging BPO services? Fig [%] Favored Pricing Models Utilisation-based pricing Fixed price Risk sharing Not stated Others Profit sharing models are currently being developed as an alternative to utilisation-based pricing; they not only take into account prices per unit, but also BPO's positive influence on the client company's business, for instance on the basis of the number of new customers or of revenue growth generated with existing customers. 30% of respondents prefer risk/profit sharing as a suitable pricing model. Profit sharing models This underlines the importance of cost cutting for BPO decisions today and is proof of a certain lack of innovation on both sides customers and suppliers. In these cases, the outsourcer has usually no influence on demand; he is only responsible for the flexible and efficient functioning of the services and the main emphasis is on cost reduction. A look at Fig. 13 also shows that the innovative capabilities of a BPO provider have become a significant factor. More than three quarters of those questioned consider this criterion as important or very important when selecting an IT service provider. Innovative capabilities of a BPO provider have become a significant factor Page 25

26 Trend Analysis 05 Conclusion and Outlook The market for Business Process Outsourcing (BPO) in Germany is gaining in maturity. IT providers are gradually professionalizing their offerings and end users are increasingly open-minded about this modern management concept. The current market situation remains transaction-oriented, i.e. focused on cost reduction through the realisation of economies of scale. The innovative approach of business process transformation with a high share of consulting and simultaneous operation by an external IT service provider is bound to gain momentum in Germany it is only a question of time. In 2005, revenues of almost 1.7 billion were generated with BPO projects in Germany. The 'concentration on core business' is quoted as an argument in favor of BPO. Customers are to focus on their actual business, while external IT service providers deliver those services they are specializing in. This concept proved its worth in production and IT. Will outsourcing be the ideal solution of the future for administrative business processes, too? A strict separation between IT and business processes is a thing of the past. Many IT service providers today have know-how about process consulting and optimisation as well as about IT. Taking over the operation after doing a consulting project is a logical consequence that promises long-term customer relationships. IT service providers extend their service offerings by taking the next step from consulting to BPO (permanent/recurrent business) or from IT outsourcing to BPO. Traditional IT service providers' primary aim is to make their customers' business more efficient and flexible through the intelligent deployment of information technology. Understanding customers' processes is indispensable in this context. If infrastructure and applications deliver satisfactory performance, and if some sub-processes are perhaps already supported in administrative terms (e.g. payroll processing), then would it not make sense to go one step further towards BPO? Page 26

27 BPO in Germany There are various approaches to place BPO services on the market that all point into the same direction. Apart from crucial sector and process know-how, providers require dedicated methodologies and procedure models, especially in the change management environment. On top of this, they need global delivery capabilities to ensure efficient international delivery terms, including nearshore and offshore resources. Particularly if BPO providers take over core processes, client companies demand proof of their profound sector and process know-how, especially in the form of reference projects in the same sector or covering the same business processes. Customer confidence plays a central role when concluding BPO contracts - even more than with other IT services. The combination of business process competences and IT services capabilities in a BPO provider is what accounts for the added value of externalisation. By optimizing their processes, e.g. by setting up a Shared Services Centre through an IT service provider, user companies can reach high efficiency levels and thus long-term innovative capabilities and constant cost cutting. According to PAC, cost transparency is more important for users than pure cost cutting. Moreover, BPO providers accommodate their customers with flexible payment models such as performance-related pricing. BPO promises customers higher flexibility and shorter time-to-market, thus enhancing service quality. At the same time, BPO users can concentrate on their core business. Successful BPO providers of the future should develop unique selling points to differentiate themselves from their competitors. The innovative ability to act as IT service provider/bpo supplier, proactively supporting customers in all aspects of their corporate strategy, will be a key element. Page 27

28 Trend Analysis 06 Questions to EDS on the Subject of BPO Interview with Joachim Langmack Managing Director EDS in Germany EDS is known to be one of the world's biggest infrastructure outsourcing providers. What are the specific requirements of BPO on an IT service provider? Joachim Langmack: As pioneer among IT outsourcing providers, EDS is predestined to also offer business process outsourcing (BPO) services to its customers. For seen from the perspective of a customer-oriented organisation, BPO includes the performancebased combination of systems, applications and the processes they support. Here EDS can profit from its infrastructure and application know-how gathered during many years of successful work as well as from the comprehensive industry expertise gained from this know-how. In the HR BPO area, for instance, EDS has offered services for as many as 25 years. Our Consulting Service Line and the partnership with Towers Perrin enable us to actively get involved in process design. The solutions are individually developed and implemented to fit the customer processes to be optimised. At this point I would like to underline that the customer of course retains full responsibility for strategic decisions and the jointly created governance model. Thanks to its Agile Enterprise concept, EDS is highly flexible and can thus support individual customers' constantly growing and changing requirements by offering innovative solutions. What business processes does EDS focus on in BPO contracts? Joachim Langmack: EDS' business process outsourcing portfolio ranges from administrative services to CRM services to HR services and F&A services. The two latter are our focal services in Central Europe, as we believe that they will account for the main share of BPO services in the coming three to five years. Page 28

29 BPO in Germany What is your delivery model for HR BPO? Joachim Langmack: In cooperation with the human resource management consulting firm Towers Perrin, EDS offers its customers the complete range of HR outsourcing services through their joint subsidiary ExcellerateHRO. ExcellerateHRO takes over customers' administrative processes so that they can focus on core competencies, strategy and its implementation. Across all services involved and the underlying technology, ExcellerateHRO ensures improved cost efficiency and smooth implementation and handling. Many users expect a transparently structured offering from IT service providers. How does EDS handle this issue? Joachim Langmack: Our cooperation with customers is based on the detailed Service Level Agreements (SLA). These can be part of an all-embracing Business Level Agreement (BLA). BLA make it possible to fully align the service to be delivered to clients' core business during analysis, execution, control, and billing. In BLA, EDS agrees with its customers on what services are to be delivered in what way. These agreements are based on standard services composed of best-in-class processes tested by EDS, which are then adapted to individual customer requirements. EDS chose this procedure to enable customers to assess services and compare them with their own cost already in the offer phase. Let's take payroll accounting as an example: We agree on a price per pay slip. This price includes all necessary cost for creating and administrating a pay slip. This enables customers to make exact calculations. In addition, they are flexible enough to react to fluctuations when the number of employees changes. According to our experience, our customers are very satisfied with this pricing model. In your opinion, what are the advantages for local and global players of working with a global BPO service provider? Joachim Langmack: A global BPO provider like EDS with its global reach is available for customers all around the world at any time; moreover, we can deliver a consistent level of service quality. Thanks to its global delivery model, EDS works according to the same standards and processes all over the world. This benefits not only globally acting customers, but also local companies, as it gives them worldwide access to bestin-class solutions. Traditionally it has been one of EDS' strengths to help internationally expanding companies enter new markets; this is an advantage for local businesses. Customers can of course use the entire EDS portfolio. They can achieve maximum cost savings by realising economies of scale through a shared service centre this benefit is available to all customers. Page 29

30 Trend Analysis Author: Stephan Kaiser, Pierre Audoin Consultants (PAC) GmbH Editors: Stephan Kaiser, Pierre Audoin Consultants (PAC) GmbH Gertrud Nöth, EDS Deutschland GmbH Publisher: EDS Deutschland GmbH Eisenstraße Rüsselsheim Tel. +49 (6142) Fax +49 (6142) oder For more information: Please contact: Stephan Kaiser (PAC), Tel. +49 (89) , Sven Wagner (EDS), Global Sales & Client Solutions EMEA Central Region Tel. +49 (0) , Page 30