Business Process Outsourcing Grows Up

Things tend to mature rather rapidly in the IT sector, but business process outsourcing hasn't been one of them.

Business process outsourcing, or BPO, has been around since the mid-1990s. In a BPO engagement, an organization offloads responsibility for an IT-intensive business task to an external vendor. "Non-core" business functions such as payroll are considered BPO candidates.

But as with many new service offerings, BPO hit the ground with a certain amount of fanfare and hyperbole. IT outsourcing took off in the early 1990s as a cost savings measure for companies weathering the 1980s' leveraged buyout craze and recession. BPO, however, was to make outsourcing more of a strategic move and less of a desperate act.

Since then, customers showed some interest in BPO, but profits were not within easy reach for those pursuing the market.

Some industry executives now point to a stronger BPO market. TPI, the outsourcing market researcher, recently reported that BPO's share of the overall outsourcing market in terms of total contract value increased to 33 percent in 2004 compared with 22 percent in 2003. BPO's share by number of transactions rose to 37 percent from 31 percent during that period. The TPI analysis covered outsourcing deals in excess of $50 million.

Heartened vendors sense a market transition. Hewitt Associates Inc., which focuses on the human resources sector, views 2004 as "the year that the HR [BPO] industry went mainstream."

More evidence comes from Affiliated Computer Services Inc. The company, which launched a dedicated BPO division in 1999, now derives about 75 percent of its business from the service. Executives at the company's quarterly earnings last week pointed to vigorous contract bookings and a $1 billion pipeline of potential deals.

Affiliated Computer Services' BPO offering covers such functions as administration; finance and accounting; human resources; payment services; sales, marketing and customer care; and supply chain management.

Maturing markets tend to consolidate, and such a pattern may be in the offing in BPO. The BPO market is fairly fragmented. According to TPI, 24 different services vendors won at least two BPO contracts in 2004. That compares with 18 vendors capturing BPO deals in 2003. TPI considered transactions in excess of $25 million.

Hewitt Associates' September 2004 acquisition of Exult Inc., a company focused on the BPO space, may be a sign of things to come. In any event, BPO appears to be escaping its long adolescence.