Business Process
Outsourcing:
Current Trends and Best Practices
Major corporations in almost every industry are taking
advantage of the latest evolution in buying improved
services at lower costs—assess its value for your
own operational circumstances.
BY MARK HODGES AND DUIE BLOCK
Today’s world economy is driving
many companies to seek increasingly
aggressive ways to meet the demands
of shareholders, investors, and employ-
ees. In a quest for higher profits and
increased competitive advantage,
you would be hard-pressed to find
an executive or manager
8 ■ Contract Management / January 2005
not motivated by lower costs and better
productivity. Additionally, most com-
panies are focusing on value-added,
customer-centric functions and striving
to reduce investments in operations
that don’t directly affect the bottom
line. What are major corporations
doing to achieve all this?
Plan of Attack
One strategy is business process
outsourcing (BPO), the most recent
evolution of buying non-strategic
services from an external provider
that specializes in delivering services
to multiple customers. IT services
have been successfully outsourced
for many years as an effective way
for companies to lower cost and raise
productivity. As a result, the out-
sourced model is now being extended
to many other internal business
processes—sometimes referred to as
G&A, or general and administrative
services, such as human resources
(HR), finance and accounting (F&A),
and procurement.
Why BPO?
Companies who contract with a
business process outsourcer—or
service provider—have found the
BPO value proposition compelling.
Companies who have adopted BPO
have experienced as much as 25
percent annual lower costs for delivery
of G&A services when compared
to baselines of internally delivered
services. And many external service
providers will guarantee specific cost
savings that can be spelled out and
committed to over the course of a
five- to seven-year contract.
There can also be dramatic savings
in technology investments, such as
enterprise resource planning (ERP)
systems, call centers, and employee/
manager self-service. Due to the
transactional nature of BPO functions,
service providers themselves make
heavy investments in these technolo-
gies, thereby saving their clients the
burden of purchasing, implementation,
ongoing support and maintenance of
ERP software, and call center technol-
ogy. In addition, these savings can be
front-loaded or begin after the transition
of each process to be outsourced.
Time is also a factor. Service providers
who operate the outsourced portion of
G&A services have been known to cut
12 to 24 months off the time it would
normally take to complete an internal
G&A transformation.
Many BPO service providers have
positioned trained, low-cost resources
About the Authors
MARK HODGES is chairman of EquaTerra
and is acknowledged worldwide as a
pioneer in the BPO industry. He speaks
regularly at global BPO events, is a monthly
columnist for HR Executive Magazine,
and sits on two industry advisory boards.
DUIE BLOCK is a client executive for
EquaTerra. He has more than 15 years
of experience in all areas of IT outsourcing
(including relationship management,
process improvement, application
development, and flexible staffing).
Send comments on this article to
cm@ncmahq.org.
around the world to provide yet
another benefit to outsourcing
customers: 24x7x365 operations
and often in two or three consecutive
shifts. Can you imagine your F&A or
HR department working non-stop?
Today, some BPO engagements feature
services that are provided onshore,
near-shore (Canada, Puerto Rico, and
Mexico) and offshore (India, Philippines,
China, and Russia)—all under the
same contract. Furthermore, the range
of services offered by external service
providers runs the gamut from com-
prehensive F&A and IT functions to
more discrete offerings such as call
center operations, supply chain/
logistics, product design, accounts
payable, and medical transcription.
Major corporations in almost every
industry are taking advantage of the
improved services and lower costs
that can be realized by using BPO
(see Table 1 on page 14). From a
service provider’s perspective, BPO
represents the single most
important growth opportunity
available in today’s market-
place. According to industry
analysts, the demand for
global BPO services is
growing at a rate of 13
to 15 percent compound
annual growth rate
(CAGR) (see Figure 1
on page 10).
Functions: What Should Stay
or Go?
BPO service providers make their profit
through economies of scale. Servicing
multiple customers from centralized
facilities with low-cost, highly trained
resources enables providers to make a
profit while staying price-competitive in
their market. The costs of leading-edge
technology and state-of-the-art facilities
are spread across customers and
positioned in the most efficient
and economical locations
to provide the highest
possible quality at the
lowest cost.
Due to their substantial
investment in systems,
networks, security, and
software, most global
BPO providers look for
highly transactional,
technology-intensive
work such as payroll
and records manage-
ment to achieve
January 2005 / Contract Management ■ 9
BPO: CURRENT TRENDS AND
For a BPO contract that is valued at $140
million over seven years ($20 million per
year in outsourced spend) the level of OCE
investment should be in the range of 4 to 6
p e r c e n t , o r $ 8 0 0 , 0 0 0 t o $ 1 . 2 m i l l i o n p e r y e a r.
the highest profit. This is major reason
that competition in the BPO provider
market is centered on HR and F&A
services. Table 2 (on page 15) con-
tains a list of commonly outsourced
HR and F&A functions. Whether pro-
vided in-house or outsourced, these
functions tend to be considered non-
strategic and low-value in terms of
impact on a company’s bottom line.
However, in any outsourcing rela-
tionship, there are portions of most
G&A processes that should be retained.
To interconnect outsourcing strategy
with that of the overall business, it is
advisable to keep consistent control
Solution Areas Opportunity 2004
$40
$37.9B,
12% CAGR
$30
$20 $21.3B,
$20.1B, 15% CAGR
13% CAGR
$10
(Billions)
F&A HR Proc.
(Source: IBM Analysis based on multiple industry sources (Gartner, Dataquest, IDC, AMR))
10 ■ Contract Management / January 2005
BEST PRACTICES
of the strategic and policy elements
HR and F&A functions. For HR, this
means the overall development of
strategy and other business-critical
activities such as workforce planning,
labor relations, policy and legal com-
pliance, executive compensation,
and talent management. Other more
“consultative” HR activities can be
shared if the provider has the appro-
priate expertise and resources.
Consultative activities include organi-
zational development, succession
planning, compensation and benefits
design, communications and learning
development, staffing policy, and
$25
$20
$15
$10
$8.9B, $5
15% CAGR
(Billions)
CRM
Figure 1.
performance management.
In the F&A area, financial planning
and analysis, management reporting,
budgeting, forecasting, and credit policy
are usually kept in-house to ensure a
tight connection among business units,
executive management, and centralized
accounting. Consultative functions for
F&A include internal audit, risk man-
agement, tax compliance and planning,
as well as statutory reporting.
When a company has geographically
distributed divisions, it is common to
keep certain functions in-house in a
centralized model, as the provider
may have difficulty delivering cost-
effective services. For example,
site-specific accounting functions
for sales/marketing, plant locations,
or inventory are best kept in-house.
Key Service Provider Players
As in the case with all new business
opportunities, competition in the BPO
service provider space is strong. As the
market for BPO services has matured,
providers have evolved, merged, and
adapted to meet global requirements.
Sectors Opportunity 2004
$24.4B
$23.1B
$17.6B
$12.4B
$12B
Public Distribution Energy & Financial
Communication Industrial Services
BPO: CURRENT TRENDS
BPO Life Cycle Methodology
Stage 1 Analysis, Education, and Strategy
Stage 2 Due Diligence and Relationship Evaluation
Stage 3 Contract Relationships
Stage 4 Work Transition
Stage 5 Relationship Management
Stage 6 Continuous Improvement
Figure 2.
Today, BPO providers come from
a variety of diverse backgrounds and
skills. There are essentially four types
of providers that are gaining success
in the global BPO, each with its own
strengths and weaknesses.
(1) BPO Consultants. Previously
known as the “Big Five,” these
partnerships have a long history
of managing business process
reengineering and systems
integration projects. They have
extended their expertise into the
BPO market and compete for
multinational engagements. While
BPO consultants have excellent
project and client management
skills, their delivery model tends
to focus on transformational
relationships as opposed to
pure transaction work.
(2) IT Outsourcers. This group is
made up of IT services firms that
have successfully shifted into BPO
from less profitable data center
and infrastructure outsourcing ser-
12 ■ Contract Management / January 2005
AND BEST PRACTICES
vices. IT outsourcers have well-
established delivery models
including offshore capabilities;
however, they may have trouble
customizing their services for BPO
clients due to their IT heritage.
(3) Business Process Specialists.
Many of these providers started
out as transaction processing
services organizations with a par-
ticular specialty such as payroll,
logistics, or office services. These
companies often occupy leadership
positions in their specific process
area, have skilled resources, and
are financially stable. Their weak-
nesses include global scalability and
client management capabilities.
(4) Pure Play BPO Providers. Backed
largely by venture capital, these
firms came to prominence in the
late 1990s to specifically address
the BPO services market. Pure
play providers are largely led by
experienced management teams
and have made strong technology
partnerships to support their busi-
ness models. They may struggle
with profitability, however, as
their client base evolves.
When evaluating BPO providers for
their specific process knowledge and
capabilities and how those match to
your needs, it is very important to con-
sider the company’s background. It also
helps to look at where they are posi-
tioned in terms of service mix. Table 3
(on page 16) maps specific service
providers and their areas of expertise
to the four types of BPO providers.
Notice that certain providers have
combined their offerings into a “com-
prehensive” mix of services that
integrate management processes
across HR, F&A, and IT services.
Common Pitfalls
In the age of BPO—with its myriad
services, providers, contracts, and
management techniques—the process
for making the decision to outsource,
choosing a provider, negotiating a
contract, and organizing around tran-
sition and ongoing management can
be laborious and complex. Success is
not always assured; in fact, there is a
multitude of outsourcing failures on
the books, but they are largely in IT
outsourcing (data center, desktop, etc.)
and not in the BPO arena.
Here are a few of the most common
problems facing companies that consider
BPO service provider relationships.
Selection Process
Developing a concise outsourcing
strategy that includes specific process
requirements and service expectations
can be a difficult task.
Relying on a vendor to provide this
deliverable is a mistake. More than
likely, you will end up with services
that suit the needs and goals of the
BPO provider, not those of your com-
pany. Furthermore, providers love to
offer “free” advice such as readiness
assessments and RFP development.
Beware—a BPO provider can never
be truly objective, no matter how well
it knows your business. Always keep
in mind that the provider must serve

its own interests in addition to yours.
The free BPO strategy advice you
receive will be shared with the service
provider’s outsourcing unit.
Strict rules should be developed and
followed to manage the BPO provider
selection process. This makes it fair
and impartial to all under considera-
tion. On occasion, companies make
the mistake of letting providers bypass
the prescribed selection process and
corresponding communications proto-
cols. This typically happens with a
last-minute entry at the direction of
an executive who is not part of the
decision team. Additionally, decision
criteria for the selection process must
be clearly defined, with such elements
as price points or provider qualifica-
tions. However, the process should
not prevent the BPO provider and
key stakeholders in your company
(executive management, functional
leadership, and process operations)
from frequent interaction. BPO
relationships are tightly interwoven
between buyer and seller—the sooner
and more regularly the two parties
interact, the better the ultimate solution
and relationship. Keeping the BPO
provider at a rigid “arm’s length”
is not an industry best practice.
Contract Negotiation
Outsourcing is often considered
by management to be the “fix” for
dramatic cost-cutting initiatives. As
a result, corporations sometimes focus
only on the first- or second-year savings,
rather than on balancing the short-
and long-term benefits.
There is also a tendency for clients
to take negotiation shortcuts to expe-
dite the deal with the chosen BPO
provider. One of the worst cases is
when both parties avoid developing
detailed language for certain business
change, opting instead to rely on future
negotiations to re-position the deal.
Another “worst” practice is waiting to
set the financial baseline and service
levels until post-contract signing.
More often, the two parties never get
around to it, and expectations quickly
become misaligned.
BPO: CURRENT TRENDS AND BEST PRACTICES
The Definitive BPO Checklist
• Statement of work (process maps, documented
activities, and future state)
• Service levels, methodology, and service-level
Pre-RFP
agreement
• Financial model (5- to 10-year projection)
• Schedules (e.g., existing third-party contracts)
• List of likely G&A BPO providers
RFP • Pricing and charging units
• Exhibits (e.g., in-scope countries, personnel)
• Sourcing strategy
• Service contract and business terms
Governance
• Service delivery management
& Relationship • Contract management
Management
• Governance
• Financial management
Figure 3.
Relationship Management
Precise understanding of internal cost;
The importance for a client to develop
an outsourcing governance organization
Firm timeline and deadline;
and relationship management (RM)
processes and skills to manage the
Identified resources—empowered
agreement cannot be overstated. and budgeted (including internal
Insufficient or unskilled resources and resources);
incomplete management processes
can result in a complete loss of all the
Appropriate use of RFI and/or RFP
expected benefits to BPO—and may with competitive process and expert
even result in the collapse of the external advisor, including legal
relationship altogether. resources;
Key Characteristics for Success
Re-engineered processes (to match
The following characteristics pertain conceptual “future state”);
to all forms of contracting for services
but are especially useful for BPO
Excellent change management,
contracts and relationships. as well as internal and external
These include: communications capabilities;

Focus more on what is performed

Commitment from executive leader- vs. “how” and “where;”
ship with a strategic imperative to act;

Emphasis on long-term relationship,

Clearly understood business objec- not “transaction;”
tives, aligned with internal interests;

Collaborative approach to the

Personally involved and passionate process and negotiations and not a
executive sponsor; commodity procurement mindset;
January 2005 / Contract Management ■ 13
BPO: CURRENT TRENDS AND BEST PRACTICES

IT, F&A, and HR (Two or More) F&A HR

Bank of America International Paper AFC Enterprises BASF

Bank of Montreal Lucent Airgas Cable & Wireless
Barclay’s Bank MRG ANZ Bank Celanese
BC Hydro Motorola AT&T Wireless CIBC
British Aerospace Compaq Fifth Third
Nortel
British Petroleum Cisco Goldman
Procter & Gamble
British Telecomm Fox Media Goodyear
Prudential Financial
Dynegy Hewlett Packard IBM
Royal Dutch Shell
Equifax Home Depot McKesson
Gateway Telecomm Italia Ingersoll Rand Sony
General Motors Thomas Cook Microsoft State of Florida
GE Vivendi Unisys
United Healthcare

Table 1.

Strong governance design and
implementation; and

Sufficient and skilled relationship
management resources.
A Pragmatic Approach
for Evaluation
Once your organization has made the
decision to pursue BPO as a strategy,
the next step is to build a realistic
plan to complete a thorough evalua-
tion of the provider market, available
services, and, most importantly, your
own internal capabilities to manage
the evaluation, selection, negotiation,
and transition processes. Without a
clearly defined plan that includes
executive sponsors, timelines, and
responsibilities, there is a substantial
risk that the project will take too long,
cost too much, or worse, fail entirely.
The following BPO life cycle
methodology has been developed by
EquaTerra as a flexible set of processes
that can be used to effectively com-
plete an outsourcing transaction, from
initial assessment to the end of the
contract term. This methodology can
be used as a basic set of guidelines
for your project. Keep in mind that
the set of steps and techniques are
usually modified for each client based
on scope, complexity and volume of
services, geography, number of busi-
ness units, and client outsourcing
sophistication.
Stage 1: Analysis, Education,
and Strategy

Gather and assess existing data,
costs, processes, and information.

Assess current situation and per-
form gap analysis with respect to
“future state” processes, service
levels, volumetrics, investments,
and best practices.

Articulate outsourcing goals/
objectives and determine preferred
sourcing strategy.

Understand the current financial
model and develop the plan to
create a new model.

Identify and educate the core
project team on process,
outsourcing, governance, and
relationship management.
Stage 2: Due Diligence
and Relationship Evaluation

Engage with BPO service provider
to understand its proposals and
facilitate sharing sessions.

Design the future-state governance
and relationship management
organization.

Develop the contract framework;
involve outside legal counsel.

Do the statement of work.

Assess service levels.

Determine method of purchase units.

Evaluate volumetrics.

Set terms and conditions.

14 ■ Contract Management / January 2005

 BPO: CURRENT TRENDS AND BEST PRACTICES

HR Functions F& A Functions

Benefits Administration Accounts Payable

Compensation Administration Accounts Receivable/Collection

ESC and Tier 1 Inquiries Banking and Cash Management

HRIS/HRIT & Data Records Billing

Learning Administration Cash Application

Payroll and T&E Administration Employee Administration

Relocation/Expatriate Administration Fixed Asset Accounting

Severance/Outplacement General Accounting

Staffing Administration Payroll Processing

Vendor Management Travel and Entertainment

Table 2.

Assess and normalize the proposals.

Highlight key distinctions of the
proposals and their unique value.

Evaluate proposal including solution
evaluation, culture evaluation,
financial model, and contracting
ability.

Perform work activity survey.
(Optional)

Execute the internal and external
communications plan; review and
update the employee retention
strategies; finalize the RM and
governance model.

Identify HR/employee/
communications issues and develop
communications and HR plans.

Develop high level relationship
management and governance model.

Perform executive briefing sessions.
Stage 3: Contract Relationships

Negotiate and finalize contractual
terms and conditions, pricing,
transitioned employees, including
service contract and all accompanying
schedules.

Build and staff the future-state gov-
ernance and relationship management
organization.

Perform mutual due diligence,
including visits to BPO service
provider service and production
centers and visits to customers.

Establish effective contract manage-
ment processes and implement the
relationship management and
governance model.

Work directly with legal counsel
and outside counsel to finalize the
contract documents.

Execute the internal and external
communications plan.

Perform executive briefing sessions.

Sign the BPO contract.
Stage 4: Work Transition

Assist in plan for the transition of
service responsibility to the service
provider(s).

Conduct town halls and other
internal communication and
change management programs.

Support internal HR and the BPO
service provider with employee
transition.

Facilitate service level implementation.

Ensure complete development
of outstanding contract schedules.

Develop contract critical milestones
and obligations communications
tool—facilitate implementation.

January 2005 / Contract Management ■ 15

BPO: CURRENT TRENDS AND BEST PRACTICES

Comprehensive F&A HR IT

Accenture Accenture Accenture Accenture*

ACS ACS ACS ACS
CGEY* CGEY CGEY* CGEY
Hewlett Packard* Hewlett Packard Hewlett Packard* Hewlett Packard
IBM (PwC) IBM (PwC) IBM (PwC) IBM (PwC)
Perot Systems* Perot Systems Perot Systems* Perot Systems

*”Comprehensive” Deloitte Aon CSC

services could be Ephinay Arinso EDS
delivered with an Equitant Convergys Infosys
existing partner.
OPI EDS Keane
Sourcenet Exult SAIC
Unisys Fidelity (FESCO) Satyam
WNS Hewitt Unisys
Xansa Mellon Wipro
SynHRgy (Mercer)

Table 3.

Further develop and implement the
governance and relationship man-
agement framework with service
provider and business units.

Develop and implement
communications plan and BPO
deal road show.
 Position descriptions,
 Decision rights,
 Critical management processes
with descriptions and work flow,
 Governance protocols, and
Stage 6: Continuous Process
Improvement

Do periodic assessments:
 Relationship audit and alignment,
 Process and organizational
effectiveness health assessment,

Assist with asset transfer and
third-party contract assignments.

Facilitate implementation of critical
interim contract management,
issues management, and dispute
resolution processes.
Stage 5: BPO Relationship
Management

Refine and further implement a
customized Governance/
Relationship Management Operating
Model based on industry best
practices:
 Organization design and staffing
model,
 Communications plan.

Develop tools strategy and
implementation plan.

Provide for an educated and
trained governance and relationship
management team—knowledge
transfer and skill-building.

Deliver a customized relationship
management platform—Web-based,
enterprise-enabled software with
tools, job-aids, training, negotiation
support aids, documented operating
model content and decisions, and
outsourcing deal knowledge man-
agement, and tracking and issues
management tools.
 Contract audit and review, and
 Benchmarking.

Develop team skills:
 Training and workshops,
 Skill-building facilitations, and
 Staff augmentation and support.

Renegotiate contracts.
Overall: Setting A
Successful Structure
A question commonly asked by
EquaTerra clients when evaluating
BPO is, “How do I manage my

16 ■ Contract Management / January 2005


provider once the contract is signed?”
Managing the BPO provider is only
half the equation—the other half is
the management of internal stake-
holders. An organizational discussion
often follows this question, which
then leads to the best construct for
accomplishing both objectives, which
ultimately results in a BPO gover-
nance and relationship management
organization. The industry is beginning
to call that organization an Outsourcing
Center of Excellence (OCE).
Creating a viable BPO OCE takes
planning, investment, and commit-
ment—otherwise the ability to
articulate the value of the BPO rela-
tionship will never be achieved. What
are the characteristics of a feasible
BPO OCE?
Level of Investment
For a BPO contract that is valued at
$140 million over seven years ($20
million per year in outsourced spend)
the level of OCE investment should be
in the range of 4 to 6 percent, or
$800,000 to $1.2 million per year.
This investment covers both full-time
and part-time people in the OCE,
processes (management, operational,
and administrative) and systems
(software tools and other enabling
technology). The number of personnel
for a contract of this size can range from
seven to 15 people. Characteristics
that drive the investment toward the
6-percent range (versus four) include
global scope, more than 10 G&A
processes, significant transformation
activities, or an ERP rollout or a client
that has never outsourced before.
Service Delivery Management
This work is performed by two to four
individuals with significant subject
matter expertise in their respective
domains (HR or F&A for example).
An example might be one person for
workforce management, another for
HRIT, and still another for total rewards.
In addition to domain expertise, quality
and project management expertise are
also required.
The quality of BPO provider perfor-
mance is focused on monitoring and
BPO: CURRENT TRENDS
reporting, breach notification, prob-
lem escalation, and resolution. It is
day-to-day, week-by-week, monthly
and even annually prescribed work
that is performed by the BPO provider
and the related client and internal
management groups. For a PM office,
outsourcing is a much different propo-
sition for success and value than an
internal project.
Contract Management
The work usually involves two full-
time resources—a contract manager
and a financial analyst. Their respon-
sibilities include billing and payment,
consumption forecasting and tracking,
financial compliance relating to the
contract, charge-back, benchmarking,
internal controls, and third-party con-
tract management. These processes
are critical, yet often overlooked. When
they aren’t given due attention, the
result can lead to significant value
leakage.
Value leakage means higher than
anticipated costs (usually > 10%) and
less than expected results. A combina-
tion of factors is often responsible,
as follows:

Newness of managing a BPO rela-
tionship—the function is considered
overhead and receives little invest-
ment in terms of budget and
resources;

Historically limited technology-
enabled processes or tools—these
ensure consistency, compliance,
and performance-reporting;

Client inability to manage internal
demand consumption—demand for
services often goes up after a BPO
contract is signed, catching clients
by surprise;

Micromanagement of the BPO
provider (or no oversight at all); and

Client loss of leverage post-BPO
transaction.
AND BEST PRACTICES
BPO OCE Leadership
The executive in charge of the out-
sourcing OCE must provide overall
governance and continuous relation-
ship management, both internally and
externally. Responsibilities include a
focus on driving current and future
value by implementing and maintaining
high quality business planning and
satisfaction processes. It naturally
requires high-touch interpersonal and
negotiating skills, supported by well
defined and mutually agreed upon
governance protocols, decision rights,
issues management, and dispute reso-
lution procedures.
Transition & Transformation
A full-time transition manager is
required, usually for three to 12
months, depending on the complexity,
number of G&A processes and coun-
tries in scope, and other factors. If
significant functional transformation
is involved in the BPO relationship, a
full-time resource is required to man-
age transformation activities, too.
Risk & Compliance
This manager works closely with
corporate risk management and com-
pliance, as well as the risk mitigation
plan for the BPO contract itself. With
regulations such as SAS 70, Sarbanes-
Oxley, and other regulatory
requirements, this function has
become much more important than
in previous years.
A best practice BPO OCE requires
full-time resources and budget—in
people, technology, and processes.
Managing multi-hundred-million dollar
outsourcing relationships demands
no less. CM
January 2005 / Contract Management ■ 17