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The Economics of Business The Economics of Business Process Outsourcing:Process Outsourcing:

Measuring the potential impact for Measuring the potential impact for high technology organizationshigh technology organizations

Don Campbell – President/CEO Virtual Management Technologies

Tom Savini – CFO AirDefense

Mike Drapeau – President The Drapeau Group

Karen Cobb – Small Business Advocate Administaff

Scott Kriscovich – Market Leader Horn Murdock Cole

Mike Janis – Senior Vice President The Hackett Group

Topics Today:+ The state of the BPO market + The key benefits of BPO+ The impact of BPO on stages of

growth+ The financial impact of BPO+ Guidelines on what functions to

outsource

Digital Health Group

BPO Terminology:+ Business Process Outsourcing: “leveraging of technology

or specialist process vendors to provide and manage an organization's critical and/or non-critical enterprise processes and applications”

+ Outsourcing: “delegation of non-core operations to a third party”

+ Offshoring: “delegation of non-core operations to a third party in another country”

+ Insourcing: “importation of knowledge worker talent to an organization (often used in economics to depict inflow of talent or exchange of talent among countries)”

The BPO RevolutionThe BPO Revolution

Broadband Internet

Broadband Internet

BusinessSpecialization

BusinessSpecialization

EducationalAttainment

EducationalAttainment

InexpensiveData Storage

InexpensiveData Storage

Online Analytical Processing

Online Analytical Processing

Internet SecurityInternet Security

BPO Drivers

Essentials of Business Process Outsourcing Thomas N. Duening, Rick L. Click 2005

BPO is a $400 billion business (Plunkett Research Ltd.)+ Largest sectors:

– Logistics, sourcing and distribution services – Information technology services

– Creation of Software– Computer Center Management

– Call centers– Financial transaction processing– Human resources management

Outsourcing for small to mid-size companies:+ Market value >$15 Billion (Gartner) + Cost savings ranging from 10-40 percent + Advantage: Level the playing field (cutting operational costs

and leveling the playing field)+ Challenges:

– Selection process– Negotiating contract– Managing the ongoing relationship– Measuring the business value– Security and privacy

“In 2005, according to the findings in the report, Georgia outpaced the national growth rate for total high-tech establishments with a 2.2% increase vs. the 1.8% national growth rate.

The state also posted impressive gains in total high-tech payroll growth with a 6.2% gain vs. the 6.0% realized nationally.”

Tino Mantella

President,TAG

State of the Industry Report, 2006

Why do organizations outsource?

• Gain access to expertise• Allow staff to focus on core business • Get rid of routine work • Reduce internal organizational costs• Reduce growth risk• Increase flexibility

corecore

What is the core of your business?

• Patentable technology

• Intellectual property

• Manufacturing process

• Software logic

• Business process

corecore

HRHR

MFGMFGSCMSCM

ITIT

What can be outsourced beyond your core competency?

• Finance

• Human Resources

• Marketing

• IT

• Supply Chain Management

• Call Center Operations

When should you outsource? Ask these questions:

• Is the function strategic to running the business, or is it a Is the function strategic to running the business, or is it a commodity? commodity?

• If the function is strategic, it should not be outsourced. If the function is strategic, it should not be outsourced.

• Is the function large enough to warrant outsourcing? Is the function large enough to warrant outsourcing? • If the function is too small, the company may not get enough If the function is too small, the company may not get enough leverage from the outsourcing relationship. leverage from the outsourcing relationship.

• Can the function be easily reproduced off site? Can the function be easily reproduced off site? • If it is too unique, outsourcing may not work.If it is too unique, outsourcing may not work.

• Do you have the data necessary to write an intelligent contract Do you have the data necessary to write an intelligent contract with measurable objectives? with measurable objectives?

• Can you manage the outsourcing relationship?Can you manage the outsourcing relationship?

Is BPO working?

+ 80% of companies claim that outsourcing has increased their competitiveness

+ 87% of companies say that by outsourcing services have helped in improving the quality of their internal processes

+ 77% of companies say they could see a significant drop in their process cost by outsourcing

NOA/NelsonHall, 2006

ROINet Margin

Sales per EmployeeInventory Turns

ROIGross Revenues

Market ShareCustomer Acquisition Cost

Cost Reduction BPO Strategic BPO

Financial Performance Metrics

Essentials of Business Process Outsourcing Thomas N. Duening, Rick L. Click 2005

Total Cost Management

Total Cost Management

Analyze Opportunity

Select Vendor

Develop Contract

Transition

Operate

Direct Costs

Hidden Costs

OpportunityCosts

BPO Total Cost Management

Project Phases Project Costs

MitigatesResults in

Essentials of Business Process Outsourcing Thomas N. Duening, Rick L. Click 2005

Hype Cycle

A Hype Cycle is a graphic representation of the maturity, adoption and business application of specific technologies.

Gartner Group

On the Rise:+ Knowledge Process+ Core Banking+ Direct Procurement BPO+ Payment Service BPO+ Insurance Closed-Book BPO+ Multifunction CRM BPO+ Comprehensive Finance and Accounting+ Accounts Receivable BPO+ Revenue Cycle Management

At the Peak:+ Comprehensive HR BPO+ Mortgage origination+ Accounts Receivable BPO+ Payment Services BPO+ Global Contact Center

Sliding into Trough:+ Billing BPO for Telecom+ Tele-radiology

Climbing the Slope:+ Contact Center BPO+ Payroll Outsourcing+ Benefits Administration+ Transaction Print Services+ Billing BPO

Entering the Plateau+ Telesales/Telemarketing+ Credit Card Processing

Gartner Group

BPO: Focus on Finance and Administration

Industry Best Practices:

“Finance Shared Services to drive Cost Savings of Over 20%”

“Offshoring of Back-Office Functions Could Generate $58 Billion in Annual Savings for Fortune 500”

“Despite the Hype, Few Companies Outsourcing Finance While Shared Service Centers Remain the Preferred Option”

“Outsourcing Increases HR Costs at Typical Companies, While World-Class Use it to Cut Transaction Processing Costs”

“World-Class IT Organizations Spend Less Yet Deliver More – Effective Outsourcing Among Success Factors”

Accounting and finance BPO: - 9% of total outsourcing market in U.S. - Growing at 11% annually

Benefits Management

What Finance Functions are Outsourced Today?

51

49

38

28

26

22

8

Payroll

Claims Administration

Tax Compliance

Internal Auditing

Sourcing Procurement

Finance/Accounting

Research: Yanlelovich Partners for PwC

Drill Down: Accounts Payable Functions

Outsourcing is a leading strategy• Enterprises that outsource reported cost savings approaching 10% for all invoice processing• 20% of enterprises currently outsource some part of their A/P operations• Another 15% intend to outsource in the near-term

A/P Automation offers compelling returns but is not widely adopted• Paper invoices cost between 68% - 76% more to process• 22.7% of invoices are received electronically• 35.4% of invoices are paid electronically

Measuring BPO ROI

Essentials of Business Process Outsourcing Thomas N. Duening, Rick L. Click 2005

High

HighLowLow

High Cost / Low Productivity

High Cost / High Productivity

Low Cost / Low Productivity

Low Cost / High Productivity

Hi

Hi

Hi

Hi

Lo

Lo

Lo

Lo

Mission Criticality

Mission Criticality

Mission Criticality

Mission Criticality

AccountingAccountingMarketingMarketing

ShippingShipping EDIEDI

ITIT

Productivity

Cost

BPO Selection Matrix – Manufacturing Co. Example

Source: Strassmann Inc.

Cheaper, But Not Better OUTSOURCED WORK as a percentage of sales

Comparison of Outsourcing Ratios for 1,100 Firms

Median ratio for high-ranking half

Median ratio for low-ranking half

Top-ranked 277 firms by return on shareholder equity(median ROE = 18.0%) 49.1%49.1% 54.6%54.6%

Bottom-ranked 277 firms by return on shareholder equity(median ROE = minus 55.4%) 71.1%71.1% 83.2%83.2%

Source: Strassmann, Inc.

Where do you go Where do you go from here?from here?

The New Shape of Business:+ Common business processes will

continue to standardize+ Technology platforms supporting

these processes will standardize – especially in software

+ The cost of BPO – as measured by transaction fee – will drop as standardization occurs

+ Organizations will gain competitive advantages earlier in the their life cycle

+ The definition of an organization’s ‘core’ business will be refined and narrowed

High tech companies should High tech companies should compare the investment compare the investment necessary to improve their necessary to improve their capabilities in the function vs. the capabilities in the function vs. the amount they would pay an amount they would pay an outsourcing partner for the same outsourcing partner for the same level of capability.level of capability.

Summary and Takeaways:+ Understand your ‘core’+ Keep your knowledge close+ Consider outsourcing non-core or non-

critical processes+ Be pragmatic in analyzing your options+ Understand your cost structure – at

transaction level+ BPO should add value, not just reduce

costs+ A BPO relationship is strategic+ Use industry metrics+ BPO is not a panacea+ Always apply good management

core

HR

MFGSCM

IT

Don Campbell – President/CEO Virtual Management Technologies

Tom Savini – CFO AirDefense

Mike Drapeau – President The Drapeau Group

Karen Cobb – Small Business Advocate Administaff

Scott Kriscovich – Market Leader Horn Murdock Cole

Mike Janis – Senior Vice President The Hackett Group

Thanks to these Gold Level Sponsors: