Globalization of key business processes in finance and other back-office areas is expected to continue to see strong growth over the next three years, with companies increasing their use of offshore resources by over 50%, according to results of a new study completed by The Hackett Group, Inc., a global strategic advisory firm.
The 2008 Globalization Performance Study is one of the first to capture the same information from companies using leading Business Process Outsourcers (BPOs) and those operating their own captive shared service centers in India and other low-cost labor markets. The study confirms that companies can generate fairly comparable cost savings with either globalization approach, with most companies driving cost reductions of 25-50%.
But the research also spotlights some stark differences between BPOs and captives. BPOs are able to ramp up twice as quickly as captives, and are twice as likely to exceed expectations for on-time service delivery levels. As a result of the faster ramp up, BPOs also see much faster benefits realization, showing a five-year Net Present Value that is more than 50% higher.
BPOs fall far short in their goal of driving innovation, the study found. Captives are significantly more successful, but still show room for improvement. According to Hackett, companies need to change the way they plan for, contract and implement BPO services initiatives to improve performance in this key area.
The research also found that globalization remains a largely cost-driven process. While process improvement, the ability to focus on the core business, and quality were all cited as "Important" decision drivers, only cost was identified by the study group as being "Very Important."
"We found several strong pieces of good news in our results," said Hackett Chief Research Officer Michel Janssen. "First, companies expect to significantly expand their use of offshoring over the next three years. By 2010, these companies have told us that nearly a third of all their transactional staff in finance will be based in low-cost labor markets. That's over 50% more than we see today. Also, our study found that both BPOs and captives are capable of generating rather dramatic, and fairly comparable, cost savings."
According to Hackett Finance Advisory Practice Leader Bryan Hall, "Our study also identified significant differences between the two approaches, and real opportunities in several areas. BPOs can ramp up to full speed in only 13 months, less than half the time that it takes captives, as they have staff and facilities already on the ground as well as recruiting channels that are positioned to expand their operation as necessary. As a result of that faster ramp up time, BPOs realize benefits for their companies much faster, with higher net present value, dramatically accelerated payback time, and reduced risk. In part due to the contractual nature of the relationship with BPOs, they are also better at on-time service delivery, exceeding customer expectations more than half the time, over twice as often as captives."
According to Hackett Globalization and Outsourcing Practice Leader Julio Ramirez, "Innovation is one area where both BPOs and, to a lesser extent, captives have a significant opportunity to improve performance. Only 17% of all responding companies using BPOs said they were satisfied truly satisfied with their BPO's ability to innovate. While a much larger percentage -- 46% -- of all companies using captives made the same claim, this is clearly an area that both types of organizations can target for investment.
"The weakness of BPOs in particular in this area is something we've seen for several years, and it hasn't improved. A large part of the problem stems from the way companies outsource," said Mr. Ramirez. "Companies jump in and begin by selecting a BPO without first developing a comprehensive strategy that addresses the key innovation issues of how outsourcing will drive the company closer to targeted performance objectives, and what transformation work is needed before, during, and after the transition to the service provider.