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BPO Providers Get Strategic

As enterprises seek to cut costs and streamline their operations, business process outsourcing (BPO) is increasingly being considered as a business strategy says Dataquest Inc., a unit of Gartner, Inc.

According to the firm's spotlight report titled: 'Business Process Outsourcing - A Market Overview,' which features reports on the outlook for the growing BPO market, BPO providers have started offering more strategic and comprehensive services to customers by assuming full process management responsibility.

Gartner says the trend helps simplify access to BPO and reduced the cost of delivery by moving away from only offering a number of selective process specialties.

"Although the shift from transactional to strategic BPO gathered significant momentum in 1999 and 2000, it remained the exception in 2001," says Rebecca Scholl, senior analyst for Gartner Dataquest's IT Services program.

"The bulk of the BPO market is composed of transaction-processing engagements, designed to optimize process efficiency, reduce transaction costs and provide flexibility to users in times of economic uncertainty," she explains.

She argues that the growth of the strategic BPO market in 2002 will be dependent on the success or failure of these providers.

Last week, an IDC report said that customers spent around $1.1 billion with BSPs last year, and it expects the market will keep growing at an average 49 percent a year, to reach $8.3 billion by 2006.

Gartner's report suggests that together with the shift to strategic outsourcing, demand for BPO services has evolved from single-process to multiprocess solutions.

The integration of collaborative applications and Web-based technologies into BPO offerings is thought to have accelerated this shift, aided by the seamless integration of data garnered from multiple process interactions.

Garner says this trend can be justified through the emergence of a growing number of BPO providers that are delivering BPO services across a range of processes, or acting as general contractors for multiple BPO providers.

"The BPO market remains immature, and only a few enterprises are willing to give up control over several processes at once. In most cases, the evolution toward multiprocess outsourcing takes place in a phased approach, through several contract extensions rather than 'big bang' outsourcing engagements," said Scholl.

Additionally, Gartner says offshore services are another trend becoming noticable among many U.S. enterprises' overall sourcing strategies.

The report suggests that though the demand for offshore externalized services in BPO is still immature, there is a history of internal offshore processing by large enterprises in areas such as accounting transactions management, payment processing, medical transcription and contact center services.

Analysts at Gartner say that service providers are beginning to position themselves to offer offshore BPO services by investing in delivery centers in countries with a skilled labor cost advantage, but with relatively sophisticated communications infrastructures.

"On the technology side, BPO providers will begin to realize the benefits of the application service provider (ASP) model for speed, reliability, predictability and reuse, and there will be a shift from BPO to the business service provider (BSP) model," Scholl says.

"BSPs, a combination of the BPO and ASP models, seem to solve any limitations of the ASP and full-blown BPO models by reducing time to market and fostering rapid deployment," she continues.

Gartner recommends that firms investigate BSP opportunities but advises they go slowly and determine which processes are good candidates for BSP and establish a solid sourcing methodology.

"The BPO model is now experiencing noticeable momentum in terms of wider user acceptance, new service offerings, as well as a proliferation of providers that buyers must choose from," says Lisa Stone, vice-president and research director for Gartner.

"Some BPO offerings are very mature, and some are just emerging, and therefore remain largely untested. It is imperative that buyers understand the services they are purchasing and the associated stability of those offerings," she suggests.

Gartner will hold its annual 'IT Services and Sourcing Summit' in Las Vegas this May, bringing together both buyers and sellers of IT services to provide tactical market research and advice.