Outsourcing Is Over-Hyped

The promise of Business Process Outsourcing (BPO) as a one-stop, lower-cost answer for complex core business processes is a myth, analyst firm Forrester Research said in a report issued Tuesday.

No single vendor is equipped to handle the range of end-to-end complexities that accompany the largest BPO requests, including human resources, finance and administration, Forrester said.

While many firms do report significant initial cost savings from outsourcing initiatives, those savings ultimately may not match vendor projections or offset additional problems that result from vendor performance, Forrester said.

That hasn’t kept BPO vendors from making those big promises, both in terms of their capabilities and cost-savings derived from outsourcing, according to Forrester analyst John McCarthy.

“Although some firms show BPO savings, vendors overstate their current offerings,” McCarthy said in a statement.

McCarthy’s research, based on surveys with 82 senior executives from both business and IT showed that despite the problems, more than half of those surveyed anticipated spending at least $1 million on outsourced processes in 2004. Forrester suggested that those expenditures might best be made in more focused fashion, particularly as the market grows more segmented.

As a result of increased BPO expenditures, accompanied by better business understanding of what can and can’t be expected of vendors, Forrester projected the overall BPO market to swell to $146 billion by 2008, but to fragment into specialty segments as it does so.

The Forrester report, “BPO’s Fragmented Future,” picked four segments as best candidates for successful and effective outsourcing, and market growth, based on areas of proven vendor strength:

* Straightforward bulk transactions, including credit card and stock transaction processing will continue to be the largest and best-mastered of BPO segments, accounting for $57 billion of annual BPO market space by 2008. Forrester pegged ACS, Fidelity Investments, Unisys and State Street as the segment’s key players.

* Only slightly behind at $57 billion, though requiring high level of understanding from vendor employees, was broad shared services outsourcing. Including finance, administration, HR and indirect procurement, the segment was expected to see further vendor subdivision, with major systems integrators dominating finance and accounting, while specialty players such as ACS and Mellon HR Solutions would concentrate on human resources outsourcing.

* Policy administration, claims, loan applications and other high volume vertical processes were projected to become a $6 billion sector by 2008, with Accenture and CSC fighting to hold market share against offshore outsource vendors, Forrester said.

* More complex and specialized vertical applications such as monitoring chemical control processes and environmental data reporting were targeted to reach $5 billion in annual sales by 2006, but increasing customer confidence was expected to kick the segment into overdrive, with Forrester projecting a vertical app BPO market of $24 billion by 2008. Key player predictions included nods at Ingenero and RMSI.

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