Strengthening Strategic Core Business, Cutting Costs

Feature Article | August 10, 2005 by admin

Many SMEs have now reached the natural threshold in terms of cutting costs internally. This applies both to the operational level (better machine utilization, automation and flexibilization of supply chains) and the strategic level. The latter includes improved product development, an optimized range of services, and systematic fixing of planning and target values.

No “one size fits all” solution

In view of increasing pressure on costs, SMEs are confronted with the issue of whether and, more importantly, which processes they should outsource. “Essentially these will be the business processes that the companies cannot perform themselves, or can only perform at the expense of their actual core business, as a result of resource shortages,” says Karsten Leclerque, consultant at Pierre Audoin Consultants (PAC), in response. According to the IT and strategy consulting house Capgemini, two main factors influence whether a particular business process is suited to business process outsourcing (BPO) – the strategic importance of the process for the company and the degree to which it has been standardized.
Horizontal processes that are not part of the core business and do not represent a competitive edge are usually suited to BPO. This mainly includes HR and accounting and industry-specific processes such as billing at telecom companies or energy suppliers. Holger von Jouanne-Diedrich, outsourcing expert at the Institute for Information Systems at the University of St. Gallen, also counts logistics, procurement (e.g. e-procurement) and certain CRM-related business processes, such as call-center services, as classical BPO candidates.
However, an analysis of the BPO market in Germany by PAC consultants indicates that vertical processes can also be outsourced. Using the example of banking, the consultants mention by name core processes such as securities handling, payment transactions, and credit business. “Whether horizontal or vertical BPO, SMEs who want to outsource business processes should always compare the services offered by BPO service providers with the quality and costs of their own business processes,” advises Jouanne-Diedrich. This step in itself can enable greater cost transparency and make BPO an attractive alternative to running processes in-house. “However, there is no ‘one size fits all’ solution for when an SME should outsource which business processes,” he warns. “This often depends on the individual case.”

Growing up fast

Studies by key market observers such as IDC or Gartner predict high growth rates for the global BPO market in coming years. According to Gartner, the global BPO market will expand to around US$134 billion in 2005 (US$123.8 billion in 2004). According to IDC, an average growth rate of eleven percent will see the market volume reach as much as US$682.5 billion by 2008. “The current economic climate has clearly boosted demand for BPO,” states IDC analyst Romala Ravi in the company’s 2004 study.
However, the breakdown for individual countries provides a more varied picture. Based on an online survey conducted in the fall of 2004, the outsourcing consultancy company Clearview concludes that the German market is still in its infancy compared to the Anglo-Saxon countries. In an article for the online service “Silicon.de”, Katharina Grimme, Director of the German branch of the Ovum market research institute, estimates a BPO volume of €710m for Germany in 2004. In a recently published study, PAC expects 17 percent growth for Germany in 2005, and subsequent years are also expected to be marked by growth rates in double figures. At the moment, however, this sector is still characterized by “emotional inhibitions and the reluctance within companies and organizations to relinquish competences they perceive to be ‘mission critical’,” is Clearview’s conclusion.

Yes to systematic BPO

PAC consultant Karsten Leclerque advises any SME who wants to outsource business processes to take a multi-stage and systematic approach. The first stage involves identifying those processes that generate a competitive advantage and thus have to remain within the company. Companies should then examine their non-competitive processes and calculate their internal costs and efficiency. If the analysis indicates that outsourcing these processes may be beneficial, then a suitable BPO provider needs to be found in the next step. “Psychological factors such as trust play an important role in SMEs in particular,” explains Leclerque. This either results from an existing business relationship or is generated by means of appropriate references.
According to Leclerque, SMEs value “being on the same wavelength” as future contracting partners, that is to say, the provider should itself be an SME or have appropriate structures, such as an SME unit. “This is because process and industry expertise are indispensable, particularly in the midmarket,” says Leclerque. If an SME operates internationally, the IT service provider should also have international expertise and be able to contribute experience from corresponding BPO projects. “To overcome the final obstacle to BPO, the ultimate price-performance package, including transparent and flexible contract drafting, must be right for the SME,” Leclerque explains.

Sharper focus

Companies now expect much of their BPO service provider. “The lens through which BPO agreements are evaluated is now more sharply focused,” says Romala Ravi, describing the dynamic relationship that companies who (want to) outsource business processes to an external service provider are involved in. An attractive option for SMEs is therefore to outsource business processes such as HR, accounting, or purchasing to a qualified external SAP service provider like AC-Service (BPO HR), ORGA, saardata or TDS. These can contribute the necessary industry-specific expertise, they are SME-compliant, and are subject to strict quality standards due to SAP’s certification guidelines. Further, SAP has introduced a new program for outsourcing business processes in the form of “BPO Services Powered by SAP”. In close collaboration with leading outsourcing providers, the “BPO Services Powered by SAP” support the set-up and operation of BPO delivery platforms that combine the efficient and standardized use of up-to-date SAP solutions with the service portfolios of the BPO providers. Companies thus benefit from automated and innovative processes in outsourcing.

Exploiting savings potential, keeping the competitive edge

The PAC consultancy firm anticipates that BPO will ultimately enable German companies to save between 25 and 30 percent of costs. According to Capgemini, companies that outsource business processes also want to improve the quality of their processes and thus increase their efficiency at the same time. In other words: “Companies that outsource specific business processes liberate themselves from the need to invest, and fixed costs are converted into variable, usage-dependent costs. The companies are thus able to concentrate on their core business again, operate more flexibly in the market, and remain competitive,” concludes Karsten Leclerque.

For further information:

Studies: www.gartner.com, www.idc.com, www.pac-online.de
SAP AG: www.sap.com/company/press/press.aspx?PressID=4467

Dr. Andreas Schaffry

Dr. Andreas Schaffry

Tags: , , , , ,

Leave a Reply