BPO battle heats up

BPO (business process outsourcing) is quickly becoming a frontline solution for CIOs desperate to reduce costs and automate business processes.

Behind the lines, however, the major application vendors are increasingly viewing BPO as an opportunity to lock outsourcers and customers into proprietary infrastructures.

Microsoft is quietly building a BPO platform strategy group, which in its own words will use Microsoft “evangelists” to promote its technology and infrastructure to partners.

Microsoft already offers such solutions, but there are hints from some quarters within the company that packaged BPO solutions will start to roll out in far greater numbers this summer. These solutions will come from BPO service providers that have domain expertise in areas as specific as 401k management for pharmaceuticals, as opposed to BPO hosts offering horizontal solutions for general accounting and HR.

The offerings will be developed with Microsoft technology and will combine a company’s domain knowledge with Microsoft foundation technology such as Windows Server, BizTalk, SharePoint, Smart Client, and Active Directory.

Microsoft isn’t the only one evangelizing to the BPOs. SAP is working along similar lines in order to make NetWeaver the infrastructure of choice for linking outside the firewall business processes and data to behind the firewall systems.

Among others, SAP has major deal with ADP, a company that does far more than just payroll outsourcing. It now also outsources services for retirement, tax and financial, HR, brokerage and claims. And it is working with IBM on the procurement side.

 “With these types of partnership agreements it will enable our partners to deliver their services on the basis of our platform [NetWeaver.],” said Christian Baader, vice president of BPO for SAP.

While horizontal solutions may be 90 percent of most business processes, Baader agrees with Microsoft’s Charles Fitzgerald, general manager of platform strategy that the remaining 10 percent must be provided by a BPO with domain or industry specific expertise.

“On that last 10 percent BPOs will write their own code and they need a platform like NetWeaver that will not endanger the 90 percent that is standard,” Baader said.

Baader says customer lock in on any one particular platform selected by a BPO is best avoided by going with companies that use standard processes rather than home grown best of breed solutions.

“Our software will support shared service centers,” Baader said.

Microsoft, SAP and myriad other software vendors and service providers are interested in BPO in part because they believe it will trigger one of those rare inflection points in how business is conducted.

Up until now, outsourcing has been about “labor arbitrage” to a low-cost site, said Terry Jost, vice president and leader of North American Outsourcing for Capgemini.

“What we are talking about now is process improvement that goes with BPO,” Jost said.

This new focus on outsourcing business processes rather than applications is a sea change, says Josh Greenbaum, principal analyst with Enterprise Applications Consulting.

“Business processes in general have become the next higher-value, innovative place for software to go. This is where Web services, composite applications, [SAP] NetWeaver are all headed,” Greenbaum explained.

Hewlett-Packard, for example, implements BPO in a multistep process. In step one, HP takes a company’s processes and the software that executes those processes, uses the same tools a customer has, and transitions that work to HP’s datacenters.

“In phase one, we just move the work,” said Jack Caffey, HP’s director of BPO Technology Solutions. Once the work is moved, HP improves the processes by automation.

The story Caffey told about the economies of scale is repeated by most BPO vendors.

According to Brian Keane, president of the $900 million BPO vendor Keane, price and performance are driving BPO. Historically, BPO has been applied to call centers, payroll, accounting, and HR. What’s new is that companies are concentrating BPO more on transactions.

BPO applies best practices to optimize processes and improve accuracy rates and cycle time, ultimately requiring less labor while adding performance and quality enhancements.

As Keane said, “A change in business process needs a change in technology.” This is also how Microsoft sees it, and why it’s making the move into BPO.

“Long term, we want the [BPO hosts] to turn into software companies building on their domain expertise,” stated Tom Yoritaka, senior product manager at Microsoft.

The goal is to have the outsourcers cast in the role of the hub, with Microsoft as the foundation technology. The infrastructure stack would typically include Smart Client for accessing data and services from within Office.

Microsoft’s strategy calls for working with its business partners to create solutions that integrate with or enhance Microsoft products. SharePoint, for instance, has connectivity to the Web and is integrated with Office programs.

There are 34 million desktops with SharePoint, said Chuck Nash, CEO of KnowledgeLake, a production workflow ISV and Microsoft partner. “We’re part of the Microsoft infrastructure. We get snapped in,” Nash said.

SharePoint becomes the data repository and comes free with Windows Server. Add on a $100-per-seat KnowledgeLake application and you have a system that’s as robust as an ECM (Enterprise Content Management) solution at 30 percent of the cost, yet is easier to implement and maintain, Jost said.

“It is inherent to the OS. It works so much better with Word, Excel, with all the other desktop applications,” Jost added.

Nevertheless, Greenbaum isn’t convinced. He said it is the process, not the technology, that injects BPO with its real value.

“If this is what Microsoft calls BPO, they don’t understand business processes. It has nothing to do with technology,” Greenbaum explained.

Microsoft has a lot to gain by being the low-cost technology provider to the high-end service companies, and it may indeed undersell rivals such as Documentum, which is now owned by EMC.

If Greenbaum is right and technology doesn’t play a key role in BPO, then the Redmond giant has a lot to lose, especially if competition comes from open source and Web-based applications.

“From the customer standpoint, the technology doesn’t matter,” EAC’s Greenbaum said.

Charles Fitzgerald, general manager of platform strategy at Microsoft, scoffs at the idea that BPO technology doesn’t matter. For Fitzgerald, the technology resides in the business process and the business process is delivered by the application.

Companies such as HP and IBM have no significant domain-specific expertise in HR, tax accounting, or other areas where business-specific expertise is required, Microsoft’s Fitzgerald said. Those companies are ITOs (IT outsourcers) and are trying to change their stripes and become BPO hosts, Fitzgerald added. Echoing Yoritaka, Fitzgerald predicted that BPO hosts will become software vendors by forging solutions out of Microsoft products that are integrated with their own vertical components.

To that end, Microsoft wants to ensure that inside the solution offered by BPO hosts with domain expertise will be Microsoft infrastructure, beginning with the application development environment and continuing to the platform the solutions run on.

What we’re witnessing is the classic Microsoft strategy of expanding the core operating system into the business application space and locking the customer into both, Jost said.

“When you stack up Microsoft along with business partners against mainstream traditional BP [business process] re-engineering, this is a market disruption,” Jost said.