HROTodayGlobal

Outsourcing Management To Bundle or Not To Bundle? How to improve decision making for business and IT services. By Leslie Willcocks, Ilan Oshri, and John Hindle For our purposes, the idea of bundled services represents, "a mix of business process and/or IT services purchased separately or at the same time from the same supplier where synergies and efficiencies are sought in end-to-end processing, governance, relationship management, cost and performance". Bundling can occur within the information technology outsourcing (ITO) silo (the same supplier for infrastructure, applications, development); within a business process outsourcing (BPO) engagement (training and development and payroll in the HR function); or across ITO and BPO services (procurement, IT applications, and selected HR activities). The possible choices for bundling are considerable, making these decisions complex and bearing important cost and service consequences. Bundling is an important trend that will grow considerably in the next five years, as suppliers mature their ability to deliver bigger scope offerings, and clients develop their ability to plan for, host, and manage such deals. How does bundling fit with the overall trend lines for ITO and BPO? Market Size The global ITO market has increased each year since we've been tracking it. In 2008, the global ITO market was estimated to be between $230 to $250 billion. The BPO market in 2008 was less than the ITO market, but growing at a faster rate. We estimate that the market for mainstream BPO expenditure is likely to grow worldwide by 10 per cent to 20 per cent a year from $140 billion in 2005 to more than $300 billion by 2012. BPO expenditure will be in areas such as the human resource function, procurement, back office administration, call centres, legal, finance and accounting, customer facing operations, and asset management. BPO is outpacing ITO because many executives recognise that they under- manage their back offices, and do not wish to invest in back office innovations. Suppliers are rapidly building capabilities to reap the benefits from improving inefficient processes and functions. IT provides major underpinning for, and payoff from, reformed business processes. Thus, many of the BPO deals will swallow much of the back office IT systems. Although ITO and BPO spend is increasing, the average size of individual contracts and the duration of contracts has been decreasing. For example, the Everest Group found that among the ITO contracts signed in 1998, 24 per cent of contracts were worth more than $400 million and 33 per cent of contracts were worth between $50 and $100 million. In 2005, only 11 per cent of contracts were worth more than $400 million, and 57 per cent of contracts were worth between $50 and $100 million. Concerning contract duration, the Everest Group found that 37 per cent of contracts signed in 1998 were more than nine years in duration, compared to 18 per cent in 2005. Into 2009, in recessionary [20] HRO TODAY GLOBAL | FALL 2011 conditions, we were seeing more contracts with shorter terms and smaller total contract value, more frequent renegotiation and repricing, and more multisourcing. At the same time many organisations were looking to consolidate suppliers, and searching for cost efficiencies in management and governance. How can we reconcile smaller, shorter deals with an overall increase in the ITO/BPO markets? Undoubtedly many client organisations have been actively pursuing more multi-sourcing. Multi-sourcing has always been a major practice, and the overall growth is driven by client organisations signing more contracts with more suppliers. While multi-sourcing helps clients access best-of-breed suppliers and mitigates the risks of reliance on a single supplier, it also means increased transaction costs as clients manage more suppliers, interdependencies, and interfaces. Governance, contracting, measurement, and comparison become complex tasks. Multi-sourcing also means that suppliers incur more transaction costs—suppliers must bid more frequently, because contracts are shorter; suppliers face more competition, because smaller-sized deals mean that more suppliers qualify to bid and suppliers need to attract more customers in order to meet growth targets. Given these experiences, especially in the 2003-2009 period, this suggests that bundled and unbundled outsourcing produce different trade-offs that need to be assessed more closely than they have been. Market Analysis An analysis of 865 bundled outsourcing contracts signed between 2003 and 2008 reveals clear conclusions about bundled services market trends, as described in Table 1 (see page 21). The value of bundled outsourcing contracts signed in 2003 was $U.S. 38 billion. This rose to a peak of $95 billion in 2006 when 204 such contracts were signed. In 2007, 200 contracts were signed at a value of $46 billion. Clearly bundled outsourcing is an interesting and dynamic market, with revenues never less than $35 billion in any one year between 2003 and 2008. When comparing the different types of bundled services, the following market trends emerge: 1. IO-applications outsourcing (AO) is by far the most popular bundled services between 2003 and 2008 (per number of contracts and per market size). 2. For both AO-BPO and AO-IO-BPO, it is more common to have a second provider than in the other bundling arrangements (e.g. IO-AO). 3. The leading industries (i.e. with the highest number of contracts and total contract value) vary depending on the bundling

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