The Rise Of Business-Process OutsourcingThe Rise Of Business-Process Outsourcing

As businesses become more comfortable with outsourcing IT work, many take the next step and hand over entire business processes, such as human-resources administration or transaction processing, to IT outsourcing companies. More than one of four respondents to information Research's Analyzing The Outsourcers survey, which will be published in the Nov. 22 issue, say they have outsourced at least one business process to a third party.

In response to the demand, many classic IT outsourcing vendors are boosting their business-process outsourcing offerings--but with a twist. To compete with pure-play business-process outsourcers such as payroll processor Automatic Data Processing Inc. or HR outsourcing company Hewitt Associates, IT outsourcers meld IT outsourcing and BPO. That is, they will provide customers with the infrastructure and the business applications and will staff the business-process function. EDS, for instance, is building a platform of hardware, middleware, and business applications called agile infrastructure, on top of which it wants to provide business services such as HR management. "We're gearing up to go into some of these more horizontal areas," EDS CEO Michael Jordan said in a recent interview. EDS is also pushing into other areas such as procurement and finance and accounting.

In doing so, EDS will run into stiff competition as other vendors eying similar services. Hewlett-Packard recently launched its own finance and accounting service and scored big when, last March, it landed Procter & Gamble as its first customer under a multiyear deal. "We're taking a strong internal capability and offering it to the market," HP executive VP Ann Livermore said at the time. IBM is also beefing up its BPO capabilities and adding an offshore component. Earlier this year, it acquired India-based Daksh E-Services for what analysts estimate was a price between $150 million and $200 million. Daksh operates a number of call centers in India and serves customers that include Sprint and Amazon.

Such moves indicate that IT vendors are building out their day-to-day operational capabilities in an effort to play in the fast-growing BPO market, says Forrester Research analyst John McCarthy. IBM used to subcontract much of the lower-level call-center work in its customer engagements but now seeks to capture that revenue, he says. There is significant revenue to be had. According to Gartner, the worldwide BPO market will grow 8% in 2004 to $131 billion.