BPO Is Key Back-Office Strategy for Most SMBs

Transcription

1 Research Brief BPO Is Key Back-Office Strategy for Most SMBs Abstract: Back-office business administration services are, by far, the biggest area of business process outsourcing uptake among small and midsize businesses. By Robert H. Brown and Rebecca S. Scholl Recommendations Vendors should view components of human resources (HR) outsourcing (such as payroll) as a way to establish a "toe-hold" from which to further penetrate small and midsize business (SMB) accounts. As SMB relationships are necessary and account development takes time, vendors should invest in relationship building with SMBs that exhibit a high likelihood of expanding their HR needs over time. If selling direct, identify small businesses that are dynamic-growth players and will increasingly need to source external services as their back-office need matures. SMB users must evaluate BPO by starting with one function, and gauge vendors' abilities to provide additional services, as needed. When evaluating BPO vendors, SMBs must first focus on the vendor's track record and ascertain how long it has offered BPO services and how long it has operated within the SMB's industry or sector. Publication Date: 12 November 2003

2 2 BPO Is Key Back-Office Strategy for Most SMBs Introduction Back-office business administration including HR, payment services, finance and accounting, and administration is the hottest area for BPO consideration among SMBs. For many SMBs, the ability to offload mundane, day-to-day tasks is a huge benefit and primary rationale in their pursuit of BPO. Certainly, this is prevalent among large enterprises too, but SMBs, by their very nature, tend to run lean and highly leveraged operations. In terms of SMBs, the midmarket forms the core of BPO adoption. Gartner Dataquest estimates that midsize businesses of 100 to 999 employees comprises 22 percent of the total market for business process management in the United States, compared with only 9 percent for small businesses of 1 to 99 employees. However, a healthy dose of skepticism pervades discussions of BPO in general, and chief among these for SMBs is fear of losing control, either over the process itself, or losing internal skill sets because re-insourcing externalized skills can be painful and costly once they have been externalized. From a vendor perspective, the BPO sweet spot among SMBs is clearly in the back office and will remain so through Latest Trends in SMB Administration BPO SMBs want to keep BPO in the back office; only a very small minority of SMBs surveyed are planning to outsource inter-enterprise processes such as supply chain management and sales, marketing and customer care. The vast majority of SMBs buy only BPO for intra-enterprise, back-office administrative processes. Business administration, including human resources and finance and accounting processes, represents the dominant area of SMB BPO activity. In recent user studies, 63 percent of small business respondents and 46 percent of midsize businesses are either outsourcing or planning to outsource a business administration process. SMBsareoftenreluctanttoengageBPOvendorsforthemoreinterenterprise process areas of supply chain management and sales marketing and customer care. They view these as core competencies that "touch" customers and as critical links in the extended enterprise for which inhouse resources are preferred by the vast majority. A common refrain from SMBs considering BPO is the need for services that "help me focus on my core business." Many of the midsize businesses that Gartner Dataquest speaks with are increasingly saddled with regulations include union-mandated benefits, HIPAA compliance and Sarbanes-Oxley for those that are publicly traded. Competent BPO vendors can be relied on for regulatory compliance and the risk management that entails. A solid, back-office BPO value proposition from a reputable vendor can be a relief by letting SMBs focus on priority No. 1: their customers. Therefore, back-office functions have become a mainstay of the SMB BPO market Gartner, Inc. and/or its Affiliates. All Rights Reserved. 12 November 2003

3 SMBs often rely on their "neighborhood" professional employer organization (PEO) to be their "virtual back office." Many good PEOs exist to handle these functions locally, however, the industry has been decimated in recent years because of rising insurance premiums, especially for blue-collar trades such as roofing and construction. Increasingly, SMBs are finding that more nationwide BPO vendors are an attractive option for business administration services, including those offering Web-based BPO services, or the so-called business service providers (see "BPO Pure Plays and Process Specialists Target SMB Market," ITSV-WW-DP-0469). HR: The SMB BPO Toe-Hold Among the subsegments of the business administration arena, HR BPO (mostly payroll) continues to be the most popular among the majority of SMBs that outsource or have plans to outsource back-office business administration services. In recent user surveys, 70 percent of small business respondents and 78 percent of midsize business respondents are outsourcing or are planning to outsource one or more of their HR processes. Beyond payroll, other outsourced SMB HR processes include benefits administration, recruiting, and training and education. Beyond HR, 45 percent of small business respondents are either outsourcing or planning to outsource finance and accounting processes, compared with only 16 percent of midsize business respondents. Small companies typically only have, at most, a handful of people handling finance, if at all. The decision to outsource is therefore a relatively easy one, with less potential for cultural disruptions and internal displacement. To date, Gartner Dataquest has seen very few examples of SMBs contracting for integrated BPO that encompassed processes across both HR and finance and accounting under a single, umbrella contract. Vendors should view components of HR outsourcing (such as payroll) as a way to establish a toe-hold from which to further penetrate SMB accounts over time. SMBs often begin their outsourcing relationships in very focused areas, and over time will expand the relationship into other, affinity areas. What may start out as a contract for payroll can often evolve in nine to 12 months to encompass benefits, or payment services. Specifically, the majority of Gartner Dataquest's SMB respondents that renegotiated a BPO contract did so to increase its scope, and for most, the extent of that increase was between and additional 1 percent and 50 percent of the original contract value. Vendors with competencies across process areas (for example, offerings spanning the breadth of HR), or between affinity back-office categories such as HR and finance and accounting, should stress the scalability of their offerings and be able to integrate what the customer wants, as needed, either alone or through partnership Gartner, Inc. and/or its Affiliates. All Rights Reserved. 12 November 2003

4 4 BPO Is Key Back-Office Strategy for Most SMBs If vendors choose to offer integrated SMB BPO services, it is crucial that interoperability of processes actually works as well as vendors may claim during the original course of sales if not, credibility as the sole-sourced provider of choice will be lost. The same rule applies to partnerships among vendors. As SMB BPO partnerships will grow, there will be an increase in subcontractor-to-prime contractor relationships, and if something goes wrong, vendor accountability will rise. Outlook for 2003 to 2004 In 2003, Gartner Dataquest has witnessed more back-office BPO deals that are being signed among small and midsize businesses. Vendors must understand the unique dynamics of the market, and decide what it means to their short and long-term BPO business development objectives by focusing on the following: IdentifywhatcomesafterpayrollinSMBs VendorsofHRBPO should view benefits outsourcing as the "next stop" beyond payroll in the development of their SMB accounts. SMB relationships are necessary Given that account development will take time, vendors should invest in relationship building with SMBs that exhibit a high likelihood of expanding their HR needs over time. SMB relationships are expensive Cultivating relationships with SMBs takes time and money, and many larger vendors will struggle to keep it cost-effective. Channel partners with direct reach into this sector may be required. For HR BPO, PEOs may be a good choice because many have been providing BPO to SMBs for years. Identify the SMB fast-movers If selling direct, identify small businesses that are dynamic-growth players that will increasingly need to source external services as their back-office need matures. Midsize "is" the SMB BPO market Midsize businesses of employees comprise 71 percent of the overall SMB BPO market forecast by Gartner. As businesses grow, their needs become more complex and require greater outside assistance in the form of BPO. BPO Influencers and Decision Makers Inside SMBs Influence over BPO lies with the top echelons of SMBs. Eighty-three percent of small businesses claim that their CEO is the key decision maker for BPO, followed by the CFO (46 percent) and board of directors (41 percent). In contrast, midsize companies experience much higher involvement from their CFO (63 percent) and still recognize the critical decision power of their CEO (57 percent). Large companies operate in a similar fashion to midsize enterprises, but also involve purchasing managers and cross-company sourcing teams in their BPO decisions Gartner, Inc. and/or its Affiliates. All Rights Reserved. 12 November 2003

5 The relative importance of CEOs and board of directors in small businesses also corresponds to the lack of involvement of business unit managers or purchasing managers. This is because small businesses operate lean organizations where there are few intermediary layers of management and top executives make all critical decisions. The direct involvement of CEOs also leads to a more acute perception of what is core vs. noncore in an enterprise and therefore to a broader penetration of outsourcing for back-office administrative processes. 5 Gartner Dataquest Perspective Incumbent vendors and prospective entrants to the SMB BPO market must articulate the strength of their offerings from a back-office perspective. Smaller enterprises most often seek a "helping hand" from a BPO vendor, rather than holistic replacement of end-to-end processes. Business administration value propositions must emphasize that BPO allows for increased focus on core business, and can offer competitive or lower prices through the life of the relationship. Vendors must offer BPO in components that SMBs can contract for incrementally and increasingly leverage the relationship over time as their needs and comfort with BPO increase. Do not expect end-to-end "mega" deals from this sector. Through the near future, back-office business administration processes are the areas where SMBs feel they have the most to gain from BPO, and will continue to represent the SMB "sweet spot" for vendors. For SMB users, it will be important to evaluate BPO by starting with one function, and gauge vendors' abilities to provide additional services, as needed. After establishing a comfort level through use of back-office BPO, SMBs should consider whether further outsourcing of interenterprise processes such as procurement or marketing is right for your business. In their evaluation of BPO vendors, SMBs must focus first on the vendor's track record. How long have they offered BPO services? How long have they been operating in your industry, or the SMB sector? Understand how the vendor was able to assist reference customers from an industryspecific standpoint, if applicable. Some back-office processes, such as payroll, do not necessarily require a vendor to have strong industry knowledge. For front-office processes such as marketing, they are critical. For newer or startup vendors, a strong commitment to the SMB space (and BPO in general) must be substantiated. If a privately-held company, ask for specific details on their funding and venture capital backing, as well as their plans for business development in the SMB space. Key Issue What are the critical market success factors and best practices for vendor go-to-market strategies in the small and midsize business market? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 12 November 2003

6 6 BPO Is Key Back-Office Strategy for Most SMBs This document has been published to the following Marketplace codes: ITSV-WW-DP-0555 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice