From ITO to BPO-The Growth of Offshore Outsourcing

While most of the books and research about IT outsourcing (ITO) are less than ten years old, ITO has actually been around in some form or the other for decades. When mainframes ruled the earth, the services of these expensive behemoths were often made available through time-sharing. Hiring contract programmers is also a thirty-year old phenomenon. Service bureaus, like Automated Data Processing, have been in the payroll business for decades, and have expanded more recently into accounting. Similarly, data center facilities management has been available for decades. Ross Perot’s Electronic Data Processing and the big accounting firms entered the systems planning, design, and turnkey software businesses more than thirty years ago, and network sharing is also decades old. From the birth of business data processing in the 1950s and 60s, companies with specialized skills have offered computer-based information systems support and services.Similarly, business process outsourcing (BPO) is not just another management fad or a recent trend. In some ways, the beginnings of business process outsourcing (BPO) can be traced back to the Second World War, when engineering and quantitative analysis tools were introduced to improve the manufacture and distribution of war materials. These quantitative and analytical techniques were based on the notion that scientific methods could be used to measure, analyze and improve any business process.

After the war management started applying these tools more generally in industry, starting in manufacturing, with the aim of increasing quality control and the quality of products. Over the decades since, operations research, system analysis and quantitative methods have been gradually applied to virtually all types of business problems and business processes. In the 1980s, the term ‘business process reengineering’ (BPR) was born as a new way of describing the systems analysis and process redesign techniques of earlier decades. At its most simple level, these techniques recognize that each organization operates based on a set of definable processes. And having defined them, it is possible to look within each process to find ways of improving efficiency.

Just as the concept of BPR was taking off, the information technology revolution exploded. Companies realized that hiring IT expertise in-house and paying for continuous upgrades to hardware and software were anything but efficient. As a result, almost overnight, a huge market for outsourcing IT was born.It was a combination of the success of BPR and a maturing of the approach to IT outsourcing that saw BPO as the logical next step. While BPR is about improving processes within a single enterprise, in one sense, BPO simply applies that same logic along the company’s value chain, or across an entire industry’s value chain. Consequently, a BPO supplier can usually harvest economies of scale that a single company within an industry can not.

Meanwhile, IT outsourcing moved on for some companies from just a way of achieving immediate cost savings, to also becoming a strategy akin to mergers, acquisitions, alliances and partnerships. And as more companies gained outsourcing experience, they also reached a greater level of understanding about the importance of relationship management. It used to be that companies thought they could just hammer out a contract, beat the supplier down in price and force the best deal possible for the buyer. Now the experienced, knowledgeable outsourcing buyer realizes that instead of immediate cost savings, the objective is to achieve sustained benefits for the life of the outsourcing agreement. Sustained long-term benefits come from positive relationships that emphasize continuous improvement of performance and of the relationship.