Evaluating the Role of the ERP in BPO

May 4, 2007 on 5:30 am | In Uncategorized |

Evaluating the Role of the ERP in BPO

Regional and domain differences are observed. A majority continue to prefer retaining software licenses internally.

By Bob Cecil

EquaTerra recently completed a study with 126 finance and HR executives to determine how they viewed the role of their ERP system when evaluating and utilizing business process outsourcing (BPO).

Not surprisingly, SAP and Oracle were cited as the primary platforms of choice for companies (especially large ones) evaluating ERP systems. Of all respondents, 59 percent had more than 10,000 employees. Interestingly, 89 percent were involved in some sort of BPO activity. Further analysis showed that 60 percent have outsourced some finance and accounting functions, 61 percent have outsourced elements of HR, and 34 percent have outsourced parts of procurement.

The respondents were also asked to outline future plans for BPO: 48 percent plan to expand current outsourced functions, and 44 percent plan to expand to new process areas. None indicated a withdrawal from BPO.

In our work advising clients on strategies to improve business processes, a frequently asked question is, “How should the ERP application be evaluated when considering outsourcing to a third-party?” Fifty-one percent of respondents indicated the leading reason for their ERP selection was based on software choices that were a part of corporate strategy; 48 percent cited the importance of software already in use but not necessarily part of an overall strategy. Clearly, legacy software applications and strategies are a key driver here.

Ownership and management of the system are often a point of discussion when evaluating BPO. The study results demonstrated there was no general consensus on how companies approach licensing in BPO. Of the respondents, 31 percent preferred that the BPO provider manage the licenses; 27 percent felt the ERP application needed to be retained in-house; and 23 percent had no preference. The divided response indicates the challenges the market faces in understanding the service provider value proposition with respect to the ERP.

Of the respondents that prefer the provider retain responsibility for the licenses, 63 percent noted the convenience of the one-stop-shop approach; 47 percent cited the balance sheet benefit. Buyers typically reap greater financial benefit from the balance sheet impact, but more respondents just preferred the “hassle” to be transferred to the provider.

For those who preferred to retain responsibility for the application licenses, the reasons most often cited were control, flexibility, ease in managing, and retaining independence from the BPO provider. These reasons are also the most common across EquaTerra’s client base.

We assessed the responses by geography (Europe versus North America) and process (F&A versus HR) and found different views with respect to software licensing. Almost 35 percent of North Americans preferred the BPO providers retain the licenses, compared with 21 percent of Europeans. In HR, 37 percent of the respondents preferred the provider retain the licenses versus 20 percent of the F&A respondents—indicating that HR systems tend to be easier to separate from the organization (i.e., not tied to inventory, materials planning, etc.).

Each respondent was asked about the key enablers of BPO success, and surprisingly, the service provider system, or ERP platform, ranked near the bottom in order of importance. Of the respondents, 63 percent felt that a quality service provider was the most important enabler of BPO success. One would expect that response to be near the top of the list, but the perception that IT was a low-level enabler was a bit startling. Other key enablers cited were service providers meeting cost reduction goals, a quality contract, and strong service level agreements.

Scoring lowest of all was the use of offshore labor. Our view is that many respondents enjoy labor arbitrage but do not view this as critical to success. While a service providers’ ability to achieve its cost reduction goals was cited as second in importance, many of these savings targets are only achievable when remote location labor pools are in the mix.

Finally, the respondents were asked to explain which factors within IT are critical to BPO success. Several of the factors included:
• Meeting quality and improvement goals;
• Meeting cost reduction objectives;
• Meeting regulatory compliance requirements; and
• Supporting outsourcing management and governance.

One of the respondents noted, “To have successful BPO, you need people, process, and systems, and without the third leg, things will fall over.” Another noted, “Without a good IT system, you have no idea how successful the outsourcing process has been. You need to have a way of measuring your success, and IT can provide this.”

To obtain a copy of the full study, e-mail research@equaterra.com.

Bob Cecil is EVP of F&A and Shared Services Practice Leader for EquaTerra. He can be reached at bob.cecil@equaterra.com.