BPO Fuels European Outsourcing

Europe has seen significant growth in outsourcing in 2004, especially in business process outsourcing (BPO). While TPI data shows that the sustained year-on-year growth of outsourcing in Europe can be attributed equally to information technology outsourcing (ITO) and BPO, the recent pace of commercial European BPO deals has accelerated dramatically, fueling the region’s total outsourcing growth.

In the first three-quarters of this year, Europe accounted for a larger share of an expanding BPO pie. The Americas, as a region, has not slowed in BPO business as much as Europe has grown at an increasing velocity. In fact, in absolute terms, BPO award volumes in the Americas continue apace – award values in the first half of this year equaled those from all of 2003. In relative terms, however, Europe has gained considerable market share in number of deals and in TCV. Europe is making its mark in BPO and sustaining it. This paper describes how Europe is embracing BPO. It examines how BPO has emerged and observes which industries and processes tend to lead BPO growth in the region. It also explores some unique factors that have inhibited or encouraged BPO in Europe. Further, TPI measures show that governments and Financial Times Europe (FTE) 500 companies have had a leading role in Europe’s BPO growth and might logically continue to do so. Finally, the paper will explore how service providers are competing for BPO business. With more than 35 experienced, European advisors working in the area, TPI is prepared to meet client needs as the region expands its use of both ITO and BPO.

The Growth of Both Outsourcing and BPO in Europe

In 2002, Europe’s outsourcing total contract value (TCV) was about one-fifth that of the Americas. By 2003, it stood at over one-half. TPI believes that European transaction values, about three-quarters of Americas’ values year-to-date, will ultimately approach those of the Americas for all of 2004. This trend toward equalization comes through dramatic European growth, not any decline in outsourcing in the Americas.1 TPI measures (which exclude government contracts) show that as outsourcing has grown in Europe, so has BPO as a part of it. By the third quarter of 2004, Europe accounted for slightly more (22) BPO deals in the broader market than the Americas did (21) in transactions valued at greater than US$50 million. This represented almost 48 percent of the number of transactions (compared with nearly 46 percent for the Americas). The TCV picture to date in 2004 is reversed, with Europe accounting for about 41 percent of the total TCV (compared with 54 percent for the Americas).2 Today, BPO assignments make up more than 30 percent of TPI’s European workload.3

How BPO Emerged: Shared Services Centers Paved the Way in Europe

Initially, many European companies – often more conservative than their American counterparts–wanted to emulate the results of outsourcing without embracing outsourcing completely. To that end, they set up shared services centers. These centers consolidated discrete business processes (e.g., accounts payable) that had been managed locally into stand-alone centers servicing whole regions or even all regions. This allowed the shared services centre to emulate a commercial relationship with its “customers.” Although many such centers have been very successful in saving costs and improving processes, they often serve as a precursor for outsourcing that provides truly commercial, legally enforceable service level agreements and contract terms. Shared services centers are good candidates for driving corporate sourcing agendas. A major example of the transition from shared services to outsourcing involved British Telecommunications (BT). BT reorganized around functional, rather than geographic, lines in 1991, creating a single HR shared-services facility that installed PeopleSoft as its enterprise resource planning (ERP) platform in 1997. In August 2000, Accenture and BT formed a 50/50 joint venture, e-peopleserve. When cost savings were not realized and new business was not generated as expected, BT sold its share of e-peopleserve to Accenture, and the relationship became a full outsourcing arrangement.4 How BPO Emerged: CRM and F&A lead BPO Initiatives in Europe Customer Relationship Management (CRM) is often seen as the first type of BPO companies adopt, partly because it involves creation or outsourcing of call centers rather than reorganizing core internal processes. Companies adopted CRM from the start of outsourcing both globally and in Europe. However, TPI historical outsourcing data5 indicates that Finance & Accounting (F&A) also began early and has grown more quickly both globally and in Europe. While F&A and Human Resources (HR) outran CRM globally by 2003, the European BPO distribution shows a more equal spread between CRM, F&A and HR by that year. Multi-process BPO in Europe has increased in number, especially during the last two years, representing nearly half of all contracts in 2004 YTD. Contracts awarded to IBM by Procter & Gamble, to EDS by Infineon, and to ACS by General Motors Europe have significantly increased the number of European employees receiving HR services from third-party providers.6 TPI expects the CRM activity that marked the initial BPO push in Europe to continue or increase, but also anticipates a number of significant F&A, Procurement and HR deals by European Blue Chip companies in upcoming quarters.

How BPO Emerged: Financial Services Led BPO in Europe

Financial Services organizations have spearheaded BPO in the Americas and Europe, partially ecause companies in this sector more readily perceived the potential for a substantial return on investment through outsourcing. Banking and insurance are highly regulated industries that can find BPO helpful in keeping processes transparent. In addition, they can embrace outsourcing as a way to surmount huge competitive pressures and as a tool for achieving the synergies envisaged by corporate mergers. Measured both by number of deals and their TCV, Financial Services dominated the European BPO growth picture during the past two years. Energy and Manufacturing run a distant second and third, while Retail has gained on Manufacturing during the first half of 2004.7 BPO market analyst NelsonHall observes that substantial insurance and banking BPO activity accounts for the prevalence of Financial Services in the past 6-12 months. NelsonHall anticipates that HR BPO will grow in Europe’s manufacturing, banking and government sectors and that F&A BPO will develop in the telecom, retail and manufacturing sectors.9 The analysts note that the government sector has recently demanded a mixture of services, and that central government appears to be replacing local government as a BPO consumer.10
Unique Factors Shaping Growth: European Complexity and Labor Restrictions
Although Europe has followed and capitalized upon some of the lessons learned by early BPO adopter, the Americas, the pace of European BPO adoption is largely shaped by the more multifaceted and complex nature of the European market, compared to the more homogeneous
Americas market. Because it is less complex, the Americas region has traditionally adopted BPO on a larger scale, faster. Europe is not one single market but a grouping of smaller markets. The European Community alone comprises some 25 nations that differ vastly in culture, economy, language and receptivity to outsourcing. With 15-20 different languages in Europe, BPO contracts that involve, for example, employee self-service, can become more complex and time-consuming from the outset. As a result of such complexities, BPO tends to be adopted in Europe on a country-bycountry basis more often than a regional basis. This can represent a challenge to the service providers who have traditionally performed well in the Americas. They sometimes find that they succeed in one European country but not another.11 Further, in many European countries, outsourcing service providers must accommodate both stringent labor laws and tax provisions. For example, in the EU, the cost of value-added tax (VAT) on the service provider’s services must be factored in.12 As a result of these regulations, the cost of transferring jobs and responsibilities in some countries can be high, but still affordable. The costs strongly impact service provider selection and the use of existing personnel.

BPO Growth in Continental Europe Follows the United Kingdom’s Lead

Most European countries outside of the United Kingdom have tiptoed into adopting outsourcing in general and BPO in particular. While the United Kingdom led the way in European BPO deals, Northern European countries, especially Germany, Benelux and the Scandinavian countries, are increasingly adopting BPO. In 2003, the United Kingdom accounted for 78 percent of the BPO TCV in Europe. Switzerland, Benelux, Italy, Spain, the Nordics and Germany represented most of the remainder. In the first half of 2004, the United Kingdom accounted for 52 percent of European BPO contract value, with Germany, Switzerland and Benelux accounting for most of the remainder.13 Several factors explain the shift:14
• The Continental European headquarters of major multinationals are increasingly adopting back-office BPO;
• BPO adoption in Germany has been led by a receptive banking sector; and
• U.K. local government BPO activity decreased sharply from June 2003 - June 2004. BPO activity in Continental Europe tends to be dominated by the financial services sector (middle-office outsourcing emphasis) and the manufacturing sector (Back-office outsourcingemphasis). The BPO market in the United Kingdom has traditionally been dependent on the government and financial services sectors.15 Undoubtedly, the area will continue to represent a substantial portion of the BPO pie, as BPO is “the fastest growing IT sector in the U.K.” 16 However, executives in Continental Europe profess an increasing interest in and comfort with outsourcing in general, which should positively impact BPO in particular. In general – nearly seventy percent of 400 respondents in Morgan Stanley’s European IT Spending Survey (June, 2004) expect to outsource more in 2004 than they did in 2003. TPI is experiencing a similar evolution in its overall outsourcing work in Europe. Two years ago, nearly 60 percent of TPI’s European revenues were from billings in the United Kingdom. Today, that portion is 25 percent of total European revenue. If one factors in a more than doubling of the total size of European outsourcing during the same period, TPI has not only held its U.K. position but also created a truly European business of tangible scale17 Financial Times Europe 500 and Governments Spearhead European BPO Growth Major companies and governments are quicker than other large, medium or small institutions to adopt and lead BPO in Europe. Twenty-two FTE-500 companies account for 36 of the 84 (43 percent) completed corporate BPO transactions of more than US$50M from 1991-1H04. These 36 transactions were worth a total of US$11.8 billion, or 50 percent, of the total corporate BPO TCV for the period. Of public-sector contracts, 70 completed European BPO transactions of >US$50M were for government clients and were worth a TCV of US $28.5B.18 Half of the 36 FTE-500 BPO deals were awarded by top 50 FTE companies. This could signify that top companies in Europe more readily feel the heat of global competition and, understanding the benefits global competitors gain from outsourcing, feel motivated to outsource. Several FTE-500 companies awarded multiple contracts. BPO can be a tough undertaking for the uninitiated; however, for those with experience, it has proven to be manageable, attractive and worth repeating. In the recent quarter, more small and mid-sized companies that are not in the FTE-500 have begun adopting BPO in Europe.

Service Providers Enable European BPO Growth

Major global service providers are aggressively targeting Europe. Thirteen service providers competed for and won BPO transactions in Europe in the first three quarters of 2004. Of these, Accenture and IBM have been particularly successful. By the last quarter of 2003, Capgemini had joined IBM, Accenture, EDS and HP in winning more than US$1 billion in European outsourcing revenue. 19 European companies appear to be most receptive to providers who can demonstrate quality, resilience and stability.20 These companies have top-level relationships and an established network with Western European organizations that can give them an edge. The indigenous European service provider market, although less mature than the American, has also made headway in European BPO. Some pan-European players, like LogicaCMG and Atos Origin are moving into this space, but more on a niche transaction-processing basis. UK-based service providers Capita (Public Sector, Insurance), Xchanging and Liberata are also joining the fray. Capita and Xchanging benefited early-on from recognizing that BPO is not a sub-set of IT services, but a wholly different business with different client expectations and critical success factors.21 Using a global service delivery model is more complex and has been embraced more slowly in Europe. Twenty percent of all outsourcing transactions in Europe had an offshore element compared with 69 percent globally.22 Moreover, it can sometimes be hard to make a compelling case for BPO without an offshore element. Offshore outsourcing is often the starting point for simple, commodity customer-management services. The low level of European offshoring could signal that initial BPO projects in Europe are relatively complex.23 The availability of Eastern Europe and Ireland as near-shore sources of service delivery helps European companies overcome the reluctance to consider offshoring. In Eastern Europe, compared with India, a company can easily find an educated labor force that speaks French, German, Italian and/or Spanish.24 Eastern European resources will also continue to be valued for their ability to overcome cultural or regulatory constraints. Several TPI-advised BPO transactions are evaluating service offerings delivered from Spain, Poland, and the Czech Republic. Ireland is reviving somewhat from three years of strong outsourcing competition with China, India and Eastern Europe. Ireland is waging a government-sponsored marketing campaign that de-emphasizes lower costs as it promotes its workforce’s brainpower, ability to work at all levels of business processes and flexibility. The country is English-speaking, Euro-compliant, and easily accessible to both the United Kingdom and the Continent.25 Finally, Indian-headquartered service providers are establishing their own beachheads in Europe and are still able to provide cost advantages there. Wipro has the most “local” structure in Europe. Infosys, HCL Technologies Tata, Satyam and NIIT have established full-scale services presence in Europe during the past few years. All have learned that a strong onshore presence is needed, especially to penetrate markets such as Germany and France.26

Conclusions

TPI believes that Europe is likely to sustain and even increase its BPO growth, especially if the region promotes it via a few “poster children,” examples of large, successful BPO contracts by top European companies. TPI executives cite a few or all of the following as potential catalysts for BPO growth in Europe:
• HR, F&A and Procurement begin to take on the CRM pace-setter;
• More continental European countries adopt BPO;
• Indigenous service providers make a stronger showing;
• Near-shore service delivery succeeds; and
• More FTE-500 companies and medium-sized companies adopt BPO.
TPI does not advocate any specific form of sourcing. However, in helping companies determine the right sourcing strategy, TPI advisors have witnessed what some European organizations have gained from adopting BPO:
• Cost reductions;
• Operational efficiencies;
• Greater flexibility and ability to respond to changing global market conditions;
• Increased competitiveness;
• Improved business processes;
• Ability to grow (by improving time-to-market, for example); and
• Support for merging or regrouping.27
When ten new members joined in May, the European Union became a trade and legal alliance of some 450 million people, with economic output approaching that of the U.S. Look for Europe to rival the Americas in coming quarters as both a provider and user of BPO.

Sources

1 1Q04, 2Q04 & 3Q04 TPI Index Data
2 3Q04 TPI Index Data
3 Duncan Aitchison, August 12, 2004
4 BPO Case Study, NelsonHall, April 2004
5 TPI Contracts Database, 2001-2003
6 #BP52L, IDC, April 2004
7 2Q04 TPI Index, European version, slide 11
8 John Willmott, NelsonHall, August 12, 2004
9 “Global BPO Contract Analysis & Future Opportunities,” NelsonHall, January 2004
10 John Willmott, NelsonHall, August 12, 2004
11 Business World, April 21, 2004
12 The Banker, July 1, 2004
13 NelsonHall, “Global BPO Contract Analysis & Future Opportunities,” January 2004, and NelsonHall, BPO Contract Activity and Market Developments: H1 2004,” July 2004
14 John Willmott, NelsonHall, August 12, 2004
15 John Willmott, NelsonHall, August 12, 2004
16 The Times (London), June 8, 2004
17 Duncan Aitchison-TPI Update, July 2004
18 TPI Data, 1991-2004 YTD
19 #Q52L, IDC, March 2004
20 BusinessWorld, April 21, 2004
21 NelsonHall, “BPO Contract Activity and Market Developments: H1 004,” July, 2004
22 *Newswire(VNU), April 22, 2004
23 John Willmott, August 12, 2004
24 Business World, April 21, 2004
25 The International Herald Tribune, June 5, 2004
26 IDC, #PR01L, February 2004
27 Duncan Aitchison, “Insider Insight: Outsourcing, Shore Thing,” Accountancy Age, June 10,

2004