As analysts, it’s easy to get excited with high-growth markets, but supply management BPO's different. 

Phil Fersht, Director of Global Business Services & Outsourcing Research, AMR Research & Authors of “Horses for Sources” 

While the market has grown exponentially, and a 30% increased expenditure last year is eye-opening, the nature of these engagements doesn't give us confidence that this market will sustain its growth trajectory unless customers think beyond short-term labor arbitrage, and service providers introduce significant process and technology enhancements to the early adopters to help them optimize their delivery.  This "lift and shift" model could well result in customers losing more than they save.

Why are we arriving at these conclusions?

Our research study of the supply management BPO market reveals the industry surpassed $1.2 billion in expenditure for the first time in 2008, at an annual growth increase of 30%, with 47 new engagements signed. The core reason for this uptake is the increased availability of low-cost offshore services for procure-to-pay and strategic sourcing support, with 72% of services being delivered from India for largely North American and European organizations. This was barely 20% three years ago, which reflects the rapid change in this market toward an offshore-supported delivery model. 

This low-cost labor arbitrage is enabling new contracts to be established with limited upfront costs. Several new engagements have been executed with immediate cost reduction, with the service provider streamlining the costs over the course of the contract. In past years, many enterprises evaluated supply management BPO options and were put off by the upfront investments in technology to optimize managed spend. But now firms interested in short-term savings can take the plunge without the price tag. While such myopic behavior can result in serious future ramifications, it’s a reflection of today’s corporate attitudes to slash costs immediately and delay longer term business optimization strategies, such as rolling out better procurement technology available in ERP systems and investing in lean process transformation. 

Eighty percent of all current supply management BPO engagements (see figure below) are focused purely on service providers providing staff and rebadging customer employees to deliver process work, with no enablement of the underpinning supply management technology. While this can deliver some short-term savings to the customer through lower cost labor, it’s challenging to transform a global process effectively without tying it to the underlying technology workflow. If the customer persists in a process-only global operating model, the chances are resulting inefficiencies through managing remote staff will eradicate these initial savings over time. Moreover, the service provider will struggle to develop delivery models it can use across multiple clients if it fails to develop its own technology-enabled supply management workflows. Like all types of people-centric BPO activities, if one service provider is only making money providing cheap labor, another will eventually come along and undercut the price even further. 

The key is for both companies and their service providers to develop their technology strategies and platforms at the same time they’re developing their BPO strategies. This will enable the customer to develop more efficient process flows that are tied to the technology platform.  Both are essential if customers are going to reap cost savings through better managed spending in the future.  In more mature BPO areas, such as finance and HR, most of today's engagements now entail some degree of technology enablement to move the work into an externalized outsourced environment.  

Even though companies may be saving a few dollars now through low-cost labor, these costs will sprout back if they fail to follow through with better processes and technology. We believe that if companies fail to follow this more diligent approach, this aggressive growth will quickly slow down as too many buyers end up spending more than they hoped they would save. The reality is that once costs creep back in, a trend to backsource supply management processes may begin. 

I’d love to hear your views on how you see this space developing and what needs to happen to get beyond these teething problems:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .