Savings Tip: Don't Do It Yourself

Human resources and accounting are but two cost centers ripe for outsourcing

You would think a company as big and profitable as the $179 billion oil giant BP (BP ) PLC would count its own beans. But it doesn't -- because it's cheaper to pay someone else to do it. In fact, BP is paying the Global Services Div. of IBM $1 billion to handle a chunk of its accounting for 10 years. In the first two years, BP has saved about $52 million, and over the next eight years, it expects to save $200 million more. "We're very happy with how it's working out for us," says BP Vice-President Thomas Blackwell.

BP is just one of hundreds of global corporations singing the praises of business-process outsourcing. In BPO deals, as they're known among the tech set, companies farm out entire business tasks, such as human resources, accounting, and claims processing. It's one of the few bright spots in techland -- and a growing source of revenue for the 11 tech-services companies on this year's Info Tech 100.

While the total tech-services market is pegged to grow 4% this year, IDC expects the BPO market to rise 11%, to $860 billion. By 2006, the market is likely to hit $1.2 trillion. "There are almost no boundaries to the potential," says Marty Cole, managing partner for outsourcing at Accenture (ACN ) Ltd. (No. 36).

How do these companies do more for less? The trick lies in building up expertise or economies of scale that a single company can't match. For example, First Data Corp. (No. 13), led by CEO Charles T. Fote, handles credit-card transactions for 1,400 companies, including Wal-Mart Stores Inc. and J.P. Morgan Chase & Co. "We found that First Data, with its scale, could do it for less," says James Venglarik, J.P. Morgan Chase's chief information officer.

Recently, greater savings have been realized by moving these tasks overseas, often to low-wage locales such as India, the Philippines, and the Caribbean. Of IBM Global Services' 172,000 employees, 7% work overseas doing accounting and human-resource tasks, while Cincinnati-based Convergys (CVG ) has moved 10% of its 44,000 workers abroad since 2000.

Lower costs are just part of the lure. Outsourcers can also spur innovation on the cheap. "We are always looking for new applications and technology to install," says Steve Higgins, a partner at IBM Business Consulting Services. IBM (No. 7) has replaced BP's paper-based accounts-payable system with a new setup that shuttles invoices around via e-mail. BP expects the new way to speed up its payments and save it millions annually.

Another big advantage: Outsourcers often improve the quality of work. Unisys Corp. (No. 53) handles claims-processing for Abbey Life Assurance under a 10-year, $360 million deal. Sure, it's great that the contract saves Abbey $80 million annually, or 22% of its costs, says Neil Tointon, Abbey's director for operations. Just as important, since Unisys took over in 2000 and upgraded Abbey's system with new technology, the error rate on transactions has fallen to 2% from 5%, and 95% of Abbey's claims are handled in 6 days, down from 10 days. "The performance level has far exceeded our expectations," Tointon says.

Still, farming out your back-office work doesn't automatically boost the bottom line. Just ask Peter Allen, managing director at Technology Partners International Inc. in The Woodlands, Tex., which advises companies on outsourcing deals. He says TPI has been brought in to clean up the messes created at several companies that rushed into outsourcing deals. One mistake: Clients fail to hammer out important details of their contracts, such as penalties if the outsourcer doesn't meet certain service levels. Outsourcing deals aren't "like ordering from a Chinese menu," says Allen.

Indeed, the rise of the outsourced economy is creating a new set of management challenges. "The competitive differentiation for companies will come from how they manage outsourced relationships," says John K. Halvey, a partner who heads the outsourcing practice at New York law firm Milbank, Tweed, Hadley & McCloy LLP.

One company that's rising to the challenge is Canadian utility BC Hydro. Under a 10-year, $1 billion contract it signed with Accenture in February, BC Hydro handed over functions such as human resources, procurement, and customer service. As part of the deal, 1,564 employees, or a third of BC Hydro's staff, were transferred to Accenture.

To keep things running smoothly, BC Hydro found that it needed to revamp its management structure. So the company created eight new managerial slots to oversee all aspects of the deal and installed business-planning software to give employees access to vital information about the contract's performance. "Unless you have a process and a model [for managing the relationship, such contracts] can go amok," says Jay Grewal, BC Hydro's business-development chief.

If all goes well, Grewal is expecting the deal to save BC Hydro at least $180 million over the life of the contract. With results like that, it's not surprising that more and more companies are looking to BPOs to count their beans -- and do just about everything else.

By Spencer E. Ante in New York

    Before it's here, it's on the Bloomberg Terminal.