Just when you think you can't stomach another flavour of Ben and Jerry's all-natural ice cream, along comes Candy Bar Crunch and you realise that there is space in your freezer after all. Ice cream is not that different to the IT services industry. Just when you thought outsourcing reached the pinnacle with last year's £100 million desktop/software/maintenance/migration deal between IBM Global Services and Cable & Wireless Communications, the outsourcing vendors have dreamed up another flavour of outsourcing: business process outsourcing (BPO). This hyped new service involves outsourcing IT-based non-core business processes, and promises to cut costs, raise share prices and increase efficiency. Companies hand over entire functions such as payroll, rather than systems that run the function. Analysts predict business process outsourcing will line the coffers of an already booming outsourcing market. In 1998, the global BPO market was worth $80 billion (£49bn), according to analyst the Yankee Group. And according to Giga Information Group, the market is growing at a rate of 40% each year, spurred by the general acceptance of outsourcing and the growth of web-based technologies that lower the cost of providing such services. In the US, where the services have taken off massively in the last six months, 73% of IT directors presently outsource one or more business processes, according to a report released this month by consultant PricewaterhouseCoopers. Processes commonly outsourced include benefits management, payroll, human resources and internal auditing. Business process outsourcing supposedly lets companies focus on core competencies to increase efficiency without having to invest in more people and technology. The theory is that firms become more profitable and get better service levels than internal departments could provide. All this can help a company gain a competitive advantage. Saving money is not the only benefit. 'BPO has resurrected outsourcing as a key strategy, not only to reduce costs, but to enhance flexibility,' says Julie Giera, a director of IT services at Giga. 'If a company can hire a third-party firm to take care of mundane back-office business processes, then it can concentrate resources on delivering its product or service.' Typically, the craze has been slower to take off in the UK than in the US, according to the Holway Report, which reviews the software and services market each year. 'There has been a tendency in this country to see IT as non-core to the customer operation, so there has not been as much interest in BPO,' says Anthony Miller, an analyst at the Holway group. Despite the caution, The Holway Report shows that BPO contracts worth £900 million were awarded in 1998, making this the fastest growing sector of the UK outsourcing market. One early contract was between Lockheed Martin, ICL and the UK Census. The census, which happens once every 10 years, is a survey of every man, woman and child in the UK. The organisation's contract with Lockheed covers the entire collection process, from staffing, data processing, technical support, and accommodation, to document processing and printing. 'The wide range of tasks involved made a totally in-house solution inappropriate,' says Graham Jones, Census' director. Census has kept core tasks, such as designing questions and providing the interface with the public, in-house. But ICL and Lockheed Martin have provided the expertise in systems design and IT. 'In the past, complex data had to be sampled from 10% of census forms,' explains Jones. 'But the greater throughput of data means that we can process 100% of the data, offering total accuracy.' However, for many companies entering this uncharted territory, the risks are greater than with any other sort of outsourcing contract, says Nigel Roxburgh, director of the Network Outsourcing Association. 'BPO contracts create strategic vulnerability, and the skills to put good deals together are extremely rare,' he says. So, what can companies do to make sure they see benefits? The key is negotiating contracts and terms from the start. Business process outsourcing, unlike traditional outsourcing deals, can't be measured by figures and through-put rates, says Roxburgh. 'You need a service level agreement that focuses on business success rather than numbers,' he says. Jones' experience with the Census contract confirms the importance of a service level agreement. 'We only have one opportunity to get the census right,' says Jones. 'So we have a service level agreement clearly stated in the contract and we have worked through exhausting trialling and rehearsal with the contractor.' You also need to consider how you will manage your relationship with the supplier as the contract develops. 'Contracts need to have excellent feedback built in,' says Miller. 'Meet regularly, monthly at least, and make sure that it isn't only IT people who are involved in the discussions.' Hugh Morris, managing partner of the BPO unit at consultant Arthur Andersen, believes the negotiation stage can set the tone for a whole relationship with an outsourcing partner. 'Telling yourself that you did a really great job of nailing the vendor to a tight contract may be counterproductive,' he warns. 'When you are deluged with change orders, you might find your outsourcer unusually legalistic and inflexible.' The big names in the business process outsourcing market are not the ones you might expect. The growth of the sector has encouraged a number of new players. 'The suppliers are not the typical cast of characters you see in outsourcing; they are speciality companies,' says Giera. Key players are Paychex and ADP for payroll, Synygy for commissions, and UPS for distribution. The so-called Big Five accounting firms are also making strides in finance and back-office outsourcing. Big hitters such as IBM and EDS are relative latecomers, says Giera. Several issues push users towards business process outsourcing. 'Year 2000 caused many companies to review outsourcing as an option for the first time,' she says. 'In addition, companies have realised that retaining control of key internal departments and releasing control of utility functions brings benefits of lower cost and increased focus.' This is a major shift from the fear of lost control and threats of industrial action that once characterised outsourcing. Companies today exist in a very different economic and political climate, says Joe Bradley, ICL's director of outsourcing. 'It used to be that companies were afraid to talk to people like ICL because they thought that they would lose a grip on their business,' he says. 'But people are much more used to the idea because of things like PFI, (the public finance initiative - the government's outsourcing programme) and the increase in mergers and acquisitions.' But not everyone is taken in by the BPO hype. With the advance of the Internet and corporate networks, business process and IT are increasingly intertwined. At least one UK company sees this as a very good reason not to outsource IT in any shape or form. Capital One is one of the world's largest credit card issuers, and is in the process of exiting all of its outsourcing contracts. The company launched in the UK in 1984, in partnership with Sygnet Bank. At this time, outsourcing deals were struck with the Bank of Scotland with specific goals in mind, explains Heather Cutts, Capital One's co-head of IT. 'We wanted to establish ourselves in the UK very quickly and we were able to do this by outsourcing processing to someone who was already established,' she says. However, recent months have seen a series of moves to cut down the amount of processing performed by the Bank of Scotland. 'We moved application processing out of their hands in June, and in the last few weeks we have moved the rest of the core processing, card fulfilment and account services back in-house,' says Cutts. Although the Bank of Scotland still gathers fraud information for Capital One, business process outsourcing is unlikely to rear its head at the credit card issuers. Cutts believes that the outsourcing vendor and customer can never have the same business drivers, 'no matter how lovey-dovey they are when you sign the contract'. The company would consider outsourcing non-core functions including helpdesk, but only in the face of compelling financial arguments. 'When we do this, though, it is always with a view to insourcing these skills where the systems and processes become a core part of the business,' she says. Nevertheless, business process outsourcing is almost certain to appeal to many users over the next few years. 'Strategic sourcing will become a business-critical capability,' says GartnerGroup vice president Roger Cox. 'It's as important as year 2000, but you don't have a year end.' And employees are getting prepared for this. 'I remember a very emotional reaction to a deal I worked on for Motherwell Council 10 years ago,' says Bradley. 'People used to be forced to work for the outsource company, whereas now they often welcome it as more interesting than where they are.' - For more on outsourcing see Careers, page 63. WORDS FROM THE WISE Does business process outsourcing matter? 'Yes. Business process outsourcing is growing at 40% a year and this is going to increase further over the next three to five years.' Julie Giera, Giga Group analyst 'Business process outsourcing will become the lifeblood of the outsourcing industry.' Hugh Morris, global managing partner, Arthur Andersen. 'It will in the future, but it is still very rare in the UK that a company outsources an entire process.' Nigel Roxburgh, Network Outsourcing Association Why should I care? 'BPO can help solve staffing shortages and reduce large infrastructure investments, as technology shifts to the web.' Julie Giera 'Your IT director wants ecommerce by Christmas, so you need new systems, support, and customer relations - and you need them now.' Hugh Morris 'If an outsourcing contract is not business output-based, you are simply throwing a problem elsewhere.' Joe Bradley, director of outsourcing, ICL Best piece of advice? 'Negotiate hard, and use BPO for mundane back-office business processes.' Julie Giera 'Outsourcing IT is not about technology, it is about support for the business, and links between the two need to be tighter than they have been.' Joe Bradley 'Meet on a regular basis, at least monthly - and make sure the chief executive is there as often as possible.' Nigel Roxburgh Biggest potential pitfall? 'Choosing the wrong supplier or poor contract negotiation.' Julie Giera 'People sign a deal and relax, glad the work is over. It's not. You are managing a service where you used to manage people, but you're still managing.' Hugh Morris 'The same as with any outsourcing deal, except with much more extreme retribution.' Roxburgh TEN YEARS OF THE TENDER TRAP - 15 October 1999 The Bank of Scotland confirms that it will outsource IT if it successfully takes over NatWest Bank, and predicts savings of £290 million - 26 August 1999 Customs & Excise delays the signing of a £500 million outsourcing deal with ICL following conflict over the financial terms of the package - 12 August 1999 The first 13 Metropolitan Police Authority IT staff move to private contractors as part of an outsourcing deal, prompting concerns over security - 7 August 1999 Wembley International scraps a deal with Bull Systems, after realising that it could make greater savings by keeping call centre technology in-house - 16 June 1999 Baan and Bull Systems establish a partnership to offer application rental of Baan software - 25 February 1999 The Benefits Agency and Prison Service both drop ambitious outsourcing plans, following the troubled Andersen Consulting implementation at the National Insurance office - 16 September 1998 EMC and British Airways strike the UK's first storage outsourcing deal - 12 March 1998 The Bank of England completes a six-year outsourcing project with Cap Gemini, which involves moving from legacy mainframe applications to new platforms - 14 November 1997 A $550 million outsourcing deal between Sears UK and Andersen Consulting hits the rocks when the Sears chief executive who struck the deal leaves - 28 August 1997 Unisys wins an eight-year, multi-million pound contract to run Girobank's cheque, cash and document processing systems - 4 June 1997 Hewlett-Packard launches a selective outsourcing package, which lets customers define what level of outsourcing they require - 17 April 1997 Citibank cancels a multi-million dollar application outsourcing project after internal viability tests throw doubt on the level of risk the deal would create - 7 April 1997 British Steel opts to build in-house IT skills after dropping plans to outsource its operations to IBM - 3 November 1996 Norwich Union delays a move to asynchronous transfer mode after outsourcing its networks to Racal. The two companies are in conflict over who has responsibility for the migration - 10 October 1996 Lloyds signs a £147 million deal with BT for the installation and management of a telecoms network - 14 August 1996 IBM's outsourcing arm is reported to be worth $40 billion, after deals with Thorn Europe and Sun Alliance Insurance boosted revenue - 5 June 1996 The government is accused of acting on dogma at the expense of good government when it orders local authority IT departments to outsource 80% of their operations - 5 October 1995 IT staff at the UK office of Credit Lyonnais react angrily to news that they will be forced to move companies as part of an outsourcing deal - 13 January 1994 Hewlett-Packard announces a dedicated outsourcing division, after a 12-month trial generated £100 million in revenue - 2 September 1993 British Aerospace rejects an experimental joint IBM/Digital outsourcing bid for one of the largest facilities management contracts to be put out to tender in the UK - 28 May 1992 ICL creates a stir at the BBC, announcing an outsourcing deal before the broadcaster had informed its IT staff of the move - 1 November 1991 The government publishes its manifesto of outsourcing, Competing for Quality, which orders local government and the civil service to assess the feasibility of using external contractors - 14 March 1991 The CSA predicts the demise of outsourcing because of the rise of Unix, while John Chisholm, managing director of Sema Group proclaims that 'the outsourcing boom has run its course' - 4 October 1990 Computing warns IT managers to 'beware the lure of outsourcing your information technology'. Developing in-house expertise is seen as the key benefit of owning and operating your own hardware.