To bundle, or not to bundle?

By Ben Thompson

Jeez, I hate paraphrasing Shakespeare: it just seems like such a lazy option. But there are times when no one but the venerable bard will do – and addressing the thorny issue of outsourcing is just one such occasion when you simply must roll him out. Of course, there was a time not so long ago when a phalanx of jaded technology hacks would be shoehorning bastardizations of Bill’s eternal question into article headlines addressing whether firms should outsource at all. But things have moved on, and with the majority of companies now seeing outsourcing of one sort or another as business-as-usual, it’s time to consider whether a new approach to looking outside the organization for services is needed.

According to the Everest Research Institute, companies that outsource an initial system or business function will outsource at least one more within two years. Essentially, that means executives will have a decision in front of them: to proceed with the same supplier or look elsewhere. Thankfully, a new breed of outsourcing solution is emerging to help take the pain out of such decisions: bundled outsourcing.

Bundled outsourcing is an innovative approach to outsourcing that consolidates multiple functions with a single service provider. It helps redefine back-office operations, reducing cost and increasing strategic flexibility while simplifying multiple back-office functions, and its proponents argue that in the current economic climate bundled outsourcing can play a key role in helping companies to hone their competitive edge and achieve higher performance.

"Most customers - at least from the US perspective - want some type of bundling," says David Tapper, Vice President for IDC's Outsourcing Services research team. "There's more bundling going on because customers don't want to have to deal with lots and lots of service providers. They want to consolidate contracts. They want to consolidate suppliers. They bundle more because they get scale out of it, they get cost efficiencies out of it, and they get access to more resources across more capabilities."

And while such bundles have typically comprised either related business processes - such as HR with payroll, or procurement with finance and accounting - or a collection of different IT services, an increasing number of companies are discovering that it pays to throw IT and BPO into the same mix. Bundling the IT function and select business processes to a single provider enables an organization to accelerate its drive to focus on core competencies and processes that add value to its products. And what's more, the cost benefits are attractive: according to research from New York global sourcing advisory firm EquaTerra, some businesses are reaping savings in the neighborhood of 30 percent more than they could achieve through separate ITO and BPO projects. While companies haven't generally sought to implement too many IT and BPO functions at the same time, results show that when they do, bundling can add efficiencies and economies.

The 2008 Global Services 100 survey found that demand for these services is rising. According to the survey, 54 percent per cent of respondents said that they saw customers seeking more bundled IT and BPO services than in the past. As companies seek greater synergies and try to jump-start growth coming out of the recession, the relationship between IT and BPO is strengthening and becoming increasingly vital. "The link between technology and BPO is becoming more important now," says Anoop Sagoo, a senior executive with Accenture. "Indeed, it is critical to many third-generation outsourcing strategies designed to reap the benefits from improving inefficient processes and functions." Sagoo believes that by taking a leading role in integrating IT outsourcing and BPO, the CIO can achieve a degree of business and IT alignment that would have been out of reach not long ago.

If the mega-suppliers such as Accenture and IBM have their way, IT and BP outsourcing will increasingly be bundled, meaning all the departments from IT to HR will deal with the same vendor. And with the bundled or consolidated model, CIOs need to be front and center in regard to everything from contract negotiation to determining the long-term business outcome of the contract. The result: in many instances ITO and BPO are merging into one seamless enterprise-wide solution. "In terms of outsourcing demand we are seeing evidence of a growing trend towards bundled outsourcing where clients see the advantage of outsourcing multiple processes, applications and/or infrastructure to a single provider," says Stephen Roehelder, Chief Operating Officer at Accenture. "This bundling has led to an increase in the number of sole-source deals in our pipeline."

Even so, bundling is not necessarily for everyone. Client organizations that are given to multi-sourcing arrangements, for instance, often have concerns over increased risks from bundling, due to overdependence on a few suppliers. Tapper highlights a couple of areas for companies to consider when looking at a bundled outsourcing approach. The first is contract lock-in. "One concern is that the more you bundle with one supplier, the more you will be tied in with that provider. Will they have pricing power? That's a big consideration." Quality of service is another area for concern. "If you put bundle a lot of services together, the concern is that the supplier may not be able to provide you with the quality of service across all those areas and do it effectively. Can they execute on all these service lines at a consistent quality?"

The final issue related to this, he says, is governance. "Governance is a challenge. When your governance covers a lot of business units, a lot of decision-makers, it can be tough. Unless you have a very good governance process, it will be very tough to execute on the quality of service and service-level agreements."

One additional point: the bundling question is set to be further complicated by the emergence of cloud computing as a service delivery model over the next few years. For outsourcers, cloud computing creates an unprecedented opportunity to reshape how services get delivered. For clients, it opens up a new era characterized by the arrival of new players that are eager to build relationships and showcase their capabilities. The trend will be for more providers to bundle BPO solutions in an IT cloud, so that eventually - and it will take a few years - IT infrastructure is no different from the enterprise than network infrastructure has become. If nothing else, the dramatically lower costs on offer from cloud providers will push customers to question charges by traditional sourcing providers, and the cloud will be used as a lever in negotiations.

Tapper, for one, feels that this will be the real game-changer in terms of the outsourcing industry, rather than bundling as we know it now. "I don't think you'll see total consolidation of BPO with ITO," predicts Tapper. "But I do think over the longer term, you'll see a shift to different outsourcing delivery models. The cloud is going to restructure the whole industry, bar none. The ‘how' is getting changed. And when it does change, it's going to be very disruptive to the service provider community."