While business process outsourcing (BPO) is developing into a mainstream management tool, it remains complex and many organizations vastly underestimate its challenges. Consequently, roughly a third of organizations prematurely terminated at least one BPO relationship during the past year, according to a study published by Diamond Management & Technology Consultants, Inc.

Thirty-two percent of organizations prematurely ended at least one onshore BPO relationship and 34 percent terminated at least one offshore relationship over the past 12 months. Moreover, Diamond's "2007 Business Process Outsourcing Study" found that 44 percent of buyers who prematurely ended an onshore contract have actually terminated more than one contract over that period. Likewise, 39 percent of buyers who prematurely shed an offshore BPO contract did so on more than one occasion.

"A disconnect exists between buyers and providers regarding why organizations are prematurely ending contracts, and this can lead to a lot of finger-pointing," said Tom Weakland, Managing Partner of Diamond's Global Sourcing practice. As an example of this disconnect, buyers of BPO services most often cited a lack of cost savings as the reason for terminating contracts prematurely. Providers, however, claim that buyers changing strategic vision and moving functions in-house most often accounted for the providers' terminations.

Just more than 50 percent of buyers are satisfied with their endeavors overall, according to the study. Satisfaction is highest (64 percent) among organizations that outsource customer service functions with onshore providers, and lowest (18 percent) -- by a wide margin -- among companies that outsource human resource functions offshore.

"Irrespective of the reason, when the failure to meet buyers' expectations causes dissatisfaction levels to peak, terminations will occur," said Weakland. "The smart providers are the ones that are really trying to recognize the core causes of customer dissatisfaction rather than always trying to blame someone else."

In its inaugural BPO study, Diamond asked 185 buyers of BPO services -- directors of human resources, customer service, transaction processing, finance and accounting, procurement, and R&D -- and 35 major providers of those services questions about BPO spending and adoption, challenges between buyers and providers, and effective satisfaction and performance measurement.

BPO Rationale and Future Spending

"The BPO market is alive and well, even though aggressive growth projections have not lived up to expectations," said Brian Tumpowsky, a Principal in Diamond's Global Sourcing practice. "We see continued uptake for BPO services, both onshore and offshore, but buyers are approaching things with more hesitation than in the past."

Diamond sees the market rapidly maturing -- much like the IT outsourcing market has done. As providers gain greater skills in specific functional areas, an increasing number of buyers will use BPO as a means for moving ahead of the competition-and not just for controlling costs. In fact, when asked to rank the top five benefits they have realized from BPO initiatives, buyers placed "freed up internal resources" and "improved efficiency and productivity" ahead of cost savings. That being said, the study also indicates buyers of BPO services are not quite ready to delegate the management of their most complex functions to outsourcing providers.

Looking toward the future, Diamond's study finds continued growth, albeit at a more moderate pace. "Overall, we see a great deal of caution among buyers of BPO services, going forward," Weakland said. "Spending is poised to increase in many areas and decrease in some spots, but many respondents expect to retain the status quo for the time being."

According to Diamond's study, customer service is the area in which buyers expect to generate the highest increase in demand over the next year. Thirty-one percent of buyers see onshore customer service spending increases, and 34 percent expect offshore spending to rise in this area. The study also projects significant continued demand for human resources and R&D functions.

At the other end of the spectrum, 11 percent of buyers are set to cut transaction processing spending among onshore providers -- the largest projected decrease in spending domestically or offshore. Conversely, 26 percent of buyers expect to increase transaction processing outsourcing with offshore providers. This does not bode well for onshore providers, as it signifies a shift in perspective with respect to transaction process as more buyers begin to see these services as commoditized and, therefore, more "offshorable."

Location, Location, Location

India and the United States will continue to dominate the BPO landscape well into the future. But with the market evolving at a rapid pace, Diamond's study reveals that buyers and providers are not in complete agreement on which countries will dominate the second tier of locales in the future.

"It was particularly revealing to see that providers actually expect India's presence to shrink over the next three to five years," said Weakland. "This may indeed happen as the BPO market matures, and buyers expect downward pressure on prices, aggressive marketing, and a plethora of providers and countries from which to choose."

Not surprisingly, buyers expect China to be the fastest growing BPO location in the future, with the current presence of 22 percent of buyers growing to 33 percent within five years. China is followed by Eastern Europe, which is expected to increase from 7 percent to 17 percent in the same time period.

"Buyers of offshore services should be particularly careful during the vendor due diligence process," said Weakland. "Buyers will find significant disparities between providers, mainly because the markets for many of these services are in their infancy."

Work Remains

The BPO market has not yet fully matured, and the study confirms there is work to be done by both buyers and providers. "Buyers are struggling to learn from the past, and providers are missing the mark in meeting buyers' specific needs," said Tumpowsky. "Rather than swim against the current, buyers of BPO services could benefit from candid conversations with their CIOs and IT departments about their past experiences."

"Buyers cannot have a 'set-it-and-forget-it' mentality when it comes to BPO," said Weakland. "They need to be hands-on and involved in the work on a daily basis. Clear communication is the key. Costs escalate, scope changes, and savings can disappear quicker than many organizations expect.

"The organizations that best integrate BPO initiatives into their businesses are those which view the buyer/provider relationship as a true partnership-understanding that no two relationships are ever alike. Buyers that use BPO as a competitive advantage learn how providers work with their most satisfied clients, allowing the buyer to more easily boost overall productivity."