31 July 2006
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The booming market for business process outsourcing (BPO) is proving to be great news for the global services industry and lawyers alike. Just as the market for IT outsourcing reaches maturity and deals are commoditising, along comes a whole new market for outsourcing projects, many of which are more complex than those that went before.
Originally one of the central tenets of outsourcing was that companies would never outsource operations core to their business. Outsourcing was, therefore, limited to services such as catering, security and facilities management. That began to change 15-20 years ago, when many companies contracted out their IT operations. In the UK landmark deals in the early 1990s saw the Inland Revenue, the Driver and Vehicle Licensing Agency (DVLA) and British Aerospace all outsource their IT operations in landmark multibillion-pound deals.
And the IT outsourcing market grew rapidly over the 1990s as many other large organisations adopted the core philosophy behind outsourcing: better services at lower cost. Government departments in the UK became leaders rather than followers in this particular management trend, as both Conservative and then Labour governments followed an agenda of securing private investment in public projects via PFI services projects.
By the late 1990s outsourcing was still growing, and organisations - and the lawyers advising them - had become more sophisticated and more confident as projects became increasingly larger. Multijurisdictional and global deals became more frequent. Equally, outsourcing service providers realised that there were major economies to be made in terms of the use of resource in low-cost jurisdictions, and the subsequent growth in offshore deals in locations such as India operated as a multiplier of the size and frequency of deals as the ability to achieve significant savings grew.
But the cloud on the horizon was that the market for new IT outsourcing deals, while not saturated, was at least reducing. There were fewer greenfield sites and some of the more straightforward IT outsourcing projects were becoming commoditised.
At about this time it gradually came to be accepted that there was no reason just to stop at outsourcing IT. All kinds of functions - HR, accounting, back office processing, cheque clearing - lent themselves quite effectively to outsourcing. BP Amoco, for example, had historically made very effective use of IT outsourcing and had begun looking at whether the same processes could be applied to its global HR. So in 1999 it took the plunge and outsourced its global HR processes to Exult (now part of Hewitt, which was at that time little more than a start-up). And so began the global BPO market.
Continued outsourcing growth
As we stand in 2006, the global outsourcing market continues to grow at a significant rate. The rate of growth for IT outsourcing has probably peaked and the annual rate of growth is roughly 3 per cent. So, from having been the main driver for outsourcing growth over most of the past 20 years, there are now fewer and fewer 'mega deals' in the IT outsourcing arena and more multi-sourcing opportunities (smaller deals spread between more specialised vendors). The BPO market is now predominately fuelling the market growth, with the BPO global market forecast to reach $180bn (£96.92bn) by 2009 at an average 9 per cent annual growth rate.
Within the BPO market outsourcing of front and middle office functions represents a 72 per cent share of the market and, particularly over the past few years, HR outsourcing has been a significant growth area. Procurement outsourcing is forecast to be a market of the future, but has been slow to get going. Outsourcing of finance and accounting services has, for a number of years, been held up by a preoccupation by many companies with Sarbanes-Oxley compliance. But now that most finance directors have got to grips with making their processes compliant, and there is a more stable market for such services, finance directors have the time and budgets to look at the outsourcing of these services.
The legal profession, as so often, has tended to mirror the growth in a particular market for legal services. The rise of BPO over the past few years has challenged law firms to think about the way in which they advise on these projects.
It is possible to identify three phases in the legal profession's response to outsourcing:
First, the growth of specialist practices to reflect the development of the market. Given outsourcing's origins as an IT project, most of the early outsourcing lawyers tended to be generalist IT lawyers who came to increasingly specialise. During the 1990s, as the number of IT outsourcing projects began to multiply, some law firms picked up on the trend and set up specialist outsourcing units.
Second, an invasion of corporate lawyers in 2000-01 reflected the slump in traditional corporate work at a time when the outsourcing market actually continued to grow. When even Slaughter and May announces the launch of an outsourcing practice, you know that outsourcing has moved from a niche to one of the mainstream disciplines of the legal profession.
Third, the rise of BPO has meant that law firms have had to reinvent their outsourcing units to reflect the changing nature of the outsourcing market. Firms have had to realise that a 'one size fits all' approach to outsourcing is not enough, and that having done one deal does not automatically create an outsourcing practice that covers all outsourcing types.
Ten years ago the number of people who might describe themselves as 'outsourcing lawyers' was very limited and they tended to be drawn from ranks of IT lawyers. Nowadays, any self-respecting law firm of any size will feel that it ought to be able to handle outsourcing work on behalf of a client.
However, not all outsourcing practices are equal. Maturity in the IT outsourcing market has seen a degree of commoditisation in the smaller deals in this sector, and what sets a handful of firms apart is their ability to undertake the most complex outsourcing deals, particularly international outsourcing and multijurisdictional outsourcing in the BPO sector. It is still an interesting oddity of history that most law firms run their BPO advisory units out of their IT groups using IT lawyers.
Changes in departmental structure are not the only challenges in the pipeline for law firms. The increased sophistication of outsourcing clients has thrown up a number of interesting dilemmas for law firms. For example, how do firms manage the conflicts inherent in acting for both an outsourcing vendor on some projects and also against that vendor on other deals? Good outsourcing lawyers ought to immerse themselves into a client so as to understand its most sensitive data, such as its pricing mechanisms. Does possession of that information not create a conflict when on the other side of the negotiating table from that client?
Going forward, the ability to negotiate a good set of terms and conditions is just not going to be enough. Outsourcing lawyers must add value for their clients by advising them on how to position themselves to maximise the value on offer in the outsourcing market. -
Alistair Maughan is head of the global sourcing group at Morrison & Foerster