With the recent global recession, senior executives are desperate to cut costs from back office functions like information technology, human resource management, finance and accounting. Outsourcing these functions has been the primary cost reduction strategy for the past decade, and remains a viable option. But some innovative companies actually see the potential to participate as a supplier in the outsourcing space. Companies such as Lloyds of London, Bank of America, Barclays Bank, and BAE Systems have transformed high-cost, low-performing back office functions into commercial enterprises by partnering with key suppliers. The suppliers typically centralize, standardize, and web-enable the customer’s back office processes, retrain, empower, and motivate transitioned back office staff, and leverage the assets to attract external customers. The results are impressive: lower costs, better service, and revenue generation. Of course, such radical transformation is never pain-free. We aim to help senior executives assess the viability of commercialization of their own back offices and offer eight lessons derived from one customer’s experiences.
To many senior executives, back office functions such as human resources, information technology, indirect procurement, finance, and accounting are often perceived as costing too much, providing too little, and responding too slowly. Yet, their back office managers reply that these functions are, or could be, key contributors to competitive advantage. After all, human resources attracts and develops intellectual capabilities; information technology is critically ubiquitous in every business process; indirect procurement — which represents up to 80 per cent of a business’ costs — must be aggressively managed to protect profitability; and of course recent events at Enron, WorldCom, Tyco, and others has taught us that finance and accounting are essential capabilities. What if senior management devoted substantial attention and resources to these back offices? Might their true strategic potential be realized? Could they even be commercialized to generate revenue?
In this paper, we discuss how innovative companies like BAE Systems, Bank of America, Barclays Bank, and Lloyds of London have actually transformed their back offices into commercial enterprises. Although the idea of commercializing a non-core function seems counterintuitive — if not downright absurd — it is hard to argue with results: these organizations reduced their back office costs, improved their services, and generate external revenues through third party sales.
Commercialization of back office functions is viable because of the increasing market for back office services, also known as business process outsourcing (BPO). The Gartner Group, for example, estimated that the BPO market was $119.4 billion in 2000 and projects the market to grow to $234 billion by 2005 in the areas of human resources, payment services, supply, customer care, and finance and accounting (Scholl, 2002). Of course the market for IT services warrants its own numbers — an estimated $250 billion market each year. Other research predicts even larger size of market figures1. While many senior executives reading this article are, or will probably become, customers in this market, some might actually become suppliers. In this paper, we describe how several companies have commercialized their back offices through strategic partnerships, with special focus on the Lloyds of London/Xchanging deal. Senior managers will learn to assess the viability of commercialization, how to select a strategic partner, and what it takes to achieve commercialization. But even if readers ultimately reject the idea of commercialization, the paper offers many insights for reducing costs and improving back office services.
