Why sell what you just bought?
A recent Channel Insider article raised the concern that HP might sell off or shutter some of its outsourcing business. Specifically, the article speculated on the BPO operations that EDS brought into the firm as part of HP’s acquisition of EDS. BPO, business process outsourcing, describes the outsourcing of entire business processes, like accounts payable, to a third party with the objective of reducing costs and/or improving the performance/outcomes of those processes.
HP bought EDS back in May this year. Selling off assets, like the BPO practice, would seem like something that would have been done earlier than now. But, HP may not be happy with the lower returns that BPO offers. That was certainly one scenario that Channel Insider offered up.
(Fellow blogger Dennis Howlett offered up an assessment of the HP EDS merger here).
Why do companies decide to get out of recently acquired businesses? They do so because:
- the businesses do not ‘fit’ their strategic game plan
- the businesses are not healthy
- the businesses cannot return the margins that the company’s shareholders demand
- the economics of that business are really messed up by competitors’ pricing
- they do not understand that space or how to operate it well
BPO is about scale and process delivery. The more scale, theoretically, the lower the operating costs. The better designed the processes, theoretically, the lower the operating costs and improved service levels for customers. However, BPO in practice doesn’t work the same as in theory. BPO deals often include a lot of one-off processing. Few ‘best practices’ or ‘best processes’ work well across industries or work well for every company. Too often, BPO solutions are not standardized and hence more expensive to operate than in theory. I suspect that most BPO solutions look more (and are sold more) like hosted applications than the standardized, multi-tenant applications offered by SaaS (software as a service) vendors.
Another issue with BPO deals concerns the ability of the outsourcer to dramatically improve existing processes and performance levels. Some deals essentially involve the transfer of systems to another firm. No step change in improvement occurs. Other deals promise a transition to new level of performance via new systems and process designs. These deals are expensive to implement as the change management, user training, and other costs drive up the BPO cutover costs for the user firm and the outsourcer. Finally, BPO providers who promise ‘continuous’ process improvements may find that getting a customer to one step change is expensive enough. Future improvements may be too costly to justify.
BPO providers also build their business on the use of third party ERP software. Guess what, those same BPO providers better have terrific pricing with those firms as license, maintenance and support costs for these products have been growing faster than inflation, consumer price index or reason.
But the use of ERP software may not be such a great thing for these BPO firms. If every BPO provider uses the same limited set of solutions with their limited (1980s) functionality, these solutions are not innovative or delivering unique value. This is especially true for back office (i.e., accounting and HR) applications. ERP and innovation are not words often found in the same sentence. Without innovation, value is hard to deliver.
BPO doesn’t have to be a low margin business, though. If outsourcers want to get higher margins, they need to offer something more than a commodity offering. Specifically, they need to offer innovation and value. The value must be more than low cost/pricing. Innovation must be more than process designs. BPO without innovation is a commodity. Without innovation, BPO is like any other business service: janitorial, vending, delivery services, etc.
If HP can spin off this business without taking a bath, they should use the funds to re-invent BPO. BPO today should be a service offered via a SaaS solution running with a PaaS (platform as a service) in a full multi-tenant world. BPO needs to fully embrace the cloud.
BPO-based processes need a huge infusion of innovation and it won't be coming from the usual ERP suspects. Most of these firms have become large technology portfolio managers more interested in 43% operating margins on their maintenance base than in delivering something really new or different. These ERP firms are too vested in maintaining the status quo and not in delivering something really amazing. Their inattention to innovation is hurting BPO. Maybe, this is why HP is possibly running away