What is BTO?
June 21, 2008
Business transformation outsourcing (BTO) is the next logical step for the big outsourcing vendors. In BTO a company’s entire business process is outsourced to the BTO vendor. The BTO vendors not just manage the business processes, instead they work closely with the company to transform and improve the business process to add strategic value to the shareholders of the company. BTO goes beyond the traditional outsourcing in which the external service provider will constantly transform and optimize the business process based on the changes in the marketplace and competition.
BPO vs. BTO
In business process outsourcing (BPO) often a discrete function within an overall business process is outsourced, the BPO vendor maintains the discrete business function for their client company, there is little or no value added by the BPO vendor. On the other hand the BTO vendor will own the entire business process of their client’s company and adds strategic value by bringing process and business efficiency to the entire company. For example in the accounting business process BPO vendors will mange accounting functions like bookkeeping, Accounts Payable, and Accounts Receivable. On the other hand the BTO vendors will manage and transform the entire accounting and financial processes of their client’s company.
Often time BPO vendors have generic skills in managing the entire business processes or some functions within the overall business process. BTO vendors will have deep vertical business expertise in particular businesses like Accounting, Legal, and HR. Even within Accounting they will have strong expertise in particular industry like retail, manufacturing, and hospitality. By working with several vertical industries BTO vendors will bring in industry best practices and procedures to their client organizations. BTO vendors have the vision for changing business landscape and work closely with their clients to change the entire business process according the events like competition, government policy changes and business mergers.
BPO contract between the client and vendor is simple, have a specific contract written for the BPO tasks and BPO vendor gets a flat fee for their work. In some cases BPO vendors will be paid based on their performance. The BPO contracts are simple and easy to mange and monitor. On the other hand the BTO contracts are fundamentally different and it is complex in nature. Both BTO vendor and the client must have a mutual trust between each other and often they need to engage in partnerships to share the risks and rewards.
Cost saving is the main reason companies opt for BPO relationships and most of the time senior managers or Vice presidents can directly engage with the BPO vendors to form the relationship. If the BPO vendor doesn’t provide the necessary cost savings, clients can cancel the contract. BTO relationships are long-term and often formed to increase shareholder values by creating new business ventures and partnerships. The BTO relationship is established with strong commitment with the C-level executives from the client company with the BTO vendor.
In any BTO engagements there are significant risks associated for both the client and the BTO vendor. The BTO vendor needs to get full control of the business process so they can adjust and change it as needed. For client it may not be easy to give full ownership of the business process to the BTO vendor because of internal structure of the company. The IT systems and technologies of a company have to be properly aligned with their business processes. The client has to give control to their IT systems and the corresponding business processes to the BTO vendor to succeed in their efforts. As the part of their business transformation strategy BTO vendors may change the client’s IT systems and this will be a significant risk to the client employees in managing their regular day today operations.
There are other challenges in BTO adoption, the policies and pricing models are complex and in most part it is untested. Managing BTO deals are complex and client companies must have proper tools and systems to adequately manage and measure the relationship.
For the client companies one of the greatest risks of BTO is the intellectual capital of their business processes that distinguishes it with their competitors. For example if a BTO vendor provides business process transformation services to an electronic retailer say Best Buy and to generic retailer say Target, how the BTO vendor will maintain the intellectual capital for the two clients? It is a known fact that both Target and Best Buy compete for customers and each has it’s own business strategies in attracting the customers. In this case how the BTO vendors will mange the relationship without compromising the trade secretes of Target and Best Buy?
The key advantage of BTO is it enables to transform Client Company’s business with industry best practices so it can compete efficiently in the global marketplace. BTO also helps companies to quickly adopt to change in market conditions and this will be the key for companies to survive and thrive in an era of volatile market and shifting customer demands and priorities.
Rapid technology changes only add more challenges and risks to the companies in adopting and integrating them with their own IT systems and to their business partner’s IT services. To a certain extent BTO reduces the challenges and risks associated with the new technologies. For example BTO vendors like IBM and HP can manage entire IT infrastructure with business processes associated with them, in this BTO engagements companies can make the BTO vendors accountable to all the technology and business changes.
In the highly competitive global marketplace, BTO helps companies to focus on their core competency and outsource rest of the functions to the BTO vendors. By focusing on their primary core competency, companies can make the BTO vendor accountable for all the auxiliary but critical business processes required for the core business processes.
Future of BTO
Unlike Business Process Outsourcing (BPO), Business Transformation Outsourcing (BTO) does not have a standard structure yet; each deal is unique in nature and there are significant risks associated with the BTO. But this does not stop companies in signing BTO contracts with major consulting firms like IBM, Accenture, EDS and BearingPoint. The big three Indian offshore consulting companies TCS, Infosys, and Wipro are also started offering BTO solutions, this will be a topic for a future blog.