The battle for the business process outsourcing market

As big general outsourcing contractors like IBM Global Services and CGI Group Inc. pursue business process outsourcing opportunities, they are steering a collision course with specialized processing companies such as Automatic Data Processing Inc. and Ceridian Corp. by coming at the same market from

another direction.

Toronto-based ADP Canada and Winnipeg-based Ceridian Canada are the two biggest Canadian players in payroll processing, says Jim Westcott, senior analyst at research firm IDC (Canada) Ltd. in Toronto. Along with smaller firms, they provide most outsourced payroll processing services in Canada. These companies are trying to leverage that position to become business process outsourcers – effectively setting themselves up as human resources departments for their clients, Westcott says.

ADP has expanded from payroll processing to providing human resources and time and labour management, says Rod Dobson, president of the company’s employer service business in Canada, and a small but growing part of its business could be considered business process outsourcing. Ceridian Canada’s executive vice-president of business development and consulting, Dave MacKay, says business process outsourcing (BPO) has reached roughly five per cent of his company’s business today from a standing start 18 months ago, and a third of new sales this year will be BPO deals.

Meanwhile, big information technology outsourcers are also trying to move into BPO. “”They’ve really built their outsourcing practice on doing IT infrastructure,”” Westcott says. “”That market has matured, so they’re starting to look at other sources of revenue, such as migrating the outsourcing portfolio up the stack from IT infrastructure to applications outsourcing to business process outsourcing.””

The outsourcing market began with infrastructure, then proceeded to applications and now is moving into the business processes surrounding the applications, agrees Mark Langlois, business development executive for application outsourcing business at IBM Canada Ltd. in Markham, Ont.

The big IT outsourcers are using different strategies to get into BPO. For IBM, the purchase of PricewaterhouseCoopers Consulting in 2002 was a key step, Westcott says, giving the company more expertise to complement its technology strength.

Early last year, Montreal-based CGI bought local rival Cognicase Inc., a move that strengthened CGI in BPO, financial services and other markets. “”Business process outsourcing is now a solid part of our strategy and our business,”” says John Foreman, CGI’s vice-president of corporate marketing. “”It accounts for about 20 per cent of our business.””

Westcott expects more such deals. “”There’s probably a fair amount of consolidation ahead of this market,”” he says. “”Over the course of the next few years, there’s going to be a number of acquisitions.””

One possible scenario would be for one of the big IT outsourcers to acquire a payroll processing company like ADP or Ceridian. Another way for a big outsourcer to gain strength quickly would be to take over the human resources functions of a major client and hire away most of the client’s staff as part of the bargain.

Still work to do

The IT outsourcing firms still have work to do to establish a strong foothold in the human resources business process outsourcing field, though. Westcott says it is “”still early days”” and firms such as EDS Canada Inc. and IBM are landing relatively few deals in this field.

ADP’s Dobson agrees. He says his company encounters direct competition from the big general outsourcers only rarely today – they focus more on high-value, client-specific projects than on the mass market, he maintains. That’s not to say Dobson discounts them as competitors. “”We do expect to see them arriving in our market,”” he says.

CGI is better established in the payroll field, providing payroll processing for some 18,000 clients. Many are in Quebec, where the Cognicase acquisition brought CGI a substantial payroll business. Ceridian’s MacKay describes CGI as a kind of hybrid of big IT outsourcer and payroll processor, thanks to the Cognicase deal.

The payroll specialists, meanwhile, are entrenched in payroll processing but lack consulting and professional services expertise, according to Westcott. “”Obviously they’re tuned very finely to perform at a very high level for the services they provide,”” CGI’s Foreman says. But companies such as CGI can provide a wider range of services.

MacKay doesn’t dispute that, adding that Ceridian will look to strengthen its capabilities in those areas.

If consolidation doesn’t come through general outsourcing firms acquiring niche players, it may take the form of niche players merging to build global presence. IBM’s Langlois thinks niche strategies will only work for firms with global reach.

Ceridian will pursue acquisitions to fill gaps in its human resources offerings, and may do international deals, MacKay says. The company’s major presence today is in the U.S., the U.K. and Canada, and it serves global customers through subcontractors in more than 30 other countries. In time, Ceridian may buy some of those subcontractors to gain direct presence in important markets, MacKay says.

But if general IT outsourcers and human resources specialists are becoming competitors, they can also be allies. Langlois says IBM Canada frequently subcontracts to such firms or works with them to address specific clients’ needs. Some, he predicts, may find IBM becoming their biggest customer.

Comment: info@itbusiness.ca

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