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Potential savings and efficiencies await, but timing is everything.

In 2001, Marmot Mountain LLC was a privately owned, midsize outdoor apparel wholesaler in Santa Rosa, Calif. As the business grew, orders began to come in from retailers nationwide, often by phone and fax, and processing them became increasingly difficult. "It took hours of data entry, and mistakes were being made," says Alison Smith, the company's director of operations. "We were spending three or four days on data entry, and fulfillment was taking weeks."

Despite these difficulties, Marmot was wary when Denver-based CenterStone Technologies offered to take over and reengineer the company's order fulfillment process. "It was our first stab at using technology to help us to manage our business, and at relying on a third party to help us, so loss of control was an issue," Smith says. It took many meetings and much hand-holding, but "we finally got the picture," she adds. CenterStone connected Marmot's supply chain and ERP platforms and created a Web portal that allows retailers to view Marmot's products, check for inventory in real time, and place orders. CenterStone manages the order fulfillment process from its Denver offices and ensures that systems stay running, product descriptions stay current, and orders are accurately filled—within days instead of weeks. Although Smith won't disclose actual figures, she says that Marmot has seen significant savings in supply chain costs thanks to the system. Today, the company—which was acquired by K2 last June—is experiencing 20 percent year-over-year sales growth.

For Marmot, like many other businesses, outsourcing a piece of the business can be a wrenching decision. In theory, BPO promises not just reduced costs, but also streamlined processes by letting third-party "experts" refine and evolve systems from start to finish. The problem for many companies is determining exactly what, if anything, should be outsourced. In addition, BPO deals are often plagued with poor management, badly negotiated contracts, hidden costs, and political infighting. In fact, analysts estimate that as many as 60 percent of all BPO deals will falter. And because BPO deals involve processes that directly affect important corporate stakeholders—including employees, suppliers and customers—the consequences of failure can be severe.

Yet despite the obstacles, BPO is growing: Gartner Inc. analysts estimate that the BPO market will increase from $113 billion in 2003, to $176 billion in 2008. Several large companies are already betting big on BPO's success: British Telecom recently renewed its contract with Accenture Ltd. to expand its HR BPO initiative from its U.K. division to all 38 countries where BT operates; and Procter & Gamble Co. has struck BPO deals valued at $4.3 billion to manage the company's HR, facilities, and some IT infrastructure and finance functions.

While managing an ongoing BPO contract presents its own challenges, the work that is done before inking the deal is perhaps the most important. The success of any BPO deal will depend on careful advanced consideration of three crucial elements: which processes you outsource and when; a detailed cost analysis; and the impact on the workforce that will be affected by the decision.

This article was originally published on 03-25-2005
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