Excerpts of a speech by John C. McCarthy, Vice President, Asia Pacific Research, Forrester Research, Inc.
I chose the title "Midlife Crisis in the BPO industry" because I felt it very appropriate, for some of the angst that we sense has been going around in the industry.
There are a lot of high expectations around BPO, but as the market has gotten older there's been a frustration very similar to what you see in the classic white middle aged man in America. The same thing today is true for providers and also some of the big multinationals- the IBMs' and the Accentures.
There is a lot of consolidation - a BPO acquisition or merger happening on a daily basis. Those BPOs that have struggled to build momentum and get beyond the start up mode are searching for the right strategy.
Future success for BPOs will require serious technology and marketing investments. Not just for branding, but on aspects like, which accounts are we going to target, which processes are we going to go after, how are we going to articulate our differentiators, our value propositions and then the technology investment? Over time the successful companies are going to be those who offer black box solutions. (The customer just gets results and does not bother about how the results are given).
From a survey we did in November last year, asking companies to describe their level of interest in BPO, we found that this was pretty consistent over the last few years. About 14% of the companies in North America and 15% in Europe are leveraging BPO wherever possible. The good news is that a good percentage of the market is untapped; the bad news is we've been at the same level for a very long time and how to jumpstart the market is one of the key issues to get the momentum going in the BPO space. Financial services, Utility, Telecommunication, Insurance were some of the big birds that are driving BPOs.
Areas where the BPO work is happening There is huge range of processes, the biggest of which is payroll. Things like accounts payable or receivable are relatively well defined simple transactions with limited number of inputs and transactions which BPOs are taking on. However I think these are just a small fragment of what is possible. Also outside the HR area the BPO industry has not done much to have a significant momentum.
Have we seen the savings which we've expected in a BPO? Comparing with data from 2002 - The percentage of people who said that their savings exceeded their expectations is significantly higher, so the value proposition story is getting proven. The people who said that it was too early to tell dropped dramatically - this shows the level of maturity, traction, and consistency that we are starting to get in the industry. The people (customers) who said that they didn't get what they expected probably didn't know how to cost them to begin with.
This is particularly important because overall when we asked about the concerns people have about outsourcing; -the top one is cost effectiveness, followed by quality, security and loss of control.
We had offshore providers talk about cost savings - Comparing with data collected two years ago; the overall ratio of people who are very satisfied to somewhat satisfied has gone up. There is a little bit of a drop in the people who are very satisfied, when asked about the quality of deliverables. I think taking into account the pressures of growth a lot more complex work is being offshored compared to 2 years ago. So that has raised the expectations about capabilities. Another aspect is that the Multinationals have started setting up their own offshore centers and the notion that offshore is purely the purview of the Indian supplier is going down. These factors have increased the expectations of the customers and might account for a pretty significant drop in the people who are very satisfied with the quality of the deliverable.
Security Breaches over the course of last year, has impacted offshore BPO clients who felt overall loss of control and security and that's why the initiatives that NASSCOM is leading for employee registry etc. are particularly important because there is a fair amount of angst related to offshore.
23% of the people said they were extending their investigation and were putting even more rigor around the orders that they were doing around vendor security practices, 10% were revaluating their commitment to go offshore and 6% had slowed their migration offshore. So almost 40% of the companies had slowed down what they were doing. Even those that weren't slowing down were providing more oversights, were looking at negotiating their SLA's, with more things in place around security, a small percentage was thinking more towards a captive centre.
The state of the market and how we see some of those investments playing out - First, the market is still fragmented; it's very rare to find anybody who's got more than 50 clients overall and more than 10 or 15 clients in a particular segment. The industry is growing. We have seen higher growth rates in segments like HR and F&A. HR has shown significant consolidation and you have a series of players who have a broad range of capabilities in terms of the different HR processes they can go after but also in different skills in terms of process, consulting, technology, and operations.
The call centre business we feel has almost stopped dead in its tracks. The vendors are retreating and considering other focused transaction processes.
The delivery models are in flux, we see a lot of large multinationals trying to figure out if they really achieved what they set out to when they brought this business to this place. Companies like P&G, HP, IBM are looking at how they can leverage the same sort of capabilities to build momentum in other areas. Market consolidation is accelerating, there's almost a deal a month. People are trying to build scale and get out of that midlife crisis. They are asking ‘Where are we going to make any money?' They think that they have to go after these huge deals and do the transformations later, because they see that they can derive profits in those large deals sooner than in the smaller ones.
There's a little bit of a discast between the vendors and users. The systems integrators chase the big deals, the clients don't necessarily want to go through the disruption of the big deals. The Indian vendors are trying to build a solid set for scale and referenceable customers, but the clients are skeptical.
The challenge we have is that the customers don't optimize some of these BPO decisions in favor of the vendor's existing platforms and processees. That makes it hard for the vendors to prove and deliver on a consistent scale and a consistent platform. Then there are people who think that the clients approach or the captive approach is going to save the day. We've started to look at the capex space over the last 2 months. From the interviews that we've done we find that a lot of the captive organizations are struggling. One of the things we see happening in the transition is that companies are not talking about thirty verticals anymore, but about two or three sub-processees in a series of verticals and that over the next 3 years verticals are going to be very important.
From the evolution point of view, if you look at the call centre space which is largely a body based approach, and has very low barriers to entry. We are seeing a convergence-the domain expertise which you're building up, the process expertise, the technology which you bring will be of particular importance, and that's going to raise the barriers for entry.
In the verticals we are seeing a parallel evolution where people are starting on a very simple transaction centric processees-things like mortgage processing, claims processing, with fairly limited number of inputs & outputs. We're starting to see deals to build on these strengths. You are going to see the IT firms saying that we've got this suite of applications, which we can sell and underpin our BPO offering.
The third stage of the market is a much more platform based approach with reliance on the underlying technologies. This is the engine that we see will drive long term profitability - a much more differentiator approach. No one is asking what software you run, they are trusting your process and systems and your economies of scale. Some firms have started building their own platforms, so it's much more of a technology play in parallel with some of the process and the labour play. This is going to be particularly important because if we look at the pricing of these BPO contracts, the pressures are going to be significant. If the client's base level cost is US$100/- over a ten year life cycle of that contract, we are going to see that price drop below thirty (dollars) over time, (a more than two thirds drop).
This is going to take people through different phases. We see there are three key elements in the BPO strategy -the labor arbitrage, the process improvement and a common technology platform. Today, it's a few things that drive success, particularly in the offshore space, it's the arbitrage and process improvement-the six sigma discipline that people bring, once the technology platform plays a part, the importance of these factors will be much more limited. The (cost) arbitrage will play out because everybody has it, the process improvement, the six sigma discipline and the desire to measure outcomes will then be particularly important - the move for a common platform is going to drive a scalable advantage over time.
Part of what's happening outside of this BPO space is that services oriented architecture modular approach, which will become the heart of the BPO solution.
There are a range of benefits in this platform based approach. For the supplier, it allows them to get scale. The one to many relationship, benefits the customer who escapes the cycle of having to build these applications themselves , important from a low flat rate or a low single digit IT budget growth point of view, and the customer gets access to a common set of best practices in the platform.
This was a presentation during the NASSCOM-ITES BPO Strategy Summit-2006 in Bangalore.
Issue BG68 Nov06