The recession has upped the ante for today’s BPO providers: the move to providing business services in a cloud-like model is accelerating, and the real challenge for today’s service providers lies in answering the following questions:
1) Do we want to play in the BPO space?
2) How do we play in this market? What’s our angle?
3) How can we compete? What’s our differentiation?
The challenge today is whether a provider is adding value beyond low-cost processing services. If you are only really providing an arbitrage solution, someone is going to come along and offer it for even less money, and someone else will eventually come along and provide it for even less. It’s a no-win game, unless you want to become the lowest-cost provider in town and make a razor-thin profit margin.
What’s interesting is this coming together of the IT/BPO model. And it’s becoming much more sophisticated then simply providing a platform and some low-cost processing services. It’s about integrated business services where the provider delivers the hosting, the application skills and the business services needed to help clients achieve specific business outcomes.
IT services providers have made a living differentiating themselves by providing expertise in technical areas that allowed them to charge a premium to their clients. However, as technical skills became a commodity, some IT services providers are moving up the value-chain by providing expertise that apply technical skills to specific business needs, while others have opted to scrap around for the low-cost “price per developer per hour” commodity business. Those IT services providers which think they can get away with charging a premium for commodity development services are having a rude awakening in today’s post-recessionary marketplace. Most clients today are insisting on greater transparency with the costs of services.
This is where BPO gets interesting, as the similarities are striking as services commoditize, and the winners focus on providing value. Let’s take an example in life sciences: an IT services provider is performing technical clinical data management services for a phama client. This entails providing programmers skilled in integrating Oracle’s clinical data repository into the pharma’s legacy applications. That pharma has five other IT services shops working on its systems, all of which can provide the same skillset to performthe same work. It’s become a price-play. At the same time, the pharma is spending millions a year on analysts to extract that data and apply it to research projects for new drug development. If that IT services provider delivering the clinical data development work can step up and also provide analytical services to help interpret and apply that information to the pharma’s research operations, new business value is now being created (not to mention the huge cost-savings if these services are delivered offshore).
However, this isn’t about providing cheap bodies to crunch data, it’s about having systems analysts working in tandem with bio-informatics analysts to ensure the right data is being made available and subsequently analyzed for the pharma’s scientists to make critical judgment calls. The differentiation is in providing the integration of technical capability, business process execution and then applying it to the client’s business. Moreover, if the provider has performance-based incentives to help its client develop new drugs and achieve medical breakthroughs, it is becoming intrinsically tied to the success of its business. This scenario is similar in other industries, for example merchandizing support for retailers, or supply chain optimization for manufacturers. This is where the whole IT services/BPO industry needs to go.
In Part II of this article, we will discuss how BPO providers can differentiate themselves by developing / acquiring IP to deliver holistic business services that integrate the application hosting, development and business processing within a single cloud-delivery model and then apply it to client situations. And is there really a role for the pure-play BPOs, or is the power shifting to the IT services shops developing domain-specific industry BPO expertise?
Posted in : Business Process Outsourcing (BPO), Cloud Computing, IT Outsourcing / IT Services, SaaS, PaaS, IaaS and BPaaS
Phil,
You’ve managed to describe the path outsourcers needs to take in a few brief paragraphs. You’ve nailed this on – Platform BPO alone is a play for cheap processing services tied to commodity ERP implementations. Vendors need to be much smarter about the value they bring to the table – and you’ve done a great job highlighting this here,
Paul.
Phil,
You’ve definitely hit on a strong point here, and the life sciences analogy sums up the value an IT/BPO services provider can bring to the table. Time to leave the low-cost, low-value work to those providers which add little (if any) quality.
Peter Evans
Hi Phil,
Great thought provoking piece this. You have nailed it on the head in terms of the issue at hand for outsourcers and providers. My two cents on the topic as below –
There will always be mature outsourcers and first timers on the demand side and likewise on the supply side a whole array of integrated, pure play and niche players. With both the demand side and supply side, the landscape will continue to evolve and it will always be very difficult to put your finger on one phenomenon as the key trend. Having said that, there will always be a need of the hour or a writing on the wall. Smart ones on either side of the sourcing value chain will read/sense that early enough and make strides which will entrench them in advantageous positions in times to come. Your article Phil, is blowing a loud whistle about the writing on the wall.
The writing on the wall in the post recession era global sourcing is about the departure towards outcome driven sourcing from cost driven sourcing. While the green shoots continue to keep coming, one can safely predict that we will never see the hay days of strong capital expenditure based IT sourcing back again. So the lowest cost “body shopper” from IT trenches across the world will never see their glory days back again.
When you are talking about business outcome driven integrated sourcing you no longer look at technology, business process and knowledge harvesting in isolation, you try hard to look at them in harmony or at best in tandem.
Now in the brave new world where the White House in Washington hosts Iftaar parties, the future is all about inclusive growth meeting consensus, far reaching goals. Phil took the case of Pharma, let me take the case of healthcare.
It is forecasted that in some years the Healthcare spend of America can reach almost 25% of its GDP. Still there will be millions beyond the reach of managed care, a number which will increase as the cost of care goes up. So the writing on the wall for the care providers is to reduce the cost of care per capita. But just how are they going to do it when all the input costs are at best going up?
Take the case of the ICD-10 migration deadline and the EHR initiative for example. Does it make sense for care providers to spends billions of dollars and build new systems customized to the skill level of their staff and standardized to the new coding and data requirements or does it make sense to migrate to a ready built standardized platform/s hosted by a third party/ies with guaranteed uptime and system performance and leave it to the experts to make the platform evolve with time? The second will be less expensive for sure but who takes care of the huge staff retraining requirements emerging from something like this. A standardized system will also make lot of manual intensive staff functions redundant. So does a turnkey process outsourcing initiative make sense there with a combination of on location and offshore delivery strategies?
Probably yes! But where is that one vendor with expertise in all the areas who can take over large staff functions across the healthcare gamut and transform the processes and run it with a mix of existing in premise and outsourced and offshore staff? Where is that one provider which is capable of building such end to end care provider systems conforming to all the new standards and still be able to host it on high availability? Where is that one provider that can take care of all the specific customizations of unique providers and still deliver it on a reasonable cost on a unified platform? They really aren’t there or are too few and too expensive.
So wake up to the world of business outcome sourcing or business ecosystem sourcing. Business ecosystem sourcing is all about harnessing the power of many. Many niche and integrated infrastructure providers managing the uptime of a large platform. Many application providers collaborating to deliver the functionality and performance required for a large best practice application suite and many business services (read BPO) providers working hand in glove to deliver a common customer outcome.
It’s the time for carving your niche in this emerging space for sure – specialization pays, so long it is capable of collaboration and co-creation of a larger value for a larger inclusive purpose. And if primacy of a larger inclusive purpose is the writing on the wall, collaboration and co-creation becomes an integral part of the business eco-system. And green shoots for that are showing.
Recently on a large integrated IT Infrastructure and managed service desk deal with a Fortune 50 IT company (note the description of the deal nature) we saw big blues and others forming and breaking provider consortium configurations more like they do and undo pre-election political alliances in third world nations – in their case only to get the co-creation equation right for their customer.
So consortium delivered deals are back in and providers should start mastering the language around integrated delivery alliances of computing infrastructure, BPM platforms, business applications and service delivery organizations to deliver large inclusive customer outcomes. Compete to collaborate and excel in delivering a larger goal.
Outsourcers and providers alike – wake up and smell coffee and tune your sourcing/delivery engine differently so that you can have a tomorrow living happily in cloud nine in a cloud, cloud world! The vision only seems to be a bit cloudy yet.
It will be cloud computing look-alike in technical architecture for sure but will also continue be based on the SOA driven business process delivery model which is called platform BPO in sourcing vernacular. So platform is not out – it is in – in with a bang – in with cloud architecture.
Phil,
Very interesting posting that happens to synch closely with my current obsession – finding outcomes that are most impacted by the coming together of process, technology, and analytics. One thing which I am realizing is that if the outcome provides limited opportunities for financial “leverage”, this concept still looks and smells a lot like “platform BPO”. In order to prevent commoditization:
1. The outcome needs to be one where an improvement has material monetary value (not just metrics) that can be clearly defined/measured and unlocked (e.g. fraud)
2. The deal itself needs to be able to tap into this value through mechanisms like gain sharing and risk assumption that need a balance sheet
3. The processes around the outcome need to be amenable to outsourcing/extraction
4. The service provider needs to bring relevant functional or domain experience in order to have the gravitas to carry off the deal
Regards,
Anish
Phil,
It was interesting to note Tiger Tyagarajan’s contention that ‘platform based BPO’ is an attempt by ITO leaders to create a space for themselves in BPO market. Now let us assume that there is really a martet pull for such sourcing, would this mean that we will see lot of IP/platfrom acquisitions by strong pure play BPOs like Genpact?
Alternatively, if this ‘process’ + ‘technology’ synergy is so strong would this lead to possible M&A activity with two organisations, each briging to the table strengths in one of these spaces?
I currently use a CRM ‘cloud’ system, completetly online where all my colleagues and partners can work on the same or their own projects.
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