Experts in the global services terrain

What I’ve predicted for several years is now happening and the global services industry is experiencing a pricing war. The industry’s core arbitrage marketplace is moving from modest pricing competition to an intense pricing war. Providers’ prices are coming down not by 3 to 5 percent but in some cases by 20 to 30 percent. I’ve blogged about this inevitability for some time, and the last six months showed rapid movement in a downward spiral. Pricing disciplines that providers previously exercised are collapsing. Why has pricing become so precipitous?

Who is driving the intense pricing competition?

Mature enterprise clients, which are on their second or third generation of sourcing, are instigating this market move. They themselves face unrelenting cost pressures and point to providers’ high margins as proof that there are plenty of gains to be had. At the same time as they eye the margins, they are convinced that the next generation of cloud, automation, and as-a-service offers provide breakthrough cost advantages; and they seek to combine all this into step-change gains.

With these raised expectations also comes a willingness to switch providers and a realization that the barriers to switching have been greatly reduced. This is evident in our statistics, and I blogged last year about the increasing anti-incumbent bias.

Factors exacerbating the downward spiral

In addition to enterprises’ effort to drive pricing down, other market forces add to the momentum toward a pricing war. As enterprises’ willingness to switch providers increases, incumbent service providers are increasingly in an untenable situation. Investors reward firms that demonstrate growth; so providers can’t afford to have lower-priced competitors capture large chunks of their existing revenue. In addition, the maturing arbitrage market no longer gains share from traditional models at the same rate.

As the prospect of losing existing customers becomes increasingly painful, a retain-at-all-cost dynamic is increasingly the tone forcing account teams to drop price for existing customers while encouraging providers to use lower prices as the way to win new customers.

All these actions create a downward spiral that feeds the enterprise customers’ belief that pricing must come down. And voila! We have gathering momentum on a pricing war.

Industry implications

I think the implications for the industry are very significant. The days of relying on contractual switching costs to protect providers are over. Switching costs have eroded and providers are left with no choice.

I think the new normal will be much more competitive pricing – certainly for mature clients, but also it will spread to new clients. Clearly the idea of getting COLA adjustments is an uphill climb.

I’m not saying there is a race to the bottom in all market segments. Certainly providers in the growth areas such as as-a-service models and digital technologies and value-added areas will be able to command high margins. The challenge for the industry is that the core of business is in the quickly commoditizing spaces with a customer base that is unwilling to pay a premium. We must accept that this is happening.

It brings to my mind words in a Dylan Thomas poem: “Rage, rage against the dying of the light.”

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While multiple studies have addressed the significant value-add potential of analytics delivered by third-party service providers, surprisingly little research has been conducted on analytics supported by Global In-house Centers (GICs). To close this gap, Everest Group recently released a research report detailing GIC footprint, adoption, and best practices for analytics processes.

Following are three lesser known facts about analytics in GICs:

Consulting and professional services is one of the largest and fastest growing verticals in GIC analytics adoption

Perhaps unexpected to many, consulting and professional services is the second largest vertical in terms of GIC analytics headcount, after BFSI. It is also the fastest growing vertical for analytics market. (See Exhibit 1 below). Leading professional services firms such as Deloitte, EY, KPMG, and PwC have developed large analytics teams in their India GICs and other offshore/nearshore locations. These analytics GICs are an integral part of these firms’ core delivery model, and support both internal and external stakeholders. The teams provide support in areas including core audit, tax support, risk advisory, performance improvement, technology advisory, and transaction advisory. They also have sizable headcount supporting market intelligence and reporting activities. Leading consulting firms such as McKinsey & Company and Bain & Company are also significantly leveraging in-house analytics capabilities to support client work.

Projected growth of GIC analytics headcount

Exhibit 1

Most verticals, other than BFSI, primarily use analytics to drive top-line growth

The prime focus of the analytics teams in CPG & retail, and technology is to drive sales through activities such as product recommendations, optimal pricing, and customer lifecycle. And due to GICs’ role as an extended team, most of the analytics work in consulting and professional services contributes towards the firm’s revenue.

This is in sharp contrast with BFSI, which is the most mature adopter of GIC analytics. Major regulatory changes such as Dodd-Frank Act, the CARD Act, FATCA, and Basel III have compelled banks to be more transparent in data reporting, thus requiring regular data collection and event monitoring. Hence, leading financial services firms need to maintain large in-house reporting teams. Increasing usage of online banking, mobile banking, and card payments has led to higher risk of a fraud these days. Banks use analytics to cull out the risky customers and predict default. This, and given legacy reasons, banking GICs tend to have a much higher analytics scale for activities pertaining to cost reduction and risk management compared to those that support top-line growth. These vertical-specific variations in utilization of specific analytics processes by GICs are illustrated in Exhibit 2.

Analytics in GICs 2015, I4

Exhibit 2

Increasing evidence of analytics consolidated as a shared capability within GICs

Most of the analytics work requires domain understanding and alignment with business unit-specific objectives. Hence, GICs, especially financial services centers, traditionally structured analytics as vertical teams directly reporting to the corresponding business units.

However, there are increasing instances of GICs structuring analytics as horizontal shared capabilities for certain activities. With experience and maturity in service delivery, GICs have realized that certain analytics activities (e.g., data collection and cleaning, model design and validation, and Management Information Systems (MIS)) can be structured as a horizontal shared capability supporting multiple business units. The key driver for this is creation of a common talent pool of like-minded individuals for career development. It also leads to consistency in hiring and recruitment.

Everest Group’s recently released report, “Analytics in Global In-house Centers (GICs): Running Deep and Wide” provides details on the current market size of analytics services delivered by GICs (overall and industry-specific), key growth drivers, and location landscape. For more details, please download a preview of the report.

I’ve blogged before about consolidation in the services industry, and I believe the industry is now on the cusp of a new round of significant acquisitions. But don’t expect a repeat of the usual M&A strategy. We’ll see a shift from the usual tuck-in acquisition strategy to billion-dollar-capability acquisitions. At this game-changing level, consolidation could have an immense impact on the industry.

Market conditions are ripe for consolidation: a maturing marketplace, the cost of capital is very low and there is a changing perspective in executive ranks toward major acquisitions. As a result, the number of highly acquisitive players has jumped dramatically.

Cognizant led the way with its TriZetto acquisition, which changed the game in terms of size. ATOS acquired the infrastructure arm of Xerox. At Everest Group we also see Capgemini, Fujitsu, Genpact, NTT Data and Wipro as highly acquisitive players. And we wouldn’t be surprised to find others driving consolidation.

It will be interesting to see who these companies acquire – and whether they will acquire each other.

Photo credit: Flickr

The Global in-house Center (GIC) model continues to grow across industries, functions, and emerging markets ‒ from the financial services and technology industries to most verticals, from call center and R&D to a diverse set of functions, and from India to most emerging markets.

As the model continues to grow, with GICs evolving from low-cost service delivery centers to strategic entities driving value beyond cost savings, they face strategic and operational challenges: demand fluctuation management, talent management, driving further optimization through adoption of industry best practices, and knowledge management, to name just a few.

Third-party service providers can come into play here, helping GICs overcome these challenges by providing:

  • Additional cost savings through economies of scale and delivery pyramid optimization
  • The flexibility to ramp-up and ramp-down the capacity based on demand
  • Expertise in tools/technology and best practices on processes/control mechanisms
  • Large global footprint and language capabilities to serve for all regional centers across geographies
  • Niche skills such as digital and analytics

In this hybrid sourcing model, the GICs use service providers and/or manage their delivery on behalf of the parent organization. This also includes situations in which the GIC is driving or supporting sourcing initiatives (e.g., service provider selection or contracting) on behalf of the parent organization.

Everest Group, in collaboration with the Shared Services and Outsourcing Network (SSON) and NASSCOM, recently conducted a survey on hybrid sourcing adoption trends in offshore GICs. Eighty percent of the respondent GICs have adopted hybrid sourcing, leveraging service providers predominantly to manage volume fluctuations, lower costs, and access best practices. As the graphic below shows, most (80%) responded that hybrid sourcing is meeting or exceeding their expectations.

Adoption of Hybrid Sourcing by GICs

Our research shows that service delivery improvements and governance enhancements are the top priorities for the GICs. Therefore, it is not surprising that GICs collaborate with service providers across three key associated areas – supporting service provider delivery, supporting/implementing the parents’ service provider sourcing program, and identifying global sourcing opportunities and designing the sourcing model strategy. As GICs evolve in their operating models, they are likely to look for more opportunities to work with service providers in these priority areas to enhance the overall impact.

Areas of GIC-Service Provider Collaboration

Going forward, it is safe to assume that there are multiple opportunities for service providers to work with the GICs. However, further adoption of hybrid sourcing in GICs will be driven by their ability to influence the mandate from the parent organization, and service providers’ ability to assess the opportunities. Understanding GIC maturity will also be a critical factor driving these collaboration opportunities.

Everest Group has recently released a report on adoption of hybrid sourcing that provides a detailed landscape of current adoption and future trends for this model. For more information, please download a preview of the report, Adoption of Hybrid Sourcing in GICs – Driving Impact through GIC-Service Provider Collaboration.”

As I’ve blogged before, the healthcare space is at the cusp of a transformative change. Consumers are assuming greater ownership, control, and responsibility of health outcomes. Consequently, the decision making is shifting to the individual. Consumption patterns have undergone a significant change owing to disruptive mobile computing, rapid adoption of social media, next-generation sales/engagement channels, and ‘‘anytime-anywhere’’ information access. As individual consumers (patients and physicians) become more empowered, healthcare is transitioning to a principally patient-centric operating paradigm, with focus on cost, efficacy, and equity.

Analogous to what Uber has done to transportation, in progressive (and controversial) ways, there is a fundamental transformation in healthcare, placing patients at the center of all the action. These changes are reflected in the way reimbursements are distributed (moving from volume-based to outcome-based) and the onset of personalized medicine therapies based on real-world evidence. These gamut of changes are also aided by various cultural and socio-economic forces. The disruptive shift – from a healthcare provider-centric to a more customer-centric model – is driving significant healthcare investments in digital enablers of consumerization – social media, mobility, analytics, and cloud.

Healthcare consumerization levers

The New Kid on the Block

These winds of change have given rise to an immense opportunity to cater to this new patient-centric paradigm leveraging next-generation technology channels and enablers. Which brings us to Oscar, a New York-based health insurance start-up. Health insurance in the United States has conventionally been complex and non-transparent. With the advent of PPACA and health insurance exchanges (HIX), there has been a greater sense of accountability. Oscar aims to bring big data/analytics, design thinking, and transparency to the often-puzzling world of health insurance, making it smart, intuitive, and simple for consumers.

The idea for Oscar was born when one of its co-founders received his health insurance bill and realized that none of it made sense to him. The complexity and high entry barriers to health insurance can be gauged from the fact that Oscar was the first new health insurance provider to launch in the state of New York in more than a decade. The start-up sells coverage to individuals through insurance marketplaces in New York and New Jersey. The insurance plans offer free basic care including doctor visits, phone calls with doctors, preventative care, and generic drugs.

The company is backed by seasoned venture investors Peter Thiel and Vinod Khosla as it attempts to bring Silicon Valley mojo to health insurance. It was co-founded by venture capitalist Josh Kushner (an early stage investor in Warby Parker and Instagram), Kevin Nazemi (a Microsoft veteran), and Mario Schlosser (MIT Media Lab and hedge fund experience). The company’s strong digital health ethos is reflected in the senior leadership team – CTO Fredrik Nylander is a former Tumblr executive, Dave Henderson (ex-Cigna and EmblemHealth) is Oscar’s president of insurance, board member Charlie Baker is former CEO of Harvard Pilgrim Health Care, and senior medical executive hires from EmblemHealth, a leading health plan in New York state.


What’s different?

Oscar’s value proposition is on being a more personalized health insurance provider, with a strong sense of convenience and personal attention, aided by marketing, design, and consumer service practices that are aligned to the needs of the millennial generation. It has a sizable emphasis on telemedicine (offering it free of charge), and lets customers speak to doctors 24×7 with a goal of 10 minute wait time or less. To help answer medical questions, the company has doctors on call to chat online or over the telephone with customers. Oscar also lets customers check prices for procedures ahead of time and offers three free in-person doctor visits and free generic drugs.

The company faced minor bumps in the beginning with poor reviews and complaints (an average Yelp rating of 2 stars), but has instituted a feedback input mechanism based on customer interactions. The company aims to productize every customer interaction by implementing feedback as soon as it receives it. It has a slew of partners and tie-ups in line with its strategic focus.

In December 2014, Oscar announced a partnership with Misfit (a wearable tech company), by offering members free fitness trackers, along with Amazon gift cards, as part of an attempt to incentivize healthy behavior and bring down employee healthcare costs. Oscar also offers services at many hospitals and retail locations such as New York CVS CareMark. It is a health insurance company that resembles a technology start-up rather than a faceless insurance behemoth, sort of a health insurance start-up for “born digital” natives.

The future

Since commencing operations in July 2013, Oscar has had a reasonable start. It had about 15,000 members and estimated revenues of U$72 million in 2014. It doubled that member base to 30,000 in January 2015, with one month of enrollment left to go. Oscar is seeking approval to enter California’s individuals exchange by 2016. The primary litmus test for Oscar is going to be the same as for any health plan – managing risk, keeping premiums reasonable, maintaining margins, handling payer-provider convergence, and improving health outcomes. Oscar is a prime example among modern companies looking to shape consumer-driven healthcare in the United States leveraging next-generation technology. As it looks at a reported valuation of significantly more than US$1 billion (implying a handsome 14x sales multiple!), the bet might just pay off.

Photo credit: Oscar

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