Verticalization Archives

Trends Reshaping the BPO Marketplace | Sherpas in Blue Shirts

December 3, 2014

The BPO segment of the services marketplace has been undergoing significant change in its growth trends. As we lean into 2015, here’s a look at how and where BPO is experiencing the biggest growth.

Industry-specific offerings lead growth, and horizontal BPO growth comes from newer segments.

Industry-specific segments

The industry-specific segments are growing significantly faster than the traditional horizontal offerings. For example, our study of the three-year CAGR of various segments reveals that:

	Industry-specific	Horizontal
	Capital markets – 20-22%	FAO – 8-10%
	Insurance – 14-16%	Contact centers – 6-8%
	Banking – 14-16%	Multi-process HRO – 2-4%

This data underlines the shift that I’ve commented on in previous blogs. Customers not only expect industry expertise and relevant industry solutions but also favor them over the horizontal segments of generic process-oriented offerings.

Fast-growth process-oriented segments

Nevertheless, some process-oriented segments are growing very quickly. Examples of segments on the adoption fast track include:

Analytics BPO segment – 30-32%
RPO segment – 16-18%

Go-to-market strategy

Although most service providers now structure and deliver a horizontal offering, they bring it to market to their vertical orientation. For example, they sell their analytics offering through their manufacturing, retail or healthcare verticals. This allows the horizontal segment to capture the growth benefits of the vertical orientation while getting the scale benefits of the horizontal delivery model.

Midmarket

Another factors shaping BPO growth for 2015 will be adoption by buyer size. Our research tracking new BPO contracts points to this trend. For example, in Banking BPO contracts signed as of December 2013, midmarket customers signed 57% of the contracts in 2011-2013, a sizeable increase over 43% signed up to 2010.

Influence factor

Underpinning the shift to more industry-focused and customer-focused offerings, is another shift I’ve blogged about several times — the shift of influence from the central buying organizations to the business units. This trend has been a major factor in BPO adoption during 2014 and will continue to exert pressure that creates both upticks and downward trends in BPO for 2015.

Photo credit: Andy

Capgemini Rides the Wave of Demand for Industrialized, Standardized and Pre-packaged Services | Sherpas in Blue Shirts

May 29, 2014

At Capgemini global analyst event in London last week, the company provided a holistic view of its business growth strategy and internal initiatives to enhance skills and sales capabilities.

Capgemini management was relatively upbeat about growth opportunities while acknowledging the continuing headwinds in its main market in Europe. Economic uncertainty continues in continental Europe, but the need for cost cutting and efficiency is driving demand for services. Capgemini also expects growth from wider adoption of outsourcing and offshoring in continental Europe with a number of large deals on the horizon. Disruptions from cloud and offshoring continue to negatively impact revenue growth but improve margins. At the same time, cloud and other disruptive technologies such as big data, are increasing demand for services and boosting business.

Against this backdrop, Capgemini provided guidance of 5% – 7% organic revenue growth for the mid-term. Paul Hermelin, Group CEO, also indicated that the company is well on its way to achieving an operating margin of 10%. Assuming a 2-3 year period for mid-term, this is in keeping with outlook at the end of Q1 2014: organic revenue growth of 2% to 4% and an operating margin rate between 8.8% and 9.0% for 2014.

In terms of services, industrialization, standardization, innovation and pre-packaging dominated the company’s strategy. In infrastructure services the strategy has seen service delivery standardized and globalized with increasing focus on RIM, automation, cloud migration, orchestration and brokerage services. Capgemini saw +19% growth in cloud bookings year on year in 2013.

Application management has turned into a success story for Capgemini too. This is something of a turn around with dwindling bookings reversed into an increase of 60% in 2013 and 40% in Q1 2014. This has been achieved through industrialization and taking a factory approach to AM. Capgemini highlighted circa 30% cost savings for clients through this approach. It is also offering a new approach to AM services with a business process focus – where KPI’s include related business process metrics. This is a novel approach to AM that Everest Group will cover in a separate piece.

Another key lever for growth is innovation with Capgemini investing in IP in its strategic offerings (which are based on major technological transformation themes such as customer experience, cloud, mobility, big data, and social media). In keeping with this strategy, Capgemini will continue to target demand in the market for digitization of services and for transforming big data into new business opportunities. Similar opportunities from the Internet of things is also on its radar.

The widening of the strategic offerings portfolio with more IP is to boost profitability with higher margin services. Capgemini has shown that it can do well in these. Its strategic offerings grew by 19% in 2013 and are on the way to grow by 20% in 2014.

The drive for innovation is likely to lead to more acquisitions and partnership co-development. The latter brings with it the risks of investing in ambitious technology that proves too difficult to bring to market in a timely fashion e.g. Skysight, the cloud service orchestration product which Capgemini is developing in partnership with Microsoft, has been delayed.

Verticalization is another growth lever for Capgemini. One example is industry managed services offerings with OnePath Suite. This consists of pre-packaged SAP solutions that have been pre-configured for specific verticals, such as CPG, Energy and Life Sciences, and which will be delivered and set up as part of hosted and managed services with the potential to add business process services on top of bundled infrastructure and software integration.

BPO services are also being extended from the core F&A offerings to a broader set of services aimed at CFOs, including spend analytics, internal audit, SC analytics and MDM, and tax efficient accounting.

Internal organizational measures include:

HR: Increasing the size of the offshore workforce and its leadership while flattening the labor pyramid in other regions
Sales: A unified ‘One Group’ approach is being rolled out with dedicated major account teams, new rules across P&Ls and priority access to Group assets.

With globalization of services have come the challenges of managing resources better and increasing utilization rates. Capgemini needs a robust global organization to support its evolving delivery model. The HR strategy is addressing this requirement.

Capgemini has had an entrepreneurial culture with many P&L centers. This has led to a sales structure that has adapted to local market conditions. The implementation of a ‘One Group’ approach to major accounts is needed to tap into large multi-national opportunities that can now be supported by Capgemini’s global delivery model.

Overall, Capgemini has made excellent progress in transforming itself to ride the wave of demand in the market for modernized services and to compete with India-based vendors who are targeting Europe, Capgemini’s biggest market. Offshoring and globalization of service delivery has been largely achieved. Other aspects of the strategy are still work in progress but with the economic outlook generally brighter across the globe, the company is set well to achieve its latest guidance.

The Limits of Verticalization | Sherpas in Blue Shirts

May 5, 2014

Many service providers are busy organizing along vertical industries and going to market with vertical solutions. As the services industry matures, it’s very clear that customers want to do business with companies that understand their industry. However, many providers find that verticalization doesn’t give them the growth acceleration they anticipated. So there are limits to this strategy; just knowing about a customer’s industry is not enough. What’s missing?

Customers want providers to know more about their industry but also to know more about their business and how they operate. Providers that succeed in putting these two aspects together enjoy faster growth.

Cognizant is an example of how to be effective in this strategy. They have organized by industry and built industry expertise, but they also invest a great deal in understanding their clients and leaving the teams or key players in place for clients (particularly the in-country teams).

Customers express a lot of frustration to us. They don’t like providers’ churn. They have to train new people every six months, and the churn is debilitating. They want providers whose people get to know them, build relationships with them and understand who they are and how they work. Those kinds of relationships allow both parties to cut through the noise and get things done.

Despite what the customers are looking for, we see many providers responding in one dimension — the industry knowledge.

My advice to providers: don’t overlook how important relationships are. It doesn’t matter how clever you are or how much vertical knowledge you have. The relationship activates the opportunity.

Photo credit: Curtis Perry

Wipro’s Winning Numbers | Sherpas in Blue Shirts

January 8, 2014

Everest Group’s ongoing analysis of global service providers’ performance revealed some notable market shifts in the most recently reported quarter. We note especially that Wipro seems to be righting its ship. Although its growth previously had lagged its peers and the industry, the last quarter evidenced higher growth.

As the chart below displays, Wipro is now performing as one of the top global services firms.

To what can we attribute this improved performance?

Certainly we need to give some credit to the strategic maneuvers that CEO TK Kurient and Wipro’s executive council made. First of all, they have been implementing a verticalization strategy. They also are focusing on large accounts. We believe these strategies make sense and could well contribute to further growth.

In addition, taking a step further back, we believe that Wipro is reaping the benefit of its concentration in services areas that are recovering — infrastructure and Europe. The industry has seen growth in infrastructure services really picking up over 2013. Also, as Europe recovers from its economic crisis (particularly in the UK, Germany and the Nordics), Wipro’s strong position in Europe allows it to also benefit from this growth.

Considering it’s in the right place at the right time with effective strategies, where will Wipro be in next quarter’s charts?

Enterprise Cloud Goes Vertical | Gaining Altitude in the Cloud

January 19, 2012

Most enterprise cloud offering conversations to date have focused on the horizontal benefits…flexibility, scalability, auto scaling, cost savings, reliability, security, self provisioning, etc.

Advantageous as these are, CIOs are increasingly interested in learning more about cloud benefits that are specific to the industry in which their organizations operate. For example, latency requirements, failover mechanism and data encryption are important to a CIO in the financial industry. A healthcare industry IT executive will be interested in hearing more about mobility and data archiving. How the cloud can improve supply chain or logistics is important for a CIO in manufacturing industry. And a media industry IT executive, quite aware of the various platforms being used to access content, will want to hear more about Content Delivery Networks (CDN) supported by the cloud.

A growing number of enterprise cloud providers are beginning to understand this interest in vertical cloud benefits. While their focus has been on “SaaS-i-fying” their offerings to meet unique, industry-specific application requirements, the trend will continue towards “PaaS-i-fying” and even “IaaS-i-fying” their offerings.

Let’s take a quick look at some of today’s verticalized enterprise cloud offerings.

IBM’s Federal Community Cloud is dynamic and scalable to meet government organizations’ consolidation policies as mandated by the Obama administration’s CIO. It is in the process of obtaining FedRAMP certification to meet Federal Information Security Management Act (FISMA) compliance standards, a requirement for government IT contractors, and will be operated and maintained in accordance with federal security guidelines.

Savvis provides customized IaaS solutions that cater to the financial industry. Growth in this vertical has been led by providing infrastructure services – such as proximity hosting and low latency networks – which support electronic trading. Savvis has added six new trading venues and an international market data provider. Its customers can now cross-connect, or have network access, to over 59 exchanges, Electronic Communication Networks (ECNs), and market data providers. For example, it hosts Barclays Capital’s dark liquidity crossing network, LX, which aggregates its global client bases’ market structure investments.

Infosys took advantage of Microsoft Azure PaaS platform and its SQL Data Services (SDS) to provide automotive dealers with cloud-based solutions to go from a point-to-point dealer connection for inventory management to a hub-based approach. In this solution, an inventory database for all dealers is hosted at a dedicated instance of SDSin the cloud. It provides middle tier code and business logic to integrate data between participating parties and a web-based interface for dealer employees wanting to check inventory at other dealerships.

Amazon Web Services (AWS) has cloud solutions that cater to the media industry’s needs for transcoding, analytics, rendering, and digital asset management. It developed a CDN, based on CloudFront™, which provides the streaming from edge nodes strategically located throughout the United States for a robust streaming experience.

AWS’ Gov Cloud™ provides a cloud computing platform that meets the federal security compliances FISMA, PCI, DCC and ISO 27001. The Department of State and its prime contractor, MetroStar Systems, built an online video contest platform to encourage discussion and participation around cultural topics, and to promote membership in its ExchangesConnect network. The contest drew participants from more than 160 countries and took advantage of AWS for scalability. AWS hosts websites for many federal agencies such as the Recovery Accountability and Transparency Board (recovery.gov) and the U.S. Department of Treasury (treasury.gov). AWS provides multiple failover locations within the United States, a provision which meets the security requirement that only people physically located within the United States have access the data.

Game hosting companies are running their games in the cloud for faster delivery and scalability. And AWS’ S3 platform provides the storage capacities for gaming companies such as Zynga and Playfish.

GNAX’s healthcare cloud specifically caters to the healthcare industry and understands the nuances of HIPPA. It provides a private cloud solution to healthcare companies that scales up and down depending on patient volume.

Of course, there are both pros and cons to adopting vertical-specific cloud offerings.

Pros:

Customized solutions based on industry regulations
Immediate creation of competitive advantage

Cons:

Vendor lock-in
Proprietary workloads may not be migrated

These issues can be mitigated through a careful sourcing methodology, now being provided through cloud agents who negotiate the contracts with multiple vendors as per the needs of the client organization.

As illustrated above, there are significant benefits to be gained from industry-specific cloud solutions, and I predict we’ll see an increasing number of them emerging in the near-term.

Part 2: Verticalization in the Health Insurance Industry | Sherpas in Blue Shirts

December 15, 2011

In an earlier blog, M&A in the Insurance Industry: Is the party over, or yet to get started?, I talked extensively about horizontal consolidation in the health insurance industry. Now, let’s take a look at vertical integration, wherein up and down the value chain healthcare companies merge and the different business units within the resulting conglomerate type of organization become internal suppliers and buyers.

A prime example in today’s marketplace is Kaiser Permanente, which for years has been operating under this model. The company provides health insurance via Kaiser Foundation Health Plans (KFHP), and delivery of medical care through Permanente Medical Groups.

First, there is very little synergy in terms of primary value creation due to the disparate core focuses of the two businesses (risk management versus healthcare provision.) Second, an inherent conflict of profitability maximization interest arises from the two businesses serving each other – the health insurance business unit is primarily incented to squeeze the most attractive pricing out of the medical services business unit, but in the opposite direction, there’s a 180 degree flip. Granted, industries such as oil & gas have been dealing with this internal pricing issue quite successfully for a long time, and it is not an impossible obstacle to overcome. But to succeed, there must be a clear decision on which of the two businesses will be the cost center, and which will be the profit center.

Against the backdrop of general public dissatisfaction with the overall cost of healthcare, many credible sources have mentioned Kaiser’s model as a potential alternative with positive qualities. The first is superior control over cost structure. In the Kaiser model, all delivery of healthcare services is squeezed into a fixed cost of running a chain of hospitals and physician offices where majority of medical personnel consists of salaried employees. Even if this does not result in much lower comparative services costs (as some mega insurers can obtain equally good commercial conditions by exerting enormous pricing pressure), it at least provides considerably more cost transparency and predictability, allowing for much more accurate decisions on selective growth initiatives. Additionally, the internal nature of transactions allows elimination of costly activities such as rate negotiations, reimbursement management, pre-approvals, and litigation, as well as other processes associated with conducting business between independent entities. Finally, vertically integrated companies can exploit some economies of scale by consolidating various back-office functions such as HR and IT. And given how IT-intensive healthcare has become in recent years due to the need for implementation of various capital intensive projects to establish electronic medical records and health information exchanges, these economies of scale are especially attractive.

Not surprisingly, all these considerations have triggered some discussions and investigations of existing opportunities in the industry. Case in point: Highmark’s acquisition earlier this year of of West Penn Allegheny hospitals. This is a very aggressive, “stand out from the crowd” move, given the multi-billion dollar scale of operations of both involved parties. And it raises the question of whether we should expect a series of similar deals from other industry players trying to optimize their cost structures in the current ambiguous business environment resulting from President’s Obama healthcare reform. Obviously, this is a difficult question to answer, in part due to the controversial nature of the model, but primarily because very few healthcare providers operate on a national level, while large health insurance businesses typically do.

Think about it: Highmark’s acquisition of West Penn Allegheny will allow it to provide healthcare services to roughly three million of its five million existing members, so it will have to maintain a dual delivery model (i.e., based on both external and internal delivery), which drives additional governance cost. To completely switch to a fully internal delivery model, most large insurance companies would have to conduct multiple acquisitions, practically one deal per region, resulting in ownership of an extremely diverse set of assets, thereby requiring enormous integration and standardization effort. This is the primary obstacle for massive replication of the Kaiser model.

I believe any vertical integration in the nearest future will remain limited to a regional type of play, wherein some locally existing benefits justify an insurer’s move down the value chain. What do you think?

My Service Provider is Verticalizing…Why Should I Care? | Sherpas in Blue Shirts

October 3, 2011

At every NASSCOM event this year, there has been a buzz about verticalization and how every ITO and BPO provider, both large and small, is rushing to adopt it. To many industry observers, this has the feel of retail stores seeking to run out their own version of the latest hot fashion from Paris. There seem to be uncounted knock-offs of one description or another, with varying degrees of quality and fit.

The move to verticalization is a reflection of a maturing services industry and secular pressures on the provider community. Consider the following:

Despite the often-shrill denials from sell-side, industry growth rates are slowing. Yes, the recession has trimmed sales, but a fundamental resetting of growth rates began before the downturn, and the once great hope that BPO would take over from IT as the major source of growth is fading into the gloom.

At the same time, buyers have become more sophisticated in how they scope and buy services. The larger firms are increasingly rationalizing their portfolio, looking to do more work with fewer suppliers.

These same buyers are setting an industry example by demanding lower prices for work, and examining closely where they are paying risk premiums. To date these pricing concessions have largely not affected the leading providers’ gross margins as they have been more than offset by productivity improvements they have extracted from their offshore talent factories and new work that is not as competitively bid. However, there is growing awareness that these productivity gains cannot go on forever, that buyers’ increasingly sophisticated purchasing functions will demand that the gains be shared or at minimum passed on, and that the opportunities for new, non-price-pressured work are fewer by the day.

In addition to these pricing and growth pressures, every provider is beset with constant demands from its clients to bring more value to their relationships.

Veticalization is one of the ways providers are seeking to deal with this changing industry and its negative secular forces. Let’s examine what it means to verticalize, and how providers going about doing it. At its core, verticalization is an attempt to create more value for clients.

The dimensional thought is that focused management attention through dedicated organizations aligned by industry will drive increased focus and accountability at the account level, and that it should facilitate sharing of industry learning across accounts thereby increasing account teams’ ability to engage more thoughtfully with their counterparts. Ideally, reusable IP can be developed or extracted from existing accounts, which should enrich the total offering to all accounts, regardless of the industry in which they operate. Dedicated industry talent can be recruited and developed to further increase the effectiveness of the set of offerings, both in country and in the offshore talent factories.

In the most effective examples of industry verticalization, the potency of these organizational and talent changes are further increased through focused investments in additional capabilities and IP, often through acquisition and joint ventures. The net result is that each provider hopes it will be able to create a source of differentiation from its competitors that makes it indispensible to its clients and prospects and less vulnerable to pricing pressures. Each aspires to create a firewall that allows it to become the predator rather than the prey in the ongoing industry realignment driven by the wide spread portfolio rationalization efforts. And the crowning glory of this strategy is to move from being viewed as a provider of commodity services to a highly valued business partner.

The often cynical and always pragmatic buy-side client executive has heard all this before and seldom seen it improve the firm in a significant way. So is today’s verticalization different?

The jury is still out, as many providers are just now embarking on this strategy, and those who have already pushed down this path are at various stages of completion. However, it is fair to observe that some providers – most notably Accenture, Cognizant, and TCS – have made substantial investments in IP, and have enrolled foundational clients with successful examples of deep value being delivered across each of the above dimensions. And growing numbers of industry-focused and industry-experienced talent are swelling these providers’ ranks with a substantial percentage remaining onshore in close proximity to their clients.

Interestingly, this same set of providers is separating itself from the pack with respect to grow and gross margin. It remains to be seen if the fast followers can duplicate these leading firms’ success, or if in the rush to differentiation they will increasingly look the same.

Regardless, the downsides for clients are few, although increased intimacy and business stakeholder relationships can and will complicate governance. However, these should be more than offset by a stronger technology ally with increased capability, even if the ally fights to retain its margins.

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Tag: verticalization