Just a little over a year ago, I predicted that the analytics services market was maturing quickly. I pointed out that it was moving beyond the early “gold rush” stage and becoming core or necessary to customers’ businesses and competitive advantage. Today I characterize analytics as “the X factor” – something that has a strong but unpredictable influence. So since it’s already heavily adopted, why would I say the analytics services space is unpredictable?
Analytics is an X factor because it’s one of the high-growth business process service (BPS) areas and it has great potential to enrich a service provider’s value proposition, increase the intimacy and commitment between service providers and clients and potentially increase a provider’s profitability. The unpredictable aspect is the profitability because it depends on which path a provider and client take.
There are two areas in the market where providers can apply their offerings:
- Pure analytics
- Embedded analytics
Pure Analytics. In the market for pure analytics offerings, providers provide the talent (analysts and data scientists), proprietary and third-party tools and analytic support to their clients. Typically, in this model, the provider uses its client’s data as well as third-party data. This is currently a $3.3 billion market, and it’s growing at a rate of 30 to 35 percent. We at Everest Group believe this will continue to be a good market. But its growth will slow.
Providers’ profitability in this market over the long term will depend on whether their clients go down the path of bringing the services in house and perhaps even establishing an analytics center of excellence (CoE). As the value of analytics becomes even more powerful, companies are likely to seek to own their own data scientists and move third-party providers to overflow or augmentation roles.
Embedded Analytics. In this market, providers embed analytics in their other service offerings. This path can be very profitable for providers because it would enhance their offerings as follows:
- Make offerings more powerful – allowing providers to price the offering higher
- Make offerings more sticky – making it harder for a client to switch service providers or to bring the process in house
- Make the relationship with a client more intimate (creating more value that can lead to additional scope and higher margins for the provider)
This potential for augmenting analytics to providers’ existing service lines is enormous and spreads across pretty much every service. All business process services hold potential to be enriched with analytics.
Ultimate Path to Profitability
This raises really interesting questions. Should a service provider centralize its analytics functions so it can get scale and depth and build data scientist capability for the pure analytics market? Or should a provider distribute analytics capabilities into its service offerings where it can align analytics more closely with the services and drive the services up? I’ll discuss these issues in my next blog post.