Author: Rajesh R

An Unnecessary Defense of “Indian IT” | Blog

The recent headline, Indian IT Firms Set to Slash 3 Million Jobs by 2022 Due to Automation, grabbed attention. But our analysis shows this is nothing more than a catchy title. To learn about the other side of the picture that points to job and hiring growth, read on.

Occasionally, a news article or stray comment will suggest the Information Technology (IT) industry in India faces a stiff battle to survive against an onslaught of automation, cloud, and insourcing. The latest is the claim in news stories that 3 million jobs in India will be lost by 2022. The next day, NASSCOM shared data that suggested the opposite, and a few media outlets issued clarifications.

We had a chance to view an excerpt of the original Bank of America report that found automation is creating millions of new jobs and boosting global productivity. Our initial reaction is that the original story is a combination of faulty or incomplete analysis and lack of context, topped with a sensational headline.

Below we share a more nuanced understanding of the industry to help avoid such storms in teacups in the future.

The Definition of Indian IT-BPS

Media coverage of the Indian IT and Business Process Services (BPS) industry often conflates the India-based talent pool with homegrown industry giants like TCS, Infosys, Wipro, HCL, and Tech Mahindra. The reality is that all firms, including globally headquartered giants like Accenture, Capgemini, DXC Technologies, and IBM (to name a few), have a massive presence in India.

The IT-BPS talent pool in India is employed across the following key segments:

  • Large service providers like the ones named above, irrespective of where they are headquartered
  • Mid-tier (e.g., L&T Infotech, WNS, Genpact, Mphasis, Hexaware), and smaller service providers (e.g., Aspire Systems, Maveric Systems, Cigniti, etc.)
  • Global Business Services (GBS) centers or Global in-house Centers (GIC) established by Fortune enterprises (e.g., Novartis, Bank of America, Shell, etc.) to serve their internal functions
  • Product development teams of Big Tech giants like Microsoft, SAP, Adobe, etc.
  • An increasingly rich ecosystem of start-ups that often serve a global clientele (e.g., Zoho, Zeta Technologies, Qure.ai, etc.)
  • Domestic demand for IT and Business Process Outsourcing (BPO)
  • Countless staff augmentation firms that serve as aggregators of talent (typically freelance) and help all the other segments meet their staffing requirements

Any analysis that fails to look at the swings and roundabouts between these segments risks missing the mark. For instance, insourcing – a growing trend of using an organization’s own resources instead of outsourcing – often tends to benefit Global Business Services (GBS) organizations at the expense of third-party providers. Automation and technology disruption may pull down demand for a few outsourced services, but simultaneously increase the desire for services in many other categories.

The Facts

Even if we assume for a moment that the term “Indian IT” was used loosely to focus on third-party outsourcers, the facts still do not support the following conclusions:

  • We estimate the total India-based headcount for outsourcers and shared service organizations (Segments 1, 2, and 3 above) across IT and BPS at 3 million full-time equivalents (FTEs) as of March 2021. The headline of slashing 3 million jobs by 2022 simply does not add up
  • TCS, Infosys, and HCL have publicly declared their intentions of hiring 40,000, 24,000, and 15,000 FTEs, respectively for FY 22. Capgemini and Cognizant plan to hire 30,000 and 28,000 in 2021. All of this is easily available public information
  • NASSCOM, in its clarification, estimates that the Indian IT-BPS talent pool expanded by 138,000 FTEs in FY21

Most of the industry leaders we speak with cite the opposite problem. They are facing a glut in demand and can’t hire fast enough. Enterprises are frantically upskilling existing employees to learn new technologies, impacting hundreds of thousands of FTEs across the talent pool in India. These skills do not exist in sufficient numbers externally so laying off current workers and hiring new ones is not an option. If the original report wanted to convey that companies are seeking to replace old tasks with new ones through reskilling, the headline failed to convey this accurately.

The Myths and the Nuances

Myth #1: “Indian IT” survives on doing commodity jobs that no one else wants to do

Reality: The talent pool in India enables many of the world’s most innovative companies to meet their objectives

Yes, the industry might have started to provide labor arbitrage but it sure as heck could not have survived and grown that way over decades. Just to cite a few examples, talent pools in India are supporting the advancement and application of technologies critical for autonomous driving. Software that is required to roll out 5G networks is being built and supported by India-based talent pools, as are platforms that power banking operations for some of the biggest names in the world. Many GICs we speak with mention that the share of commodity tasks in their portfolio is down to 30% (from 70% 10-15 years back). The current reality is a very far cry from the days of Y2K and spammy call centers. It might be helpful for skeptics to visit some of today’s modern India-based development centers and labs. The experience is usually quite eye-opening!

Myth #2: Automation is the equivalent of the Infinity Stone

Reality: Automation takes years and years to get right, and scale. This usually means time to adjust, and more work, not less

No, the RPA God does not snap its fingers to kill jobs. At the current level of maturity, RPA typically eliminates specific tasks. However, it is still some distance away from automating a process (a series of tasks/activities). Further, the scalability of RPA remains a challenge. What works for one type of task or even a series of tasks may not work as the context changes.  Yes, automation is getting intelligent through cognitive and Artificial Intelligence (AI). But as anybody who has spent some serious time in the AI world would attest, it takes time to first get the AI-engine trained and usually requires human-in-the-loop (HITL) to complete the process. To be clear, smart automation does increase the productivity of the individual meaningfully and, in turn, lead to process efficiency and other benefits. However, instead of “killing jobs,” it is creating more opportunities for service providers and GICs to serve enterprises more deeply and widely leading to higher demand for labor in India.

Myth #3: Things just die

Reality: In the world of technology, services usually evolve, and new categories get created, replacing old ones

We often hear an implicit (and occasionally explicit) assumption that technology disruption will kill old service categories. For instance, cloud will kill the need for IT infrastructure management, and that application testing is passe. And that’s it – nothing else happens.

In reality, IT infrastructure management is evolving to handle the complexities of hybrid and multi-cloud and is facing an acute talent shortage. There is a shortage of people who can test complex apps that are hosted on the cloud, control software-driven physical devices, or have elements of AI baked into them.

The history of technology shows that every disruption creates its own service model. Enterprise Resource Planning (ERP) systems were supposed to be the death knell for bespoke applications. Instead, they spawned a massive industry of consulting, implementation, customization, and maintenance. Automation to scale will require highly skilled talent to build, monitor, and maintain algorithms and datasets. As the pace of AI and Machine Learning adoption picks up, we are witnessing the expansion of Machine Learning Operations (MLOps) services, which help in the continuous delivery of algorithmic models.

Vindicating the Indian IT Industry

The world of technology is changing, arguably faster than ever before. India just happens to have the world’s largest reservoir of talent that can enable this change. The “Indian IT industry” does not need a sensational headline and it does not need defending. It deserves a deeper understanding that will help us predict and navigate these changes better.

Why Business Process-DevOps Will Be a Transformative Pillar in the BPS 4.0 Era | Blog

Over the past 20 years, the BPS (Business Process Services) industry has conditioned and advanced itself and become a relied upon force, even when the global business environment was in flux. Not only did the proven business model draw in the world’s top enterprises, but the industry successfully evolved in terms of value proposition and associated levers to meet changing business requirements.

The threat of COVID-19 brought disruption, but the industry emerged from 2020 more agile and dynamic, applying its newly learned strengths to build the next generation of evolution — BPS 4.0.

Everest Group’s BPS 4.0 report, Business Process Services (BPS) 4.0: Heralding the Start of a New Era, outlines five strategic levers designed to help industry stakeholders stay on top of business developments as well as new initiatives that organizations can take hold of. One of the new components of BPS 4.0 that businesses will want to pay attention to as they strive to advance and move on from legacy models is a Business Process-DevOps-style approach, wherein cross-functional teams collaborate closely to drive agility and speed in go-to-market strategies and decision-making.

In this blog, we will delve into the Business Process-DevOps (BP-DevOps) lever of BPS 4.0 and further explain why it’s not only a pivotal addition to business processes but how businesses can start thinking to adopt it.

What is BP-DevOps?

BP-DevOps extends the concept and application of DevOps, which originated on the IT side, into the business process operations. It combines development and operations principles across IT and business processes that ultimately increases an organization’s ability to deliver services at a much higher velocity. With a re-thinking of tools, frameworks, team structures, and philosophies, organizations can evolve and improve products and services faster than traditional processes. The speed and efficiency enable organizations to better serve their customers and compete more effectively in the market. There needs to be buy-in at all levels; however, so that there is end-to-end adoption for the model to work to its fullest and companies can gain the most value.

For example, for a function or a sub-set of that function (say, campaign management in marketing), development, IT operations, and business process operations will need to be combined. This cross-skilled team becomes fully autonomous with end-to-end responsibility to build, deploy, run, and improve the overall process with agility. The speed of decision-making and nimbleness to respond to changing market dynamics are the key objectives to get this model right.

Why now is the time to implement BP-DevOps

BPS 4.0 stems from the drivers of BPS 3.0, one of those drivers being a move away from legacy processes and technologies and towards digital and next-gen services across all departments. The goal of becoming the technology-enabled organization is still a top priority, and BP-DevOps can act as a stepping-stone toward digital transformation. This is because the digital era demands business processes and underlying tools and technologies that are more flexible and capable of responding to the changing needs of the businesses, which falls right in line with the BP-DevOps model.

BP-DevOps can also help organizations to remain agile. And if we learned anything from 2020, it was that business models that cannot adapt often get left behind.

Additionally, the report revealed that, of the 550 BPS executives who were polled across industries, a majority (88%) agreed that COVID-19 has hastened transformation, accelerating the speed in which technology is being adopted and on a much larger scale than originally projected, making the agility and flexibility that comes with BP-DevOps models even more coveted.

Where and how to begin adopting BP-DevOps?

BP-DevOps can be adopted across the organization, but areas that are more dynamic (for example, customer-facing functions such as sales, marketing, etc.) are better candidates to start with. Further, given this concept is still relatively early in its maturity, we suggest hitting one benchmark at a time. Consider it like hitting base hits instead of home runs. They also need to make sure that their BP-DevOps roadmap aligns with strategies and alongside other digital transformation efforts.

Discover more about BP-DevOps, the remaining four levers, and how to shape a BPS model using the 5D approach in this on-demand webinar: How to Attain Value from the Next Generation of Business Process Services, BPS 4.0.

 

Sourcing Professionals Have a Tough Job | Sherpas in Blue Shirts

If you are a sourcing professional, you have our deepest respect, because now, more than ever, your job is a tough one. The sourcing industry is changing fast, disrupted by emerging technologies, shifting talent requirements and evolving service provider capabilities. Moreover, fluctuating geopolitical and legislative issues are causing enterprises to rethink substantial, long-held sourcing strategies and provider relationships. Sourcing professionals face formidable challenges in the global economy as the new year approaches and they look for better strategies in an industry experiencing unparalleled turbulence.

Technology is Changing the Game

It used to be that a sourcing professional’s No. 1 responsibility was finding a way to get the work done as cheaply as possible. Not any more. Technology has changed the game. In nearly every industry, digital technologies are driving the development of innovative products and services and improved customer experiences. To keep pace in this digital world, enterprises are now pursuing a digital-first rather than arbitrage-first strategy. In fact, the global services market has seen a threefold increase in digital-focused deals.

Automation, once merely a service delivery tool, is now “front end,” with enterprises demanding strategy, vision and strong Proof-of-Concepts (POCs) for advanced automation in 33 percent of all application services contracts in 2016. Similarly, artificial intelligence, cognitive computing and robotics will soon begin to pervade the enterprise portfolio and will eventually become mainstream in sourcing landscape.

Talent Requirements Are Shifting

The increasing adoption of digital strategies is changing the workforce skills that enterprises seek, and, in turn, forcing sourcing professionals to revamp their location portfolios in the midst of a dynamic landscape. Location options for traditional global sourcing continue to expand, and new locations are emerging for unique talent demands, such as digital capabilities.

Geopolitical Disruption Adds Complexity

Sourcing professionals also must anticipate and react to numerous geopolitical disruptions that keep the sourcing landscape shifting like windblown sand. In the past year, for example, we have seen a significant decrease in demand from the United Kingdom given the uncertainty with Brexit; uncertainty about healthcare legislation in the US has dampened the healthcare sourcing market; and the uncertainty due to visa reforms has led to increased local hiring and onshoring in the U.S.

The Provider Landscape is Constantly Changing

Sourcing professionals also are challenged to stay abreast of changes in the provider landscape. Mergers and acquisitions are on the rise, and leading providers are making fundamental changes to their talent and service delivery models. Between April of 2016 and March of this year, Everest Group witnessed 40 acquisitions to expand digital capabilities, 140 alliances between providers and technology providers or startups, and the setup of 35 new centers and digital pods to help clients rethink their digital strategies.

Data for Sound Decision-Making

In the midst of this complexity, buyers of global services are tasked with making critical decisions. Recompeting an outsourcing contract, selecting a location for a global in-house center, or contracting for new tech services—these are the types of decisions that can significantly impact an organization’s performance and an executive’s career.

That’s why Everest Group has announced that it is doubling down on its commitment to provide fact-based comparative assessments. We’re consolidating our comparative analysis offerings – previously offered under a variety of product names – under our flagship PEAK Matrix brand, which will now evaluate services, solutions, products and locations. Additionally, we’ll be expanding the market segments addressed to include new functions, processes and industry verticals. Read more about it here.

In the midst of all the complexity and change that sourcing professionals face, one thing remains the same: Everest Group is your source for the fact-based analyses you need to make informed decisions that deliver high-impact results.

BPaaS is Dead – Long Live BPaaS | Sherpas in Blue Shirts

Renowned futurist Kevin Kelly once said, “Possession is not as important as it once was. Accessing is more important than ever.” The rise of Uber is a prime example of the shift to an access-based consumption model in the consumer space. Business-Process-as-a-Service (BPaaS) is a similar construct in the enterprise space. At Everest Group, we define BPaaS as a model where buyers consume/access standardized business process services on a pay-as-you-go basis by accessing a shared set of resources – people, software application, and infrastructure.

It’s a reasonable assumption that the move to access-based consumption is great news for the BPaaS model. But the reality is that there are two variants of BPaaS. And there are warning signs for the demise of traditional BPaaS, wherein an enterprise accesses the entire stack – the people, application, and infrastructure – from one provider on a pay-as-you-go basis.

Traditional BPaaS emerged and found traction in the on-premise application era. Essentially, it provides enterprises a more efficient way to access business process services without the large upfront licensing and infrastructure build out costs that were typical of the time. Service providers pushed it, as it offered them the nirvana they had been seeking:

  • Non-linear growth – Opportunity to de-link growth from their FTE headcount by driving a standardized set of services that could be leveraged across multiple clients
  • Bigger deals – Broader scope of services across the entire stack, and hence larger deal size
  • Stickiness – It’s darn hard for a client to divorce its provider when they’re wedded at multiple levels!

However, traditional BPaaS poses several key challenges to enterprises:

  • As a boxed solution, it doesn’t allow selection of best-of- breed options
  • While stickiness is great for the provider, it is not for an enterprise if the technology or services turn out to be below expectations
  • It puts all the enterprise’s “eggs in one basket.”

The new-age BPaaS model tries to address these issues. It gives enterprises the flexibility to choose the technology (application and infrastructure) and processing/people component from best-of-breed providers while still reaping the same pay-as-you go benefits of traditional BPaaS. Central to this is the fast rise of the commercial off-the-shelf Software-as-a-Service (SaaS) technology option. SaaS provides the consumption-based construct at the technology level, while BPO does so at the people/processing level.  Of course, some service providers continue to push traditional BPaaS, as the new-age model is not as juicy as the previous one. Their arguments for the traditional model? In addition to having “one throat to choke,” as one provider is responsible for the output and outcome, they claim a more compelling price due to discounts for the entire stack, and potentially better services given tighter integration of BPO services with the underpinning technology

But there are fallacies in their arguments. As far as pricing is concerned, unless the traditional BPaaS model is really scaled up, there are limited levers through which pricing can be made meaningfully lower than the new model. And on the tighter integration point, an increasing number of close SaaS and BPO provider relationship are emerging that can provide a similar, if not better, experience.

Interestingly, as the new-age model accelerates BPaaS adoption, service providers that embrace it have a far better chance of achieving the nonlinear growth they’re seeking. The underlying SaaS construct will provide the required standardized environment, and growth will provide the scale to create a multi-tenant model at the people/processing level as well.

So, is traditional BPaaS living on borrowed breath? The answer is yes. But how many breaths it has left depends on the functional segment it is supporting and time horizon. Where credible commercial off-the-shelf SaaS options already exist and have attained maturity, e,g., for the large buyer segment in HR, it seems like the end of road will come sooner than later. However, where SaaS options are limited or less mature, such as in claims administration, traditional BPaaS model will have a longer life.

But at the end of the day, as more SaaS options emerge and more BPO providers create a delivery model around them, it is more of a question of when, than if, even in these segments.

Is Big Bad? Two Sides of the Coin for Scaled-up BPS Providers in the Digital-First World | Sherpas in Blue Shirts

One of my favorite quotes is “Disruption doesn’t discriminate.” And you’d have to be living under a rock if you hadn’t noticed the fundamental shifts taking place in the global services market due to digital disruption. We know that digital disruption is generally chaotic. It shakes up the existing business models, (likely destroys them), and paves the path for new ones. And it creates a set of opportunities not apparent earlier, while eliminating those we took for granted.

In general, big incumbents find it difficult to change, (change is hard, really hard when you are large – just ask prehistoric dinosaurs!), thus creating opportunities for smaller, nimbler ones that embrace it. Is this the case in the Business Process Services (BPS, also called BPO) market as well? Are the large incumbents necessarily in the disadvantageous position? The answer is actually more nuanced. Here are two big themes that highlight two very different sides of the coin:

  • Curse of Incumbency The rise of automation (especially RPA) is creating the biggest challenge for incumbents in their existing business model. Everest Group research shows that on a like-to-like basis, buyers are expecting the price per unit of work delivered in transactional BPS to reduce by at least 25-30 percent. If the incumbent shows reluctance, buyers are not hesitant to move the work to others. To put things in perspective, it means a USD $1 billion BPS company would see its base shrink by at least USD $100-120 million every year on an as-is base account basis (assuming an average five-year contract term, 40 percent of the portfolio will each year face pressure coming from renewal (20%) or a mid-term benchmarking (20%) situation). In reality, providers with the right approach and strategy will be able to mitigate this through scope expansion and new wins. Nonetheless, the pressure on an existing large book of business is tremendous.
  • Benefit of Data As I highlighted in a blog last year, scaled-up providers are sitting on a treasure trove of data that is ready to be exploited and monetized from a benchmarking and associated analytics perspective. Some of the providers have started to make the right moves here. The next frontier is leveraging it for artificial intelligence (AI). One of the big challenges of making AI tools enterprise-ready is helping them learn fast. Injecting the AI tool with variety, volume, and contextual data is key to making this happen. Large incumbent providers are uniquely positioned to exploit this opportunity. Combined with their deep domain expertise, this can act as a powerful differentiator, and help them create significant value for their client, and, in turn, for their own business.

Big is not bad. It is about identifying the digital disruption opportunities while managing the risks proactively. Speaking of size, my next blog will discuss what sized providers seem to be well positioned to exploit the opportunities created by digital disruptions. Stay tuned.

BPO Majors Ignoring Buried Treasure Resulting in Gross Undervaluation | Sherpas in Blue Shirts

Great goldmines lie hidden in large BPO providers’ backyards. A few clever ones have just started digging up fortunes. Some are, quite unfortunately, dragging their feet or blaming their tools. Most others are sleeping on tons of buried treasure, possibly not even aware of the magnitude of loss due to inaction.

The gold is data. BPO providers have long had access to their clients’ actual data. However, like buried gold, the data’s potential has never been exploited enough. Most providers use basic reporting and simple descriptive analytics to provide visibility into the client’s internal operations. The more advanced ones have invested in predictive and prescriptive solutions. But, even these providers have only skimmed the surface of the real treasure. We are talking here of an aspect of analytics that has huge potential but has not received the attention it deserves from BPO providers – benchmarking.

Currently, the multi-billion dollar benchmarking industry is mostly based on data collected through surveys or other secondary media. Such media are inherently prone to errors of omission and commission on the part of the participants, which directly impacts the accuracy of data that goes into the benchmarking analysis. Moreover, the volume of data with at least the smaller players in this industry is, in many cases, not large enough to ensure statistical significance. Perhaps most importantly, benchmarking service providers struggle to obtain the right context of data, which makes apples-to-apples comparisons difficult. Any organization with data that trumps that of the benchmarking providers in terms of accuracy, volume, and context is well-poised to disrupt this large industry.

Now, here come the billion dollar questions. What if the BPO majors with large portfolios of sizable clients start thinking bigger? What if they realize that their data is more accurate (as it is their clients’ actual data,) more voluminous (as they have a continuous flow of data of hundreds of enterprises,) and more contextualized (as they have high visibility into the processes that generate the data) than that of the benchmarking industry? What if, after realizing the value of their goldmine, they use the data not just for internal analytics for a particular client, but also to provide benchmarking analytics by combining data from multiple clients? What if they go whole hog and start offering benchmarking services apart from their usual BPO services? And finally, what if they combine this data with big data to unlock the true potential of predictive and prescriptive analytics? The answers will determine whether the BPO majors are ready to let go of inertia and wake up to their true potential.

To be fair, a few providers have taken steps in the right direction. The first example that comes to mind is ADP’s analytics. Its technology is powered by actual payroll and HR data of many of its North American clients. Perhaps the most powerful feature of its tool is compensation benchmarking. Currently offered only to BPO clients, this feature uses data on actual salaries paid to employees by its thousands of customers to arrive at pay benchmarks. Used to its full potential, this offering can be the stuff of nightmares for the incumbents in the lucrative compensation benchmarking industry, such as Aon Hewitt and Mercer.

The common argument put forth by naysayers of BPO providers’ benchmarking potential is that such use of data would constitute violation of client confidentiality. The fact is that client confidentiality can be ensured almost exactly the way it is done currently in the benchmarking industry – by sanitizing data so that actual entities cannot be recognized. As long as legal frameworks allow repurposing of anonymized client data, this argument against benchmarking is surmountable. Of course, an effort to obtain the customer’s buy-in is imperative. This can be through inclusion of security and confidentiality standards in SLAs, and through proper incentives including offers of pro-bono benchmarking services. The other important imperative for providers is to ensure they make the right investments in talent, process, and tools with respect to benchmarking services. Indeed, providers looking to harness the full potential of these services by offering them stand-alone may want to consider creating an organization separate from their BPO services.

What providers averse to the idea of benchmarking fail to realize is the opportunity cost associated with not letting the world know the potential of the data they have. For example, how did WhatsApp, which generated US$ 10.2 million in revenue in 2013, get acquired for US$ 22 billion in 2014? Answer – the potential of data. How did LinkedIn, which made US$ 2.9 billion in 2015, get a valuation of US$ 26 billion? Answer – the potential of data.

BPO providers are letting themselves be grossly undervalued by not looking at benchmarking as a possibility. And we are talking here specifically of the scaled-up BPOs that have the threshold of data in one or more BPO segments required to deliver benchmarking services. It is high time that these providers realize they are sleeping on a goldmine and get moving on developing benchmarking offerings. Those that do stand to take their enterprise values to whole new levels.

Introducing the Everest Group BPS Top 50™ | Sherpas in Blue Shirts

The global third-party BPS industry has evolved rapidly over the past decade or so, in breadth and depth of services. What started as largely a cost optimization play focused on non-core back-office business processes today has expanded to encompass the entire business process value chain supporting a wide variety of business objectives, including agility, flexibility, compliance, and improved business outcomes, among others.

With that evolution has come growth – the BPS industry today is valued at about $150 billion – and, as you might anticipate, interest among service providers from a broad range of backgrounds and heritages. In fact, Everest Group estimates that there are more than 200 service providers with more than US$50 million in revenues around the globe, some pure-play BPS providers, some that offer BPS as part of a broader portfolio, some focused on a particular domain or geography, some broad-based.

Yet, with all that expansion, what’s lacking in the industry are reference points to identify and compare the largest providers by size globally. Until now.

Everest Group is unveiling our first ever BPS Top 50 to fill this gap. With this list, enterprises can now identify the largest providers and their functional coverage. Service providers can now compare themselves against others in the industry. In the coming years, all industry stakeholders will be able to understand the broad dynamics of the growth and success in the industry.

 
Download the BPS Top 50
 

Capita Goes for Accelerated Growth with Xchanging Bid | Sherpas in Blue Shirts

This week we heard that Capita and Xchanging had agreed on the terms of a recommended cash offer of 160 pence per share. The offer values Xchanging at approximately £412m. If it goes ahead, the acquisition would be Capita’s largest ever; it is 260% bigger than its previous largest acquisition, that of avocis for £157m in February 2015.

Capita’s newly found appetite for larger acquisitions marks a noticeable change in approach between the current CEO, Andy Parker, and his predecessor, Paul Pindar. While Pindar went for niche acquisitions, Parker is going for accelerated inorganic growth.

If this bid goes through, it will impact Capita’s business in the following ways:

  • Significant leg-up in Insurance BPO: Xchanging is something of a jewel in the insurance sector due to its golden relationship with Lloyds of London as well as insurance sector specific technologies such as Xuber. Insurance services accounts for the larger part of revenue at circa 60%. For some time now Capita has been talking about growth in the insurance sector, setting the scene for more of its M&A activity. It has previously stated, “Where premium growth remains modest, (insurance) firms are focused on improving operational efficiency and organisational flexibility, areas Capita is well placed to help them address.” Before it made the offer for Xchanging, Capita had expanded its insurance capabilities through the acquisition of SouthWestern. This brought it 700 skilled, multi-lingual FTEs at two sites, Krakow and Lodz, providing services to insurance, finance and legal administration, and customer management across Northern Europe. Another relevant and recent acquisition was that of tricontes in 2014. The £6.2m acquisition of the Munich-based company in June 2014 brought Capita specialist contact centre services for various sectors including the insurance sector in Germany.

  • Bigger play in the private sector business: The split between Capita’s public and private sector business has always stayed roughly around 50:50 with annual variations of plus or minus 5%. In 2014 Capita’s private sector business was £2273.6 and accounted for 52% of revenues. With revenues of £406.8m in 2014, Xchanging could boost Capita’s private sector business by as much as 18% – a significant growth.

  • Entry into potentially lucrative BPO segments: Xchanging has good capabilities in the fast growing Procurement Outsourcing (PO) and Capital Markets BPO. Our analysis shows that both market segments are growing upwards of 10% CAGR. Further, these are specialized BPO segments and hence less prone to commoditization. However, to fully capitalize on the potential, Capita would have to address recent issues with Xchanging’s PO business.

  • Geographic diversification: This acquisition would help Capita expand its market presence beyond the UK. Some of the key countries where it could help Capita are Italy, Germany, and the U.S. While the scale may not be big, it can provide Capita a base upon which to build its international business. Further, continental Europe is a specialized market, which may not be the easiest to penetrate for an external service provider. Xchanging, with its multiple contracts in Germany, can help Capita in its entry in that geography.

  • Greater global sourcing leverage: Capita has around 5,000-6,000 FTEs in offshore location. This acquisition offers the potential of increasing this number by 20-25% primarily in India.

Clearly, this acquisition can help accelerate Capita’ growth and capabilities in multiple ways. However, as with any acquisition, successful integration will be key to harness the potential including effectively addressing recent issues.

Capita is not the only service provider to be eying growth in the insurance sector. With this bid, Capita’s acquisitive culture is set to give it an edge over the others.

For our previous coverage of Capita’s growth strategy see “Capita’s German Gambit.” 

Why Mess with a Good Thing: Recalibrating Our PEAK Matrix Assessment Methodology | Sherpas in Blue Shirts

We regularly make small adjustments to our PEAK Matrix™ assessment methodology – minor tweaks to fine-tune our approach to align with market evolution. This year, however, we have decided to undertake a more comprehensive modification to the assessment.

Why mess with a good thing? To make it even better and more relevant. In particular, we’re making changes to keep pace with the rapid evolution of IT and business process services, particularly as innovation, intellectual property (IP), digital, and technology-driven solutions take center stage in the delivery of these services.

While our fundamental principle of using a fact-based assessment remains core to our methodology, we are enhancing our PEAK Matrix assessment methodology in three principle areas.

  1. Maximize IP and innovation. We are recognizing the rising value of IP and innovation in global services by significantly increasing the weighting assigned to them. Of course, IP and innovation have always been a part of the PEAK Matrix Assessment, but their status will rise in the assessment, as has their significance in the global services market.
  2. Eliminate FTE count. At the same time, we are eliminating FTE count as an assessment dimension altogether. As technology increasingly fills the roles FTEs had managed in the past – at lower cost and often better outcomes – the size of a provider’s delivery talent pool has become irrelevant.
  3. Minimize scale. The provider’s overall scale – a combination of financial strength and focus on the service area being assessed – will remain as part of the assessment, but will decline in importance in the evaluation, making room for innovation to take on a larger role.

Together, we believe these changes assure that our assessment framework continues to be aligned with the emerging and future direction of the global services market.

We expect these changes to have a couple of implications for service providers. First, those providers that bring innovative programs to their clients will be recognized for their efforts – and expense. Furthermore, overall scale will have less impact on the providers’ ratings, assuming they demonstrate high levels of innovation and good business outcomes.

The recipients of these services, the enterprise buyer, will have a much clearer view of each provider’s ability to deliver innovation and outcome-oriented solutions. And they will gain insights that will help them better understand how service providers’ capabilities align with future objectives.

As the dynamic global services industry evolves, we will continue to make adjustments to our PEAK Matrix assessment methodology – some minor, some major – to ensure that it retains its universal relevance and value.

Because sometimes messing with a good thing is a good thing.

Robotic Process Automation and Anti-incumbency in Business Process Services (BPS) – Opportunity or Threat? | Sherpas in Blue Shirts

While robotic process automation (RPA) is creating opportunities for the newer breed of service providers, their more established competitors are feeling the pressure of change. RPA would cannibalize the established service providers’ labor arbitrage business which they have invested in for decades. At an initial estimate, we see a phenomenon of 40-40 emerging which means 40% of existing BPS work is likely to get impacted by RPA with a 40% lower cost impact. Free of this legacy, newer service providers can ride the wave of automation to gain market share quickly. Cannibalization is not the only threat to established vendors. The RPA disruption has coincided and in part fuelled the current trend for anti-incumbency. In 2013, for example, Everest Group research shows that over half of Finance and Accounting Outsourcing (FAO) contracts were taken away from the incumbent provider when they came up for renewal. In this market the newer breed of service providers could be seen as agile and unencumbered by legacy investments in labor arbitrage. However, established providers are also upping their game and this means it will likely be a buyers’ market in the mature BPS segments.
40-40 Phenomenon: 40% of existing #BPS work likely to get impacted by #RPA wtih 40% lower cost impact

The Newer Breed of Service Providers

The newer breed of service providers are those which have either focused strategically on RPA as a growth engine (and have limited legacy non-voice BPS business), or which have been newly established as pure-play RPA-based service providers. Let’s look at the one illustrative provider in each of these two categories respectively – Sutherland Global Services and Genfour.

Sutherland Global Services

Sutherland Global Services (SGS), a leading contact center player, is arguably one of the first service providers to strategically focus on RPA as well as actively market it for the non-voice BPS space. It has made automation a key part of its proposition and is leveraging it to differentiate itself from other service providers that either rely heavily on offshore resources or global majors that can implement automation through major transformation and system integration projects. This strategic focus has led it to develop partnerships with RPA technology providers such as Blue Prism. It has also seen the company develop its own RPA software layer which links to and supports third party automation technologies. Another key capability that SGS has developed is a 24×7 control tower, which maintains existing automations to ensure continuous operations.

SGS refers to a recent contract win as a sign that its focus on RPA is paying off. As part of the RPA-led BPO deal with an European travel company, it is taking over two operational centers in Scandinavia and Estonia.  It already has circa 400 people in Sophia delivering transactional and front-office services. The largely U.S. based service provider will leverage the additional delivery centers to grow in Europe. That growth, according to SGS, is going strongly with annual targets reached and exceeded part way through its financial year. Other RPA-led deals are in the pipeline.

We believe, as a relatively newer service provider in the non-voice BPS space, SGS is transitioning to a mostly automation-enabled provider in the back- and middle- office. We estimate that automation currently accounts for 10%-15% of its FAO & middle-office services but is rising fast. 

Genfour

Genfour was founded in 2012 to offer a different way of providing back-office services. Today it offers Robotics as a Service, on a cloud-based infrastructure on-demand. The proposition to lower costs is strong given the benefits of automation combined with a cloud infrastructure. Its challenge is to win over skeptics that do not yet believe that robots can do as good a job as people in delivering business processes.

Genfour also offers consultancy, development and on-going run operations. It has gained six clients since it was established and these include organizations such as NHS Scotland, IFDS, Coral and RAC.

Genfour is building an annuity-based business model where, not only does it generate revenue from the reselling of robotic software but also from managing every robot that it operates on behalf of its clients. It is already achieving a high operating margin for a business process service provider at 22% in H1 2014. This is set to stay at 20% to 21% full year.

Both SGS and Genfour see the use of automation as a good fit to the increasing buy-side appetite for transaction or outcome-based pricing instead of the input/FTE-based model.  Genfour started out with its “as a service” model while SGS is in a transition state. It is offering banded pricing using virtual FTEs and some blended pricing where people and robots are mixed.

Anti-incumbency

Anti-incumbency provides opportunities for the newer breed of service providers which could be seen by potential clients as agile an unencumbered by legacy investments. However, these service providers will have to have the ability to scale services and offer slick switching processes if they target contract renewals.  Competition is intense in the market with established service providers making investments to optimize and streamline the switching process. For example, multiple service providers have developed specialized transition management solutions to streamline switching and subsequent transition.

Established Service Providers

There has been a great deal of buzz about RPA in the market recently. This is making established service providers increasingly highlight their own automation capabilities and make new strategic alliances with third party automation software vendors. Examples include EXL, Infosys and Steria which have been largely using their own automation tools. In addition, some such as Steria and Genpact, have also set up partnerships with third party software vendors (e.g. Blue Prism & Automic). These and others will be looking to narrow the gap in mindshare between themselves and the new generation of service providers which have gained market share through strong messaging and strategic use of RPA.

Buyers are increasingly becoming focused on higher-end value proposition. They are willing to switch to a new provider, in case the incumbent is unable to deliver value beyond just labor arbitrage and basic process efficiency. Established service providers that are building on their RPA capabilities will be looking to make up for cannibalization of revenue by opening up new higher value opportunities such as analytics services. RPA can help them reduce internal costs too. Apart from helping the bottom line, given anti-incumbency, this would enable them to more easily absorb the cost involved in clients switching.

Everest Group will be publishing a report on Service Delivery Automation (SDA) shortly. It will be discussing the findings of the report at its half-day Robotic Process Automation event for buy-side clients in Dallas on October 22nd. Review the agenda and request an invitation

Watch out for forthcoming research reports from Everest Group on anti-incumbency, analytics, and technology / automation in the BPS space for a deeper-dive into these dynamics.

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