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

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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