BPO Market Commoditization | Market Insights™
June 12, 2015
BPO segments that require deeper IP/domain knowledge and/or technology-embedded solutions are less prone to commoditization
BPO segments that require deeper IP/domain knowledge and/or technology-embedded solutions are less prone to commoditization
While the financial crisis had a major impact on the BPO market*, increased activity in newer segments is likely to accelerate growth over the next few years
Today, Capgemini announced the merger agreement to acquire IGATE for $4.04 billion. IGATE is a US-listed technology and services company headquartered in New Jersey with US$1.27 billion in revenue in 2014. The sale of IGATE has been in the offing for a while after private equity company, Apax Partners, which financed most of IGATE’s US$1.2 billion acquisition of Patni Computer Systems in 2011, converted its debt into equity in November 2014 (becoming its largest shareholder) and also filed with the U.S. Securities and Exchange Commission to have the option to sell its stake. The combined group will have nearly US$13 billion in annual revenue and 177,000 people globally. Capgemini aims to realize revenue synergies of US$100-150 million (through cross-selling and account farming) and cost savings of US$75-105 million over the next three years. The deal’s size and cross-ranging implications make it one of the most significant transactions in the IT-BPO industry. Capgemini is paying a premium for its North American ambitions, over 3x revenue multiple. It outstrips other such deals in the marketplace, notable CGI-Logica (2012) and IGATE-Patni (2011), indicative of the scale and urgent imperative driving deal rationale.
Major acquisitions in the IT-BPO market (US$ million)
Prima facie it gives Capgemini a sizable foothold in the North American market, the biggest IT outsourcing market in the world. North America becomes a significant market for the combined entity, comprising nearly one-third of 2015 projected revenue, up from 20% for Capgemini earlier. Europe will still account for over half of the combined revenue. The North American region contributed nearly 80% to IGATE’s revenue in 2014, with marque clients such as GE and Royal Bank of Canada. This had increasingly become important for the company since its French-rival Atos bought Xerox’s North American ITO business late last year. That deal also made Atos the primary IT services provider to Xerox (~US$240 million annual revenue) and also have the right to first refusal on collaborative opportunities with Xerox.
It enhances Capgemini’s delivery presence in offshore/low-cost regions specifically India, where most of IGATE’s 33,000-strong workforce is based. Capgemini had earlier acquired Kanbay in 2006 with a focus on increasing India operations. It also bought Unilever’s India GIC – Unilever India Shared Services Ltd (UISSL) – in parts over 2006-2010. Around two-fifths of Capgemini’s global workforce of 144,000 employees is based in India, with the combined group having an offshore leverage of nearly 55% by the end of 2015, comprising over 90,000 people.
The move adds greater definition to the verticalization maneuvers Capgemini had been driving of late. IGATE’s strong BFSI client roster (CNA, Royal Bank of Canada, MetLife, UBS, Morgan Stanley), comprised over two-fifths of its revenue last year. Similar synergies are expected in manufacturing, healthcare, and retail sectors.
Capgemini’s functional spread stands to gain on account of IGATE’s mixture of IT and BPO services. Specifically, Capgemini has been looking to grow its ADM and BPO business, as enterprise clients exhibit a preference for integrated services stacks led by an expanding As-A-Service economy, combine infrastructure, application, and business process service needs. This is the driving force behind IGATE’s business model – ITOPS or Integrated Technology and Operations, which will help Capgemini position itself as a fully integrated service provider. The deal also holds Capgemini in good stead, bolstering its industrialization play. As the value proposition in the global services space moves beyond labor arbitrage, service providers are looking at non-linear IP-driven revenue sources through products, platforms, and solutions. IGATE has monetized the ITOPS value proposition through productized applications and platforms – IDMS (for BFS), IBAS (for TPA clients), and SIB (for retail customers) – which are distinct P&L-plays for the company. Capgemini is also likely to receive additional tax benefits from the deal, as it is carrying a large deferred tax asset in the U.S.
The adage “culture eats strategy for breakfast” couldn’t be truer for this merger. There is a stark cultural tension with a Europe-heritage firm struggling with offshoring trying to integrate an Indian IT service provider with a strong North American client roster. Plus all is not rosy with IGATE. One of its largest clients, Royal Bank of Canada, has been facing problems for its use of IGATE services while GE’s contribution to revenue has been falling. CEO Ashok Vemuri’s hire-for-growth plan witnessed a bump when Q4 2014 headcount actually fell by about 900 employees. IGATE registered an annual revenue growth of just 10% to $1.27 billion in 2014, lagging other IT peers. On the executive front, the merger means uncertainty for Ashok Vemuri, who left Infosys specifically to take over as CEO after Phaneesh Murthy left. His dream of staying a CEO might be curtailed, and he will be tempted to move on, as he wouldn’t want to occupy a role similar to what he held at Infosys, with even less leverage with the leadership. This potential void in leadership could pose a major hurdle for the integration process.
The move is indeed a bold one by Capgemini to catalyze growth, plug delivery/regional/vertical gaps, and streamline operations. IGATE is the right size for Capgemini to absorb – not too small so it does not have a tangible impact but not so big that to create an integration struggle. The sizable deal size could spur U.S. giants to action. Given Capgemini’s European legacy, other regional service providers could mull their options in a bid to expand their operational footprint. We have already seen recent activity in Europe with the Steria-Sopra merger last year. MNCs struggling for growth and looking at globalizing delivery could start thinking of mid-sized players as possible targets. Some of these players have growth issues, significant PE investments, scaling problems – all of which make a good rationale for a merger with a bigger player. On the other hand, the deal lacks some specific attributes when it comes to next-generation technology tenets such as cognitive computing, automation, digital, and analytics. Moreover, Capgemini will need to bridge the inherent disconnect between two different cultures, systems, processes, and people, to make this integration successful. The deal is certain to spark further consolidation and conversations, as service providers witness pricing pressures, evolving engagement models, and increasing anti-incumbency, in a bid to adapt to the As-A-Service construct.
Photo credit: Capgemini
I hear people in the services industry asking why automation hasn’t taken off yet. Actually, as long as I’ve been in the industry since the 1980s, we’ve been working on automation. Back in 1983 we were talking about automating business processes and the elimination of most of the people in the services value chain. So why hasn’t it made an impact yet?
I think there are three primary reasons for this phenomenon.
First of all, we actually have made incremental steady progress in automation. It’s just that the number of processes turned over to third-party providers has grown exponentially at the same time. In this much larger set of services, it’s easy to miss the progress made in automation.
Second, when labor arbitrage came into the market, it was so much simpler and quicker to get a payback using that strategy. So it delayed progress in automation.
Third, the automation journey is really hard work because we’ve moved to a point where pockets of labor are connective tissue. And process components continually change (such as IT infrastructure or the F&A process). This rate of change overwhelms automated models. These changes require rethinking automation.
Moreover, the cost of automation is high.
The good news is we’re entering a new phase of automation that I believe will make significant progress. So what’s different now that will enable automation to move forward?
First, the time is right. The labor arbitrage model is mature and the industry is turning to new sources of value. So we’re going back to automation as a source of value.
Second, today’s tools are much easier to use and quicker to implement. Thus, the cost of automation is dropping very precipitously.
Finally, providers are starting to merge services with integrated platforms and put artificial intelligence into automated or robotic tools. This enables adapting to change much more rapidly and facilitates machines learning in a similar way as employees learn.
The net result? Although we are early in this next phase of automation, I believe we have hope of going further than before. The desire is strong, tools are better, and companies’ ability to adapt to change is much stronger than it was. This should allow us to dramatically raise the level of automation that services clients value.
Three stoplights. Well, eventually four by the time I moved away in 1985. Also, a line of people each night around the new McDonalds for several days after it opened in the late 1970s. This was the situation in my hometown of Maryville, Missouri with a population of just less than 10,000 people at the time.
Small, rural town, right? Yes, it was in many ways. But it was also home to a university, Northwest Missouri State University, which was the first college in the U.S. to put PCs into every dorm room and a student population of about 5,000. The area was packed with PhDs and farmers quietly living the pleasant life in the middle of the country.
As the buzz about rural and domestic outsourcing has increased over the past five years, I have often wondered “Is this type of location a good candidate for a service delivery center?” To the best of my knowledge, it does not have a service delivery center of any notable scale.
To help answer questions like these, Everest Group is the research partner for RevAmerica, to be held in New Orleans on May 5-7, 2015. This is the only event focused on domestic sourcing in the U.S. and Canada.
The research report that we release at the event will analyze the trends in domestic outsourcing, looking at variations by location type across different functions (IT, business process, contact center), type of service provider, and other factors.
Although we are currently deep in the middle of collecting responses to RFIs and conducting interviews, we have been able to glean a few initial insights from the database of approximately 350 cities, which range from small, rural communities to tier 1 cities. Some of these insights include:
We invite you to join us in New Orleans as we roll out the findings of this important study. We look forward to hearing your experiences.
Wipro just hired Abid Ali Neemuchwala as COO and group president. Clearly the provider is setting up a succession plan for him to take over Wipro from current CEO, TK Kurien, who has been driving the firm’s transformation. This is an intriguing move as Wipro appears to be succeeding in the turnaround. So it makes sense that the industry is questioning the move. If the turnaround is, indeed, happening at Wipro, why bring in an outsider?
Abid comes to Wipro from TCS with a pedigree of having run the TCS BPO business. This is a big step up for him, from running a $2 billion business to a $9 billion business. The good news is Wipro is giving him at least a year to learn the ropes.
It’s interesting to reflect on why Wipro did this. I don’t believe the firm is stepping away from the transformation that TK Kurien has been driving. Nor do I think Wipro looks to capture some of the TCS magic and execution capability. I believe the firm is reinforcing its need to continue changing and is bringing in an outside perspective to drive change. This move follows in the footsteps of Infosys, which similarly brought in outside leadership.
Wipro gave TK formidable power, and five years, to drive significant change and transformation. Like any transformational plan, it has been painful and has taken time. But as I blogged before, the transformation is starting to show promise with Wipro wins picking up in the marketplace just as TK’s five years comes to a close.
So why bring in an outsider? I believe the answer is that the journey has just begun. The services industry is at an inflection point. It is clear that with changing technologies, client expectations and business models, leadership in the existing space does not guarantee leadership in the future. I think Wipro understands this and is looks to challenge its organization with fresh perspectives.
Running faster with the old model will not allow for leadership in the future. Fresh perspectives and augmenting existing talent is necessary to give Wipro the best chance at being a leader as the market evolves.
The challenges Abid will need to take on will shape and continue to drive Wipro to change how it delivers services, takes advantage of new technologies such as the digital and analytics space, and how it deals with changing client expectations demanding value beyond labor arbitrage. And Abid will bring new perspectives on how to successfully guide Wipro through the transition into the new business models of SaaS, BPaaS, platforms and consumption-based IT and business processes.
I think it’s a good move.
Photo credit: Wipro
Analytics BPS providers: BPO providers dominate market share, specialists growing at a faster pace
While North America will continue to be a key buyer geography, EMEA and Asia Pacific are likely to drive growth
Analytics BPS is among the fastest growing markets in the BPO industry
The healthcare payer market continues to experience rapid transformation as efforts to control costs, minimize waste, and root out fraud and abuse collide with the effects of an aging population, the burgeoning insured population brought on by the implementation of the Patient Protection and Affordable Care Act (PPACA), and advances in technology and medicine. Taken alone, any one of these events would have significant impact on healthcare payers; together they’re nothing short of revolutionary.
Faced with such transformation, healthcare insurers are seeking strategies that can help them to manage ever-increasing demands. Among the more impactful tools they can employ is business process outsourcing (BPO). The healthcare payer BPO market, currently estimated at about US$4 billion, is growing at a healthy 14 percent annually. And it’s no surprise, as BPO is more important than ever in helping healthcare payers to streamline their operations and reduce costs. Beyond the basics, BPO can also help providers to research, develop and launch new products; to glean value from the masses of data they capture; and, to identify and reduce cases of fraud, waste, and abuse.
And there appears to be some evidence that payers are tapping into the power of BPO to help address their most significant challenges. While claims processing remains the most commonly outsourced BPO process, other more strategic areas are driving overall growth:
The changes in the healthcare market are daunting for even the most prepared and best funded healthcare payers. In order to compete in the increasingly challenging and competitive market, payers have to take advantage of every tool available, and BPO is fast becoming the industry’s Swiss Army Knife.
For more insights on the healthcare BPO market, see our just released report, Healthcare Payer BPO – State of market with PEAK Matrix™ Assessment. Log in or register to download a complimentary preview.
Photo credit: Flickr
©2023 Everest Global, Inc. Privacy Notice Terms of Use Do Not Sell My Information
"*" indicates required fields