Comparative operating cost per FTE of Peru versus Tier-2 UK and U.S. cities
Comparative operating cost per FTE of Peru versus Tier-2 UK and U.S. cities
We at Everest Group have been exploring robotics and understanding its potential. What we’re seeing is that it’s relatively easy and cheap to implement. Where it has been implemented to date, it results in somewhere from a 15-20 percent reduction in critical shared services or BPO functions, depending on the transactional nature of the BPO function. If this proves to be true across the industry, we’re looking at disruption of a similar magnitude to the disruption I’ve blogged about regarding workloads migrating from an asset-heavy environment into the cloud.
Explained very simply for those of you who are not aware, robotics is a software program that can take screenshots or data from system such as ERP, apply logic to that and input it back into the system or into another system.
The reason this is disruptive to the BPO industry is that BPO is largely based around activities (such as finance and accounting, HR procurement, invoicing and customer service), which are performed by labor in low-cost destinations. For some providers, a significant or meaningful proportion of their FTEs are dedicated to these activities.
Here’s the issue: if you reduce the number of FTEs by 20 percent, it’s reasonable that revenue will drop by approximately 20 percent. And up to this point, revenues had been growing at 5-6 percent per year. Customers will capture the lion’s share of the benefit of reducing FTEs.
This will further complicate an already-maturing industry that is struggling to sustain growth levels that it has enjoyed for the last five years. Furthermore, in a contracting industry, price becomes a weapon. So we would expect a knock-on effect that pricing will become more competitive as companies struggle to replace revenue from automation by challenging competitor businesses.
The net result is potentially quite disturbing if you’re a service provider and attractive if you’re a customer.
These are early days and we have yet to complete our full study around how widely applicable robotics technology is. But our early analysis leads us to believe that it has serious implications for the BPO industry.
I recently had a briefing with HP Enterprise Services about HP BPO Flight Deck, a visual F&A performance monitoring and reporting tool focused on processes such as order to cash, source to pay and record to report. The flight deck is based on MooD software, which produces visual performance reports based on an enterprise business model that is built to reflect the client’s organization. This typically includes interrelationships between components and processes. HP is offering the tool as part of its BPO proposition in every deal, to engage with clients on transforming processes from the earliest stages of a procurement cycle.
The intention is to help clients increase visibility of F&A performance across the organization to manage operations better and to help with achieving business outcomes. Views can include specific initiatives such as electronic invoicing or dynamic settlements. HP also highlights the application in multi-sourced outsourcing deals, with HP BPO Flight Deck used to measure and monitor service provider performance as well as outcomes and issues. Other features include trending information and scenario-based planning capabilities, e.g., what would be the knock-on effect on processes if certain factors were altered.
This tool could potentially addresses the kind of F&A issues that Everest Group’s buy-side clients often highlight to us, including:
Getting that end-to-end view of processes is not easy though. One of the biggest challenges that organizations face is getting their data in order. Data challenges typically include:
HP and MooD have worked together to address some of the typical data integration issues that organization face when seeking this kind of end-to-end view of operations. The offering includes pre-built data dictionaries, templates and ready-built connectors for major enterprise systems and their reports.
Deployment can be done by degrees starting from a consulting engagement to map out the enterprise business model, and data taken for a sub-set of processes. A hosted proof of concept can be built, if required, before the full deployment is taken live in the client’s production environment. The software can also deal with data quality issues as part of its extract, transform and load (ETL) processes which include automated checks and fixes for standard types of issues, such as different date formats or typing errors in standard terms.
With HP BPO Flight Deck, HP aims to address many of the data challenges that organizations face when going for global process views but at the end of the day, organizations still have to get their data practices in order to be able to make the most of such tools. That said, in these days of intense global competition in business, there are strong drivers, such as year-on-year efficiency and profitability improvement targets, for coordinated group-wide action for every organization to improve its data. Many organizations are also proactively looking to gain end-to-end views of their F&A operations.
HP’s product addresses growing demand and adds an edge to its F&A offerings with the flight deck and its price built into every deal. It also supports HP’s strategy to provide a new style of BPO, based on data and performance analytics.
HP’s challenge is to help potential clients build the business case for the technology. As part of this, it highlights the case of an oil company that saved circa $23m in the first six months of deploying a similar MooD-based tool for its IT. HP believes the savings were possible because the client’s management team got visibility of problems and was able to take immediate action to fix them.
HP BPO Flight Deck has been deployed at one major client in the U.S. and is currently being implemented for another client in the UK.
Everything that is not IT Outsourcing is often called BPO! This over-generalization and over-simplification was perhaps fine when the BPO market was in its infancy but not today.
I like to refer to BPO as an amalgamation of multiple markets that include horizontal business process services (such as F&A, HR, procurement and supply chain, contact center) and industry-specific business processes (such as banking, insurance, healthcare, utilities).
In fact with increasing maturity, BPO is getting more specialized. You can look at BPO specialization across three dimensions:
Specialization by industry. Industry-specific BPO services are growing at a much faster pace than horizontal BPO services. Even horizontal BPO services are developing an industry angle. For example, meter-to-cash in utilities and revenue cycle management for healthcare providers are industry-specific versions of the horizontal order-to-cash process.
Specialization by process. Instead of big-bang HR outsourcing, specialized HR outsourcing across recruitment, benefits, multi-country payroll is witnessing significant growth. And, similar to the specialization by industry, even within industry-specific BPO, specialization by process is emerging. For instance, banking BPO involves cards processing, mortgage processing, retail operation, and commercial operations. Each of those represents a different line of business within a bank and with very different outsourcing drivers and objectives.
With this increasing level specialization in BPO, the underlying characteristics of each BPO segment are becoming very different from one another.
Value creation levers are different – sourcing and category expertise are the key to drive value from procurement outsourcing as opposed to arbitrage or operational cost reduction
Role of technology changes – while technology is playing a more invasive role across all BPO segments, the nature of technology leverage in each segment varies. Platform-based BPO services are the norm in HR outsourcing while most F&A outsourcing solutions involve add-on tools that wrap around client’s existing core technology
Delivery approach varies – procure-to-pay services are largely offshorable but source-to-contract requires significant onshore component
Pricing structures are different – F&A services are largely FTE-based, HR services are priced per transaction, while procurement is often a combination of managed service fees with some gain-sharing
As a result when making BPO-related decisions, it is very important to understand the market dynamics of the specific segment in question. When multiple BPO segments are in play, make sure to draw out contrasts and comparisons between different segments. You don’t take the same pill for every health issue – do you? And unfortunately there is no magic pill that cures everything or we would never need to visit a doctor. (Read “I won’t have a job!”)
Longer-term deals (5+ years) have taken up a greater share of the BPO transactions market over the past year while share remains relatively unchanged in the ITO market.
Nomenclature for third-party provision of business process related services (typically called BPO or Business Process Outsourcing) has stirred up quite a debate in the industry. Is it just a marketing exercise or a step in the maturation of the industry? Clients have to feel the difference before they are willing to adopt a new name; otherwise it is purely marketing.
Most of the conversation is about replacing the letter “O” in BPO. Accenture retained the “O” but are calling it “Operations.” Nasscom along with several other service providers started calling it BPM (Business Process Management). Several industry stakeholders have asked for Everest Group’s opinion, so here’s my list of different acronyms (in ascending order of my personal preference):
|My least favorite. The name should at least convey what it means. BPM tends to confuse the BP? industry with workflows and process management tools and technologies that enable BP? delivery but are not truly representative of it. With BPM, I tend to think more Appian and Newgen rather than Genpact, TCS, and Accenture.|
|It accurately describes the market, but I can understand why people do not want to associate the industry with just outsourcing which often connotes commoditized offerings providing cost reduction through arbitrage. It also has a certain social and political stigma associated with it. A word of caution though – outsourcing is not the same as offshoring but is a superset that may include offshore, nearshore, and/or onshore delivery.|
|Nice play of words but again seems to imply “operational” value creation and not the “transformational” capability of BP? in terms of value creation.|
|My current favorite as essentially BP? is an industry where a third-party provides enterprises with services across horizontal business processes (order-to-cash, procure-to-pay, hire-to-retire) and industry-specific business processes (mortgage processing, claims management, meter-to-cash). Service delivery requires people expertise, process excellence, and technology capabilities, and service performance can be measured across efficiency, effectiveness, and business outcomes.|
The industry is desperately seeking ways to go beyond the cost reduction mindset and evolve into a cost+ value proposition. Changing the name of the industry will not be of much use unless the underlying behavior (both buying and selling), solutions, contracts, and performance of the industry change.
However, I fear the industry is just trying to change the name versus actually working on the value, which will leave it open to criticisms. It’s just like putting a new coat of paint on an old car that needs an engine replacement!
So let’s try and go beyond this “name game” and focus on things that really matter.
Photo credit: Quinn Dombrowski
To date, the global services industry in 2014 has all the signs of being a “son-in-law.” As many parents will tell you about their prospective son-in-law: “He’s nice, but … I was hoping for something a little better.”
2014 arrived with so much promise, both in IT and BPO. Europe’s economy was improving. We hoped the U.S. economy was ready for robust expansion. We hoped we would see a surge in discretionary spending. And we hoped that the uncertainty that characterized the past four years would recede. We also anticipated that disruptive technologies and new solutions in cloud, big data and analytics would generate robust growth opportunities in the services space.
All these things happened. The economy has stabilized and new technologies are generating growth opportunities.
But as we look at the net results of the first quarter, well — it’s nice … but it does feel like a son-in-law. We were hoping for something a little better.
At the request of a BPO provider, we did a fairly exhaustive study of all vendor/provider-funded innovations and their impact on the business growth. The data were startling. Our study clearly revealed that the hundreds of millions of dollars that providers invested in innovation yielded very disappointing returns. Although they often succeeded in taking their innovations to market, they realized only scanty returns and not the kind of return that creates a differentiated accelerated growth. Why is that? Were their hopes too ambitious?
The biggest culprit in the poverty of their return on investments is that those investments didn’t have the necessities for success built into their DNA. What was missing? In many cases innovation initiatives don’t resonate with existing and prospective clients because they simply don’t meet the clients’ needs. In other cases the offerings require a different kind of sales discussion as the provider tries to sell something the client isn’t looking to buy. In both cases this creates a difficult sell and largely proves unsuccessful.
Strategy for innovation that leads to business growth
As I explained in a previous blog post about innovation agendas, these disappointing outcomes from provider-funded innovation initiatives often start with trying to design a solution for multiple clients rather than innovating on a single client’s defined needs. Providers fall into the seduction of believing it makes sense that just because one client wants a particular innovation other clients also will want it that way.
Further, building things in a vacuum away from a client is not helpful and tends to result in outcomes that are off target.
The path to innovation that accelerates growth lies with the provider working closely with clients to define their needs and then bringing the provider’s capabilities to meet those needs. It’s a powerful strategy that results in much deeper client satisfaction.
It also allows a provider to deal with the issue of changing influence structures that we’ve noted in previous blog posts, where the business stakeholder is now more influential in defining a client’s business needs and driving investment and work that goes to third parties.
Providers that interact with business stakeholders to address their needs find the effort pans out and they can move to more impactful innovations that the client will be ready to fund.
And that’s a recipe for explosive growth.
Photo credit: Matter Photography
I once read that our society’s major accomplishments over the last 50 years were that we had harnessed lightning and used it to get sand to think. This massive leap forward was about using information and computers to automate processes, and it really took center stage in the service marketplace. But 15 years ago labor arbitrage emerged and arguably supplanted automation as the dominant source of value creation in the services field. With the maturing of the arbitrage market, we are seeing automation reemerge at the center of service offerings, and I feel we are in the early stages of a tectonic shift where automation once again dominates the landscape.
We see this disruptive shift to automation happening in many areas. For instance, what moves the market now in end-user customer service isn’t outstanding service from India or the Philippines. It’s the emergence of “service now,” an automation SaaS play, which creates increased levels of automation for customer service.
And there is the expectation of just-in-time cloud or consumption-based CRM. I blogged before about IBM reacting to this trend by selling its transactional BPO and CRM practice when the space commoditized. Dell and CSC are other market leaders reacting to the move toward automated services.
The analytics movement is part of the shift to automation. Another hot growth area is digital commerce. Both of these areas have become largely a tools play rather than a labor arbitrage play.
The as-a-service platforms are also a manifestation of the shift to automated services. Hot new offerings are coming out as BPaaS platform-based services and disrupting the BPO space. In a previous blog I mentioned how payments companies are outperforming BPO companies because of the automated platforms that allow the payments providers to be highly profitable.
These are all harbingers of things to come as automation re-disrupts the global services world.