Robotic Process Automation (RPA) is becoming a big deal in the services industry. For the last 10 years, the Indian IT industry attempted to affect pricing by breaking the link between FTEs and the services they provide. They tried outcome-based or transaction-based pricing. As I have blogged in the past, although this is interesting and has some utility; but it has both positive and negative consequences. And it’s an incomplete answer to severing the link; it prices the services differently, but it still maintains the link between the services and the people who do the work. But software accomplishes the goal with RPA. Here’s why it’s a big deal.
At Everest Group we’ve studied the impact of RPA’s disruption on BPO services. Automation and RPA break the link by replacing people with a piece of software sitting on a virtual server, which can be spun up at any time and then shut down when the work is done.
Great efficiencies come from RPA breaking the link between FTEs and services. Another significant benefit is that it enables delivering services in a consumption-based pricing model. Providers can match their costs against consumption. In the traditional FTE model, the people continue to be an inflexible cost over time, even after the provider switches them to work on another task or another client’s work. And reassigning them to other work draws out inherent friction and the problems of a learning curve.
In Silicon Valley, software firms used RPA to move from having 30 to 50 virtual servers per person five year ago to now having over 100,000 (and climbing) virtual servers per person. I believe the same potential lies in the services industry through leveraging RPA.
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 road ahead
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.
Do you remember back in 2009 when questions were raised on the sustainability of the Global In-house Center (GIC) model? The GIC market was shaken up with multiple divestures, giving rise to speculation that the model was dying. Since then, confidence in the construct has been a little precarious, even though the number of divestitures has remained low (except for in 2012.)
But here are some recent facts that will quell those concerns:
Now, after recognizing that the shared services model is flourishing, let’s look at key developments that occurred in the GIC space in 2014:
Business Process Services (BPS) continued to witness growth due to increased demand for Customer Relationship Management (CRM), Finance and Accounting (F&A), and Human Resource (HR) services
Activity in the Manufacturing, Distribution, and Retail (MDR) vertical picked up considerably, especially in the retail sub-vertical, as companies set-up GICs for IT services delivery
Several locations made their mark on the location radar for the first time for specific industries. For instance, Romania and Ghana emerged as new GIC regions for BFSI firms, Croatia for healthcare companies, and the UAE for the hospitality sector
Share of GIC activity by U.S.-based firms declined, as most of the large companies are already adopters of the model; moreover, other geographies are increasingly embracing the GIC model.
While the model continued to see considerable momentum in 2014, the overall market is gradually shifting toward getting better and becoming more relevant for their adopters. Changes that have surfaced and are expected to shape the future course of the industry include:
GICs are no longer seen as only a support unit or cost-saving mechanism for the parent entity; rather, they are becoming a partner in their companies’ growth journey
Due to the increased value that the GICs are adding, or are capable of adding, buyers are willing to invest more for the additional advantages they can reap from the model
Cost arbitrage is not the only factor for GIC location selection. Talent scalability and sustainability, and linguistic and cultural affinity, are also playing a critical role in the decision making process
Realizing the value of diversification and the concentration risk involved in the mature markets of India and Philippines, companies are increasingly leveraging locations in other geographies such as Central and Eastern Europe, Latin America, the Middle East, and Africa. Ericsson, Intel, Johnson & Johnson, and Robert Bosch are among the firms that have spread their wings in the last few years to explore delivery locations in countries including Ghana, Mexico, Romania, Ireland, and Vietnam. Still, India remains the top location for GIC set-ups, with 28 centers established in 2014
Several delivery locations are also becoming attractive for their domestic market opportunities. Thus, some organizations are leveraging offshore centers for dual purposes; for their GIC operations and to tap into the local market
In addition to the pure GIC model, hybrid sourcing constructs, such as virtual GICs, that require a partnership between the buyer and the service provider to deliver services, are being considered.
For those of you who may have been questioning the health of the GIC model, it’s clearly vibrantly alive and kicking. The data speaks!
For more insights on the GIC model landscape, please refer to our recently released report “Global In-house Center (GIC) Landscape Annual Report 2015.” The report provides a deep-dive into the GIC market and an analysis of the GIC trends in 2014, comparing them with the trends in last two years. The research also delivers key insights into the GIC market across locations, verticals, and functions. It concludes with an assessment of the hybrid sourcing constructs.
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.
Since the start of 2015, we have had the opportunity to speak with a wide range of old friends, new acquaintances, and industry contacts – and spanning across enterprises, services providers, technology providers, academics, and consultants. Almost without fail, the topic of robot process automation (RPA) comes up. Most of the discussion aligns with the thinking in our report from last October (Service Delivery Automation (SDA) Market in 2014 – Moving Business Process Services Beyond Labor Arbitrage), but some goes deeper and adds fresh new colors.
In this blog we offer a quick summary of recent observations from these dialogues. Although these points are an amalgamation of many conversations, a few bear mentioning specifically. Mihir Shukla (CEO of Automation Anywhere), Lee Coulter (CEO of Ascension Health Shared Services), and Gianni Giacomelli (SVP Product Innovation/CMO at Genpact) debated the trends in disruptive technologies, particularly automation, at a recent SSOW event in Orlando. Additionally, Matt Smith and Dan Hudson – formerly leading Virtual Operations North America, now in Cognizant’s RPA group – spent some time explaining how their views have evolved as they have gone from advising service providers to actually working for a provider. We also spent time speaking with a number of enterprises with process improvement programs that are utilizing robotic process automation, plus conducted a recent webinar with Telefónica about automation.
Viability of RPA
RPA is a “no regrets” move that essentially guarantees results. Beyond the somewhat obvious fact that it can generally deliver savings quickly, it is also flexible. Unlike many decisions in global services, the approach, priorities, and tactics can all evolve fairly rapidly without having to take major steps back because the automation routines are not fixed and are designed to be changed. In this way, it is closer to how small applications outsourcing projects are simple compared to large infrastructure agreements with multi-year terms, which are complex and hard to reverse transitions, etc.
For automation-friendly processes of 8 or more FTEs, 40% savings is a reasonable expectation. Sometimes it is less but can also often be more. As a result, ROIs of new initiatives are measured in quarters, not years.
Although the cost savings is nice, the predictability and rigor from automating complex, but rules-based processes can add tremendous value. It makes knowing that operations are under control much easier. Plus, the benefits of reduced errors and delays can be a huge positive–truly value beyond cost savings.
Rate of adoption of RPA
Although initial processes can be implemented in several months or quarters, it requires two to three years to implement and reach significant penetration of processes across an organization.
There is a surprising degree of organizational inertia to not look seriously at RPA or go slowly. As a result, our view is that it will take five years to penetrate most of the market – despite being a fairly simple, almost no-brainer approach.
As an illustration of the pace of adoption, consider the exhibit below from our recent webinar on service delivery automation. RPA is making inroads into FAO renewals and new deals. However, notice that only 12-28% of recent deals are including RPA. Given that most of those are 4-5 year terms plus others immediately preceding them had even lower rates of RPA inclusion, this means that 3-5 years from now deals signed without RPA will be coming up for renewal…and it will still be the majority of the deals hitting the market without RPA. Once we see the deals per year with RPA cross 50%, the rate of change in the market will be noticeably faster. The wildcard, of course, is how many of the deals being signed now without RPA will be restructured during the term of the deal to include it – this will happen, but the rate is not yet clear.
Technology models for automation
No single tool can do everything and it is a matter of building the right portfolio of options. Further, even if a tool tried to do everything, the market would likely be reluctant to select it due to fear of lock-in.
Interestingly, we are seeing more proprietary tools by service providers coming into play. This is not to say that the commercially available tools aren’t effective – they are, but rather that providers are experimenting with making their own investments to avoid licenses fees and to create the operating model they desire. In fact, there is a general feeling that some of the proprietary tools have functionality not found in the commercials tools (and vice versa), such that we may be entering an arms-race for innovation in automation tools. Might this even lead to service providers being willing to license their proprietary tools without also providing accompanying services? Time will tell, but this would seem to be a compelling way to attract and retain clients with a differentiated offering while spreading investments across a larger base of users.
At this point, those organizations electing to utilize outsourcing appear largely comfortable allowing their service provider to select and provide the relevant tools (results-oriented mindset). Those enterprises wanting to select their own tools, tend to shy away from an outsourcing model anyway.
In case you missed it, we recently released some additional information on automation and technology in business process services:
A complimentary Practitioner Perspective highlighting the learnings of Telefónica with RPA as told by Wayne Butterfield, Head of Digital Service Innovation & Transformation
A major, new report on the broader technology landscape in BPO (Reinventing Business Process Services Leveraging Technology to Deliver on New Expectations) – our team analysed over 250 tools of leading service providers to find insights regarding investments, adoption, role of partnering, breadth of deployment, variations by function, pricing models, hosting models, and many other aspects. Check out our Market Insights infographics for some free previews of the findings:
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:
The number of centers for domestic outsourcing is clearly on a growth trajectory and with a whopping 66% centers expecting headcount growth in next 3 years
Some of this is in response to preferring domestic locations over offshore locations, but much is about creating a portfolio of locations to support increasingly diverse sets of work
The typical size of a center is in the range of 100-500 employees; some centers are in the 1,000 employee range and are almost exclusively a long-term hub of an organization in a tier 2 location (vs. tier 3 or 4 or rural)
For IT services, the key driver is largely around the presence of local educational institutions that offer computer science and technical training, and are willing to collaborate on helping shape that talent for the needs of technical employers. Having said that, IT is a function where more than half of the centers are using a mix of locally hired resources and landed resources (resources traveling from other parts of the world on work permit)
Finally, two-thirds of the centers are single function delivery focused (i.e., IT or BP or CC) and couple with the fact that they are small, indicates that they have been primarily set-up to serve a specific need – serve a local client, tap into (small) specific talent pool at the same time gain cost arbitrage
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.