Romania’s ADM and non-voice business process FTEs are 60-75% less costly than tier-2 U.S. and UK cities’ workers
Romania’s ADM and non-voice business process FTEs are 60-75% less costly than tier-2 U.S. and UK cities’ workers
Much like Jonathan Swift proposed an outrageous, over-the-top suggestion that the Irish eat their children as a way to accommodate themselves in famine and over-population, I have a modest proposal for Infosys. It’s over the top, but it’s intended to highlight an issue.
My modest proposal is that Infosys keep its platform IP business, sell its labor arbitrage business and use the proceeds to buy IP and software and further develop it.
I understand that this sounds beyond the pale that Infosys would ever sell its arbitrage business. But think about this: they already split the company into two. They recognized that the arbitrage outsourcing business is maturing and is going to be in a mature state.
They already clearly bet the future of Infosys on its ability to jump on the next S curve in terms of IP. I say go ahead and go whole hog. In the words of the country and western song, sell the truck while it’s still running.
Why not sell it while they can get a huge premium? The Infosys arbitrage business is the jewel of the industry. Great people, great clients and extremely high-quality work. It would fetch a very high multiple. Any competitor would be proud to own it.
Infosys could then deploy its capital into its IP business. The strategy goes along with already having hired a CEO from SAP who understands products and IP, and it would free management from the complications of having to manage two business models at the same time.
My modest proposal illustrates the underlying issue that faces the offshore services industry. It contemplates the maturing of the space and the complications of jumping to a new high-growth market segment. If you want to look at other similar situations, consider IBM, which recently sold its transactional BPO and voice BPO services.
It would be a breathtaking move. But, with my apologies to Jonathan Swift, it’s certainly food for thought.
Photo credit: “Jonathan Swift by Charles Jervas detail” by Charles Jervas
Chengdu, the provincial capital of Sichuan province in Southwest China, offers significant benefits over major cities such as Shanghai and Beijing for supporting non-voice BP services
At HP EMEA analyst summit in London last week, the company highlighted progress towards strategic plans and targets. Key messages included:
Under the moniker of OneHP, the different divisions within the group have been working more collaboratively to share skills and assets better. This strategy was further emphasized during the analyst summit with representatives from various divisions co-presenting sessions.
Stronger sales is a key initiative across the business. This has been achieved to some degree in EMEA already but there is still more to do; Q2 FY 2014 results showed that EMEA, which accounted for 38% of the company’s revenue had experienced growth of 4% compared with a decline of 6% in Americas and a growth of 1% in APAC year-on-year. However, growth was driven by hardware while services revenue shrunk. HP Enterprise Services (HPES) in particular, saw the biggest negative growth within HP group, of 7% year-on-year globally. HPES profit margin of 2.5% in Q2 2014 was up 100bps on previous quarter but unchanged year-on-year.
Focusing on HP Enterprise Services (HPES): the management presented a brighter outlook for sales than previous quarters with 400+ new clients added in 2013 and a very large deal in the pipeline. Signs of progress on strategic objectives included:
Sales restructuring: HPES has changed its sales structure with 29% of sales force deployed on proactive/new sales rather than scope extensions/renewals sales up from 4% in 2013. HPES has enhanced its sales collaboration tools to improve planning and execution. It is also improving account management. To enhance its sales HPES is hiring top talent as well as building a global practice to meet market demands.
New Style of IT: Delivering solutions for the new style of IT, comprised of capabilities for cloud, mobile, big data and security. Examples of success in this activity include the Norfolk County Council contract which was won in 2013. Contract deliverables have included a cloud-based information hub for data sharing to enable public services work better in partnership with each other. HPES is also delivering desktop, data center and other infrastructure services to the council. The OneHP component includes the use of Autonomy and Vertica, as well as HP’s technical skills around cloud, desk top, virtualization and infrastructure capabilities.
Increasing advisory services: This is to enable HPES to engage with clients early, to help articulate requirements better and specify the solution that can draw on OneHP, to also increase higher margin services. An example of this is HPES’ contract with Seadrill which included advisory services to plan vacating a data center in six months and migrating 31 applications to the cloud, including some transformation. The advisory service appears focused on identifying potential innovation or transformation opportunities or helping clients define a solution as part of an on-going service. Carving a modernization niche for its advisory services, in this style, could help HPES potentially avoid coming into direct competition with major consultancies that would sell their services on a vendor/technology agnostic ticket and with SI partners that may be HP resellers.
Other measures underway include developing more vertical capabilities, becoming more business requirement-focused and continuing to reduce costs.
Overall, the focus of the event was heavily on IT with BPO limited to a short part of the HPES deep dive session. HPES maintains that BPO is an important part of its business and it is currently bidding for a new major contract in the UK government sector. My take is that BPO has become something of a quandary for HPES. Although it values the business and wants to grow it, other activities appear to get the higher share of resources. Yet, we live in the era of increasing digital channels and automated processes. HPES’ IP and access to vast technology resources should position it to do well in this market. Some of its IP such as Vertica, Autonomy, and multiple content/document management software can be used to deliver analytic-based or more automated digital BPO services. HPES also has a whole load of vertical capabilities, such as banking, government tax and revenue, and healthcare, that it can take advantage of to leverage platform-based BPO sales. HPES is taking a good hard look at these assets. A comprehensive strategy for growth of the BPO line could bring all the different components together to target emerging demand for a new style of BPO such as analytic-based services (e.g. revenue assurance, fraud and error, and risk management).
There’s a big move underway, especially among the Indian firms, to rebrand away from outsourcing and BPO. The industry now prefers to use a variety of other terms such as BPM, BPS and managed service. But the immediate impact of changing the terminology on a provider’s website is that the website disappears from the search engines, effectively turning the company into stealth mode and sabotaging marketing efforts when potential customers turn to search engines to look for those services.
In the U.S. market, the term outsourcing is saddled with the negative connotation of job loss and exporting jobs. And in the Indian market, negative connotations have attached themselves to the BPO brand due to BPO workers enjoying themselves in their first job out of college and often getting into interesting escapades that appear to be an aggressive, risky lifestyle. BPO is increasingly seen in a poor light, particularly among the parents of the Indian workforce the providers seek to attract.
India’s service providers have nothing to be embarrassed about; they offer employees high-paying jobs with good career potential. But in an attempt to deal with the negative connotations, they are changing the terms “outsourcing” and “BPO” to sidestep the problematic issues. It’s quite understandable.
There’s no doubt that the industry has accumulated these difficult brand connotations, and we would all prefer not to work in an industry with negative brand connotations. However, businesses tunnel to Google for marketing and, by calling themselves by other terms, they disappear from the search engines.
Nevertheless, customers continue to believe that they’re buying outsourcing and BPO services and are confused and somewhat annoyed about these new terms they must learn. It violates the first rule of marketing, which I’ve blogged about before: it’s all about the customer.
At a time when services growth is becoming more difficult, going into stealth mode in search engines may not be the wisest course of action.
Photo credit: Daniel
Its attractive cost arbitrage over Western Europe and established service delivery locations in Central and Eastern Europe (CEE), coupled with its large, high-quality pool of multi-lingual entry-level talent across both IT and BP services, make Bulgaria a land of opportunity for global services.
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!”)