New deal activity tops 18 percent growth as service providers from all backgrounds, diverse regions taste success in highly competitive, fragmented RPO market.
The global Recruitment Process Outsourcing (RPO) market continued to remain one of the fastest growing single-process HRO markets. Buoyed by a resurgence of growth in the North American market, RPO posted a strong growth rate of 17 percent in 2015 over 2014 and touched the US$2.4 billion mark. A majority of the global growth is attributed to new deal activity, which grew at a rate of more than 18 percent year on year.
From a regional perspective, the United States, United Kingdom and Australia are the relatively more mature and bigger RPO markets, and they account for a large chunk of the global deal activity. Nonetheless, many countries in different regions across the world are emerging as strong RPO markets on their own, particularly in Latin America, Continental Europe and Asia Pacific.
“Across the globe, the key challenge in today’s recruitment landscape is the need to find and engage the required talent, especially for high-skilled roles, and buyers are expecting greater proactiveness and innovation from service providers in that regard,” said Arkadev Basak, practice director, Business Process Services, at Everest Group. “Providers are responding to this opportunity by developing niche areas of expertise, adding talent advisory capabilities, and improving their internal efficiencies, by leveraging technology, providing targeted training, and addressing division of labor fundamentals.”
Over 40 percent of RPO deals are bundled with a technology capability. In particular, many service providers are making dedicated investments in developing bundled RPO offerings that include advanced analytic services.
“Service providers are using technology as a productivity lever as well,” adds Ranjan. “For example, we are beginning to see providers adopting Robotic Process Automation to improve efficiency and save on costs, and we expect RPA adoption to rise rapidly in the future.”
These and other research findings are explored in a recently published Everest Group report: Recruitment Process Outsourcing (RPO) Annual Report 2016 – Opportunities Abound in a Buoyant Market.
This report provides comprehensive coverage of the RPO market across dimensions such as market overview, key business drivers, buyer adoption trends, solution and transaction trends, emerging themes and areas of investment, and service provider landscape.
Other key findings in the report:
The RPO market continues to remain intensely competitive and fragmented. Providers from all backgrounds (including staffing, broader BPO, and pure-play RPO) have tasted success in this fast-growing market
Procurement outsourcing market matures, with buyers seeking more value, more innovation, broader scope from service providers.
The global multi-process Procurement Outsourcing (PO) market witnessed decent growth of 10 percent in 2015, reaching US$2.3 billion in size, led by strong adoption by North American manufacturing, consumer packaged goods (CPG) and retail segments, according to new research from Everest Group.
PO buyers cite cost reduction and analytics support as their two most crucial needs. In response, service providers are increasingly adopting robotic process automation (RPA) to usher in a new round of cost savings in such areas as administering purchase orders, invoice processing, fraud/duplicate payment detection, claims processing, and conducting arrears review. Similarly, buyers are increasingly asking for analytics solutions because they enable savings and minimize financial and operational risks. Typically, buyers lack in-house analytics capabilities, tools and expertise, so they are increasingly looking to service providers to plug this gap. Buyers list analytics expertise as one of the top three service areas in which they would like to see improvement by their outsourcing partner.
Growth in the PO market can also be attributed to an emerging trend of buyers seeking more end-to-end coverage. PO contracts are moving towards multi-tower scope, with an increasing inclusion of finance and accounting, supply chain management and human resources outsourcing processes in addition to traditional procurement processes.
“Organizations are seeking to transition to a cost+value model of procurement outsourcing, where the entire procurement function shifts from an operational role to a business enabler role,” said Megan Weis, vice president, Business Process Services, at Everest Group. “Service providers play a key role in this transformation effort by providing best-in-class process efficiencies, technology solutions, and supplier relationship management that collectively contribute value far beyond cost arbitrage to the organization. Value-added contributions include risk mitigation, market intelligence, supplier-led innovation and faster speed-to-market of finished products.”
Other key findings:
These results and other findings are explored in a recently published Everest Group report: “Procurement Outsourcing (PO) Annual Report – 2016 – Analytics and Beyond.” This report assists key stakeholders (buyers, service providers, and technology providers) in understanding the changing dynamics of the PO market and helps them identify the trends and outlook for 2016-2017. The report provides comprehensive coverage of the global PO market including detailed analysis of market size and growth, buyer adoption trends, PO value proposition, solution characteristics and service provider landscape.
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For large transformation projects, the services world has locked itself into a world permeated with high dead deal costs, wasted solutioning, and long transitions of nine to 18 months where the client sees low value and tries to get the provider to absorb the cost as well as expensive consultants and legal fees for the client on top of distracting management. And in the end, we have a lot of unhappy clients. This needs to change.
Remember John Lennon’s song: “Imagine?” Imagine a world in which we compress these cycles and we don’t have high transition costs. As Lennon wrote, you may say that I’m a dreamer, but I’m not the only one. Over the years there have been a lot of experiments in how to shorten the sales cycle. But largely they were frustrating. Even when you rush through the process, it still tends to straighten back out to the nine-plus months’ duration because it takes time for the enterprise to understand and absorb the journey and get to decisions. Others have experimented with sole sourcing, but it doesn’t really shorten the sales cycle and has a lot of limitations from the client side in terms of leaving them wondering whether they got a market deal, despite benchmarks and pricing assurance.
From studying this over the years, I’ve come to believe that as long as providers and clients define the goal in terms of procurement, they’re likely to be disappointed. The process and price become too influential and the provider loses sight of the client’s real goal. So they end up with incremental gains but not breakthrough, transformation gains.
Let’s think about these deals as transformation journeys instead of procurements. Just imagine ….
After all, the client doesn’t want the outcome to be a contract; the outcome needs to be a transformed state of the client’s process or capability. So we need to reconceive the origination of these transformation deals along this line.
We need to first focus on the benefits, defining the game-changing benefits the enterprise wants to build. Typically those benefits in today’s world have something to do with efficiency gains, cost savings, better aligning the process to the requirements of the business users, and improving the speed and agility to be responsive to the business needs.
If service providers stop thinking about the procurement process and think from the consumer’s point of view, it works great. The client gets what it wants and needs, friction is reduced, it’s clear what the client needs to reach its goal, and the provider gets to pull the client on the journey rather than pushing and selling to the client.
After defining the business outcome goal from the client’s perspective, the next step in developing a solution would be to develop breakthrough metrics to drive the change through the client’s organization. I’ll discuss this in my next blog post.
The parties build the journey together, and the client sees the solutioning as value rather than a sales exercise to be viewed with skepticism. In effect, this method turns the procurement process on its head and eliminates the sales cycle. The provider get paid to assist the client in solutioning rather than for building a complete construct to be compared to competitors’ solutions and examined at every level.
The result is a better outcome, focused not on contractual terms but on results for the client. And this process goes a long way to eliminate the nettlesome issues around the procurement transition phase because transition is accomplished as the transformation journey progresses. Just imagine.
In John Lennon’s words, I hope someday you’ll join us, and the world will be as one.
The PO Value Proposition: Transitioning from Cost to Cost+Value
Evolving business imperatives are changing the procurement mandate, causing the PO value proposition to transition from cost to cost+value
As outsourcing markets mature, traditional cost levers become increasingly less effective, driving enterprises to seek alternative sources of cost savings. RPA is filling that void, promising a new wave of cost savings, particularly in FAO’s transactional and FTE-intensive processes.
Wipro is reportedly looking at headcount and cost-reduction exercise in the realm of $300+ million. Why are they doing this? Is it a good idea? Of a few possible interpretations for wringing out costs, here’s my opinion – starting with my belief that this undertaking was inevitable. The more important question is how will they do it?
Wipro’s action comes on the back of similar news about TCS and IBM and is predicated by the pricing pressures hitting leading service providers. As I blogged recently, pricing pressure has become acute with existing clients looking for significant cost reductions.
In addition, the market is changing and clients are more insistent about requiring onshore resources; this raises operational costs for the Indian firms, which need to invest in a richer set of capabilities on shore. These resources located close to the customer are substantially more expensive for Wipro and other providers than their India-based resources.
It’s a case of when push comes to shove; if Wipro and other providers are to maintain reasonable margins or be competitive, something has to give. That “something” is the necessity to take out costs to allow them to meet the pricing pressures and allow them to hire the onshore resources that clients increasingly insist upon.
I think Wipro and others will move further into the industrialized factory model, which relies on an ever-widening pyramid that pushes work down to lower-cost resources and eliminates middle-management roles.
However, I think the strategy of moving deeper into the pyramid model raises the risk of further commoditizing the space and increasing churn. And clients are more and more intolerant of churn. The likely result is that it will open the door for firms like EPAM and others that differentiate around persistent teams of experienced engineers.
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