European industry clusters display an acute digital investment orientation towards efficiency imperatives, with limited focus on growth
European industry clusters display an acute digital investment orientation towards efficiency imperatives, with limited focus on growth
The BPO segment of the services marketplace has been undergoing significant change in its growth trends. As we lean into 2015, here’s a look at how and where BPO is experiencing the biggest growth.
Industry-specific offerings lead growth, and horizontal BPO growth comes from newer segments.
The industry-specific segments are growing significantly faster than the traditional horizontal offerings. For example, our study of the three-year CAGR of various segments reveals that:
|Capital markets – 20-22%||FAO – 8-10%|
|Insurance – 14-16%||Contact centers – 6-8%|
|Banking – 14-16%||Multi-process HRO – 2-4%|
This data underlines the shift that I’ve commented on in previous blogs. Customers not only expect industry expertise and relevant industry solutions but also favor them over the horizontal segments of generic process-oriented offerings.
Nevertheless, some process-oriented segments are growing very quickly. Examples of segments on the adoption fast track include:
Although most service providers now structure and deliver a horizontal offering, they bring it to market to their vertical orientation. For example, they sell their analytics offering through their manufacturing, retail or healthcare verticals. This allows the horizontal segment to capture the growth benefits of the vertical orientation while getting the scale benefits of the horizontal delivery model.
Another factors shaping BPO growth for 2015 will be adoption by buyer size. Our research tracking new BPO contracts points to this trend. For example, in Banking BPO contracts signed as of December 2013, midmarket customers signed 57% of the contracts in 2011-2013, a sizeable increase over 43% signed up to 2010.
Underpinning the shift to more industry-focused and customer-focused offerings, is another shift I’ve blogged about several times — the shift of influence from the central buying organizations to the business units. This trend has been a major factor in BPO adoption during 2014 and will continue to exert pressure that creates both upticks and downward trends in BPO for 2015.
Photo credit: Andy
Today, Cognizant announced the acquisition of TriZetto® (a leading provider of healthcare IT software and solutions) for US$2.7 billion. The deal ties in favourably with Cognizant’s dominant position in the healthcare IT marketplace, with the combined entity having US$3 billion in healthcare revenue. TriZetto has around 3,800 employees across the U.S. and India, who will join Cognizant’s existing healthcare business, which currently serves more than 200 clients.
The acquisition is a landmark deal within the Indian IT service provider community, given the size, scale, intent, and implications to the status quo, but what makes it unique is its focus on industry solutions vs. other services-centric acquisitions.
TriZetto primarily develops and licenses IT platforms and service for healthcare providers and payers, competing with the likes of Allscripts, DST Systems, and McKesson. Cognizant aims to leverage its dominant position in the market–a healthcare IT portfolio in excess of US$2 billion–to provide an integrated portfolio across services and platforms. Investing in products and solutions has been a key area of focus for Indian IT service providers as they look to embed their solutions within enterprises buyers, use technology adjacencies, and leverage the technology-platform model instead of flexing just the labor arbitrage card. This acquisition could be one of the steps allowing Cognizant to cross-pollinate and build an integrated (applications/infrastructure/business process services) services play in an industry in which it has primarily relied on its application services strengths.
Cognizant will get access to multiple software platforms and aims to realize nearly US$1.5 billion of potential revenue synergies over the next five years. TriZetto currently operates at 18.5% margins on a revenue base of US$711 million. The numbers are right in the zone for Cognizant, as it wants to continue to drive its growth-plus-margin story in the high revenue base in which it currently operates. The products, platforms, and solutions play has very unique challenges, opportunities, and operating dynamics. Whether Cognizant can navigate this fundamental transition and still maintain its growth story, will be an interesting study.
The ongoing transformation in the U.S. healthcare system is shaping service provider’s strategies as they look to capture the incremental opportunity that is up for grabs. The focus on driving down healthcare costs, wide-sweeping reforms (driven by Obamacare and ICD-10), and blurring lines between payers and providers, are principally reshaping the healthcare delivery model. Cognizant will aim to drive increased stickiness with healthcare buyers to drive retention in an increasingly complex vendor landscape. It is aimed at garnering a large share of the growth pie, when it comes to the payer and the provider ITO market. This acquisition is an unmatched clear indication that service providers must evolve from a services-only play to a platform-based solutions play, to stay relevant in a market that has an immense potential to grow.
The deal will also have myriad implications for the overall healthcare IT services competitive landscape. Most competitors of Cognizant already have a steady revenue stream (large or small) implementing TriZetto solutions, most importantly Facets™, which is used by most payers in the U.S. How this impacts its engagements and partnerships will be tricky. Whether Cognizant will want to (and if so, how) assume a dichotomous role of a partner and competitor will be another interesting area to watch. Additionally, whether Cognizant plans to ultimately absorb TriZetto (thereby dissolving the brand) or leverage its unique positioning is also unclear.
Cognizant is ideally placed in healthcare with few like-sized competitors, allowing it to consolidate. Two things that are definitely salient here–one, Cognizant is going all out to bet big on healthcare; and two, this acquisition has the potential of taking it to a different league altogether! There are already murmurs in the healthcare IT industry equating Cognizant to a new “IBM,” when it comes to its negotiating power at the table. This is another step in ensuring it stays ahead of peers as the competitive intensity in the market increases. The deal definitely has characteristics of a long-term strategic bet than a tactical manoeuvre.
Download the complimentary breaking viewpoint: Cognizant Acquires TriZetto for US$2.7 Billion.
FAO buyers looking to providers to deliver industry-specific capability in healthcare, insurance, real estate, retail, and travel
Earlier this week, Accenture announced that it has acquired PureApps, a UK-based specialist in Oracle-based Enterprise Performance Management (EPM). PureApps enables clients to analyze financial data to gain insights into corporate performance, to measure and improve organizational effectiveness, and alignment to strategy. PureApps enhances Accenture’s capabilities for services to the CFO, and enhances its consultancy services in the UK and Europe and global shared services offering. This is good timing by Accenture when many large organizations are looking to get increased visibility into their financial performance.
PureApps is to be integrated into Accenture’s Finance and Enterprise Performance practice, part of Accenture Strategy. The acquisition fits into Accenture’s focus on increasing its analytics capabilities through acquisitions.
Another recent example of this strategy is the acquisition of i4C, announced on 30 April 2014. Italy-based i4C is a provider of advanced analytics applications (AAAs), turn-key industry- and function-specific solutions. The i4C ACE platform allows analytics to be built and integrated into workflow without the need to do any coding. It uses industry specific logic and maps business processes into the application with configuration tools. Its portfolio includes some applications for energy, finance, retail, manufacturing, and telco sectors and a set of other applications, such as predictive asset maintenance tools.
Everest Group estimates that the market for analytics BPS, alone, is set for 30% CAGR to 2015. Accenture has made steady investment in its analytic capabilities over the years but the most recent acquisitions, those of PureApps and i4C, in quick succession show that the service provider is positioning for the predicted growth in demand for analytics. It is also filling the gaps in its portfolio by adding different flavors of analytics (e.g., EPM and predictive analytics) to its existing capabilities such as customer analytics.
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!”)
Many service providers are busy organizing along vertical industries and going to market with vertical solutions. As the services industry matures, it’s very clear that customers want to do business with companies that understand their industry. However, many providers find that verticalization doesn’t give them the growth acceleration they anticipated. So there are limits to this strategy; just knowing about a customer’s industry is not enough. What’s missing?
Customers want providers to know more about their industry but also to know more about their business and how they operate. Providers that succeed in putting these two aspects together enjoy faster growth.
Cognizant is an example of how to be effective in this strategy. They have organized by industry and built industry expertise, but they also invest a great deal in understanding their clients and leaving the teams or key players in place for clients (particularly the in-country teams).
Customers express a lot of frustration to us. They don’t like providers’ churn. They have to train new people every six months, and the churn is debilitating. They want providers whose people get to know them, build relationships with them and understand who they are and how they work. Those kinds of relationships allow both parties to cut through the noise and get things done.
Despite what the customers are looking for, we see many providers responding in one dimension — the industry knowledge.
My advice to providers: don’t overlook how important relationships are. It doesn’t matter how clever you are or how much vertical knowledge you have. The relationship activates the opportunity.
Photo credit: Curtis Perry