Watch Rishabh Gupta, Senior Research Analyst at Everest Group, talk about the market size and potential for Insurance BPO and the trends in technology adoption within the Insurance BPO market. The trends and facts highlighted are from Everest Group’s recently released report on Insurance BPO.
A new week – a new market speculation. My favorite business paper, Business Standard, is hard at work again breaking technology M&A stories. This time the company in play is AppLabs, an independent software and application testing company. Reportedly, French IT services company Capgemini and U.S.-based CSC are looking to buy it.
Interestingly, AppLabs – which claims to be the world’s largest independent software testing and quality management company by testing professionals – itself grew through acquisitions. Founded in 2001, AppLabs has grown from a three-person outfit to its current size of ~2,500 employees, and has testing facilities in the United States, United Kingdom and India – its three key markets. AppLabs acquired KeyLabs in 2005 for US$7 million, IS Integration for US$37 million in 2006, and ValueMinds in 2010 for an undisclosed amount. The acquisitions gave it capability, geographic access, and IP and toolsets.
In terms of business mix, AppLabs’ is dominated by the hospitality industry.
Between 2004 and 2007, Sequoia Capital funnelled US$17 million into AppLabs to fund its growth, including acquisitions. While it is understandable that Sequoia Capital wants to exit its investment and that may have led AppLabs to find a suitor, the question that comes to mind is why Capgemini and CSC are interested at a valuation of 2.4x revenue (this seems very high, and may just be an asking price, and the acquirer may have a very good reason for doing this) for a ~US$110M top line.
Growth at any cost: Why are companies with close to US$30 billion in collective revenues interested in buying a small operation? My preliminary research shows Capgemini has a strong organic testing portfolio. Our hypothesis on testing as a service has been that third-party testing will grow as clients look for independent validation. There is certainly a case for having independent testing services companies with lower cost bases, compared to full services IT companies that employ high cost engineers and scientists. Unless, of course, these companies are buying growth wherever they find it. CSC grew its revenues less than 1 percent in FY11, while Capgemini grew at a relatively healthier ~4 percent in 2010. For both companies it may also be a buy versus build entry strategy into offshore testing.
Portfolio: AppLabs’ business portfolio shows a high share of business from hospitality and healthcare, two of the verticals with higher runways and growth potential. Companies will pay to be present in industries in which there is likely to be future growth
Testing as a wedge: One of the ways in which third-party testing services help diversified IT firms is by providing them with a lever to enter an account in which another competitor is strong in core services. This may be relevant for some of the India-heritage offshore majors looking to replace global incumbents in accounts. Which brings me to – where are the Wipro’s, Infosys’ and TCS’ of the world in this AppLabs game? Here is a look at the cash balance on their balance sheets as of June 30, 2011:
1 Includes bank deposits and investments, as reported 2 Includes available for sale investments, as reported
With these kinds of cash balances, might one of the offshore majors want to buy AppLabs, thereby preventing Capgemini or CSC – and perhaps other globals that might potentially jump into the bidding fray – from gaining inorganic entry into the offshore testing market, and instead needing to build it themselves? Food for thought?
The mandate of Everest Group’s Location Optimization practice is to assist clients with data, insights, and advice on which global sourcing practitioners can rely to make their most critical decisions related to global locations. As we go about conducting our day to day business, three questions underpin the discussions with global sourcing practitioners nine out of 10 times.
What are the key locations for global services delivery?
Which regions are attracting attention and interest to meet the next wave of global services requirements?
How do the key global services stakeholders (buyers and service providers) perceive the next frontier(s) for global sourcing?
In order to build awareness on the trends we are observing across the global locations space at the highest level, we will attempt to provide the answers to these three questions.
First, let’s look at the key regions for global services delivery today. Exhibit 1 depicts our Market Vista Locations Maturity Heatmap, which tracks and compares the level of market activity across global locations. Asia remains the dominant location of the global services installed base by a large margin. This should come as no surprise as the global sourcing story has been pioneered and successfully played out in Asia – India provided the proof of concept for building industrial scale in global services, and the Philippines has rapidly adopted this successful model and opportunity to become a world leader in customer service. The success seen by India and the Philippines has encouraged other locations in Asia to concoct their individual recipes for succeeding in the attractive global services space. For example, China has emerged as a credible option for sourcing R&D and engineering services (read more in Everest Group’s “What is the True Maturity of China’s Offshore Services Market?”) while Malaysia is making concerted efforts to carve out a niche in the shared services space.
Exhibit 1 – Market Vista Locations Maturity Heatmap
Central and Eastern Europe (CEE) and Latin America are the next set of regions beyond Asia in terms of installed base of global delivery. These regions experienced waves of expansion, especially as companies strive to put in place a global portfolio of delivery locations for purposes, such as risk diversification, leveraging technical/language skill sets, 24×7 coverage, regional support, etc. There are more than 10 locations in both these regions with credible evidence of global services activity. Poland (in CEE) and Brazil (in Latin America) are the two large locations that have built credible scale in global services delivery and are recognized as mature locations on our Market Vista Location Maturity Heatmap. Poland has carved out a niche as a nearshore location for servicing Europe in non-voice business processing and IT, while Brazil is recognized for IT talent and an attractive domestic market, in addition to its proximity as a nearshore location for global services. (Read more about Brazil in Everest Group’s “Perspectives on the Maturity of Brazil’s Offshore Services Market.”)
Africa is a relatively new entrant in the global services locations landscape and has three or four locations with nascent global services activity. It presents specific and, at times, niche propositions and opportunities. And its value proposition is now being slowly understood by global investors.
Next, and before we discuss Africa in greater detail, let’s look at the set of locations attracting interest from buyers and service providers to meet the next wave of global services expansion. Exhibit 2 is based on Everest Group’s comprehensive survey of key global services stakeholders and compares regions that buyers and service providers are planning to leverage for setting up new centers. (Read the Everest Group Location Insights detailing buyers’ and service providers’ location-related plans and perceptions).
Exhibit 2: Location Expansion Plans of Buyers and Service Providers
As is clear, Asia figures prominently in the plans of buyers and service providers for setting up new centers. Asia continues to attract interest from buyers and service providers, despite the high installed base of current activity. The Asian locations witnessing sustained interest include India, the Philippines, China, and Malaysia.
The survey results also give a big “thumbs-up” to Latin America. This is corroborated by recent market activity trends that show the region is experiencing activity in establishment of both captives and supplier delivery centers. Key countries that are witnessing increased interest include Brazil, Argentina, Chile, and Mexico.
Let’s go now to one of the most interesting findings from the survey – Africa! Indeed, as many as 20 percent of all respondents from the service provider segment indicated plans to add new countries in Africa to their global delivery portfolio. South Africa seems to be especially popular with service providers, with 10 percent of all respondents disclosing plans to set up a center there. Egypt also figures into the list of leading choices for locating a new delivery center.
So what are the reasons behind this emergence of Africa countries as the next frontier of global locations, especially for service providers?
They provide a capable (although nascent) low-cost alternative to CEE locations
They offer scalable language skills and cultural affinity with the developed world. South Africa and Morocco have strong cultural similarity with the United Kingdom and France, respectively. Egypt offers the opportunity to cater to the lucrative Middle East market.
A foothold in the African region gives service providers the ability to serve domestic African markets, e.g., South Africa for sub-Saharan regions, and Egypt and Morocco for North African markets. Business from local firms and especially MNCs operating in the region present a lucrative opportunity for service providers looking for the next set of clients
In addition to the above value propositions offered by African locations, we can contextualize the motivations for location portfolio expansion from both the buyer and service provider standpoints. Buyers set up captive centers or influence service providers to provide support from new locations primarily to complement their current global locations portfolio in terms of access to specific talent pools for language skills, time zone proximity, to support international business expansion, etc. At the same time, buyers are also sensitive to the complexities associated with a wider geography footprint and, hence, are looking to find the optimum balance of value capture and risk mitigation from global services programs.
On the other hand, Tier 1 service providers usually have a wider frame of reference due to their servicing of multiple clients, and hence are typically more globalized than buyers. In addition, service providers are more open to moving into hitherto unexplored territories due to incessant cost pressures and the need for differentiation. Most of the Tier 1 service providers are already well penetrated in all the major global services theatres and are now looking to explore the African continent.
Although it remains to be seen how much of this enthusiasm will ultimately get converted to any action, the sheer level of interest itself should excite countries in the African continent – South Africa, Egypt, Morocco, and Mauritius – to develop the global services capabilities in their individual countries, sharpen the articulation of their value proposition and differentiation theme, and craft effective marketing strategies to attract global investors.
As the debates continue, the courts rule, and the American people become more educated on the true impact of “healthcare reform,” the question that begs for an answer is, “What, exactly, IS healthcare reform?” Read any article, tune into any top news organization, and listen to one of the political pundits or news anchors, but your view will change as soon as you hear another source. Even the politicians responsible for the legislation are confused!
The American people are speaking out like never before in gatherings and town hall meetings across the United States about healthcare reform’s cost impact on our system, especially in such a down economy. The reactions have been astonishing; but even more astonishing has been the opposite views from both sides of the issue with opposing explanations on whether traditional town hall meetings really represent the true feelings and will of the American people. New political explanations and themes are beginning to emerge. Instead of healthcare reform we now have “insurance reform.” The debate seems to be around identifying the bad guy. Is it insurance organizations, physicians, pharmaceutical companies, or government? Where is the “Bogey Man” in this?
Most of us in the healthcare technology market space agree that all this debate and posturing has caused a delay in the commitments to move healthcare industry technology forward. It has been a lean year for major providers of healthcare solutions and services to implement anything because healthcare provider organizations are confused over government mandates, stimulus and what that entails. It’s apparent, however, that whichever direction the debate moves, whatever is or is not deployed for healthcare reform, the resulting environment will require innovative technology solutions that can support access to the critical information necessary to comply to market demand and government mandates. It’s time to act on compliance demands rather than gamble that they will be moved out or go away. It’s time to plan for the next generation of services that will help healthcare organizations do more for less, rather than adding to already strained information technology budgets.
It’s not yet clear which organizations will step up to the plate and define the healthcare model for the future and the technologies that will drive that model. But what is abundantly clear is that next generation IT applied to mHealth, medical device integration, telehealth, and data center transitions will support and drive innovation that will support quality of care and wellness programs and make these affordable for consumers.
As we strive to understand what healthcare reform is, we cannot lose sight of the fact that healthcare is a costly issue, and we must make it affordable for all without consuming our national economy.
Most small, independent companies can attain the services they need at a comfortable price point from a “one size fits all” sourcing model provided by a second-tier or niche provider. But for an enterprise that owns multiple companies that run different administrative solutions with varying degrees of automation, process robustness, standards, and technology platforms, this model can become prohibitively expensive and fall severely short of required results.
To help a holding company with a portfolio of over 20 companies find ways of lightening the administrative costs across all its holdings, we recently conducted an exercise to test the efficacy of “joint sourcing” multiple SG&A functions to a single first-tier provider.
The companies belonged to a variety of different industries, and, as expected, they varied in their administrative solutions and infrastructure. Some had an internal support staff; others had already sourced portions of their services; and others still relied on the parent company for administrative support. Thus, we decided to focus our attention on six of the 20 companies we felt were best suited for this exercise. The selected companies operate in the automotive and parts, manufacturing, personal and household goods, pharmaceuticals and biotechnology, and communications industries.
To estimate the joint sourcing cost savings, we followed a five-step approach:
Perform a high-level peer group analysis – Assess the relative operational efficiency of each company by evaluating SG&A spend as a percentage of revenue in comparison to a peer group
Derive baseline spend for IT, HR, F&A, CRM, procurement, logistics, knowledge services and engineering based on the client’s financial reports
Develop estimates for addressable spend – Identify addressable portions of functional spend (those sensitive to optimization levers such as sourcing and process improvements) and fine tune estimate by considering each company’s pre-existing optimization and sourcing programs (See Table 1 below)
Estimate potential savings for the function – Estimate the savings potential for each addressable portion, and derive the range of savings estimates based on existing operational efficiency (See Table 1 below)
Estimate the impact of earnings per share (EPS) – Calculate the impact of savings on EPS (by comparing to operating income)
Table 1: Addressable spend and savings potential by function
We next analyzed each company individually with the assumption that each could achieve the pricing and solutions available to large organizations. Table 2 is a portion of the outcome of the analysis we performed for a subset of the functions for one of the companies.
Table 2: Annual Cost Savings Estimate
The results of the exercise and analysis, shown in the following table, speak for themselves.
Table 3: Joint Sourcing Savings Potential
By joint sourcing to a major provider, we were able to identify a combined savings that would not be available if sourced separately as the owned-companies would benefit by:
Speed of implementation
Solution standardization, in turn resulting in improved management reporting and compliance
Access to mature capabilities (e.g., ERP technology platforms)
Significant investment already made in offshoring
Increased viability of captive/shared services centers
Companies with multiple holdings and private equity firms alike are constantly looking for ways to achieve a positive impact on their SG&A expenses. We believe joint sourcing is an interesting option for them to consider when evaluating potential cost savings scenarios.
Earlier today Peter Bendor-Samuel, CEO of Everest Group, posted a blog about what Accenture’s acquisitions of Zenta and Duck Creek signal for the global services industry. My goal in this blog is to drill down into specific details around the Zenta acquisition. So, with that…
Accenture announced earlier this week that it had acquired Zenta, a provider of residential and commercial mortgage processing services in the United States. The announcement also cited the launch of Accenture Credit Services, which will consist of full service consulting, technology, and BPO capabilities for the commercial real estate, residential mortgage leasing, and automotive finance industries.
Given the abysmal state of the mortgage industry – especially residential – in the United States, this is an ideal time for a large BPO service provider with sufficient cash reserves and existing low-cost delivery model to build or expand its capabilities in the mortgage servicing space by taking advantage of attractive valuations, thereby making an investment in the future. (Cognizant did exactly this last month when it acquired CoreLogic’s India-based captive.)
Think about it. The mortgage industry is facing significant double whammy profitability issues, with costs rising due to higher fulfillment expenses and the need to manage increased and changing regulatory norms, and revenue dropping due to lower origination volume (purchasing volume). The nature of services itself has changed with loan modification volume rising significantly, while new mortgage initiations have reduced dramatically. And the increased regulatory oversight, resulting from regulations such as the Dodd-Frank Act and additional proposed changes, has created an air of uncertainty in the mortgage servicing industry. Against this backdrop, Accenture’s acquisition of Zenta was certainly smart and well-timed.
The acquisition was also smart, for a different reason. Within the banking, financial services, insurance (BFSI) BPO market, Accenture has a strong position in the insurance sector which accounts for 60 percent of its BFSI BPO revenue. However, it has a fairly modest scale of operations in banking BPO, and limited capability in industry-specific capital markets BPO. With this acquisition, Accenture gains Zenta’s strong voice and non-voice experience and capabilities in the mortgage services space, which it can then infuse with its own strong consulting and technology capabilities to establish what is essentially a one-stop-shop for the mortgage industry. The launch of Accenture Credit Services is a clear step in fulfilling this objective.
With Accenture making this move in the mortgage services space – as we had suggested it might in our BFSI BPO service provider profile compendium released earlier this year – what can we expect next? Will it make further investments in banking BPO around, say, credit cards? Or will it perhaps invest in capital markets BPO, which has been a gap in its overall BFSI offering? Can it develop the capabilities organically, or may another acquisition, either a captive or pure-play niche service provider similar to Zenta, be in its crosshairs?
Yes, it’s exciting times in the BFSI outsourcing space. Stay tuned for new developments!
Recently I was in Manila for the Contact Center Association of Philippines (CCAP) annual industry event, which also marked the CCAP’s 10-year anniversary. There was a great deal of enthusiasm about Philippines having reached an important milestone of becoming the world’s leading voice BPO destination. Prominent industry and political speakers emphasized the fact that Philippines had achieved this distinction on the back of a vibrant ecosystem, a natural affinity toward the services and customers in play, and the significant attention the industry is enjoying relative to the political and economic quarters. One of the eminent presenters summarized the upbeat mood by stating that Filipinos had demonstrated that it is possible to be nice and still win!
The celebrations were well-deserved. The Philippines IT/BPO industry has grown at a healthy clip of ~30 percent annually over the past five years to reach ~US$9 billion in revenues, and is a significant contributor to the country’s GDP, direct and indirect employment, and foreign exchange earnings. Additionally, the industry has catalyzed growth of multiple next-wave cities in the provinces, attracting local talent, entrepreneurs, and governments to participate in the overall economic upswing. Multiple factors, including availability of a robust English-speaking talent pool, relatively neutral accent, cultural similarity with the United States, and a competitive cost environment have contributed to this success.
Yet, one must question whether this success is sustainable and what lies ahead for the industry in the years to come. The global services phenomenon has certainly spawned a new generation of competing destinations beyond India and Philippines. While locations such as China derive strength from regional and domestic market scale and capabilities, countries in Africa are witnessing a significant government-backed push to target the relatively lesser tapped UK and European markets. Other countries such as those in Eastern Europe and Central/Latin America are establishing themselves as the preferred nearshore destinations for Europe and North America, respectively. While it is important for Philippines to protect and enhance its position in the existing strongholds, the competition will be more apparent in the comparatively new markets such as the UK, continental Europe, and Asia Pacific, and in service segments such as non-voice and industry-specific BPO services.
So what must Philippines do to ensure continued growth and success in the emerging global services landscape? Investments in talent capacity and quality are required to meet the industry’s projected entry-level workforce requirements, as are development of specific domain expertise and a steady pool of management/ leadership. The industry’s expansion into next-wave cities needs to be strengthened through adequate physical/social infrastructure development and local government stewardship. Finally, the industry’s stated agenda of further diversification into newer markets and service lines must be supported through renewed and targeted marketing and communication initiatives.
The Philippines IT/BPO industry has set itself an ambitious 20 percent annual growth target over the next five years. Achieving this will require Philippines to proactively shape its destiny and profile, recognizing evolving customer expectations and competitor capabilities. Will there be any surprises?
A colleague and I recently hosted a roundtable for the leaders of captive centers (i.e., offshore operations not belonging to third-party ITO or BPO suppliers) in the Philippines. In attendance were leaders from more than 15 organizations with operations at varying degrees of maturity. So what do you think their reactions were to the discussion?
On one level, most participants could have felt good. Makati City is bustling (and far better organized than, say, Gurgaon or Bangalore). Most operations are growing well, and are perhaps a key factor in the Philippines’ overtaking India in voice BPO. Everyone around the table is facing the same operating issues around attrition, wage increases, staffing for night shifts, and the constant traffic of visitors from the parent company coming to kick the tires and bond with the associates serving internal or external customers halfway around the globe. The issues would have been worrying for the leaders if they weren’t all dealing with the same stuff.
At another level, the leaders should be worried. After all, it’s easy to be absorbed by the operating issues of trying to keep a few thousand people engaged and focused on customer service and attendance, and making sure they’re happy and well-fed in their 24×7 operations. But the world is changing. Parent companies have gotten a lot smarter in what work they send where, and to whom. Third-party providers are the ones renting out a majority of new office space in Manila, and they are eager to grab what market share they can from the captive pie. Many of these third-party operations are led by Indian managers who are perhaps a bit tired of things in Gurgaon or Bangalore and have come to the Philippines to get their next kick in life.
So why does this matter? On one hand, things can continue as-is; after all, life is good as long as headcount in the captive center keeps increasing, isn’t it? On the other hand, status quo can relegate these operations to becoming a mere spoke in the global supply chain of their parent organizations. Decisions that shape their future will continue to be made by the leaders back home, or worse, by peers in these organizations’ centers in India or other locations.
It’s time for the leaders of the Philippines captives to face the fact that business as usual is not going to last as long as the third parties are coming and parent companies are getting more discerning. More importantly, they need to make themselves heard by demonstrating leadership capabilities beyond day-to-day delivery, and taking charge of the offshoring agenda, or at least starting to shape it.
A rapidly evolving business environment is causing the global banking industry to rethink the way it leverages technology. Market growth objectives post the recession, the desire to create a globally integrated multi-channel environment, and managing the complexity of new products are placing increasing pressure on global banking institutions to move toward a “bank of the future” paradigm. The transition to this future state requires banks to realign their technology environment and, more importantly, their IT applications portfolio. Recently released Everest Group research report, IT AO in Banking – Trends and Future Outlook, highlights the key drivers causing this evolution. Following is a summary of the three most noteworthy trends we identified:
Increasing focus on customer-centricity: How does the “bank of the future”communicate with its customers? The recently unveiled technology-studded concept branches of Barclays and Citibank offer us a preview.
Barclays’ flagship Piccadilly Circus branch in London went high-tech in December 2008 with multiple types of cash machines, an interactive video wall, a floor staff equipped with tablet PCs, and a “premier lounge” with Microsoft Surface technology. Citibank unveiled an even more tech-savvy branch in New York’s Union Square in December 2010, featuring interactive iPad-style “sales walls” that allow customers to purchase the bank’s products through a flip-friendly, touch-screen interface. Other high-tech features include Wi-Fi access, enhanced-image ATMs to deposit checks without envelopes, and 24/7 video chat station for speaking with a customer services representative.
The clear, common underlying theme behind the extensive use of technology at these banks of the future is improving the customer experience. That said, the bank of the future is not just about having high-tech feature-packed branches; it is also about being in contact with the customer through other channels such as the mobile and Internet. Some banks are using Web 2.0-based technologies to service existing customers and reach out to new ones. ABN Amro, ING and Rabobank all have dedicated web-care teams that communicate with customers through social media. Banks are also striving to provide customers with a uniform and convenient banking experience across channels, be it physical branches, web portals, or mobile devices.
Managing complexity in banking operations is becoming exceedingly important as banks’ operations expand and the regulatory requirements become tougher. Frantic M&A activity during the recession and the subsequent foray of banks into newer markets such as the Middle East, Africa and Asia, have created large banking entities with many disparate systems that require integration and standardization. Banks are striving to create a unified view of the customer by integrating complex customer data from across geographies and product lines in order to address risk and improve sales effectiveness.
The regulatory environment today is also tougher than ever before. Regulations such as Basel III (which will be phased in from 2013 to 2019 globally), the U.S. Dodd-Frank Act, and the reverse stress-testing requirements for banks in Europe all require banks to be on top of huge volumes of customer data and process it real-time to assess risk. This will require most banks to upgrade their IT backbone, with a special focus on data management and analytics.
Improving profitability has, expectedly, become an important driver against the backdrop of the pressures brought on by the financial crisis. Banks are continually striving to remove redundancies in operations, improve business efficiencies, and achieve cost savings especially in the middle- and back-office activities. Technology outsourcing continues to be a key enabler of all these goals. Cloud adoption is another emerging opportunity by which banks can meaningfully reduce their IT costs and complexity.
Technology is widely regarded as the panacea for addressing the challenges associated with all these themes of customer centricity, complexity, and profitability. Technology is fast changing the way consumers do banking and the way banks do business. Banks are banking big on technology to prepare for the future today, and tomorrow’s IT services leaders are working fervently today to lay the groundwork.