The Rise of Credible Service Providers
When 2002 dawned, the growth of business process outsourcing had one major constraint: the lack of credible service providers. During the course of the year, a plethora of firms stepped into the breach in an attempt to fill this market void.
First, venture capital firms opened their pocketbooks and funded ventures that hoped to establish their competence in a particular niche. Next, the consulting arms of the Big Four accounting firms developed solid and well-articulated BPO product offerings. Accenture, Cap Gemini Ernst & Young, Deloitte & Touche, and Outsource Partners International or OPI (formerly KPMG) moved to become serious players.
Finally, the established BPO service providers, especially ACS and EDS, also stepped up to the plate and enriched their market offerings. ACS, in particular, marshaled its forces to become a serious BPO player. BPO contributed $2 billion to the company’s $3 billion annual revenue. Even IBM entered the fray by purchasing PricewaterhouseCooopers’ (PwC) consulting group, known for its BPO expertise.
In Canada, CGI made big strides.
Buyers Skeptical of Working with Venture-Funded Firms
The influx of new providers created a new psychology in the BPO market. During the dotcom boom, buyers were willing to sign up with a new service provider flush with venture capital funds. The then-rosy view was that the huge sums of money available would help the youngsters develop into mature, capable BPO service providers. Unfortunately, that was not how history played out. Today, buyers are much more skeptical about doing business with a new firm backed by an equity partner.
However, firms funded by venture capital that survived the dotcom crash are doing well, thank you. One prime example is Exult, which has clearly proved it is a viable and effective player in the human resources (HR) space. Exult’s success is important to the BPO supplier marketplace because it proves capable new providers can create a sustainable market niche.
Buyer insistence on past performance and future viability clearly benefited the old guard, however.
Transaction Engines Give BPO a Boost
This year buyers understood more clearly why BPO made sense for them. The emergence of transaction engines defined BPO’s benefits clearly. Service providers could explain in a more understandable way the value of economies of scale, best practices and access to labor arbitrage using a transaction engine. This was an important step forward for BPO.
Going into 2002, there was a dearth of credible BPO suppliers. As the year ended, BPO buyers had a much broader spectrum of options. But that’s just the first step in a still nascent market. With so many new providers in the market, I predict consolidation will become the hallmark of 2003. This will be good for buyers as the new configurations will make the offerings even better for them.
Transaction engines will continue to drive BPO. New and/or better transaction engines will emerge in HR, supply chain management, and finance and accounting. Like IT outsourcing before it, I predict BPO will break into silos. A corollary is service providers will aggressively take advantage of labor arbitrage. This will allow them to measure their success by the end result.
I see substantial gains for BPO buyers thanks to the combination of labor arbitrage and transaction engines. Together, they can increase quality and cut costs — exactly what a buyer wants when it outsources.
2003 will be a building year for BPO. As the year goes by, we will see more significant transactions. They will further validate the marketplace and expand the power of BPO.
BPO Outsourcing Trends for 2003:
- Venture capital funded firms, accounting firms’ consulting divisions and the major players themselves reworked their offerings to better fit the needs of clients.
- Buyers today want to feel comfortable that their service provider will still be there when it’s time to renew the contract. They are now more wary of new companies, a change from the dotcom days.
- The rise of transaction engines is making power of BPO more understandable to buyers.
- Labor arbitrage, combined with transaction engines, can lower costs and improve quality.