Even though business process outsourcing is the new baby on the block in the outsourcing world, it already accounts for more than a third of the entire outsourcing market, according to the Everest Research Institute. In 2005 the US BPO market was $362 billion. BPO accounted for $129 billion or 36 percent.
Here are the trends that may affect BPO in the next 12 months:
1. BPO deals will get smaller.
For the last three years, the outsourcing industry has been driven by large deals, many of which had an IT component, notes Leon Busch, President and CEO of SourceNet. Buyers wanted to remove the entire finance and accounting (F&A) department, for example.
As the outsource market matures, Busch says buyers are realizing they may want to outsource only the “transactional aspects of the process.” They are recognizing that in some instances, their own staff needs to handle the work that adds value to a BPO process, at least initially. This approach mitigates some of the perceived risk of an outsource relationship, but still allows the company to achieve cost benefits.
For example, in SourceNet’s area of expertise, accounts payable (AP) buyers now want to handle customer service, prepare budgets, and do the forecasting. But they are eager to save money outsourcing the commodity work.
Busch believes 2006’s smaller footprint is an evolutionary phenomenon. Suppliers will need to propose and provide transformative processes and measures that will potentially grow deal size over the term of the agreement.
2. Multisourcing will gain acceptance in 2006. For that reason, specialists will thrive next year.
Mark King, CEO of ACS, says 18 months ago “we thought every deal was going to be a mega-deal.” Now, “buyers want best-of-breed suppliers, so there are five different procurements.” He says when buyers began checking references, they discovered “no one can do it all because BPO is still immature as an industry.”
“Buyers have to decide if they want four suppliers or one,” says Busch. He believes today’s savvy buyers will eschew one-stop shopping and instead choose suppliers who can add value. “It’s difficult for one supplier to add value and save money in all processes,” he points out.
“Multi-tower deals don’t seem to be materializing,” adds Jim Konieczny, HR Outsourcing Global Operations Leader for Hewitt. “Organizations aren’t willing to take the risk to outsource everything to one person. Each function is too important to give to someone who will just do an okay job. Buyers want deep domain expertise,” he posits.
However, the Hewitt executive believes multi-tower deals can eventually flower after suppliers have had the time to build up the required expertise to do it all. Peter Hirano, Senior Vice President and Global Product Manager for Professional Services for Convergys Employee Care, agrees. “Success begets success. When more and more companies combine processes, there will be some successes. That will create the momentum for the multi-tower market,” he says. He predicts multi-tower deals will become more important as “we head into 2007.”
Paul Jameson, Vice President of Marketing and Strategy for Getronics, says new operating level agreements (OLA) between suppliers create a single point of accountability for the buyer, making multi-source deals easier on the buyer’s governance committee. “Suppliers have to be able to play together in the sand box. OLAs make a lot of sense. And they work,” he says.
3. Security and privacy will become a bigger issue.
King says security and privacy challenges in the IT arena, which has established, standardized practices, may turn out to be minor compared to the difficulties in BPO. “Imagine what happens when you take over human resources (HR) or finance and accounting (F&A) functions; that’s exactly where security and privacy collide,” he says. King believes the problem with security in BPO is that technology is NOT the problem. It’s the people. “You can encrypt everything and still have a problem if someone becomes lax,” he says.
King says suppliers can’t become too confident. They have to have set guidelines and then make sure everyone is clear about how to adhere to them. “You must stay vigilant,” he says. To this end, two years ago ACS created a safeguards and security committee which he chairs.
4. Service level agreements (SLA) and metrics will change to reflect the value a supplier can bring to an organization in addition to cost savings.
Historically, SLAs reflected the transactional aspects of a process. They centered on cost, efficiencies, and through-put. But today, buyers are beginning to require suppliers to transform the processes to add value to the business. For example, a supplier can process a paper transaction in 48 hours, but the buyers believe an electronic transaction could be processed in 24 hours and at a lower cost, and they want their outsource partners to “take them there,” explains Busch. “This year, SLAs will need to account for transformation and value,” he predicts.
5. The supplier community will continue to contract.
While the acquisitions won’t be as broad as the Hewitt-Exult transaction last year, Konieczny says BPO suppliers are still jockeying for position. “Today buyers are demanding a broader set of capabilities,” so suppliers have got to find the talent. Buying it is a quick way to fill in the blanks. “We’re looking at our gaps and seeing how we fill them,” says Bob Shultz, HP’s Vice President and General Manager for BPO.
King, who is a CPA, reports there is a lot of venture capital money floating around. In addition, the suppliers’ stock prices are tempting. He points out the industry’s price/earnings ratio is trading at about 15. But the industry’s average ratio is 19 or 20. “When the P/E ratio is this low, it means it’s time to consolidate and wring out the inefficiencies,” says King.
6. 2006 will be the year procurement comes of age.
Michel Janssen, President of Supplier Solutions, Everest Group, predicts procurement “has crossed the chasm.” While there weren’t many procurement deals this year, he believes companies are watching and waiting for the results of the early adapters.
Kevin Campbell, Global Managing Director, BPO Businesses for Accenture, says interest in procurement will swell “because procurement yields immediate savings which creates a strong business case early on. And it truly fits in well with the bundling of other BPO processes.”
7. Buyers will buy BPO differently next year.
Jameson believes buyers have gotten savvier and now are buying BPO services with greater understanding. Historically, he says the buyer’s procurement department was responsible for choosing the supplier. “They were just interested in cost,” he says.
Next year he predicts the procurement department “will no longer have a stranglehold on outsourcing.” He says buyers are using outside advisors and are also consulting with the business group that will be impacted before making a selection. “The theme is now quality. Productivity and effectiveness are now the marching orders,” Jameson says.
8. 2006 will be the year of differentiation in supplier offerings.
At this stage in HR and F&A, every supplier can do basic BPO transactions. Campbell predicts next year will be the year of differentiation. “Buyers tell us, ‘You can process the transaction. But can you speed up the collection time?'” he reports. The differentiation will center around having an impact on business results. “We’re moving up the complexity curve,” says Campbell.
9. Offerings have to be global.
It’s amazing what a difference 12 months make. Offshoring has gone from (maybe) evil to mainstream and then some. “Offshoring has become table stakes,” says Shultz. “This year people will be asking, ‘What else can you do for me?'”
On to the next phase. “Today North American solutions are not enough,” says Konieczny. Today suppliers need to add components from Asia, Europe, and Latin America to meet the needs of today’s demanding outsourcing buyers.
Campbell agrees. He says buyers tell him, “We know this works here. But we want it to work everywhere.” Companies want standardization across borders. Adds Jameson, “Global integration and standard technology are the only ways to win deals from large companies.”
10. Offshoring will accelerate.
The Hewitt executive says the gains of 2005 will accelerate next year. “Some buyers are buying into offshoring as a business strategy because they now understand labor arbitrage is necessary “to get to the right economics.”
11. Buyers will look to other locations besides India.
King says buyers now feel comfortable with India, which created the business case for offshoring. Originally buyers felt India was the only place to go. “We had Fortune 20 clients whose CEOs said ‘We just want to go to India regardless of the price,'” King reports. Now CEOs are looking at price first. Next year he says buyers will go “anywhere offshore that makes the most sense.”
“India is probably not right for every aspect of a BPO process,” adds Campbell. For example, Eastern Europe is important for native language skills, he points out. He says 2006 will be the year of “truly global delivery,” which demonstrates “a maturing of the offshore value proposition.”
12. Offshoring has opened up emerging markets for suppliers.
Joe Hogan, Vice President, Marketing for HP’s Outsourcing Practice, says offshoring is producing new markets for suppliers who are also manufacturers like HP and IBM. This year India, Brazil, Russia, and China have provided customers as well as employees for HP. Hogan predicts this trend will solidify next year.
13. Suppliers with industry vertical expertise will find themselves in demand.
Smith believes suppliers “with unique industry experience will be the next wave.” They will have unique offerings that address the particular needs of that industry in addition to the requisite process expertise.
For example, last year the applications world focused on banking and the capital markets and was successful, according to Campbell. “Now we’re going to see more focus on industry-specific skills on the BPO side,” he adds. Suppliers are branching out into other verticals. He predicts credit services processing, data management, and healthcare will get attention next year. In addition, he believes this specialization will spawn new entrants into specific verticals.
14. Outsourcers will no longer be able to compete on price alone.
Hogan says offshoring has leveled the playing field. “Next year a supplier will have to be able to prove it has the ability to deliver business transformation to win a BPO contract,” he notes.
15. Third party advisers will become more important to BPO transactions.
Konieczny sees the third party advisors like Everest Group, TPI, and EquaTerra becoming even more important to 2006 BPO transactions. “We see strong demand for their services because very few organizations will look to do a complicated BPO transaction without hiring an advisor,” he says. Since the transactions are now so complicated, he says buyers look to a seasoned advisor with broad experience to guide them through the outsourcing thicket.