Analyze This: BPO Vendor Consolidation Forecast at Gartner

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A few months ago, Gartner's Robert Brown, Research VP, authored a report entitled "Business Process Outsourcing Vendor Consolidations: Is Your Contract at Risk?" in which he says that he expects a full quarter of today's top 20 BPO providers will not exist (in their current entity) by 2012. Put differently: within the next two years, we may see 25% of today's BPO providers "disappear".

The repercussions are enormous: a potential loss of flexibility and competitiveness as we move to global oligarchy? Standardization over-ruling any effort to provide a tailored service? Contracts suspended in mid-term, as a provider ceases, or is acquired? Or, looked at differently: the most efficient, most effective, strongest providers survive, building closer, longer-lasting ties with clients and morphing into true partnerships?

We sit down with Robert Brown.

SSON: Robert, your prognosis is sobering. Which geographies do you think will be most affected by the changes you foresee?

Robert Brown: Most of the top 20 BPO providers have elements of a truly global spread of service. If you look at where they are actually signing contracts the answer is the US and the UK. But in terms of delivery sites, we can expect some ramifications in terms of consolidation. So, as we see M&A activity carry on, some providers will be looking for the diversification of sites that comes with it; others will be consolidating centers as a result. We'll definitely see an impact on back end delivery capabilities.

SSON: Where do you think vendors might retain their delivery centers? Which geographies are more attractive from the provider end?

RB:  It's not so much an issue of country as it is an issue of capability of skill set. The BPO market, from a delivery standpoint, is going to be looking to automate. If you have a process that can follow a script or a set of rules, and you cut cost by sending it to a low cost location, or a low end demographic of delivery personnel - that would be the first area where you'd expect to see a greater investment in automation. In other words: Manual processes will become more automated - these functions will be delivered on the basis of software. So the deciding factor is not so much which countries have those capabilities, but rather, where in the world are you able to obtain that caliber of higher value-added employee?

SSON: And where would that be?

RB: Well, let's look at it this way: What is the greatest value that Eastern Europe offers, in terms of delivery into Western Europe? It's the low-cost language capability. So, any processes that are totally language dependent as opposed to transactionally dependent, will probably stay there for a longer period of time compared to transactional processes, wherever those might be based. Again: transactional processes are easy to automate and therefore countries that have specialized in these processes may find themselves more impacted.

You could also consider this: the biggest locations for delivery today are India, the Czech Republic, Hungary, The Philippines and Poland. In recent years, we've seen the emergence of tier 2 and 3 municipalities, in India in particular, as well as new countries like China, Mexico, Argentina, Slovakia,  and a slew of others. Partly, this is due to chasing labor arbitrage to lower costs. There is, if you like, an offshore rabbit hole effect taking place - eventually you'll hit a wall with regards to how much cost you can take out. And automation has now increasingly become a part of that story: because the alternative to the rabbit hole is to utilize technology to take out costs via process automation. And yes, that's been happening for a while but the pace at which it is now occurring is accelerating. In fact, it's accelerating so fast that, in two years, we'll see a full 25% of the -- by then $193 billion -- BPO market effectively be automated business process utility services. To offer some perspective, the BPU delivery model was responsible for only 5-10% of the BPO market in 2008, when the market was valued at about $164 billion. So coming back to your question of which country might be most impacted by this consolidation - the areas that are most exposed are those that were the first to be established by the initial offshore wave, that have not invested in higher-value added, non-rote services. Because rote, standardized functions will be the first to become automated.

SSON: So how do customers make themselves attractive to a vendor in today's market? How do you retain the attention of the A-team?

RB:  There is definitely going to be some supplier constraint in the market. So buyers need to do their homework. A key question will be how much work they are willing to do on the front end of BPO - i.e., how much standardization will they accept as opposed to expecting providers to just 're-badge' current processes? How much standardization are buyers willing to accept, as the name of the game becomes configuration, or "good enough"? Other considerations relate to buyer size and industry.  If you are a large business in a market providers consider attractive you'll be in good shape. Another positive indicator might be a buyer's commitment to sourcing advisors. Willingness to invest in a sourcing advisor means they are serious and not time-wasters, and providers will be more inclined to invest their top talent in these clients.

SSON: What might we be able to expect from these new players, once they are consolidated and as they re-engineer their services, in terms of the go-forward strategy?

RB: In the long term, we can expect a really strong infusion of greater levels of automation. But there will be plenty of manual work remaining. I expect that we'll see a lot of focus on Knowledge Process Outsourcing, and tied in to that is Analytics Outsourcing - both supporting the climb up the value chain that BPO offers. Successful BPO providers will thrive in the near-term by leveraging full automation wherever they can - though note that it's what they do with that automation that makes the difference; and an increased use of heavy analytics layered on top of automation, to drive a more customized value-added view for clients. That is not so different from the consulting-led outsourcing that we witnessed at the beginning of the decade, but in the past BPO deals were incredibly ossified - many big end-to-end contracts were set for five to 10 years, and were all-inclusive. Going forward they'll need to be more flexible and dynamic to provide a value-add to clients' sourcing strategies, where change has become a constant. Providers will have to hold the line on customization for everything else. So you might see an 80:20 rule, whereby automation impacts a standard set of services for 80% of delivery, but with a much greater emphasis on the remaining 20% that is heavily using analytics and KPO to drive a more customized set of services on top of the standardized and automated base set of services.

Additionally, I think we'll see a greater sense of problem sharing, as opposed to adversarial approach; a greater sense of strategic alignment with business priorities; a higher sense of the importance of baseline data so that course corrections can be made early and often; and most importantly, perhaps, both sides will need patience -- there will always be rocks in the road - the marriage analogy still holds true.

We've probably seen the end of those massive end-to-end deals, and are already witnessing buyers as well as providers prioritizing and chunking out pieces, being more deliberate in their approach and taking processes in steps. This just a natural evolution of BPO and really follows the lead of ITO a decade ago.

I still think it will be difficult for buyers to employ a best of breed sourcing strategy for BPO - while a selective approach sounds good in theory, it's difficult to master with respect to BPO today.  You'll likely see a blended approach - a provider will be used as a prime contractor, with various subcontractors plugged in to deliver best of breed services.