Arise, Verticals

Alrighty … The “horizontal” BPO of outsourcing SG&A (sales, general, and administrative) functions such as HR, finance and accounting, call centers and procurement hasn’t reached the take-off velocity many -- including yours truly -- had expected. What’s up with that?

We recently reported on 2006’s full-year contract award metrics. We counted more BPO contracts awarded than ever before. But 2006 was the second consecutive year of double-digit percentage decline in the total contract value of the BPO contracts awarded.

We’re in the middle of a tremendous number of BPO evaluations, with clients of all sizes and industries. This visibility tells us that the core outsourcing business model isn’t the issue affecting slow growth of BPO adoption. Rather, it’s client concern over the service provider landscape.

With so many providers swimming in the outsourcing waters, some clients feel there is no critical mass or expertise. Even the largest and most successful BPO providers are struggling to deliver on the promise of standardized processes, world-class automation, seamless global delivery and end-to-end integration.

The net effect is that many clients chose to do BPO tactically. They contract for discrete processes rather than a broad scope of functions. And they get the benefits of BPO largely through labor arbitrage rather than through real transformation of the business functions.

Those dynamics aren’t the sort of motivators to prompt service providers to continue to invest in their BPO offerings. What to do? Well, we’re seeing a fair degree of bet-hedging, with providers electing to go down the path of “vertical industry BPO.” A vertical BPO focuses on providing various functional services in a limited number of industry domains. Healthcare, financial services, manufacturing and retail are examples of vertical BPO domains. The providers focus on processes that are specific to those industries.

Will that confuse and diffuse the outsourcing market? Or is vertical BPO the answer to the needs of today’s discriminating corporate buyer? We shall see.

Comments

[Sudhir B]

This stat of decline in contract value is really striking. Is the % decline applicable to contracts handled by TPI or the entire industry?
Also, wouldn't vertical BPO require more investment than a horizontal BPO offering?

[Peter Allen]

Sudhir ... these metrics relate to the global outsouricng industry at large, not just the TPI-advised transactions. The greatest driver of the decline? Fewer large multi-process BPO relationships and fewer large Call Center deals.

Of course, the HRO market is among the most visible examples of buyer uncertainty regarding provider ability to deliver!

As to your question on degree of investment, the vertical space is a much more focused and defined target of opportunity. Proportionately, the market is smaller for a vertical solution when compared to a horizontal process such as Accounting, but the ROI dynamics of value-creation AND cost-reduction motivate that focus.

Many providers are struggling with the lack of broad leverage for their solutions in general, so the logic of a focused application might make sense.

Peter