BPO Backchat

Feb 20, 2014

This piece of thought leadership was written by Guy Kirkwood and first appeared on Professional Outsourcing. 

Downgrades, doldrums and disaster?

As France smarts from the good slapping it got from Standard & Poor's, it appears that it's not only Euroland that's crying out for a little bit of stability and certainty. Although any port in a storm is a godsend and sterling might well be considered such a safe harbour, the UK economy is still "trepidacious" as it skulks into 2012.

All bad news one would expect for the sourcing market. And yet; and yet...

Some counter-intuitive data is emerging that would indicate that all is not as gloomy as one would expect. This begs the question: do bumpy times in the economy potentially lead to bumper times for the outsourcing industry?

Used as a tool to cut costs and to help organisations restructure, vendors would normally expect to benefit from straitened times. Yet the counter-cyclical norm is being challenged. According to Horses for Sources,1 organisations have been wary about outsourcing as economies teeter on the edge of recession (again) and have been pushing outsourcing down the priority list while "they fear for their very existence."

What we're seeing aplenty is planning for outsourcing, as well as an increase in scope for mature areas such as technology and call centre operations. There also appears to be an increase in the number of companies looking to outsource for the first time in areas such as finance and accounting (F&A) and procurement.

What's driving this? A resurgence in the number and scope of operations in the third party advisor market as clients seek help in deciding on their sourcing strategy. Whilst it's hard to disagree with Niels Bohr that "prediction is very difficult, especially about the future," any increase in consulting activity is a good indicator that the market in the latter half of 2012 will be busier than in the recent past - because if companies are prepared to invest in good advice, it makes it much more likely that outsourcing deals will come to fruition.

Equaterra / KPMG, in its recent survey,2 has seen its clients embarking on new alternative service delivery models particularly in technology; in the creation of nearshore captive operations and in shared services. It also sees vendors facing strong pricing pressure which is driving efforts to provide more profitable service offerings. Technology, specialised BPO and multi-tower deals continue to exhibit the strongest levels of demand, particularly in banking and insurance which remains the top industry group to deploy shared services and outsourcing.

The competitive landscape for offshore services is also changing as reported by PricewaterhouseCoopers.3 Indian providers in particular have been struggling with profit erosion with margins dropping from 25 percent in 2007 to 20 percent in 2009 to 17 percent in 2010.

"Going forward, providers need to make a conscious decision about which markets they want to enter," PwC advises. "To that end, they should focus on growing markets where demand for a given service is strong, and where they have superior capability and a competitive advantage over their rivals."

Ovum expects this to drive vendors to adjust structures, engagement strategies and partnership models, leading to greater M&A activity as the largest vendors seek to "buy the stack" as a means of gaining more control over these changes and influence the market more effectively.4

Everest agrees that financial services including banking and insurance will continue to be the dominant industry sector in 2012, with verticals such as healthcare and manufacturing distribution and retail continuing to witness increasing traction.5 North America will continue to be the dominant buyer geography, followed by Europe. Asia Pacific is also likely to grow faster than the industry average.

So, let's take each of the main areas of perceived growth and look at them in turn:


As businesses have been facing the reality of lower growth, procurement has achieved new prominence as a strategic vehicle to support cost reduction and cash generation objectives. Turbulence from natural, political and economic events places growing demands on purchasing leaders who must maintain continuity of supply and preserve their company reputation against breaches of regulatory, green or ethical policy. There continue to be growing demands, but many purchasing teams are still facing headcount reduction challenges and struggle to secure significant investment to improve systems, processes, people or tools. All this is compounded by an insufficient pool of experienced procurement professionals in the marketplace that is not growing fast enough to meet demand.

Against this backdrop procurement outsourcing has experienced explosive growth and the smarter service providers have been upgrading or finessing their platforms to help clients improve the management and analysis of procurement initiatives, savings, spend and targets.

Additionally, almost all analysts are reporting that the "pull" for procurement services is stronger relative to other BPO services. For example, Everest has recently said that the market potential for indirect procurement BPO is $60bn globally but the existing market penetration is only $2-3bn - representing significant untapped and latent demand. Global market growth is 20-25% per annum and is resulting in a steady flow of opportunities.5


With significant catastrophe underwriting losses and persistent poor returns on investment income, global Property and Casualty (P&C) insurers are increasingly looking to operational cost reduction in order to protect their bottom line. Outsourcing of both technology provision and business processing is increasing to aid organisations in taking significant cost out of their back office operations.

In the London market, further steps forward in creating the most advanced electronic insurance market in the world were taken in 2011 with the major upgrade of the electronic claims capability. In addition a new facility has been provided which allows straight through processing of premium payments for brokers to carriers.


Developments in infrastructure, storage and software "on demand" services, many of which are centred around orchestration and the ability to manage third party environments effectively, have allowed companies to procure a service which is comprised of a blend of platforms, locations and partners. The steady erosion of the "in-house or outsource" binary decision point is allowing organisations to take full advantage of the flexibility of on-demand and cloud-based services more aggressively and with more confidence and tighter integration than ever.

Software developers in all fields are thinking more carefully about which eventual deployment models their customers will wish to use. This means that a tiered and modular "cloud friendly" approach to development now also includes a renewed focus on efficient network code development - something which had become steadily less important in the traditional on-site high speed data centre network hosting model over the last few years but has now become critical once again to delivering an effective on-demand experience.

Consensus around approach and the development and adoption of open standards for the myriad of new hosting and SaaS / IaaS technologies has significantly contributed to customers being able to manage smooth transitions between platforms and helped to remove some of the perception of risk involved in hybrid solutions.

This in turn has encouraged service providers and consumers to be more open to using a blended approach to sourcing their services, with every technical model from fully on demand, consumption billed offsite to traditional licensed server on the premises being regarded as perfectly viable and able to co-exist under the umbrella management and reporting of a single service.

Financial Services

The last 12 months has seen the global economy and financial markets crises hit new lows. Balance sheets fluidity and capital adequacy requirements are changing along with new regulatory implications. The normal operating environment is changing and as a result all financial institutions are having to work out a way of reducing their risks and generate new revenue streams whilst cutting costs, particularly in respect of stricter regulatory regimes. Decisions on sourcing are an important element of generic strategies to achieve growth in such a difficult environment.

Outsourcing is becoming more mature as the financial services sector adopts various tactical solutions to manage risk and reduce cost whilst leveraging current assets and IP, which is seen as being staff. Increasingly, business areas ripe for immediate labour arbitrage opportunities are being considered. But I'm now seeing a hybrid play which gives total flexibility and also leverages the asset and creates additional higher margin revenue streams. I see this as a key area of growth as outsourcing further matures.


I interviewed one of the leading BPO analysts in the world last month and asked the classic question: what's hot? Crass I know, but then I've never been entirely smooth. The response was:

"Within BPO, finance and accounting (F&A) has been hot and continues to be hot; procurement is hotting up very nicely; life and pensions insurance in the UK; government will be exploding next year. In other geographies things are different, but software as a service (SaaS) is clearly continuing to explode."

Then, to confirm the fact that I'm completely lacking in gorm, I asked what's not (hot).
"Anything that requires heavy investment up front or long time scales; that's just not happening. The other area that's had a slowdown is old style traditional IT outsourcing because people are keeping a watching brief on cloud."

Now I have a problem with the whole cloud thing as I see it as either vapourware or as simply a delivery mechanism for more traditional services. I wish the word would disappear because it covers everything. We're not yet seeing broad platform-based BPO, regardless of vendor hyperbole, except where it always has been (such as in life and pensions) - but even there with some vendors it isn't "cloud."

I think the excitement of cloud will disappear over the next five years because for some forms and activities it will have become mainstream. I get irate when I see a press release from a vendor who trumpets a new offering that is a "cloud solution" when three years ago they would have said "we have this new piece of software." The key is to find out if there is a managed service behind the SaaS and if it's multi-tenanted.

Well, that's a snap shot for the first BPO Backchat of 2012. We'd welcome your feedback, suggestions for future editions and criticism (of the constructive kind of course).

Next time, we'll look at how and why outsourcing transactions fail. I'll leave you with a quote from one of the world's leading BPO advisors.

"Most outsourcing transactions are not structured correctly for what the client is trying to do. For example if you do outsourcing and all you want to do is cut costs, it's generally not going to work because you are not going to focus on the trade-off between cost and quality and get the flexibility."


BPO Backchat has had several incarnations but only one writer: Guy Kirkwood, whose day job is head of channel at Xchanging.

1. Horses for Sources: Will a Double-Dip Recession reverse the trend of buyers "delaying outsourcing" during a slump? Here are 10 factors to consider, August 22nd, 2011
2. Equaterra / KPMG Q3 2011 Global Pulse Survey
3. PwC and Duke Global Services: IT Outsourcing Provider Profits Shrink; Growth Slows in India, December 09, 2011
4. Ovum: 2012 trends to watch
5. Everest: 2012 Market Predictions