There was a huge up tick in business process outsourcing (BPO) in 2000, says Julie Giera, vice president at Giga, a Cambridge, Massachusetts-based research and advisory firm specializing in the technology industry. She attributes BPO’s double-digit growth to the popularity of Web-enabled offerings.
BPO soared because companies are seeing the benefits of using an application service provider (ASP). Giera defines the ASP model as application rental over the Web. Many BPO companies combined an ASP offering with business services, offering remote technology and support that is available 24/7.
These BPO offerings save buyers money. The cost savings are significant, especially for small and mid-sized firms who struggle with inadequate technology. These companies can now outsource their technology and business process functions at a lower cost. In addition, they gain access to technology embedded with best practices, Giera points out.
BPO is gaining in outsourcing popularity because the processes they focus on are complex but non-core. “Why do your own accounting when you can have access to world-class accounting services?” she asks rhetorically. In addition, these firms don’t have to hire an IT staff or make a capital investment in technology. “All you need is a device that connects you to the Web,” she notes.
Although the ASP model is the basis for the explosive growth in BPO, Giera’s second trend discusses the limits of ASP growth. She believes many of the ASP offerings “aren’t applicable to big business.” Last year many analysts predicted the ASP market would take off like a rocket and act as a magnet for the companies with household names. That did not happen in 2000.
Continued Growth of Managed Services
Giera says the reason Fortune 50 companies didn’t sign ASP contracts was because they require sophisticated packages that need customization. “Rented applications over the Web don’t lend themselves well to customization,” she says. In addition, most ASPs don’t have experience integrating their systems into the customer’s legacy back-end applications.
Next year Giera predicts the market will see a continued growth in managed services, which she defines as technology bundled together with a management component. For example, a company that offers bandwidth will also begin offering a capacity planning service. Giera cites Exodus Communications as an example of the change. The Santa Clara, California company, which made its name in Internet data centers,† now offers bundled services for monitoring Internet operations.
The key, says Giera, is to take a commodity offering and add a “high-touch, high-dollar service” to it. That’s because providers who sell a commodity can only compete on price. The best way to remove price from the equation is to add other services that are unique.
This market began to get crowded last year and the crowding will continue this year. Giera predicts the telecommunications companies will attempt to move into this market “in a big way.”
Giera expects “a tremendous wave of consolidation” as 2001 winds down. The outsourcing providers who are competing on price alone may discover they are being priced out of the market. The safest survival path is to be acquired by a bigger player or merge with a rival.
The lack of qualified technical staff mitigates the growth of outsourcing vendors. The services vendors are adding all require a human element. “It’s not as easy as adding another server,” points out the analyst. Growth is becoming dependent on recruiting and retaining skilled staffers. Giera says this year 10 percent of all tech jobs remain unfilled.
And the demand for this kind of talent has risen to 17 percent a year. “Where are the people going to come from?” Giera asks.
Acquiring other companies is one way to grow because the merger includes the talent. “Today companies are buying each other for the people, not the customers,” she reports.
The Rise of Risk/Reward Contracts
Another general trend is the rise of risk/reward contracts.† This type of deal had fallen out of favor, but has been revived as companies try to find their way in the new economy. Today, buyers, in return for their business, are asking vendors to help shoulder what can become substantial risk in bringing new products to market. In addition, “buyers want accountability,” explains Giera.
Finally, Giera predicts usage-based pricing will become more widespread. Currently, most service providers are charging a flat monthly fee. The analyst says buyers want to only pay for what they use — “from bandwidth to full-blown consulting services.”
Until now vendors have not had the technical capability to measure usage. The current software has not been able to deliver enough detail to identify specific charges. But this kind of tool is becoming available, making usage based pricing a reality.
Lessons from the Outsourcing Primer:
- BPO outsourcing enjoyed double digit growth rates last year. Web-based offerings were responsible for the growth.
- Big companies have not selected the ASP model because they require customization and integration.
- This year a wave of consolidation will occur. The lack of IT personnel will fuel this consolidation as vendors buy other vendors for their staff.
- Risk/reward contracts are coming back into favor.
- Software tools will allow usage-based pricing.