Transparent pricing, highly standardized processes, vertical solutions. Companies will select service providers that deliver the best quality and value-add, not just the best price. “Increased adoption of standardized solutions in outcomes-based models will drive outsourcing to become more utility based,” says Don Schulman, General Manager, Finance and Administration at IBM. “And that becomes where the market starts to trade.” Andrew Pery, Chief Marketing Officer at Kofax, agrees. He believes verticalization and business process utilities (BPUs) will be the major trend in outsourcing over the next five years.
Once a distant vision, these dynamics are “changing quite dramatically now, precipitated by the recent economic volatility.” Companies are so eager now to shed fixed-cost overhead that they are now willing to outsource vertical applications that are crucial to their core business.
Healthcare and financial services — both saddled with costly paper processes and legacy data centers — are the early movers toward verticalization. The outsourcing industry is also seeing increasing verticalization in supply chain management.
Companies in industries undergoing turbulence around new regulations, or deregulation, such as utilities and telecommunications, find vertical solutions especially beneficial, says Rahul Singh, who leads banking and financial services BPO at Tata Consultancy Services (TCS). It’s becoming increasingly difficult for buyers to keep track of the legal and regulatory compliance issues across every country in which they operate.
The push for vertical solutions and for business transformation will accelerate the pace of the journey to more end-to-end solutions and utility-like platform models in the BPO space, predicts Ritesh Idnani, Vice President and Head, Global Sales and Marketing, Infosys BPO. “Transformation is so tough. Service providers can’t do it by simply finessing the processes they handle. Lean and Six Sigma are hygiene factors, but transformation requires a technology-driven framework that completely overhauls the processes.”
And it will drive growth in BPUs.
The impact of business process utilities on BPO services
“Business process utilities will, in fact, replace a lot of traditional BPO over the next 12-18 months,” states Rebecca Scholl, Senior Vice President, Marketing and Communication, ACS. A BPU is a standardized platform for buying business processes, as opposed to highly customized processes in the BPO industry.
That differentiation accounts for the way buyers will adopt BPU solutions. “Some buyers still believe their processes are unique, and they will still want BPO services to have things done their way,” Scholl says. BPU adapts well to the needs of small and midsized businesses that want to buy process services just like they buy utility (telecom, electricity) services. Large enterprises will turn to BPU, she believes, because they’re currently looking at everywhere they can possibly save money, including their existing BPO arrangements.
IBM’s Schulman agrees, saying that the optimal solution is “business process as a service,” and that “having process optimization embedded into the technology platform greatly enhances the value delivered to clients.” He says that while the market is advancing slowly, buyers are beginning to recognize the ease of standardization, understanding that the platform approach not only meets but in many cases exceeds their individual requirements.
Business process utilities will be highly attractive to buyers that want business transformation but want it through quick access to more efficient processes rather than going through a sustained, complex, change management exercise, which is necessary for customized services.
BPUs will be attractive to service providers because standardizing processes enables them to leverage best practices and also deliver services at a lower cost.
Scholl explains the best targets for shifting to BPU services are “processes where you can easily see the beginning and ends of the process, those that are fairly independent from other departments in the buyer organization — processes that can stand on their own. Once a process starts linking to multiple processes, multiple systems, or cutting across departments, it’s difficult to standardize it onto one platform,” says Scholl.
A good example is e-learning. Companies have seldom invested in that because it wasn’t their core business. “They are very willing to do a BPU model,” says Scholl. Providers standardize how the services are delivered and clients plug the almost module-like services into their performance development system or training system.
Jim Stikeleather, Chief Technology Officer at Dell Perot Systems, says over the next five years he expects “to see outsourcing evolving almost to a telecommunications model” because of utility models and cloud-based services. Just as in telecommunication services, one just chooses a set of features and functionalities; it’s invisible and immaterial to the customer how the supplier provides the services. He believes the business process utilities will be more attractive initially to small and midsized businesses and that this will cause competitive pressures for large enterprises, which will then start to turn to BPUs in five or more years.
The impact of the BPUs on outsourcing will have a dramatic effect on the provider landscape. Stikeleather points out that “the model will allow big, monolithic companies to offer capabilities and services to small and midsized businesses, which they have not financially been able to do in the past. In a BPU, it doesn’t matter to the provider’s bottom line whether it delivers services to a company with five employees or 50,000 employees.” Also as a result of the growth of BPU services, the industry will see more consolidation of the provider supply chain into single companies.
Factors buyers need to consider when moving to vertical or BPU solutions
The most important service provider selection criteria for a vertical or utility model solutions is the provider’s level of domain knowledge in the buyer’s industry. Does it have the expertise to support vertically-oriented functions? This is a more serious consideration that it may appear at first because vertical functions and applications are business critical and time sensitive.
Pery at Kofax cites a healthcare example. Does the provider have the skill sets and knowledge for processing financial transactions among providers and payers? Does it have the requisite knowledge, processes, and technologies to keep the buyer’s data secure as it flows through various systems? Does the healthcare vertical provider have specific expertise in content management applications that can house tens of millions of images and documents and manage them for compliance, risk, and audit trails?
Another consideration in choosing a vertical or utility solution provider is the pricing structure. Does the unit basis for the provider’s services give the buyer flexibility for changing needs?
Also of prime importance is the provider’s commitment to required customer service levels. After all, verticalized and utility services include core functions that will impact the buyer’s client relationships and customer service levels.
Scholl states that, although “a BPU is a much simpler buy and a shorter decision process,” there is a key consideration added to the buying decisions. “Buyers need to understand their situations in terms of keeping access to the platform if they decide to switch providers,” she warns. “What are the options? Buyers need to make sure of their exit strategy in case the utility platform ends up not being the right solution for them.”
Stikeleather also alerts buyers to another important consideration in selecting a service provider in a utility-based model. “Utility computing includes the concept of unified communications. A provider can have the most secure server or data center in the world. But if it can’t, for instance, deliver information onto the new Android phones and maintain security and information integrity and meet SLAs all the way out to that point, it really isn’t a utility service,” he explains. Exceptions will change the cost and benefits picture. Buyers need to ensure they select a provider with a proven track record in integrating with emerging technologies.
Lessons from the Outsourcing Journal:
- The growth of vertical solutions, which will also increase adoption of business process utility (BPU) services in outsourcing, will be a major change over the next five years. Buyers will reap the benefits, including transparent pricing, highly standardized processes that allow best practices, lower costs, and the ability to plug in and out to the service providers that have the best quality and value-add, not just the best price.
- BPUs will replace a lot of traditional BPO over the next 12-18 months. The differentiation: A BPU is a standardized platform for buying business processes, as opposed to highly customized processes used in the BPO industry.
- The impact of the BPUs on outsourcing will be dramatic in that it will allow big, monolithic companies to offer capabilities and services to small and midsized businesses, which they have not financially been able to do in the past.
- Of prime importance in service provider selection criteria in vertical or utility model services is the provider’s commitment to required customer service levels. Solutions in these models include core functions that will impact the buyer’s client relationships and customer service levels.