BPO Validated: Verticalization and Aggregation Accelerate (Executive Summary) Executive Summary

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1 BPO Validated: Verticalization and Aggregation Accelerate (Executive Summary) Executive Summary Publication Date: 7 February 2003

2 Author Rebecca Scholl This document has been published to the following Marketplace codes: ITSV-WW-EX-0283 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 BPO Validated: Verticalization and Aggregation Accelerate (Executive Summary) Introduction Business process outsourcing (BPO) was validated by developments in Despite the difficult economic environment, a significant number of large contracts were signed and executive-level interest in BPO rose dramatically. Many CEOs and CFOs who had been outsourcing certain functions in a piecemeal way began taking a holistic view of the benefits of outsourcing. Furthermore, they began taking steps to adapt their organizations to the virtual enterprise, creating a stronger focus on core business and a network of specialized relationships for non-core, yet strategic functions. Others continue to turn to outsourcing for transactional reasons, hoping to improve operational performance while reducing costs at the same time. Study Objectives The increase in awareness and adoption of BPO should not overshadow the fact that BPO services are still immature and that in many instances, early adopters of BPO are still seeking to understand their cost and business benefits. Though business process services have been delivered since the 1960s, BPO has emerged as a market only in the past decade. Even today, the BPO market still shows dynamic characteristics of an "emerging" market. During the transition phase toward higher maturity in BPO, there is still significant confusion about what exactly BPO is, how much process responsibility enterprises should delegate to service providers and how the services are delivered. Points of confusion include the following: Confusiononthebuyerside Thebusinessdecision-makerswhoarebuying BPO services (CFOs, COOs, CEOs, purchasing managers and VPs of HR) frequently fail to learn from years of experience in IT outsourcing and are making similar mistakes in the basics of outsourcing. They are carving out the wrong processes for outsourcing, selecting providers hastily, ignoring SLAs altogether or setting inflexible service levels. Confusionontheproviderside Anumberofserviceprovidershave jumped on the BPO bandwagon, attracted by high-growth rates and highprofile contracts, but each provider brings a different set of skills and capabilities to the table. Many companies want to be in the BPO market without having any business process capabilities at all. With such a fragmented competitive landscape, providers are trying hard to establish a brand presence and a competitive differentiator. Some of the legacy players in BPO are now branding their services differently to stay ahead of the pack. This report examines the North American BPO services market from the vendors' perspective, focusing on marketing, selling, pricing, contracting and delivery strategies for BPO providers. The specific objectives of this provider study are as follows: Analyze high-level current and future market trends in adoption of BPO worldwide Define the current BPO competitive landscape by process and list the most significant providers for each category Analyze current and future sales and marketing strategies for BPO providers Evaluate current and future contracting and pricing strategies for BPO Analyze current and future BPO delivery models with regards to technology, people and offshore sourcing 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

4 2 BPO Validated: Verticalization and Aggregation Accelerate (Executive Summary) Methodology From July to September 2002, Gartner conducted an online survey with BPO providers that resulted in 43 completed responses. The objective of the survey wastoassessthematurityofthebposerviceproviderlandscapeacrossa broad range of processes and target segments. After the online survey was completed, Gartner conducted 29 qualitative phone follow-up interviews. The BPO providers participating in the survey are listed below: Accenture ACS ADP Amdocs BearingPoint CenterBeam CGE&Y CGI Group Convergys Creditek CSC Deloitte Consulting Deloitte & Touche EDS eplus Equitant EXL Exult FacilityPro Fidelity FlexiInternational Software Franklin Covey GenesysSoftwareSystems HCL Technologies Hewitt HP ICG Commerce ICT Group Infosys Technologies Intelligroup Mellon HR MsourcE OPI 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 February 2003

5 BPO Validated: Verticalization and Aggregation Accelerate (Executive Summary) 3 Seurat Spherion Sykes Enterprises Talx TCS TriNet The TriZetto Group Unisys Wipro Xansa Xchanging Key Findings and Highlights Following are some of the key findings from this report: The provider BPO pipeline is growing, but contract signings are not always realized. Most providers interviewed in 2002 claim that their pipeline of BPO business is larger than ever before. But there is definitely a big gap between the level of interest in discussing outsourcing opportunities and the realization of these opportunities. Many providers interviewed in this year's survey claim that only a small percentage of the leads they receive are actually qualified and will lead to a real contract. However, service providers have high growth expectations for their BPO service lines and were optimistic on their results for More than 50 percent of our sample indicated they expected revenue growth to be more than 15 percent in 2002 compared with The primary focus of BPO activity in 2002 has been in the area of HR. Both Gartner Dataquest's user research and contract signatures in the market at large underscore this trend. Demand for aggregated HR outsourcing services is becoming more mainstream the aggregation of multiple HR processes into one outsourcing contract (for instance payroll, benefits and HR records management). Demand for finance and accounting outsourcing is not as high as demand for HR outsourcing, judging on user research conducted in the fall of 2001 and spring of 2002, as well as by the level of inquiries Gartner Dataquest receives from end-user clients. Most of the finance and accounting demand remains fragmented, focused on the transactional components of accounting accounts receivable and accounts payable. The 2002 survey indicates a much more diversified spectrum of BPO target markets than in Whereas BPO providers were almost unanimously targeting Global 500 companies in the financial services sector in 2001, they are expanding their array of opportunities in This probably also indicates demand is emanating from new buying centers. Financial services and large corporations are often among the first to try out new business models. Now other vertical markets are formalizing their adoption of BPO and a number of providers are adapting to the "verticalization" of BPO demand. However, vendors must be cautious in targeting new opportunities and not target every BPO opportunity that comes along. Verticalizing BPO solutions requires focus and investment. BPO providers continue to primarily target large corporations but the focus on midmarket companies is increasing. In 2002, 64 percent of survey respondents' BPO revenue came from large clients (more than $500 million in revenue) compared with 75 percent in the 2001 survey. Another 36 percent of the 2002 sample targeted companies with less than $500 million in revenue, compared with 25 percent in the 2001 sample Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 February 2003

6 4 BPO Validated: Verticalization and Aggregation Accelerate (Executive Summary) Recommendations BPO adoption is occurring on a global basis. Demand emanating from Europe and Asia/Pacific remains fragmented and requires a strong local presence, but these regions are accelerating their adoption of BPO. The United Kingdom has been one of the leading countries in taking up BPO, even compared with the United States or any other country, but the adoption of BPO in continental Europe is still limited by several cultural and legislative factors. Demand in Asia/Pacific remains concentrated in a small number of countries (Australia, New Zealand, Singapore and Malaysia), but early signs indicate that 2003 might be the true kick-off year for BPO in Asia/ Pacific. Gartner developed the following recommendations for BPO providers: Select targeted opportunities. Do not try to be all things to all people in BPO, which is impossible even for the largest BPO vendors. This means selecting the appropriate process mix, scope of services, countries and industries to target for BPO. Opportunism may lead to client disillusionment and unprofitable engagements. Modularize your offerings. Megadeals will always get a lot of press, but they will remain the exception, not the rule. Vendors that are successful will have a set of modular offerings that can be packaged into a full, multiprocess BPO offering or be offered in a la carte fashion (single process, service bureau), depending on the needs of the customers. Cultivate BPO vendors as your newest, best customers. Some IT services vendors have smartly realized that their fortunes and core competencies lie outside the domain of BPO. These vendors have realized they have a critical and sometimes symbiotic role to play with BPO providers, and that direct contact with end-user customers is not always necessary or desirable. Go vertical in a focused manner. As several horizontal BPO offerings become more mature, particularly in the business administration space, services providers should consider expanding deeper into a carefully selected number of vertical-specific BPO services, especially in industries that already have extensive experience with BPO. Standardize for profitability. Developing repeatable solutions is one of the key success factors for all IT services vendors, but standardization is often difficult as it relates to business processes instead of pure technology. It will be imperative for BPO vendors to find ways of streamlining and standardizing components of their service delivery, thus driving higher levels of profitability. For the full report, see the Gartner Dataquest Market Trends, "BPO Validated: Verticalization and Aggregation Accelerate" (ITOU-WW-MT-0107) Gartner, Inc. and/or its Affiliates. All Rights Reserved. 7 February 2003