The recession has upped the ante for today's BPO providers: the move to providing business services in a cloud-like model is accelerating, and the real challenge for today's service providers lies in answering the following questions:
1) Do we want to play in the BPO space?
2) How do we play in this market? What's our angle?
3) How can we compete? What's our differentiation?
The challenge today is whether a provider is adding value beyond low-cost processing services. If you are only really providing an arbitrage solution, someone is going to come along and offer it for even less money, and someone else will eventually come along and provide it for even less. It's a no-win game, unless you want to become the lowest-cost provider in town and make a razor-thin profit margin.
What's interesting is this coming together of the IT/BPO model. And it's becoming much more sophisticated then simply providing a platform and some low-cost processing services. It's about integrated business services where the provider delivers the hosting, the application skills and the business services needed to help clients achieve specific business outcomes.
IT services providers have made a living differentiating themselves by providing expertise in technical areas that allowed them to charge a premium to their clients. However, as technical skills became a commodity, some IT services providers are moving up the value-chain by providing expertise that apply technical skills to specific business needs, while others have opted to scrap around for the low-cost "price per developer per hour" commodity business. Those IT services providers which think they can get away with charging a premium for commodity development services are having a rude awakening in today's post-recessionary marketplace. Most clients today are insisting on greater transparency with the costs of services.
This is where BPO gets interesting, as the similarities are striking as services commoditize, and the winners focus on providing value. Let's take an example in life sciences: an IT services provider is performing technical clinical data management services for a phama client. This entails providing programmers skilled in integrating Oracle's clinical data repository into the pharma's legacy applications. That pharma has five other IT services shops working on its systems, all of which can provide the same skillset to performthe same work. It's become a price-play. At the same time, the pharma is spending millions a year on analysts to extract that data and apply it to research projects for new drug development. If that IT services provider delivering the clinical data development work can step up and also provide analytical services to help interpret and apply that information to the pharma's research operations, new business value is now being created (not to mention the huge cost-savings if these services are delivered offshore).
However, this isn't about providing cheap bodies to crunch data, it's about having systems analysts working in tandem with bio-informatics analysts to ensure the right data is being made available and subsequently analyzed for the pharma's scientists to make critical judgment calls. The differentiation is in providing the integration of technical capability, business process execution and then applying it to the client's business. Moreover, if the provider has performance-based incentives to help its client develop new drugs and achieve medical breakthroughs, it is becoming intrinsically tied to the success of its business. This scenario is similar in other industries, for example merchandizing support for retailers, or supply chain optimization for manufacturers. This is where the whole IT services/BPO industry needs to go.
In Part II of this article, we will discuss how BPO providers can differentiate themselves by developing / acquiring IP to deliver holistic business services that integrate the application hosting, development and business processing within a single cloud-delivery model and then apply it to client situations. And is there really a role for the pure-play BPOs, or is the power shifting to the IT services shops developing domain-specific industry BPO expertise?