While the Business Process Outsourcing (BPO) marketplace continues to grow and innovate, the vast majority of BPO-client relationships can still be characterized as labor arbitrage. For example, a typical executive might describe their use of BPO services thusly: “we used to handle these transactions in-house, but we have outsourced them to a third party (in India, Malaysia, Argentina) which not only does the same work for less, but also manages the seasonal spikes better than we could do on our own”. Got it, you outsourced jobs to a call center in Asia and the business saved money. This business model has been commoditized, and in the M&A context, the valuation of these companies has dropped precipitously.
Labor arbitrage has matured to the point that many providers of BPO services have begun to lose interest, and have taken to shuttering or selling off low-margin contact centers. The margins of running such an operation in Asia are not what they used to be. India became so effective at creating and operating call centers that it has begun to exhaust a once-inexhaustable resource: low cost, english-speaking labor with enough education to be effectively trained in BPO. As a result, turnover has increased dramatically, labor costs have risen, and BPO providers have had to either move to lower-cost labor markets or innovate higher-value services.
This month, Phil Fersht from HfS Research published a new paper titled “BPO on the Brink of a New Generation”, in which he and his co-author discuss the impact that technology is having on BPO, and why it is critical for BPO services firms to take notice. In the article, HfS describes a small group of forward-thinking firms that have innovated the next generation of services with technology-enabled BPO. These organizations are employing data mining and analytics to provide both descriptive and predictive insights that can impact business outcomes.
I concur with the findings of HfS, that the future of BPO is in value-creation and decision-support. The days of wringing cost out of the customer service operation are over and done with. If BPO providers want to drive “exit” value for their business, they need to drive ROI for their customers and attain operating margins of 20% or more. That means investing in technology and professional management that can increase the value proposition of the services these firms provide.