Arise, Verticals

Alrighty.. The "horizontal" BPO of outsourcing SG&A (sales, general, and administrative) functions such as HR, finance and accounting, call centers and procurement hasn't reached the take-off velocity many -- including yours truly -- had expected. What's up with that?

We recently reported on 2006's full-year contract award metrics. We counted more BPO contracts awarded than ever before. But 2006 was the second consecutive year of double-digit percentage decline in the total contract value of the BPO contracts awarded.

We're in the middle of a tremendous number of BPO evaluations, with clients of all sizes and industries. This visibility tells us that the core outsourcing business model isn't the issue affecting slow growth of BPO adoption. Rather, it's client concern over the service provider landscape.

With so many providers swimming in the outsourcing waters, some clients feel there is no critical mass or expertise. Even the largest and most successful BPO providers are struggling to deliver on the promise of standardized processes, world-class automation, seamless global delivery and end-to-end integration.

The net effect is that many clients chose to do BPO tactically. They contract for discrete processes rather than a broad scope of functions. And they get the benefits of BPO largely through labor arbitrage rather than through real transformation of the business functions.

Those dynamics aren't the sort of motivators to prompt service providers to continue to invest in their BPO offerings. What to do? Well, we're seeing a fair degree of bet-hedging, with providers electing to go down the path of "vertical industry BPO". A vertical BPO focuses on providing various functional services in a limited number of industry domains. Healthcare, financial services, manufacturing and retail are examples of vertical BPO domains. The providers focus on processes that are specific to those industries.

Will that confuse and diffuse the outsourcing market? Or is vertical BPO the answer to the needs of today's discriminating corporate buyer? We shall see.