By Bill Huber

What’s ahead for the BPO space in 2012? Based on insights from executive discussions and lessons learned from client engagements during the past 18 months or so, we at ISG anticipate expansion in terms of activity and agendas, coupled with an increasing focus on competitive positioning and attention to operational detail.

BPO Agendas Broaden
Increasingly, companies are pursuing broader BPO agendas. A few years ago, client organizations tended to look at single functional areas or discrete towers. Today, a maturing environment and increasing C-level interest in the potential of BPO have resulted in companies looking at restructuring broad swaths of the organization. Cost savings remains a goal, but executives are becoming more ambitious about using BPO to free up capacity and make better use of limited internal resources and capture business knowledge. The goal is to tend the garden more intelligently, to leverage standardization and address unique growth challenges. Specifically, clients see BPO as a way to free up capacity and resources to invest in their own talent and make better use of limited resources.

However, larger ambitions and broader project scopes increase risk – if the project goes awry, the stakes are higher. This means that a well thought-through strategy, with effective risk and change management and a Project Management Office (PMO) function, is increasingly imperative, as are senior-level commitment and focus, and expert guidance.  Given the scope and pace of change involved when these projects ramp up, you need these elements in place to avoid derailment.

Industry Readiness Varies
How prepared are companies to take on these projects and manage these risks? From what we’ve seen, organizations are all over the map when it comes to readiness. Some get it, and are willing to invest and prepare. Others haven’t learned the lessons of the past few years and are still trying to do it on the cheap. More often than not, shortcuts lead to predictable issues, with companies realizing too late that experience and attention to detail are as important to success as is the right strategy.

This “big picture” approach to BPO, meanwhile, is accompanied by an increasing focus on granularity and performance. As businesses face continued pressure to “do more with less” and improve cost structure, they need to ensure that BPO initiatives take advantage of every opportunity to leverage efficiency gains. Put simply, they can’t afford to be spending more than the competition.

Service providers are accommodating this demand by eschewing price-based differentiation for vertical- and process-based specialization. While relying on labor arbitrage and process discipline for entry level table stakes, vendors are applying differentiation strategies tied to specific business issues to deliver value and generate corresponding profits.

Platform Enablement Boosts Vendor Value
One approach vendors are taking is platform enablement – using technology and automation of processes to make themselves more profitable and valuable to customers. Examples are “Cloud-enabled” or “Platform” BPO.  The winners in this space will be those who can take a one-to-many approach and take advantage of economies of scale.

Service Providers Swim Upstream
Another approach for service providers is to move upstream by focusing on specific capabilities or verticals. Traditionally, outside of financial services and pharmaceuticals, BPO vendors have tended to be horizontal. That is changing, as service providers are leveraging specialized capabilities to more deeply penetrate key industries and drive top-line value creation.

For example, providers with expertise in data analytics have augmented their penetration of the  pharmeceutical industry through applying expertise gained through pharmacovigilence processing to develop analytical tools that identify upstream and downstream opportunities to improve quality and speed and more proactively identify potential risk areas. Improved information management provides a range of benefits, including value realization, increased intellectual property asset management, protection and utilization, and earlier development of marketing strategies for new drugs.

Experience gained through these activities better equips service providers to create industry-specific marketing materials, develop efficient fulfillment approaches for product information literature, coordinate sample management, reduce the cost of sales, and so on.  Other examples of emerging areas include analyzing data or managing web content for retail companies to improve their ecommerce effectiveness, or providing ongoing warehousing and logistics analysis to improve the efficiencies of outbound supply chains.

Procurement Growth Looks Promising
Procurement BPO is one area that is poised for particular growth.  This area has taken off since the mid-2000s, largely as a result of the significant cost savings that are being achieved.  A company typically spends 25 to 75% on external services; if you can impact that even by a few percentage points it’s a significant impact on the bottom line. Also, from an “optics” standpoint, procurement is a winner as it has a lower impact on jobs.

Overall, we anticipate increased BPO activity in 2012, as businesses recover from their “deer in the headlights” reaction to the 2008 recession. We believe that this will be partly fueled by greater regulatory stability which should alleviate some nervousness that has persisted over the past couple of years. Today, while the economic risks remain, companies recognize they can’t simply wait and so are moving forward.

Bill Huber is a Partner with ISG, a global research, consulting, and advisory services organization.

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• 2012 – A Year of BPO Evolution
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• Lee’s Notes