Posted in Operations & IT Articles, Total Reads: 2812
, Published on 02 October 2012
As the IT industry is evolving and trying to grow in uncertain business environment, the market is looking for winning strategies, business models for the new phase, new competitive spaces and differentiators. Platform BPO is the logical next step in evolution of outsourcing. The idea is quite appealing – create a layer or “platform” of technology solution, incorporating the best practices and relevant domain knowledge, which supports the BPO delivery; with the client being concerned only with the service levels, and the vendor taking care of all technology investments & upgrades, process benchmarking, best practices, etc.
This is also one of the ways of achieving non-linear growth for IT companies i.e. business model where revenue growth is faster than the workforce. The only thing that can make it possible is “Re-usability of applications” and using “Shared services” which can be achieved by “Platform BPO” or “Technology cloud”. This can greatly improve the efficiencies and provides great value.
What is Platform BPO?
Platform-based services can be defined as “Hosted technology services delivered on a pay-as-you-use model.” When hosted technology services are offered on a managed services model, they are referred to as Business Process as a Service (BPaaS) or Platform BPO. Platform BPO is basically a new business model in which the company uses Platform-based system as a service without actually owning it. This may be an ERP system such as SAP or Oracle. Not only the Technology but the service delivery too is managed by the vendor. The company will get entire benefits of a full-fledged ERP system without actually buying the license. The company simply has to pay for the implementation and maintenance according to the use.
In Platform BPO, applications, infrastructure and BPO services are bundled into a single service framework where the vendor takes complete ownership of customer’s non-core but critical activities, thus enabling them to focus on core and strategic functions. Platform BPO, a bundling of technology, consulting and BPO, helps synergistic value creation and delivers transformational value using strategies such as global sourcing, technology innovation, process optimization, scale and centralization. It is about providing ‘Business Processing’ services using a domain rich vertical or horizontal application (platform). Good examples for Horizontal application would be F&A, Human Resource Outsourcing, and Procurement etc. There are innumerable vertical platforms. Some examples are Mortgage Processing, Collection Management, Insurance Benefits Administration, Policy Administration, and Claims Processing.
The Evolution of Platform BPO
Platform-based BPO is the new buzzword in the industry with most big players betting heavily on this segment. Though the concept of platform BPO has been around for some time, it is only now that they are picking up. Platform BPO marks a paradigm shift in the way outsourced business processes get delivered. It has evolved gradually over the years from Pure BPO.
Image source : http://www.sourcingnotes.com/
Why Platform BPO
Platform BPO is best suited for Small and Medium Businesses (SMBs). These are companies which are showing growth but typically don’t have the resources to adopt a full-fledged ERP system. Even though they may afford to use ERP, there businesses are small and hence the capacity of ERP is under-utilized. Hence they can adopt the Platform Based ERP system such as SAP Platform which is owned by a third party vendor. Once the implementation is done, the company can use the ERP system on pay-per-use basis. Typically the company can make a implementation contract along with the Service delivery contract for a fixed period e.g. 5 or 10 years.
The vendor analyses the business process of the client and implements the ERP system. The vendor basically customizes the standard processes according to the requirements. Even though there is more than one client using the same ERP hosted by the vendor, the client data is strictly confidential from the other tenants in the platform. Only the client specific data is provided according to which client is using the ERP. So, for e.g. if 3 companies A, B, and C are using the same platform based SAP system owned by vendor V, the companies will A B and C's data will not interfere with one another.
Advantages of Platform BPO
The advantages for the Client are:
The cost of the company to manage the process is greatly reduced since the process is completely managed by the vendor.
Manpower of the company to manage the IT processes is greatly reduced as the vendor takes complete ownership of the Service Delivery process. Companies want Vendors to replace the back office systems.
The process is transformed and the company can have the state-of-art Systems.
The software license and software updates are managed by the vendor. Hence the company can run the process on the latest version of the underlying software.
There is a single point of contact as the entire process is managed by a single vendor. Hence any issues with respect to IT, Infrastructure as well as the Service Delivery can be addressed by a single vendor.
The total cost of ownership is reduced. The Capital Expenditure is converted to operating expenditure. The company which uses the Technology based Platform BPO does not have to bear any cost related to purchase of ERP system or software. The company just has to pay a monthly or yearly charge to the vendor for using the platform.
The pricing of using the technology platform is designed in such a way that the company pays more whenever the business cycle of the company is strong and the company has to pay less when there is a downtrend. It is quite rightly described as the “outcome-based business model.” This means the payments made toward services rendered are directly in correlation to the ultimate set of benefits derived by a client from the services being rendered, rather than being based on the number of employees engaged for delivering the services and the physical hours spent on delivering them.
The implementation time is greatly reduced and the transformation of the business can happen faster.
Since the concept of platform BPO is based on the concept of reusability, the company can implement the best-in-class processes as per the suggestion of the vendor. The vendor typically has some existing clients on the platform and hence the vendor can implement the best business processes.
The advantages for the Platform BPO Provider (Vendor):
The implementation cost is reduced since the entire ERP system is already in place for the existing clients and the vendor just has to add one tenant in the platform.
The resources including Infrastructure such as servers are shared across the clients.
The vendor becomes aware of the best in class processes by working with multiple clients and understanding there business processes.
Standardized processes which are provided by the ERP system such as SAP can be used. Only the configurations specific to the client can be made according to the client requirements.
The platform approach gives a revenue base that is non-linear. The revenue grows faster than the growth in the number of employees. Hence platform BPO is often called as the nonlinear growth initiative.
Along with the implementation charge, the vendor gets a monthly or yearly payment for managing the business process of the clients. Hence the IT company is assured of a Service delivery revenue for a period till expiry of the contract. Thus the typical implementation contract is converted into implementation as well as Service Delivery, Infrastructure and support contract.
Even though platform BPO has lot of advantages there are some issues with platform based offerings.
A ‘Platform Based BPO’ Strategy needs very high level of commitment, investment and effort. Typical gestation periods are anywhere between 12 to 18 months. Often due to this, many BPO companies are shying away for launching themselves into the platform arena.
Also, a platform strategy is inherently risky. The barrier to entry is very high due to huge upfront cost.
Some clients are not ready to use Platform BPO as they think that it is risky for them to hand over their entire business process to a third party company as there may be data security issues. Certain strategic processes cannot be outsourced on a platform as they are very confidential.
Who are in the game?
1. Pure Play BPO Providers :(E.g. Genpact, WNS) These companies have a strong capability for Service delivery operations but they do not have the experience to implement and transform the business process to the technology platform.
2. IT Services Companies (. E.g. Infosys, TCS, Wipro) They have a strong implementation capability. Many IT companies also have BPO division and hence they are best suited to adopt Platform BPO. The thing they may lag is the domain expertise. E.g. certain project may require the experts in US Payroll process which the IT Company may not have.
3. Product (Application) Vendors: (E.g. Ariba) They already have the product ready but they cannot make so much customizations that the vendors are looking at.
Thus, the boundaries of pure play BPO providers and IT Services companies have been shaken in the last few years and are virtually non-existent
The above 3 players can be compared against 4 key capability model.
1. Process – This is ‘Operating the Business’ capability. This is the strong hold of the Pure Play vendors.
2. Domain – This is the in-depth knowledge on the domain. There are two parts to this. Domain expertise required to operate the business. This is possessed by the pure play BPO Providers. Domain expertise required to configure the business application aka Functional Expertise. This is possessed by the IT Services companies.
3. Implementation – This is the technical expertise to implement a business solution like Oracle Financials or SAP FICO module. IT Services companies are good at this.
4. Business Model – While ‘Product Vendors’ are good at Implementation and Functional Expertise they lack the business model to do service.
Future of Platform BPO
Gartner has predicted a double digit growth in Platform BPO Market in the next five years.
Source: Gartner Forecast Overview: Public Cloud Services, Worldwide, 2011-2016, 2Q1
(Note - BPaaS : Business Process as a service, SaaS : Software as a service, PaaS: Platform as a Service, IaaS : Infrastructure as a Service )
Will these platform based offerings succeed? Will they stand the test of time? Will they result in increased customer satisfaction? Only time will tell. But, one thing is certain - the Indian technology outsourcing space is breaking new ground - and it has just gotten a lot more interesting with the rise of Platform BPO.
This article has been authored by Omkar Kelkar from Prin L.N. Welingkar Institute of Management, Mumbai.