Vertical-specific BPO services present a larger and more diverse market opportunity as compared to horizontal BPO services. The US Healthcare Reform bill has been the biggest newsmaker in this regard, with many already terming it the “biggest bonanza yet” for the industry. Service providers with expertise in the healthcare area, both from industry leaders like India, Philippines and nearshore locations like Canada, Mexico are queuing up to grab a share of the approximately $2.5 trillion US healthcare pie.
 
Experts say that opportunities will be widespread in those industry domains where BPO and IT services can be bundled together under a single vendor's provision. This will help to generate more efficient business outcomes and to secure future IT work with existing clients. So the providers who can bring in industry domain expertise are set to emerge as significant players in the coming year.

A trend which is indicative of this growth potential is that newer vendor entrants are entering the BPO industry through the industry-specific (vertical) process domains. Most of the strong IT services vendors have also been developing BPO niches in specific verticals where they have developed some strong process acumen and client credibility.

According to a survey by Horses for Sources, one-in-ten financial services firms, and one-in-five from life sciences, are looking to move into some form of domain-specific BPO this year for the first time. These are typically areas where there is some immediate labor arbitrage opportunity, like trade settlement transactions and mortgage processing in financial services, and data storage and management processes in life sciences.

Reasons for Evolution of This Sector

At the outset, process outsourcing had been primarily a cost-control strategy driven mainly by labor arbitrage. Cost-control is still relevant. But in today’s environment, especially keeping the slow economic recovery in view, organizations are searching for value--for ways to do things better, faster, and cheaper--and for the ability to truly transform their businesses. To do that, they need BPO that is based on industry-specific knowledge and that is driven to achieve measurable business outcomes.

On the buyer side, several industries- financial services, life sciences, healthcare, retail, manufacturing, media, etc. - are undergoing fundamental changes, right from their infrastructure to business model to customer expectations. In such a situation, outsourcing processes is no longer seen as abhorrent or unusual.
 
Another reason is the success of existing domain-specific BPO engagements. Over half of all the financial services and life sciences firms recently surveyed by Horses for Sources are looking to expand existing BPO engagements this year, and very few intend to pull work back onshore. However, this doesn't necessarily entail massive increased spending overnight, but more a gradual incremental increase in engagement scope.

Suppliers also find the marketplace increasingly crowded, and industry-centric capabilities enable competitive differentiation. Moreover, the move to greater domain-specificity is intrinsically tied to the business utility model of the future, where there are signs of the convergence of SaaS, Cloud and BPO/ITO models within an engagement structure. The need for clients and vendors to define, develop and implement holistic end-to-end process solutions is slowly coming to the forefront.

All these reasons have led an increasing number of industry verticals to explore new and radical means to improve productivity, source new revenue opportunities and drive-out cost. Other benefits sought from providers include enhanced customer service, greater competitive agility, and measurable long-term business value, to name a few.

Vertical-specific Potential

Healthcare outsourcing– The Healthcare Reform bill has the outsourcing industry abuzz with anticipation. Many BPO firms, including several Indian ones, recently increased or are in the process of increasing their onshore presence in the US or seeking possible mergers and acquisitions with other companies so as to broaden their expertise and so gain more business from the on-the-brink-of-booming healthcare industry there.

But capturing the US healthcare market is easier said than done. So far only few IT and BPO firms have made a headway into the US healthcare provider and payer market despite the huge potential for automation and outsourced services in areas such as revenue cycle management and claims processing. Industry players and experts cite issues like lesser willingness to outsource as compared to the financial services players, regulatory and privacy concerns related to patient records, compliance to specific Acts such as HIPAA (Health Insurance Portability), knowledge of medical procedures and codes, and variations between states which make this market more challenging.

But with 32 million Americans slated to join the ranks of the newly-insured, many providers will soon be seeking assistance in the processing of not just the new enrollees, but their existing clients as well. Insurance providers who were previously hesitant about outsourcing services will also now be forced to rethink, especially as competition will be tougher than ever in their industry. Of course with that, competition to gain profit from healthcare services will be tougher in the outsourcing industry as well.

Financial sector outsourcing- The financial services sector has seldom faced a tougher set of business, market, and regulatory challenges. Many firms face threats from ongoing consolidations, more mature non-traditional competitors, and proliferating compliance demands. To meet these challenges, BPO is increasingly being seen as a logical and proven tool for banks, card issuers, mortgage, insurance and other financial services firms. Banks and other organizations are using BPO to manage risk, to reduce costs, and to comply with increasingly rigorous regulatory demands.

Mortgage Process outsourcing- The major challenge which service providers face while offering mortgage services is the integration of services like loan origination, vendor management, post-closing processing services, third party services until underwriting, modification services, technology services etc.

TCS (Tata Consultancy Services) shared with Global Services ('New Demands in Mortgage Processing BPO', September 28, 2009) that as mortgage rates dropped to under 5% early last year, re-finance activity increased creating a spike in demand for origination and loan closing related services. This demand cooled as rates edged up. For default related services including MODs and real estate owned (REO) there were early demand spikes as servicers began to deal with the mortgage crisis. An uncertain regulatory environment and political pressures for moratoria on foreclosures late in 2008 contributed to a slowing in default outsourcing. As moratoria expire and MOD programs become better defined, service providers are facing a need to rapidly add scale. Cycle time has shortened dramatically. For service providers this translates into a need for excellence in manpower management, recruiting, and training. An additional critical element is deep domain expertise – the ability to work with the client to optimize processes, find ways to automate more fully and expand the scope of potentially outsourced business processes.

Life sciences outsourcing- The industry-wide drive for pharmaceutical and biotechnology companies to lower costs, access specialized services and increase flexibility through outsourcing work to Contract Service Providers (CSPs) was highlighted by BioCrossroads’ latest report on Industry Developments in U.S. Biopharmaceutical Contract Services. The new report acknowledges that while 2009 was slow for many CSPs, the underlying reasons for pharmaceutical and biotechnology companies to outsource selected activities will continue for the foreseeable future. CSPs should continue to grow as the pharmaceutical industry moves towards a more flexible business model. Biomarker services and the need for larger clinical trials will provide opportunities for additional growth in future years.

Besides, with the consolidation of the pharmaceutical industry and the continued trend of strategic partnerships between CSPs and their clients, many companies in the sector will be drawn to find new revenue sources.

Besides India and Japan, China is emerging as a potential industry leader in this vertical. According to a 2008 report ‘The Changing Dynamics of Pharma Outsourcing in Asia: Are You Readjusting Your Sights?’ by PriceWaterhouseCoopers, big pharmaceutical companies rated China as the best location for outsourcing in Asia. The country’s large population represents enormous market potential for Western firms whose domestic profits are coming to a standstill. Pharma companies are also drawn by China’s low production costs. The Wall Street Journal estimates that the total cost of a scientist in China is $30,000, compared to $250,000 in the U.S. Worldwide pharmaceutical firms looking to expand sales into emerging markets are contributing resources to China.

Supply Management outsourcing- The market surpassed a billion dollars in expenditure for the first time last year, with a 30% hike in expenditure on new multi-scope BPO contracts, as reported by the AMR Research Supplier Management BPO services report of 2009. The main reason for this uptake is the increased availability of low-cost offshore services for procure-to-pay and strategic sourcing support, with 72 percent of services being delivered from India for largely North American and European organizations. But experts say that this market will not sustain its growth trajectory unless customers think beyond short-term labor arbitrage, and service providers introduce significant process and technology enhancements to the early adopters to help them optimize their delivery.

Publishing outsourcing- The pressures that publishers faced in the wake of economic recession stimulated the e-book market. In the US alone, trade wholesale electronic book sales amounted to $167 million according to the International Digital Publishing Forum (IDPF). The e-book segment is growing and has witnessed serious attempts by publishers to make it a strong revenue source.

Outsourcing is being looked upon, besides to tackle cost pressures, to deal with the challenges of adapting to new technology, lack of in-house capability and addressing new geographies.

According to a 2010 ValueNotes survey of publishing service buyers, India was followed by the US in popular publishing outsourcing destinations, while the Philippines was the second most preferred offshore destination after India. ValueNotes estimates the Indian publishing outsourcing industry to grow to a $1.2 billion annual market by 2012 from $660 million in 2008. This growth is expected to come from the rise in the number of publishing firms that will outsource their work.

Indian players are shifting focus from the matured academic segment to the more lucrative segments in the publishing market- educational, magazines, corporate, B2B, trade and e-books will be attractive segments over the next three-four years, and Indian service providers can extend their current capabilities to service these upcoming opportunities.

The industry still suffers from a serious piracy problem, caused largely by the high price of books, especially foreign books published under license, where currency exchange rates push up the prices. Besides, diversifying into new areas of business and providing value-addition within current offerings are areas where outsourcing is yet to be viewed as a complete solution, the ValueNotes survey revealed.

Media outsourcing- The global media and entertainment industry revenue is likely to increase by leaps and bounds due to the proliferation of content in multiple formats across media platforms. The media process outsourcing opportunity is huge since most of the existing contents worldwide are in the analogue form and need to be digitized for new platforms.

As advertising declines, the pace of onshore and offshore outsourcing in the media industry appears to be picking up. The Everest Group reported an increase in media-related outsourcing deals in the last year. Mergers among media companies are driving some of those deals, but most of the push to outsourcing is due to pressures in the ad market. Publishers see labor arbitrage and offshoring as one of the easiest things they can do to cut costs.
Many companies today understand the importance of maintaining a good profile on the internet. Hence, they seek social media services like SMO (SM optimization) for their websites from third party vendors to boost their online business marketing while they focus full time on their core business development.

Other Verticals

Industry specific variations of horizontals continue to remain unaddressed though a few areas such as Revenue Accounting (Travel) or Revenue Assurance (Telecom) are drawing interest. Travel (airlines) is a sector where industry specific services such as Pricing/Fare filing or Yield Management or Load Management have seen demand though "revenue accounting" has been leading in the sector.

Insurance is a sector which has been waiting for a good platform solution for a few years now.

Firms looking at supply chain functions, such as management of environmental compliance, distribution management, sourcing etc. are also choosing to outsource them.

Other emerging verticals include technology, telecom and transportation.

Opportunities and Risks 

The 2009 Everest report ‘Industry-Centric BPO Solutions- Opportunity to Attain Distinctive Market Positioning’ says that while “verticalization” of services implies numerous opportunities for value creation, there are also potential risks, and suppliers need to identify and adopt mitigation strategies for these risks.

Among opportunities, the report mentions that while the overall BPO market is highly competitive, the market by industry is concentrated. Also, the industry specificity of services sets the stage for the introduction of higher-value pricing models. On the other hand, strategic investments for capability building in vertical services will carry larger risks. 

Experts also warn that while industry-specificity will clearly be a major driver in outsourcing, the financial pressures on vendors to maintain their profit margins may override its development. The capability to deliver genuine domain-specific process acumen to clients is quickly becoming a major differentiator in the market. However, investing in the talent to truly scale these capabilities is expensive, and the margins aren't as appealing as those currently being displayed by several vendors delivering the easy, operational work. As a result, sector-specific skill shortages (specialized skill categories for vertical-specific processes such as actuaries for Insurance BPO) are likely to emerge, according to the Nasscom- Everest India BPO Study (2008).

While some vendors are clearly content with a thin veneer of vertical capability, others are picking verticals where they feel they can gain an edge over the competition.  But it's a gradual development, and experts say that it will take patience and attitude on the vendors’ side to invest in the depth of talent they need, and less concern about short-term profits and demands.