Verticalization: Going beyond Organization Structure

Ajay Gupta – Principal, A.T. Kearney

2

Large contribution of horizontal services in the rapid industry growth has driven current business model

Export revenue split of Indian BPOs (USD billion)

2.0

1.8

2008

9.9

0.4

2.1

4.3

1.7

1.4CustomerInteractionServices

6.7

Others (HR, PO etc.)

Finance andAccounting 

KnowledgeServices

Core Operationprocesses

2012E

15.9

0.6

3.6

2.8

2.2

2010

12.4

0.5

2.7

5.4

Relatively Industry Specific

Relatively Industry Agnostic

Organizational focus on horizontal services

traditionally led to

• Inability to infuse industry specific thinking

• Limited impact on business outcomes

• Inefficient decision-making when dealing with diverse client stakeholders

3

Vertical specific process are witnessing higher adoption, as “Proof of Concept” has been established

Outbound sales

Campaign Management

QRCBilling, Credit & Collection, Activation /

Provisioning

Customer data management

Payroll

Procurement, Logistics

Training & hiring

F&A

Pensions, Financial reporting, etc.

Market research

Marketing & Product Development

Sales

Customer Mgmt.

Support & Overhead Emerging Areas

Lead generation, analytics

Product lifecycle management

Pricing analytics and product design

Ho

rizo

nta

lV

erti

cal

High Adoption Level of outsourcing

LowAdoption

Case example – BPO activities in Telecom

More than one-third of the future market opportunity in Telecom will be dominated by industry specific requirements

4

Indian BPOs Today

With the maturity of market, Indian BPO are progressing towards becoming transformation partners

Time

Str

ateg

icTa

ctic

alL

evel

of

Cli

ent

Nee

d

• Service offering for back-end operations

• Competitive pricing

• Vertical expertise in focus areas

• Customized solutions

• Outcome-based• Process

transformation• Integrate technology

with BPO offeringsImp

lica

tio

ns

for

BP

Os

Cli

ent

Nee

d

Industry knowledge is key for BPOs to drive transformation for their clients

• Reduce cost of operations

• Outsource non-core functions

• Value added services• Need for client

specific solutions

• Strategic partnership• Innovative solutions

Transactional Scope Transformation PartnerCore Functions Support

5

Enablers

Company Strategy

Service Offering

Organizational Capability

KPIs and Governance

Organizational Structure

BPOs have started verticalization to develop industry relevant value propositions

• Alignment with future customer needs• Articulation of horizontal and vertical strategy• Leadership development

• Defining market and services based on strategy

• Platform development

• Depth of verticalization in Sales, Solutioning, Delivery and Support

• Reporting relationships

• KPIs to enable change – defining accountabilities and control

• Managing behavioral change• Alignment of hiring, training with Strategy and Org. Structure• Talent management

• Skill sets, knowledge and competencies development

Verticalization by BPOs is defined as alignment of their strategy, offering and operating model to meet the needs of specific industry verticals

6

CompanyStrategy

However, the approach to verticalization has been piece-meal

Enablers

CompanyStrategy

Service Offering

Organizational Capability

KPIs and Governance

OrganizationalStructure

State of Verticalization – Indian BPO players

Horizontally aligned model Vertically aligned model

Enablers

Service Offering

Organizational Capability

KPIs and Governance

OrganizationalStructure

7

Indian BPOs need to take a comprehensive view to re-align the overall business model

Enablers

Service Offering

Organizational Capability

KPIs and Governance

OrganizationalStructure

CompanyStrategy

• Shift towards developing vertical specific capabilities

• Most BPOs have verticalized the only the sales function

Vertically aligned model

• KPIs and Governance have kept pace with organization structure

• Largely aligned to evolution in organization structure

• Only some players have vertical specific goals and investment targets

• Few are able to offer end-to-end industry solutions

8

Verticalization efforts of Indian BPOs so far have largely been limited to Organization Structure

VerticalsV1 V2 V3

Sales

Solution

Delivery

SupportOrg

aniz

atio

n

10-15%

Verticals

V1 V2 V3Sales

Solution

Delivery

SupportOrg

aniz

atio

n

~15%

Verticals

V1 V2 V3Sales

Solution

Delivery

SupportOrg

aniz

atio

n

50-60%

Verticals

V1 V2 V3Sales

Solution

Delivery

SupportOrg

aniz

atio

n

10-15%

The depth of verticalization varies across BPOs; verticalization of Sales is a more secular trend now

Fully Horizontal Model

Fully Vertical Model

9

Industry is at cross roads and BPOs need to make definitive strategic choices

Status Quo - Diffused vertical & horizontal offering

• 2-5% erosion in rates; reduced volume growth

• More easily replicable business model; greater competition

Imperatives and Implications

Develop Vertical Capability based Differentiation

• 5-8% higher top-line growth compared to market

Become a Horizontal Specialist

• Non-linear revenues• Need for scale and

efficiency

Strategic options

The industry is at a cross-road - Clear selection, articulation and implementation of a strategic path is necessary

10

Horizontal players will need to differentiate based on service capabilities while balancing any vertical needs

• Differentiated capabilities based on tools, platforms, processes

• End-to-end horizontal capabilities

• Leverage learning from other industries to create customer value

• Vertical front-end to enable translation of client needs

• Embed vertical focus in solution design

• Develop strategy to address process-scope beyond horizontal

Develop vertical focused sales and solution-

design

Createincubation centers

for sub-scaleprocesses

Drive value through cross-

Industry learnings

Develop deep horizontal

capabilities and platforms

Key Action Themes

Action themes

11

Develop industry specific capabilities and

platforms

To evolve to a sustainable verticalized structure, BPOs need to develop capabilities to deliver increased valueAction themes for Vertical Play

Virtuous circle of Successful Verticalization

Create value for customers

through industry insights

Create/ Enhance verticalized

operating model and enablers

Strategic alignment

toward higher verticalization

Align entire organization to

higher verticalization

Increasing Customer demand

by delivering higher value

BPOs will need to continuously innovate as increasing competition will negate differentiation even in vertical offerings