Adventures in alliances land #14 – AI-Enhanced industry BPO

Strategic Alliances in Transformation: Why AI-Enhanced Industry BPO Will Drive the Next Decade of Growth

I recently participated in a workshop focused on future-proofing strategic alliances. In a room filled with seasoned professionals spanning consulting, outsourcing, systems integration (COS) and technology firms, we examined the top trends shaping strategic partnerships. The collective expertise offered rich insights into how alliances are evolving, particularly as they intersect with IT and business transformation.

Incidentally I've invented COS as new anagram for 'consulting, outsourcing and systems integration' companies because the more commonly used GSI for 'global system integrator' is not the most accurate label when some of the companies I'm referring to are neither global, nor systems integrators.

Drawing from my experience in cloud, consulting and IT outsourcing (ITO), I’ve noticed a significant shift. With the size of ITO contracts shrinking and IT budgets increasingly allocated to line-of-business units, ITO is progressively blending into business process outsourcing (BPO). This shift is not merely structural; it represents a deeper integration of IT services within business operations, making BPO a pivotal strategy for today’s alliances.

Two driving forces are contributing to this transformation. First, the proliferation of cloud marketplaces is altering the economics of technology provision and introducing new routes to market, which is reshaping the competitive landscape. Second, advancements in Generative AI are breaking the traditional cost-to-output paradigm, enabling efficiency gains across business processes. Insights from the book The Ecosystem Economy reinforce this trend, illustrating how sector boundaries are dissolving and how cloud-driven IT ecosystems are redefining traditional industry lines.

Back in the workshop, when it came time to share my predictions for the coming decade, I proposed that AI-Enhanced industry BPO would become the leading growth driver for strategic alliances. This concept sparked an intriguing debate, prompting me to delve deeper into data to refine and substantiate my viewpoint.

I look forward to sharing more insights on this exciting evolution of strategic alliances and welcome your perspectives. Do you agree that AI-Enhanced industry BPO will dominate as the fastest-growing pathway for partnerships among consultants, systems integrators, and technology firms over the next decade?

I’ve been doing, thinking and writing about strategic alliances for more than 20 years.? When something in the alliances space catches my attention that I can share, I will – so if ecosystems, partnerships and alliances are your gig and your passion too I hope you’ll find these scribblings useful.? If you enjoy this article please follow me, subscribe, like, comment and repost.? My book on strategic alliances is here if you’d like to read more adventures in alliances land; Strategic Alliances Fieldbook.

Prediction

Over the next decade, AI-Enhanced industry BPO (Business Process Outsourcing) will emerge as the fastest-growing area for strategic alliances among consultants, outsourcers, systems integrators, and technology companies.

1.Blurring Industry Boundaries The distinctions between industry sectors are increasingly fading, opening opportunities for companies to offer cross-sector BPO services—even in domains where they may not have traditionally operated.

2.Growth of cloud Marketplaces The proliferation of cloud marketplaces provides both risk reduction and substantial economic advantages, creating a more favourable environment for AI-Enhanced industry BPO offerings.

3.Generative AI Disrupts Cost-Output Dynamics Generative AI is transforming the traditional cost-output relationship in business processes, enabling unprecedented efficiencies and scalability in BPO services.

4.Alignment of IP and Business Models for AI-Enhanced BPO The intellectual property and business models of consultants, outsourcers and systems integrators are optimized for AI-driven BPO, positioning them well to lead in this space.

These factors collectively point toward AI-Enhanced industry BPO as a natural priority for strategic alliances, set to drive significant growth over the coming decade.

1 Blurring Industry Boundaries.

The distinctions between industry sectors are increasingly fading, opening opportunities for companies to offer cross-sector BPO services—even in domains where they may not have traditionally operated. The ‘enterprise services and IT’ ecosystem will be one of twelve generating $70 - $100 trillion economic output in revenue by ~2050.

Looking around us this blurring of industry sectors feels like a long trend.? The Virgin brand was an early pioneer in offering consumers a cross-sector proposition.? The company moved horizontally into air travel in 1984 from the vertical moves it made earlier in records, game and retail.? Virgin’s value proposition was exceptional customer service, and it organised itself around customers, growing a cross-sector portfolio of franchises.? We’ve all heard the one about ‘data is the new oil’ and seen the rotation of energy and industrial companies in the S&P 500 twenty years ago into the ‘magnificent seven’ companies offering a mixture of technology, consumer and marketing services of today.? We’ve also used the services of Uber and Airbnb, companies that owns no taxis and no hotels respectively.? Living these changes in sector focus and business model does not feel so dramatic until you look backwards.? The book ‘The Ecosystem Economy’ by Venkat Atluri and Miklos Dietz is the best I’ve read at describing how impactful this cross sector and ecosystem trend is, so we’ll start there.? The author’s view is that the ‘enterprise services and IT’ ecosystem will be one of twelve generating $70 - $100 trillion economic output in revenue by ~2050.

It’s a fascinating book and I recommend it for anyone who enjoys topical economics and strategic alliances / ecosystems.? The central premise is that traditional economies were arranged around the supply chains for specific sectors, but ecosystems are blurring the boundaries between sectors.? As an example of the blurring of boundaries, consumers bought fish from the fish monger, meat from the butcher, bread from the baker and so on.? Super markets emerged as one point for transacting for all groceries because it was convenient, and value added for the consumer.? In this case the supermarket is the ecosystem which has organised itself around the customer need for convenience of grocery shopping.? Ecosystems are creating enormous value and growing rapidly – to between $70-$100 trillion economic output in the next couple of decades according to the authors, which would make ecosystems in ~20 years roughly half of the total global economic output of today.? The authors go on to give many other examples of sectors blurring together and unified by serving the customer.? One is Apples mix of consumer electronics and media entertainment offering iPhone and Apple TV.? The collection of Tesla related companies offering mobility, domestic energy storage, satellite communication and social media is another.? Whilst there are a few examples that head in the opposite direction, for example two UK supermarkets recently divested their retail banking arms, the general trend for large enterprises extending across sectors appears everywhere you look.? The authors also offer Amazon as a cross-sector example providing consumer retail, entertainment and corporate IT services as another which takes us towards the second point on cloud market places, but let’s come back to that later.

The authors propose there are 12 emerging ecosystems, and of course the one that caught my attention was the ‘enterprise services’ ecosystem they define as “large corporate business services needs including large-scale IT services, strategy consulting”.? The four historic hurdles to ecosystems developing are; distribution, data, systems and access to the supply chain.? The authors believe these hurdles are all diminishing which is why the trend for ecosystems is accelerating.? This is where the intersection with sectors blurring and cloud market places struck me.

Cloud market places (CMPs) are the cloud service providers online portals where enterprise end customers can buy cloud and software services (NB I’m using ‘enterprise’ here as short hand for large organisations in the private and public sector).? CMPs have been around for more than ten years and started to accelerate recently.? For example, in 2023 CrowdStrike announced that it was one of the first independent software vendors (ISVs) to generate over $1B of revenue through one of the CMPs.? Canalys forecasts the value of market place transactions will grow 48% CAGR from $8B in 2022 to $85B by 2028 for the three hyperscalers (the largest cloud service providers).

So, back to the intersection between hurdles for sector blurring diminishing and CMPs.? From a distribution perspective software is a digital asset that does not need a physical location for customers to buy from, and the CMPs have established a presence with enterprise IT buyers.? From a data perspective the proliferation of open data sets, APIs and intra-company data lakes is making access to cross sector insights easier.? And as the digital software market places start to aggregate data about purchases by companies in multiple sectors from multiple vendors the density and value of data becoming available will increase.? Contrast that to when hundreds of different enterprises buy from thousands of different vendors through multiple channels; email, portals, I bet there are still a few fax machines whirring with an order occasionally!? In the sector specific world systems would include proprietary machinery, the technology that supports it, physical locations and personnel with specific skill sets and these would typically be incompatible and non-transferable.? It’s clear that telcos will still need Radio Access Networks and shipping companies still need container cranes, and those are not interchangeable.? However, some of the enabling technology is starting to get closer together.? There are now RANs hosted on the cloud, there are also technology enabled cranes monitored by IoT systems processing data in the cloud.? The fourth hurdle is access to supply chain, which for digital assets like cloud services and software is very much less of a hurdle than for physical assets.

So, the blurring of sectors and the authors four hurdles being alleviated by characteristics of the CMPs resonated with me.? If its true CMPs are an accelerant to sector blurring, where will they fit into the ecosystem?? Lets start by looking at the entire technology economy and then zoom into CMPs.

2.Growth of Cloud Marketplaces.

The proliferation of cloud marketplaces (CMP) provides both risk reduction and substantial economic advantages, creating a more favourable environment for AI-Enhanced industry BPO. The CMPs are forecast to achieve 30% growth over the next four years reaching $85B in revenue by 2028.

Starting with the overall technology economy, according to Canalys and Gartner IT spend is around $5T in 2024 and growing around 6%.? Let’s zoom in a step to understand what part the Cloud Service Providers (CSPs) play in this market.? Removing from the total IT spend the parts the CSPs don’t provide (peripherals, client devices and printers and telecoms services) from the total we are left with around $3.1 trillion.? The largest 3 CSPs collective revenue is around $290B this year and have been growing at ~25% CAGR for the last 2 years.? Comparing that back to the overall IT spend the CSPs are about 9% of total IT spend, indicating a lot of headroom for growth.? Canalys predicts the 3 CSPs will reach $637 billion in revenue by 2029 (15% CAGR), which would just take them to ~15% of total IT spend.

There is another public domain number that gives us a sense of the direction of cloud revenue.? The CSPs publish the value their client’s future spend commitment in what they call ‘performance obligations’ in their quarterly 10Q filings.? These commitments are also linked to the growth of CMPs because in some circumstances a customer’s spend commitment is fulfilled by purchasing via the CMP.? According to Partner Insights there are now $370B of ‘performance obligations’ to future spend from customers towards the three CSPs.? Partner Insights forecast a rise to $500B within 18 months, which would be around 28% CAGR.

Finally let’s get to the last zoom-in, the revenue currently transacted via the cloud market places.? Based on estimates from Tackle and Canalys the CAGR over the last 2 years was 100% and is forecast to be 30% growth over the next four years reaching $85B in revenue by 2028. CMPs are changing the dynamics for route to market, risk for third parties and economics of technology provision.? Let’s dive into each of these.? First the route to market.? Before cloud market places technology purchases were made by corporate IT or line of business budget holder in each company, buying either direct from the vendor, via a reseller or a distributor.?? There are thousands of choices available offering different terms and discounts, so what follows is a costly procurement exercise to evaluate which route is the best for the buyer.? The process of negotiating a contract could be equally time consuming.? Next, from a risk perspective the terms and conditions for large purchases would each be negotiated separately and as a consequence there was a wide range.? The enterprise end customer, the technology supplier and any of the enterprise BPO partners would have to tune their supply chain and risk management for each individual contract, and for a large enterprise there could have been hundreds of them in each country.? For example, if each contract requires payment in different range of days from 30 through to 120, and the contract is in USD whilst the enterprise income is predominantly in other currencies there needs to be a sizeable finance team to manage payment and foreign exchange. This moves us to the third point of economics.? There are two distinct parts here.? One is the labour costs of the effort needed to manage the technology, either of staff on the enterprises' own payroll, or the BPO partners fees.? The other is the technology costs paid to the technology vendor.? For the labour costs, the cost of the finance team mentioned earlier will increase as the complexity rises.? As another example of the cost incurred by high variability of terms, if each contract has different penalties for technology availability, different tools for managing uptime and different routes to raise tickets for technical support there needs to be a sizeable team to monitor availability and manage service levels.? Moving to the technology costs, in some circumstances the CSPs offer incentives to use their market places.? For example, when an enterprise makes an agreement to a committed spend with the cloud provider, and then makes purchases of specified third party technology via the cloud market place it may retire part of that commitment.? This could help them achieve larger discounts for the committed spend, which reduces their overall technology costs.? If the enterprise is using a small number of CMPs for the majority of their contracts it also increases visibility on technology spend across multiple vendors which both reduces labour costs and helps the enterprise to optimise their total technology spend via fewer channels. In a world where an enterprise or their BPO partner has negotiated relatively consistent contracts with a limited number of CMPs the route to market has gone from many & complex to fewer & simpler.? The risk profile of managing the contracts has reduced which means the associated labour costs of managing the contracts has gone down.? And the enterprises total technology costs have probably been reduced too.

So, lets summarise these growth percentages like a stacking Matryoshka doll, biggest absolute dollar value first.? Over the next 3–5 years global GDP growth is forecast to be around 3%, IT spending growth around 6%, CSP revenue +15%, customers CSP spend commits increase by 28%, and CMP transactions grow 30%.? This trend that CMP transactions are growing faster than all of the markets they are located in and offer a new opportunity for COSs technology businesses to support their clients is where my second point lands.

3.Generative AI Disrupts Cost-Output Dynamics

Generative AI is transforming the traditional cost-output relationship in business processes, enabling unprecedented efficiencies and scalability in BPO (Business Process Outsourcing) services.? Generative AI alone could generate $2.6 trillion to $4.4 trillion in value across industries, and for some roles AI can perform over 80% of the work.

We are seeing gen AI removing the linear relationship between costs and output of business processes.? This means there is a productivity improvement opportunity for enterprises, and a growth and margin opportunity for COSs (consulting, outsourcing and systems integration firms) to help implement and run re-designed processes.? To start with there is no shortage of predictions of the value of generative AI.?? McKinsey has forecast “generative AI could add the equivalent of $2.6 trillion to $4.4 trillion annually across the 63 use cases we analysed. This estimate would roughly double if we include the impact of embedding generative AI into software that is currently used for other tasks”.? There are multiple examples of COSs announcing they will invest; one large COS has announced a $3B investment and one of the ‘Big Four’ consulting firms announced it will invest $1B in its AI practice.? There are also various studies on the labour productivity effect of gen AI.? The UKs Institute for Public Policy Research report ‘Transformed by AI’ forecasts that “If organisations decide to integrate existing AI technology more deeply into their processes (which is not a given), we find that almost five times more tasks – about 59 per cent of tasks – are exposed.” The highest exposure roles in the study were ‘secretarial’, ‘administrative’ and ‘customer service’ each with task exposure over 80%.? In their full displacement scenario up to 8 million jobs are lost, which is currently a quarter of the UK workforce.? A positive point of? view is that new jobs will be generated for the displaced workers, rather than the economic disaster of ? of the workforce being unemployed.? Assuming the optimistic view, and that it takes a decade for this total 25% productivity change to occur at a linear rate it implies a compound productivity gain of around 3.5% a year.? This would be 7 times higher annual productivity gain than the UK has experienced for the last ten years, which is a huge opportunity for enterprises to reduce costs.

However, the results so far for the consultants and the enterprises are modest.? One large COS has declared winning 300 gen AI projects for total of $300M in its August 2023 quarter, and $500M in revenue in 2024 so far.? This is just 1.5% of their revenue and an average of $1M per project which are early experiments for enterprises.? For enterprises there are a lot of projections of potential productivity improvement, for example the CEO of one large telecoms firm has estimated the introduction of gen AI across its business could result in the reduction of about 10,000 roles by 2030.? Whilst steadily more public domain examples are emerging that demonstrate actual value realised, despite the bold predictions we have a way to go before reaching mass adoption of gen AI for enterprise processes.

At the same time questions are getting louder about how much money the AI technology companies will need to make to justify current investment spend and share price valuations.? Sequia has the view there is a revenue “$600B hole that needs to be filled?for each year of Capex at today’s levels.”. Part of the reason for the gap between expectations and realized value is that enterprise processes are complex, and it takes vast effort to re-engineer them to embed and adopt gen AI.? Until the enterprises are achieving value from the technology they are unlikely to be paying the technology companies large sums of money.? This means the technology firms are highly motivated to support their COS alliances to do the work of embedding AI into enterprise operating models and get the technology into production, creating value, and billing.

This is the opportunity for the consulting, outsourcing and systems integration (COS) businesses – enterprises and technology companies can’t realise the value of gen AI without their expertise.? COSs have deep domain experience of the sectors and the processes of their large enterprise clients.? They have decades of experience building and running complex systems.? They have a business model that is designed to quickly re-skill and re-deploy large numbers of people.? And they have the intellectual ability and balance sheet strength to provide AI- Enhanced business outcome as a service as the next generation of BPO services.? Now their clients need that capability more than ever to realise the value of generative artificial intelligence.

4 Alignment of IP and Business Models for AI-Enhanced BPO

The intellectual property and business models of consultants and systems integrators are optimized for AI-driven BPO, positioning them well to lead in this space.? Managed services and BPO is growing around double the rate of the overall ~$1T consulting, outsourcing & systems integration market.? More than half of technology budgets are now in Line of Business outside of the traditional IT department.

Let’s start with a quick look at the markets for consulting, outsourcing & systems integration (COS) to understand the dynamics.? There are a number of public domain opinions available.? My analysis is not conclusive because the definitions overlap, however there seem to be a number of general points that point in the direction of my prediction.? The global IT and business services market is $1T-$1.2T and growing at around 4%.? IDC has reported “the largest improvements seen in managed services”.? Specifically for IT outsourcing the average contract value of ITO agreements has been in decline for more than ten years and the trend continued until this year.? According to ISG whilst the overall market has risen around 50% between 2015-2022 the “mega awards (over $100M) dropped from almost 20% in 2015 to just under 10% in 2022”.? IDC has written “and the proportion of IT activities that businesses are likely to classify as non-core is falling. This is due to a recognition that technology has become more important as a competitive differentiator”. One report from Field Fisher found the most common answer to the question “What will be the most impactful trends within the sourcing and digital transformation market” was “Adoption of AI solutions”.? Slicing a subset of the market down just for consulting and IT implementation Statistica estimates a market size of $75B today growing around 4.4%.

Now, looking specifically at BPO markets, its estimated to be $300- $400B this year and growing between 5% and 9% depending on the report you read.? The largest parts of the market are Customer Relationship Management (CRM), Finance and Accounting, Human Resources, Knowledge Process Outsourcing (KPO), Procurement and Supply-Chain.? As I said, it’s not conclusive from the public domain reports I can find but seems safe-ish to assert there is a general trend that managed services and BPO shows higher growth than traditional technology consulting and IT outsourcing.

Another dynamic that fits my prediction is the shift of spend from IT to Line of Business.? Increasingly the executive who has budget to sign large technology enabled contracts is the Head of Banking, Chief Supply Chain Officer or even CEO and not the IT Director.? In 2022 Gartner found “Seventy-four percent of technology purchases are funded, at least partially, by business units (BUs) outside of IT. Only 26% of technology investments are funded entirely by the IT organization”. IDC’s forecast in 2022 went along similar lines. “With the majority of technology budgets residing with LOB by 2027”.? So the business owners of functional processes for sales, customer services, finance, accounting, HR and supply chain are already making the decisions on where to invest in technology to support their value chains it follows that the industry function rather than the horizontal domain of IT is the most important factor.? I think this shift in technology spend is an enabling factor for ecosystems in the sense that a line of business leader is more likely to be leading the hunt for growth in new business models than an IT department.

Having looked at the directional case for high growth market for BPO, lets deep dive on where the intellectual property and business models of consultants and systems integrators are optimized for offering AI-driven BPO.? I’ll re-use a graphic from a previous article here to illustrate the range of technology and business services required for a AI-Enhanced business transformation.? The punchline here is that technology is not the hardest problem to solve for embedding AI into enterprise processes.? The people and process parts of the jigsaw puzzle are the longest poles in the tent, and that is where COSs expertise lies.

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Protect & Govern - security controls must protect both data and the model’s intellectual property, and regulatory approval may be necessary. Additionally, maintaining ethical standards and robust data governance practices is critical to prevent bias in model outputs.

Run & Optimize - in the Run & Optimize phase, refreshing models to prevent drift will require close alignment with business units to ensure relevant data selection. Ongoing monitoring of model impacts on call centre processes will also be essential.

The primary dependencies for all the examples above are people and process, not technology. Without the specialized skills provided by consulting, outsourcing, and systems integration partners, achieving full adoption and realizing AI’s potential value can be a lengthy endeavour. Consulting, outsourcing, and systems integration (COS) firms bring decades of experience building and managing complex systems—integrating people, process, and technology. Their business models are designed to reskill and redeploy talent at scale, making them well-suited to support progressive automation and the corresponding workforce transitions, especially within the employment regulations in Europe. Innovative commercial models that shift from fixed-cost structures to outcome-based or gain-share arrangements will be a differentiator for AI-enhanced BPO services. This is akin to the value proposition cloud service providers (CSPs) offer, replacing fixed physical capacity costs with flexible, per-second billing. Through strategic alliances, CSPs can support COS firms in realizing this transformative model, helping make AI-Enhanced BPO a profitable reality at scale.

5 New sales and delivery motion for strategic alliances

So, what do these four trends mean for consulting, outsourcing and systems integrations (COS) companies?

1.Blurring Industry Boundaries The distinctions between industry sectors are increasingly fading, opening opportunities for companies to offer cross-sector BPO services—even in domains where they may not have traditionally operated.

2.Growth of cloud Marketplaces The proliferation of cloud marketplaces provides both risk reduction and substantial economic advantages, creating a more favourable environment for AI-Enhanced industry BPO offerings.

3.Generative AI Disrupts Cost-Output Dynamics Generative AI is transforming the traditional cost-output relationship in business processes, enabling unprecedented efficiencies and scalability in BPO services.

4.Alignment of IP and Business Models for AI-Enhanced BPO The intellectual property and business models of consultants, outsourcers and systems integrators are optimized for AI-driven BPO, positioning them well to lead in this space.

My prediction is there is a high growth market opportunity for AI-Enhanced industry BPO, and this will the highest growth motion for the strategic alliances for the next decade.? The new alliances sales & delivery motion that is emerging for COSs using cloud market places is shown in the fourth quadrant ‘COS as value integrator (MP)’.

Going through each of the motions in the wheel below we start with ‘1/customer as value integrator’.? This illustrates the customer doing the intellectual work of designing the tech enabled business transformation and leading the workstreams with their own staff. They purchase cloud and ISV products directly through separate channels, and the COS is providing resource augmentation on a time -&-materials basis.

The second “2/COS as value orchestrator”.? In this motion the COS is leading and staffing the workstreams to deliver the transformation and is orchestrating the purchasing of the technology.? The customer is contracting with the technology vendors and paying them directly and the COS is managing the supply chain of technology via the customer’s contract.? As the technology contracts are not flowing through the COSs services prime contract they have limited financial and performance risk to carry.

Motion three “3/COS as value integrator” shows the COS as being the only contract with the customer and is purchasing the technology in order to provide a fully managed service to the customer.? In this model the COS is receiving the total client budget for the project, but is also taking all the risks associated with the technology – credit, payment, availability, performance etc.? The COSs are probably also diluting their overall margin for the project.? This is because ‘margin stacking’ a normal consulting double digit gross margin on top of the technology costs which typically have single digit resell margins will appear expensive overall to the customer.

The new AI-Enhanced motion is “4 COS as value realiser”.? This model could be engaged in one of two ways.? If the COS is managing the purchasing on behalf of the client through the CMP, but the transaction is not flowing through their books its similar to quadrant 2 the value orchestrator.? The added value to the enterprise end customer here is that the labour and technology costs should be lower via a few CMPs than via 100 direct contracts with different vendors.? This will result in a lower overall cost to the end customer.? The other way this fourth model could be deployed is the COS is using the CMP themselves and running the transaction through their books.? This model would be equivalent to quadrant ‘3 COS as value integrator’, but again you’d expect the costs to be lower because of the user of market places.? This would mean either the COS enjoys more margin, or they will pass the saving to the client and swap the margin for a higher win rate and higher market share.

Summary

In summary, over the next decade, AI-Enhanced industry BPO (Business Process Outsourcing) will emerge as the fastest-growing area for strategic alliances among consultants, outsourcers, systems integrators, and technology companies. This is due to four converging trends; 1.Blurring Industry Boundaries, 2.Growth of cloud Marketplaces, 3.Generative AI Disrupts Cost-Output Dynamics, 4.Alignment of IP and Business Models for AI-Enhanced BPO.

These factors collectively point toward AI-Enhanced industry BPO as a natural evolution for strategic alliances, set to drive significant growth over the coming decade.

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