Adventures in alliances land #14 – AI-Enhanced industry BPO part 4
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.
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.
Other resources
IT spend trends https://isg-one.com/docs/default-source/default-document-library/4q23-isg-index-presentation.pdf?sfvrsn=18f6d431_0
ITO trends https://isg-one.com/articles/index-insider-the-declining-impact-of-mega-outsourcing-deals
IT and business services market https://www.idc.com/getdoc.jsp?containerId=prUS52082524
IT consulting and implementation https://www.statista.com/outlook/tmo/it-services/it-consulting-implementation/worldwide#:~:text=IT%20Consulting%20%26%20Implementation%20%2D%20Worldwide&text=Revenue%20is%20expected%20to%20show,reach%20US%2421.04%20in%202024.
Line of business spending https://www.computerweekly.com/microscope/news/252438704/Lines-of-business-overtaking-IT-department-as-spenders-on-IT
Strategic Partner Sales @ AWS for Europe South | Cloud & Digital Transformation | Sales | IT Strategy
3 周Super insightful as usual, Gavin Booth!! ??
Accomplished VP of Sales and Channels - 4 Exits - 2 IPOs - Team Builder * Channel Builder
3 周100% agree with you. We run outsourced sales teams for many tip of the spear AI solution companies. I would add that there is almost an exact split of clients/OEMs/Partners who are seeing AI projects that will get funded (many of them for $10s of million or more) vs those who don't have the visibility to any of the demand. My advice to those folks in lean in closely to the SIs/Resellers/VARs that have the visibility because there are huge spends that are going to occur next year. To your broader point, a whole lot of outsourcing and partnership is going to be needed to execute on these projects.
Hypergrowth | alliances | MBA | author
3 周4th article of 5 on AI-Enhanced BPO - enjoy, and stay tuned for the last one