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State of verticalization in the Indian context has been assessed on six broad parameters

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  1. 1. NASSCOM – A.T. Kearney StudyVerticalization: Industry Evolution for aBetter Value Proposition
  2. 2. Agenda1. Current state of verticalization2. Recent trends in verticalization and key learnings3. Future evolution of verticalization models A.T. Kearney 86/08.2012/4557 2
  3. 3. State of verticalization in the Indian context has been assessedon six broad parametersCompany • Alignment of company strategy with evolving clientstrategy needs • Clear articulation of horizontal and vertical strategy • Depth of verticalization in • Investment strategy – Organic and M&A organization structure Company • Leadership development (Sales, Solution Design, Strategy Delivery, Support functions) – aligned to • Defining market and services based on strategy and scale/scope Service Offering strategy • Reporting relationships • Platform development and formal hierarchy (matrix etc.) Organizational KPIs and • Change in KPIs to enable/implement the change – defining accountabilities and Structure Governance control • Skill sets, knowledge and Organizational Capability competencies development EnablersExecution strategy • Implementation of change in mind-set – behavioral changes and policies • Change management • Alignment of Training and Hiring in accordance with Strategy and Organization Structure • Talent managementVerticalization by BPOs is defined as alignment of their strategy, offering andoperating model to meet the needs of specific industry verticals A.T. Kearney 86/08.2012/4557 3Source: A.T. Kearney
  4. 4. Current state of verticalizationVertical specific process are increasingly witnessing higheradoption, now that “Proof of Concept” has been establishedCase example – BPO activities in Telecom Non-exhaustive Emerging Areas Training &Horizontal Payroll Pensions, Support & Recruitment Financial Overhead Procurement, reporting, etc. F&A SCM Logistics Billing, Credit Customer data Customer & Collection, management QRC Mgmt. CRM & Retention Activation / ProvisioningVertical Lead generation, Sales Outbound sales analytics, sales planning, etc. Marketing & Product lifecycle Campaign Market Pricing analytics and product Product Management research management and design Development analytics High Level of outsourcing Low Adoption AdoptionSource: A.T. Kearney A.T. Kearney 86/08.2012/4557 4
  5. 5. Recent trends in VerticalizationThe depth of verticalization of organization structure variesacross BPOs Least observed In Indian BPO CompaniesOrganization structure models for verticalization1 Most observed in Indian BPO Companies • Horizontal service Verticals offerings Verticals V1 V2 V3 • Operating model V1 V2 V3 Organization Organization aligned for horizontal Sales services; common Sales • Largely horizontal offering Solution support functions Solution • Vertical wrapper over • Traditional BPO Delivery Delivery Sales function model increasingly • Typical play of Support changing in last few Support ‘Horizontal specialists’ years Verticals Verticals • Deep verticalization V1 V2 V3 • Blended model with V1 V2 V3 across entire structure verticalized Sales & Organization Organization Sales Sales • High focus on vertical Solution Design solutions Solution • Increasingly adopted Solution • Traditional play of by ‘Horizontal Delivery Delivery Niche BPO with specialists’ as a Broad-based BPOs Support stepping stone to Support adopting this model in verticalise recent pastVerticalization of Sales is a more secular trend while few BPOs have verticalized otherorganizational functions as well1. In addition, in the traditional model BPOs adopted a geographical model wherein the P&L responsibilities for the overall unit were owned by Geography head Kearney 86/08.2012/4557 A.T. 5Source: Company interviews
  6. 6. Recent trends in VerticalizationBPOs have been changing their operating model in line withchanges in the Organization StructureExample of BPO with Verticalized Organization StructureTypical KPIs and Governance Model – 5 years back Typical KPIs and Governance Model – Today Service Lines Service Lines P&L P&L Verticals Verticals responsibility responsibility Multiple stakeholders Ownership of accounts with P&L responsibility Limited role of becoming single-point and largely residing with geography shifting to vertical heads Geographies geographies Accountability (for new sales / existing accounts) Accountability (for new sales / existing accounts) • Joint accountabilities diluting incentives – • Sales and Delivery teams share the responsibility underperformance on targets for revenues from existing customers and new sales Inefficient and slow decision-making and service delivery Fast decision-making and service delivery • Significant time and effort spent in aligning different • Increasingly all offerings being brought under teams, esp. for multi-service selling – confusion in Vertical with a single customer facing organization deliverySource: A T Kearney A.T. Kearney 86/08.2012/4557 6
  7. 7. Recent trends in VerticalizationThe focus of capability building is shifting towards buildingvertical specific capabilitiesShift in acquisition strategy driven by Verticalization Only ~30% of the ~60% of M&A deals to transactions to build develop vertical capability vertical proposition1 2002 2007 2012 • Geographic expansion Observations and scale: Sales • BPO verticalization over the presence in Western past few years has been IT-BPOs countries and delivery accompanied by investments centers in low cost • Build vertical capability: primarily in industries like in capability development countries (East Europe, APAC) Healthcare, BFSI and • Both broad-based players Travel and IT-BPOs have used • Continued investments in M&A route to build vertical • Enhance horizontal horizontal capabilities like capabilities Broad- offering: investments in analytics based analytics, HR, F&A BPOs providers1. Based on a sample of 10 companies (6 Broad based BPOs and 4 IT-BPOs)Source: A.T. Kearney A.T. Kearney 86/08.2012/4557 7
  8. 8. Recent trends in VerticalizationAs BPOs focus on transformation oriented outsourcing, keyorganizational enablers will need to be aligned accordingly Training • Training is being split into general (centralized) and domain specific training Process excellence • Dedicated vertical training • Building deeper vertical teams Hiring specific knowledge base to • Hiring at entry level managed drive process excellence centrally initiatives • Domain experts preferred at a mid/senior level recruited by vertical Hiring Partners Organizational Migration/ Transition Enablers • Vertical specific customized/ Innovation proprietary transition toolkits, • Dedicated team to identify check points and templates value creation opportunities • Dedicated vertical teams to for clients based on strong facilitate migration domain capabilities Reporting & Compliance • Identification and participation in vertical specific accreditation • Partnership with leading institutesSource: A.T. Kearney A.T. Kearney 86/08.2012/4557 8
  9. 9. Considerations for verticalized modelOver a longer time horizon, successful verticalization can leadto topline growth in multiple waysVerticalization – Revenue upside Levers • Capability to deliver transformation for clients and generate greater value • Greater ability to use outcome based pricing Price to create value premium • Vertical specific process requires• Bundled offerings including Verticalization partnership approach with clients analytics, platform based BPO upside and creates stickiness and consulting enables providers to increase Non linear Customer • Verticalized BPOs with end-to- realization revenue stickiness end offering act as one stop center for all buyer needsIn addition, verticalized BPOs will have access to a larger and relativelyuntapped ‘Vertical Specific Process’ in the outsourcing market A.T. Kearney 86/08.2012/4557 9
  10. 10. Considerations for verticalized modelSuccessful companies have seen revenue uptake that can set-off higher costs BFSI Focused BPO Supplier Large BPO Supplier (Verticalization initiated in (Verticalization initiated in the India BPO Industry last 5 years) last 5 years) ~ 20% ~12% ~40% 20% 24% ~20% 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Experienced strong topline Continued strong growth even Period of moderate growth post growth associated with higher while industry growth is 2009 after strong growth verticalization focus relatively low between 2006 and 2009 Revenue A.T. Kearney 86/08.2012/4557 10Source: Primary interviews, Annual reports, A T Kearney