The research has surveyed the IT, HR, Finance and Accounting, Clinical Research, and Customer Services outsourcing sectors. We have listed below the ten key trends that we foresee happening.
Why have we done this? A significant part of our work is with ambitious LPO suppliers who may be starting out or growing, but who have the determination and capability to become major players in the LPO space. At the outset we establish whether they are in the 'Buy' or 'Be Bought' camps, and tailor their strategy accordingly. Both are valid, but they have to position themselves in the correct camp from Day 1 to achieve their objectives. In that light, it is essential that they can foresee and pre-empt the trend that will occur in their sector.
On a general note, we have all seen 'Industry Analysts' produce mind-blowing forecasts of growth in new markets. They are then regurgitated at conferences across the globe. With very few exceptions, these overshoot reality by a significant factor. Our view is that any forecast that tries to go more than 1 year ahead is on shaky ground. 12 month forecasts are on a more solid footing due to the length of the deal cycle. Deals are complex and take a number of months to carry out, so looking at the current pipeline of deals (those that are on their way to being signed) provides a more accurate way of getting to a realistic market size.
The other thing that will happen during the maturity process is 'The Backlash'. Partly due to high, over optimistic forecasts of market size, there will be a questions asked about why LPO is not being adopted or has failed to meet expectations. These headline questions and doubts will be triggered by a couple of bad news stories (deals gone wrong, promises under-delivered, an event like a data security scare, to name a few), or maybe quotes from a conference or unnamed sources. Overall, the PR machine of the industry will have to prepare for some kind of backlash, and do so now, in order to address that inevitable point in time.
With that context, here are the key trends that we foresee and that all suppliers need to be mindful of when setting and executing their strategy.
1. Market Oversupply
As with many new markets, supply overshoots demand. Whether it is potential suppliers believing the extreme forecasts or genuinely believing they can compete, there is, and there will continue to be, a surge of new entrants flooding the market.
The barriers to entry into LPO are surprisingly low: at a very basic level anyone with legal knowledge (and not necessarily lawyers), a website, and good sales story, can set up shop.
2. Landmark Partnerships
So far, this is one area that has not happened as much as in other outsourcing sectors. Based on some of the deals currently in the pipeline, this won't be the case for long.
What we mean by 'Landmark Partnerships' is where a LPO Supplier takes over the existing, established operations of a law firm or corporate, and that operation becomes an ongoing delivery center for the LPO Supplier's operations.
This model was used extensively to kick-start the HR Outsourcing market (Accenture/BT, Hewitt/BP) in particular. It works where the Supplier is looking for a footprint and the law firm or corporate has an operation that both delivers volumes of work at scale and has been optimized to a high level.
The law firm/corporate brings delivery capability and the supplier brings transformation and sales capabilities, and together the parties are able to commercialize the service.
The exact structure of this can vary (joint venture, gain share, share swap) but it is a unique chance for a law firm/corporate to realize the investment in their delivery capability.
3. Surprising Players Will Try To Deliver LPO
Over the years a number of major corporates have jumped into delivering outsourced services and promptly-or sometimes not so promptly-jumped back out again. Major corporates like Siemens and EDS (now part of HP) have tried but failed to deliver BPO services, despite being attracted by the concept of long term, high value contracts.
One trend that applies specifically to LPO, is that there will also be the 'Surprising Players' who will actually make sense. The Pangea3 acquisition by Thomson Reuters certainly - at first glance - fell into that camp, but looked way more sensible the next day when we'd had a chance to think it through.
Even if some of the 'not surprising' players enter this space - for example the likes of Cap Gemini, IBM, and so on - the only way to succeed is with a strong acquisition. Our advice to any smart, large corporate who is looking to have an LPO offering is to get out the check book and buy one of today's aspiring players. If they do go down that route, they have to ensure that someone on their Board or Executive Team genuinely understands what they have bought. LPO has similarities to BPO, but is not the same. IT Outsourcing companies assumed that BPO was the same as ITO but hit the rocks when they failed to grasp key differences between the two.
4. Specialization - By Geography and Sector
This trend is more subtle and hard to discern until you work on the Buyer side, advising clients how to buy services and what supplier to pick. Across 2bn worth of deals in the last three years, we've noted how buyers gravitate towards suppliers who already supply into their industry. While it may seem that Recruitment Process Outsourcing is Recruitment Process Outsourcing, regardless of the industry, the facts are that they are very different requirements depending on whether you are an Investment Bank or a Transportation Corporation.
Surprisingly, Buyers are not too bothered about choosing Suppliers who also deliver services to the Buyers' competitors. Using the example of Intellectual Property, we expect to see some Suppliers leading in the Pharmaceutical space with maybe another couple of Suppliers leading in the Technology space, even though the underlying skills and processes are the same. Never underestimate sector-specialism.
While we are on the subject of sector-specialisms, demand for LPO has been led by the same sectors that led demand for other outsourced services - Pharmaceuticals, Technology, Telecoms and Financial Services. Other sectors will follow at their own pace.
There will be the obvious geographic specialization, where suppliers choose only to compete within their home country. This will particularly be the case in non-English speaking countries. In those cases, labour arbitrage will be less of a driver, and value will be driven from the use of technology, centralization, and process transformation. However, there are currently numerous on-shore offerings of varying sizes in the US and UK from indigenous, autonomous suppliers who have little reach (and no need for reach) beyond their shores.
Based on the above points, there is no surprise that consolidation is one of the major activities that will happen in the LPO sector. The low overheads that an aspiring LPO provider needs to carry will prevent the scenario within HRO whereby lack of profitability due to the failure of that sector to grow at the speed forecast, in Tier 1 players necessitated their sale. However, the LPO sector has already learned that ensuring profitability from Year 1 of an outsourcing deal is essential. Many of the LPO leaders have been through this pain in other areas and know how to avoid that trap.
Some consolidation will happen as VCs and Private Equity firms look to realize their gains. Others will happen as aspiring global players mop up specialist, in-country delivery operations, though the days of having a genuinely global LPO provider who can deliver services in the largest 60 economies of the world are far off.
What will be an interesting statistic to watch is the actual size of the LPOs. There is a real chance that the largest LPO will dwarf the largest legal firm within the next three years.
6. No Surprise - A Top Tier of 5 Suppliers Will Emerge
The phrase 'no one ever got sacked for buying from IBM' fills me with horror, as it implies a level of complacency that doesn't exist in the 21st century. That said, the Brand Value attached to any supplier that even gets close to being the 'Go To' supplier in their sector is incredible.
Already there is a clear leadership in the LPO space, with it being very easy to pick out the top 5-6 brands. I do believe that this leadership race is going to be fluid over the next few years. Though I am tempted to say who I think will be in the top 3, I don't want to have my independence questions. What I will say is that, there is space for an ambitious outsider to get there.
There will also be a healthy set of Second Tier players. They will only be Second Tier in terms of their size and reach; the quality of their work will be a good as the First Tier. They will have found their niche within a geographical reach or sector that suits their needs and from there they will be able to be successful.
It is a credible ambition to be a strong national player, and remain independent. As a role model in knowing what you want to be (albeit at a very large scale) Britain's Capita has excelled, operating within clear parameters that have guided each stage of their evolution.
7. Commoditization And Value Creation Will Define The Winners
The holy grail of outsourcing is the creation of value by a Supplier for the Buyer. To be honest, Value Creation is a much talked about, but little understood, area and has to be dealt with on a deal by deal basis. My ongoing mantra about 'every client being unique' comes into play when talking about genuine value creation. Isolating and measuring the exact Value Created from a deal requires deep understanding of the Buyer's immediate and strategic objectives, and an ability to support them.
There is also the concept of Evolving Value, i.e. what is important in Year 1 of a contract may not be important in Year 3. Strong governance and a thought-leading Supplier are the best ways to prevent objectives becoming stale; their absence will cause real issues after the excitement of Year 1.
Behind all the more attractive talk of value creation, Suppliers will commoditize certain elements of their offering. The sooner they do that, the sooner they eat their own lunch, the stronger they will be in the long term. Already there are areas of LPO that can be priced on a transaction basis, and the LPO industry is doing this at an earlier stage than almost any other Outsourcing sector. However, the focus on achieving unit or transactional pricing for the widest range of services will free up investment to fund future waves of innovation further up the value chain.
8. There Will Be Complaints...And I Know What These Will Be
In every single sector that I have worked in, by about year 2 or year 3 of a contract, Suppliers start to feel grumblings from Buyers. These can be due to missed expectations, a hangover from a tricky implementation, the uncovering of issues that existed from before the outsourcing, and so on.
Regardless of the legacy issues that affect Year 2/3 malaise, there are genuine themes that recur in our study of all outsourcing areas at that stage in the relationship.
Number 1 on the list is always lack of innovation from the Supplier. On the Supplier side, there are always complaints that the Buyer will not pay for innovation. My clear view on this is that there is no point setting up an SLA that insists that the supplier delivers one new innovation per quarter. I've actually seen that kind of wording baked into contracts and it saps the life out of the relationship.
What I have seen working is the Supplier ring fencing part of the savings they drive to be reinvested in the service. The Buyer should also be expected to have an annual innovation and investment budget that can match those savings.
Key to it all is Governance, and Governance is the most poorly understood part of any Outsourcing relationship. Typically it becomes stale and focussed on the here and now, dealing with operational issues rather than being forward-looking, outward-looking, and strategic. Get Governance right and most other problems will disappear.
Innovate, ensure there is funding for innovation, constantly look at best practice in the market place and how to apply it, and get out of the office as a Governance team to learn how other people are using LPO.
9. LPO Is Not A One Way Street
There will be examples of organizations bringing Legal Services back in house. In every industry there are examples of outsourcing just not working. There can be many reasons for this, but what comes back in house is always a lot more efficient and effective than what was outsourced.
Many of the above points I have made will minimize the likelihood of this happening. Some causes will be out of the hands of even the most deft client manager, such as but changes in Buyer leadership or shifts in client requirements. From an overall market point of view, comfort should be taken from the fact that less than 5% of any outsourcing arrangements result in services being taken back in house.
10. JVs/Captives Will Sell Out
We define LPO very broadly, to include internal or 3rd party, onshore or offshore delivery centers (and all combinations thereof). One of the trends that happened in all Outsourcing areas, and has been copied in LPO, is the investment by large organizations in their own offshore or nearshore operations. It is a valid route to take if you have the scale or an existing delivery center that already provides non-Legal services.
These 'captive' legal delivery centers do require significant investment - financial, operational, and management - to establish and to optimize. Nonetheless, they create a tangible asset that probably does not naturally sit in the long term portfolio of, for example, a law firm. Some will see it differently and choose to retain them as an internal asset; others will recognize the value they have created.
However, unless they are operating at significant scale it will be very hard to move from Top Quartile efficiency levels to Top Decile performance. Withoutdelivering services to other organizations, Top Decile will not happen. To do that you need a sales force, which is where a divestment becomes significantly more attractive. By finding a buyer who can commercialize the operation, and push the economies of scale, a significant tranche of value will be immediately added and realized.