Why is BPO Leaving >$100 Billion of Unrealized Profits on the Table?
The global Business Process Outsourcing (BPO) sector, which is projected to top over $1/2 Trillion in revenues by 2030, has the demonstrated potential to significantly increase its efficiency and profits through automation. Real-world deployments show the potential to lift manual process margins from the typical 20-25% range to well north of 60% while improving outcomes, compliance, and predictability. This potential has been broadly recognized by corporate and Private Equity investors alike for the past half decade. Yet, despite numerous acquisitions with an automation-centric deal-thesis, more than 80% of all BPO processes are still performed manually by low cost labor abroad.
Why is this sector leaving >$100 Billion of unrealized margin potential on the table through the slow adoption of automation? There are three primary barriers to the rapid advancement of automation. First, are the easy rewards of low expectations which plays hand and glove with a shortage of forward-thinking digital leadership. Second, is the unfortunately ironic role of traditional corporate procurement. Third and finally, the pernicious limitations of the technologies deployed.
The Easy Rewards of Low Expectations
BPO has long been considered to be one of the least interesting and most tedious sectors of the global economy. Its day-to-day concerns are the mundane optimization of hourly productivity, the ever-present reality of wage-inflation, the drift of granular quality metrics, the challenges of employee onboarding and training, and the minimization of employee attrition. Company cultures in this sector, reflecting the nature of this reality, are often characterized by a high anxiety, impersonal detail orientation, managing within scarcity, and the hand-to-mouth existence of run-rate economics that seem to preclude investment and innovation. It is not surprising, therefore, that there is a shortage of forward thinking digital leadership in the sector which leaves an outsized impression for management and investors alike as to the challenges and risks posed by seeking to innovate.
Against this backdrop, the easy rewards of low expectations are bedded in a highly fragmented marketplace of mostly unsophisticated players enjoying the tailwinds of a constant 8-12% annual growth rate. The growth, driven by accelerating and ongoing labor shortages in the developed world, can hide a lot of flaws, while delivering consistent and growing revenues. The fragmentation of numerous unsophisticated players presents the opportunity to deploy a modicum of disciplined operational management followed by roll-up strategies that drive growth and multiple expansion via the acquisition and improvement of numerous small and less disciplined players. I’ve personally spoken with numerous private equity investors who are perfectly happy with the bankable (albeit limited and sub-optimal) rewards and limited demands/risks posed by these “micro-rollup”strategies.
The Unfortunately Ironic Role of Procurement
Similar to the lack of sophistication commonly found in BPO management, the corporate procurement customers, who are commonly unaware and distrustful of new technologies and approaches, have a strong bias towards reinforcing the status quo of managing what is colloquially termed “butts in seats”. As opposed to seeking out new and improved technology-enabled solutions, they play into and, indeed, often mandate that the metrics of manual labor (i.e. hourly productivity, attrition, satisfaction, etc) be adhered to leaving little room for the introduction of digital workflows. The unfortunate and ironic role of traditional corporate procurement, therefore, is that while their c-suite bosses think of them as saving money for the company, what is really happening is that they are closely managing the pennies while the dollar bills pass them by.
Approaches that center on engaging the client c-suite (well above procurement) with innovative leadership from the BPO have proven able to overcome these barriers and move automation forward. Where this has happened, the benefits to the client and BPO company alike have been striking. The BPO’s have experienced top-end growth through expanding share of wallet and new logo acquisition, while profits have scaled dramatically.
The Pernicious Limitations of the Technologies Deployed
The final and central driver of this limited progress has been the very nature of the technologies being employed; the pernicious limitations of stochastic AI, brittle/hard-wired RPA and traditional limited network architectures.
A key challenge to this transformation is that GenAI agents face critical limitations when applied to real-world processes. In fact, a recent Carnegie Mellon University study found that the best performing AI platforms failed over 70% of the time in performing common real-world workflow tasks leading Gartner to predict that “more than 40 percent of agentic AI projects will be cancelled by the end of 2027 due to rising costs, unclear business value, or insufficient risk controls.” A similar study run by MIT’s NANDA group found that 95% of corporate AI pilots are failing.
Additionally, many BPO applications entail process, security and data requirements (e.g. holding data behind client firewalls) that are in opposition to improving collective automation efficiencies and difficult, if not impossible, to achieve with existing network structures. Further, the underlying substrate of data-sources, priorities and tools is often an evolving landscape that requires significant on-going investment in RPA/AI tuning and maintenance to maintain efficacy and efficiency gains over time at a reasonable cost. The brittle structure of existing automation and network architectures, therefore, is proving to be an increasing impediment to optimized automation and expanded efficiency. Traditional BPO and RPA solutions, built on client-server architectures, struggle to meet the demands of modern, distributed operations. Taken together, these technical challenges, of course, reinforce the tendency towards easier, lower-risk and ultimately less rewarding approaches.
What is needed is a new kind of workflow-AI-powered network. Such a network will need to emphasize the secure and reliable incorporation of probabilistic AI agents, a more adaptive and lower cost deployment of workflow ‘bots’, more tightly orchestrated and continually optimized human-machine collaboration, and a data configuration architecture allowing for the federated dissemination of data in a high security environment. Such a network does exist and can be found at Otonoma.com
An Opportunistic Call to Action
Taken together, this should serve as a clear call for investors to partner with innovative management and adopt new technologies to capitalize on a large and mostly untapped profit pool.
