The issue of saturation crops up routinely in BPO circles. Whether it concerns a particular city or is just a general discussion of the nature of saturation in the nearshore, the buy side, vendors and location are all worrying.
One city that keeps emerging in saturation conversations is San Salvador, El Salvador. Those on the buy side cite difficulties in attracting needed labor in key skill areas as evidence of existing – or encroaching – saturation in the BPO sector.
With a national population of just 6.3 million, the sustainability of access to skilled labor becomes a potential issue, despite significant investment in education from government and comparatively low attrition rates. Hard figures on the level of saturation are hard to come by, however, and most discussions center on the perception of growing saturation in the city and anecdotal evidence of difficulties attracting needed skills.
“Off-shore locations are as susceptible as any industry to the normal cycles of supply and demand,” said Alex Hamilton, founder and CEO of Radiant Law. “The cheapest locations are usually the most immature in their infrastructure and supplier base, and as customer demand increases, salaries inevitably go up, and there can be short-term limits in the availability of good people. We would always recommend taking a long-term view that focuses on excellence in training to increase the potential pool of people who can support you.”
A Common Problem
Stan Lepeak, Director of Global Research at KPMG LLP Management Consulting, explained that saturation and talent shortages are a common problem in many smaller BPO markets in Latin America, as well as Central and Eastern Europe. There is also the growing situation where talent is available but does not have adequate skills.
According to Anupam Govil, a Partner at Avasant, labor pool saturation happens due to a combination of reasons, including:
- Unsustainable growth of the BPO sector where demand outstrips the ability of the location to provide supply of qualified labor.
- Competition from other ancillary sectors that draws away labor or reduces the incentive for them to work in the BPO sector, such as in India where rapid growth in IT, knowledge services, and higher-end BPO diverted labor away from call center jobs
- Lack of sufficient awareness of BPO sector in the local community, along with negative image of BPO services as sweatshops or high-stress jobs
- Lack of suitable training institutes or government-sponsored training programs for the BPO sector
The results of saturation are numerous, chief among them increasing wage costs as lack of skilled labor drives prices up. Other negative impacts of increasingly saturated markets include poor service quality as under-skilled labor is pulled into positions for which they are unsuited, high attrition as wage competition drives employees to change jobs regularly, stagnation in sector growth, and deterioration in the location’s attractiveness.
Saturation, however, is not as simple as lack of skilled labor or increasing wage costs. Saturation implies no room for growth. Yet, many apparently saturated sites are seeing growth, though not necessarily in the traditional areas for which they are known.
And therein lies the heart of the matter: Perceived saturation depends on what exactly is being measured to determine whether a location is reaching saturation. If Tier 1, basic BPO skills are the benchmark, then many BPO locations are saturated or at risk of saturation. If, however, the measure is determined by the availability of skilled labor across all levels of skill, the potential for growth, and the positioning of the location in relation to high-level skills, then saturation might not be so close on the horizon.
How to Overcome BPO Saturation
Simple ways for clients to overcome saturation in a desirable location is to expand the pool from which talent is drawn or look at smaller, or secondary, locations in the same country. Despite recent political scandals, Honduras is working hard to position its secondary or emerging locations, Tegucigalpa and La Ceiba, as BPO sites.
Jon Butler, Principal Consultant at ISG, emphasized that saturation is not necessarily a bad thing. “In fact, it’s a validation of a well-planned strategy,” he said. “Nothing says success more than when others duplicate what you are already doing. While I don’t believe the markets are necessarily saturated, there are, indeed, things that first movers can do to stay ahead of the curve.”
Butler said that the smart ones will place bets on complementary services — those areas that are the natural next steps in the evolution of their base services. This provides the advantage of maintaining domain expertise while offering clients new services, a great way to keep attrition low. The world continues to evolve along EaaS (Everything as a Service) lines, and the Tier 1 BPO market is no exception.
“Even companies reluctant to make these investments can take a more risk-free approach to jump-starting operations in domains outside their areas of expertise by partnering with other companies who operate in complementary areas,” he said.
Butler added that another option to encourage growth is to explore markets outside their traditional ones. “Many nearshore centers myopically think their only markets are the U.S. and Canada without even considering other Latin American or European clients,” Butler said. “There is still plenty of room for expansion.”
Lepeak agreed that there is a need to focus on delivering more higher-value services for which providers can charge their clients a premium and maintain, or raise, revenue levels (and potentially margins) with existing headcount.
“This is easier said than done — and a long-term proposition,” he said. “Often employees do not have the skills, experience or education to deliver high-value services.” Examples of these services include knowledge-process outsourcing work, data and analytics, more complicated problem resolution, or specialized services tied to specific industries.
Lepeak agrees, noting that delivering higher level services cannot happen overnight. “Building skills for these services involves things such as more — and better — training, greater focus on specialization, drawing in talent from other industries or poaching from the competition,” Lepeak said. Government and trade organizations need to support initiatives to improve educations and draw in foreign staff.
The Future and How Automation Will Help
The introduction of robotic process automation (RPA) could also play a role in addressing saturation. Lepeak, who attended a recent two-day KPMG event on the topic, said that major BPO service providers are looking hard at how can they automate more of the services they provide using technologies such as IBM’s Watson or from firms such as IPSoft, Automation Anywhere, and Blue Prism.
“By some estimates, 70% or more of transaction BPO work will be automated in the next five years,” Lepeak said. “This automation will also occur in retained client organizations, which will reduce demand for BPO. If a BPO provider continues to provide just low-skilled services at a time when labor costs are rising and talent shortages exist, it is a recipe for disaster.” He added that the same holds true at the market level.
This ties back to the earlier point about the need for higher level skills to handle exceptions and work that is not easily automated. “Either way, reliance on lower-skilled labor or relying on providing un-automated transactional services will doom a service provider as well as a market,” Lepeak said. “And they may find very quickly that a labor glut exists.”