The digital revolution has transformed the way businesses operate. To stay ahead of the curve and address the complex demands of digital customers, companies are focusing on their core competencies and outsourcing non-core functions to specialized experts. This emergence of functional service providers or FSPs has become a major trend disrupting traditional business models.
Evolution of FSPs
FSPs first emerged in the 1990s when businesses started outsourcing administrative functions like payroll, facilities management and customer support to third-party vendors. This helped companies reduce costs and focus on their key revenue-generating activities. Over time, the scope of outsourcing expanded to include more technical functions like IT infrastructure management, cloud services etc.
Initially, FSPs offered cost arbitrage benefits by operating from low-cost locations. However, today they deliver far more strategic value through expertise, technology and innovation. Leading FSPs now spearhead digital transformations, help implement new technologies and become strategic partners in de-risking operations and boosting productivity for client organizations. Their evolution mirrors the broader transformation underway in the outsourcing industry.
Rise of Horizontal FSPs
Traditional Functional Service Providers (FSP) focused on vertical specialist capabilities within specific industry sectors like healthcare, banking, manufacturing etc. However, with digitalization blurring industry boundaries, horizontal FSPs offering cross-industry capabilities have gained prominence.
Accenture is a pioneer in this regard, developing horizontal capabilities across various functions like finance & accounting, human resources, marketing and supply chain management. It now serves over three-fourths of Fortune Global 500 companies. Similarly, Genpact, EXL Service and WNS Holdings have built significant scale through horizontal business process outsourcing (BPO). They leverage artificial intelligence, automation, analytics to deliver consistent quality processes globally for clients across multiple industries.
The emergence of horizontal FSPs empowers companies to leverage common best practices and capabilities developed for other industries, making outsourcing projects more standardized and cost-effective. It also allows clients greater flexibility to engage multiple providers instead of relying on a single vertically-focused partner.
Impact of Technologies
Technology has been a key enabler for FSPs to stay relevant in the digital era. Advanced technologies like RPA, AI/ML and cloud are augmenting the traditional outsourcing models. For example, AI assistants are automating routine customer queries while complex issues are escalated to human agents. This is helping FSPs deliver higher productivity at lower costs.
Many FSPs are transitioning from being traditional outsourcing providers to technology companies in their own right. Companies like Tech Mahindra, Infosys, Wipro are developing proprietary platforms, products and solutions leveraging technologies. They bring complementary technology expertise to help client digital transformations beyond simply processing transactions. The lines between IT services and BPO are also blurring as both converge around advanced technology capabilities.
Rise of New Sub-Domains
Within the broad FSP landscape, new sub-domains are emerging to address the changing needs of digital businesses. Platform FSPs are building industry-specific platforms and marketplaces to bring together buyers and sellers of services. Companies like UST Global, Mindtree, LTI Mindtree are leveraging platforms for industries like manufacturing, retail, CPG etc.
Similarly, localization FSPs are helping western brands expand into international markets by localization of products, marketing and customer experiences based on local language, culture and regulations. Globalization Partners, TransPerfect, Moravia IT specialize in areas like translations, localization quality assurance etc. There are also FSPs focusing on niche capabilities around digital marketing, FinTech, RegTech, smart factories and more.
The evolution of FSPs mirrors how digital technologies, platforms and globalization are redefining industries. They play a pivotal role for enterprises seeking to remain competitive in a climate of continuous disruption. By leveraging the scale, expertise and innovation of functional experts, companies can allocate more resources to strategic priorities that create differentiated value for their customers. The functional outsourcing market is poised to grow exponentially in the coming years as digital transformations accelerate across all sectors of the economy.
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