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November 9, 2023
On this special Fireside Chat, HFS CEO and Chief Analyst Phil Fersht is in conversation with Rajesh Subramaniam, MD and CEO, ResultsCX about the potential disruption and hype around GenAI and its impact on the IT and BPO industries and most particularly on CX services.
You can listen above or watch this HFS Videocast here:
Phil and Rajesh cover a range of topics, including:
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This transcript was auto-generated from the original recording and lightly edited for readability. We've done our best to catch errors, but names, technical terms, and company references may be misspelled or imperfectly captured. For the definitive version, please refer to the original audio or video. Views expressed are the speakers' own.
So it’s great to get some time again with you, Rajesh. It was nice meeting you recently as well. You’ve recently taken over the ResultsCX business as CEO. Maybe it’d be good to hear a bit about your background, what led you to this role, and what you’re going to do next.
Fantastic. Thanks, Phil. As usual, I enjoyed my conversations with you. You’ve always been contrarian and you’ve always laid your positions out very clearly. You never take the easy path, which is a little bit of the streak I have, being a little contrarian. So in terms of what I’ve done: I’ve spent more than 15 to 20 years in the business process outsourcing industry, being a numbers guy at heart. Ultimately numbers have to make sense. Everything that we do has to ultimately impact and create value for customers, employees, shareholders — they’re all part of the ecosystem, and numbers play a very important part of that. Personally, I’ve been in consulting, corporate finance, investing, fund management, venture capital — done everything until I found my calling in BPO. I was actually the first employee at a company called ICICI OneSource, which became Firstsource. I used to be with ICICI Bank and then moved into ICICI OneSource as the head of strategy, became the CFO, and went public. Then I decided to become a venture capitalist with a Silicon Valley VC called Walden International, which was one of the first venture capitalists in India — restarted their operations in India. I was on the board of Mindtree, which was the largest investment; Mindtree subsequently got acquired by L&T Infotech. I made a few investments, did all those good things, and then Firstsource got into trouble. I was extremely passionate about the company and what the early management team had done, so the board wanted me to come back, help turn around the business and have it restructured. I almost took a bankrupt — it was at a 50 to 55 million dollar market cap when I was made CEO of the company, and when I left it was closer to a billion dollars. So I played my hand out in turning around the business, making sure shareholder wealth was created, an over-leveraged business went to zero debt, a consistent dividend track record. And then I got bored, and I knew the industry was ripe for disruption. People were lazy — when I say people, I mean the industry got a little lazy, because everybody was a public company. The rate of disruption was faster than the rate of growth. So how do you manage various stakeholders? People were taking incremental steps, where I fundamentally believe there was the ability to drive a paradigm shift in how we can drive the whole spectrum of customer life cycle management across various channels. And that’s when I decided to step out of Firstsource and partner — sorry about that — partner with a private equity fund that would have similar value systems, similar cultural alignment, and, I would say, going down to the point of ethics in terms of how we build responsible businesses that create value for all stakeholders. And that’s how I aligned with ChrysCapital, early in 2020, after I left Firstsource late in 2019. And then the pandemic hit. Everything that we thought was around digital evangelization to digitally naive industries — various industries became pretty native, because the pivot to work from home, at the basic minimum, ensured that people had to open their black boxes so that customer experience didn’t suffer. So the rate of digital adoption became very different. Earlier our strategy was to do roll-ups of smaller assets in domains which we believed had various maturities of where disruption could be played — consumer tech at the highest, healthcare at the lowest, and everything else in between. We had a clear strategy, and then with the pivot, thanks to the pandemic, we said let’s go buy a bigger asset, because we don’t need to evangelize. There are certain guardrails which have been established, people are comfortable, and the incremental growth you drive from there was a lot more significant than what would have happened if the pandemic hadn’t happened. So we were looking at several deals. We were part of the FOMO process, but asset valuations had gone crazy, capital markets had gone crazy. It was very difficult to price assets because of all the free money and cheap money that was floating around. We were very disciplined — we walked away from many deals. And then we landed ResultsCX, and serendipitously, it ticked all our boxes. It was an asset that was a well-kept secret. It was 30 years in existence when we bought it. Nobody knew about ResultsCX. It was 400 million dollars in revenues in scale and size. It ticked the box. It had more than 45% of revenues from healthcare, healthcare payers. It’s a business we really like, because there are a lot of inefficiencies there. Payers have been acquisitive themselves. They make a lot of money, so when the customer is doing extremely well, there’s a general anathema to change because things are going well. But the Affordable Care Act was getting a lot tighter in terms of how the rules were being developed between the payers and providers, and there would have been an inflection point where they would have to embrace a different level of digitization. And that’s the bet we were taking — that that’s an industry vertical which will hit that inflection point, and then you’re going to see some very different growth rates, like what you would have seen with banking in 2000, post the Lehman crisis, with banking, fintech, and the emergence of that category. A similar wave would be in healthcare, and we said that’s the industry vertical we should bet on. ResultsCX was big on that, big on retail, B2B2C industries like home improvement, consumer tech, small customers in consumer tech which had a lot of potential. So overall we liked the package. We got it at a reasonable price in those days where market valuations were high, and it’s been a fantastic journey. We’ve done pretty well — from the time we bought the business to now, we’ve grown at a CAGR of over 20% in the last 12 to 18 months, and the business has done very well. This year has been a relatively tough year, because all the planning that happened over the last 12 to 18 months was on the back of the COVID excesses, but given what’s happening to the environment this year, there have been a lot of puts and takes. There have been challenges with clients, client spending, client expectation. They haven’t figured out the front end of where their customer experience is, what they need to drive, and their budgets have become a lot tighter. And who’s in between? It’s the partners who are outsourced with, who are in between. So this year has been a little bit of a challenging year, but whenever there’s a challenge, never lose a crisis or a good challenge. It just drives the next level of innovation to enable clients to agree to conversations and ideas and execution, which then makes it a win-win. So where I’m going with this is: if I was predominantly being valued as a vendor where I was told what I was supposed to be doing, the transition to advising the client as to what is the outcome I can drive, and where I put skin in the game, where I can drive outcomes and then get the benefit — that is where I align myself, without at a tactical level affecting their budgets. But any improvement over the budgets they have, I get a piece of it. It drives nonlinearity in my relationship, in my revenue growth, and in my profitability. Now how do I grow? These industries are mature, so it’s the classical story: when you have a bear chasing you, if there are two or three people trying to escape a bear, it depends on who’s faster than the other two and gets ahead. So in mature industries, incrementally, if you’re better than the other partners working in that ecosystem, you get a disproportionate share of the business back — on operating performance and digital sophistication. So all this has played out well for us this year. The number of proofs of concept that are at play with industries that were anathema to embracing digital ideas — especially in industries like healthcare, and some part of regulated businesses within financial services too, because any business which is highly regulated — everybody wants to keep it within their own boundaries, but the cost of labor, the cost of doing business, has become so expensive and so competitive. Now some of those elements are lending themselves to a level of digitization, where you give them comfort on the guardrails on how you protect their privacy, consumer data, and how you use technology to augment productivity and drive superior experience. So all this has played out very well for us. But generative AI is the next spin on the sophistication as to what’s going to happen to various industries and the impact it’s going to have. I fundamentally believe it’s a game changer. As we’ve seen historically, when the automobiles came in, it didn’t kill transport, it killed the horse carriages. And when various forms of efficient technologies in the car industry came, there were some parts of the value chain that were category killers and some parts which had to innovate and coexist with everything else that’s out there. So fundamentally in our business, I believe that if I take a look at where there is an interaction that I don’t need to predict the expectation of the person on the other side of the transaction — GenAI and AI technologies will need time for learning. But where the actions are non-live, where I can solve for it in batches — whether I’m doing title checks, valuation, originations, claims adjudication which are not live — I think there’s going to be massive disruption. If it hasn’t already happened, it is going to happen, what GenAI can do. And when I’m saying GenAI — intelligent automation, a combination of both these elements in the value chain can completely be disruptive and be category killers for some of the back office operations. But as far as the front office is concerned, playing in regulated industries, complex industries will take time. But again, this is a concept of ceteris paribus. If I assume that for the next 10 years the level of complexity, predictability, innovation, and customer sustenance remains the same, then AI becomes a lot more sophisticated, because there’s machine learning which allows it to get better and better. But as customers innovate, and as there is a new segment of customers coming through the workforce — you have the baby boomers going out over the next 10 to 15 years, and you’re going to see a whole bunch of 18-year-old kids coming into the workforce with very different needs — you don’t have homogeneity in your customer base, which requires different products. So again, the winners and the losers would be people who are agile, who adapt quickly, who understand their customers’ business, and who are willing to take risk. Risk-taking has not been par for the course in this industry, but putting skin in the game to say: I work for 30 such companies as you are, I have the benefit of creating the utility, because my IP creation on how I can solve your problems is much better than what you can do individually — give me that access. Fundamental success is access to data. AI is hungry for it. You have to feed the kraken. If you don’t feed the kraken data, it fails. I can come with the best AI tools and technology, but if I don’t have access to that data, and where our data is democratized, where you get it, where standards are clearly prescribed — for example, I can throw a trial balance into GenAI and say, give me a balance sheet, and it’ll give me a balance sheet straight. So the question is, how do the Big Four innovate? What is the next level of sophistication that happens? Similarly with law firms — all the rules are out there. But if I get into healthcare with ICD-9/10, I get into 50 states, I get into 4,000 regulations, and then I get into different population segments from minorities to Medicare, Medicare Advantage, to national plans, to commercial plans — the complexity becomes very different. There’s no homogeneity in that. Again, if all that remains stable for the next 10 years, GenAI will clearly have a differential impact in terms of how they drive customer experience. But GenAI needs to learn. It needs data. So would customers be willing to open the kimono or not? That is also a function of that favorite — all your physics lessons start coming up: for every action there’s an equal and opposite reaction. For every time there is something you want to do good using AI, there are bad actors that create the narrative that enables the ability to change what the intended outcome is, because of where these bad actors are coming from, and that ensures significant penalties for our clients, especially when they are in regulated business. Every business — you don’t want bad customer experiences, but especially when you get into deeper regulated industries, it becomes that much more of a challenge. So if I declutter all this and put it in the matrix in terms of where are the businesses you stay away from, which are going to be category killers — it’s just going to kill a whole bunch of things. Where are the businesses where it’s going to take time, if there is a stable, steady, predictable data source that doesn’t change? It’s going to have a certain timing impact to sunset. And which is a segment that is going to be dynamic, which will happen over the next 10 to 15 years, and how do you play in that segment. So that’s how I see this whole paradigm shift playing out — a pretty long narration to a very simple question, but I thought it’d be interesting to put the perspective on the table.
You mentioned a lot about AI technologies, GenAI in particular. We’ve got brand-new data from the Global 2000 to show that customer operations is the number one area that they expect GenAI investments to take place. A large number of them also say they’ve started implementations. But I’m also seeing a lot of resistance to change going on amongst a lot of enterprises. So while they can see the promise, we’ve actually got some technology out there that has a ceiling of real value — beyond that ceiling we don’t know. What do you think is holding customers back from maybe being more aggressive with this, maybe trying to get ahead of the curve?
That’s an excellent question, Phil. It again comes back to the point of every action having an equal and opposite reaction. What happens if the narrative of what AI is supposed to do becomes detrimental to the health of the business? Once the genie is out of the box, can they control how AI is going to impact them in the way they want to drive the outcome? They know the answer. They know AI is nothing but machine learning. If I go and pick up a conversation with a client and they have a problem with their claim status, they have a problem with their mortgage, they’re going to be late on their payment — whatever it is, I solve for it in a certain way and I deliver an excellent outcome. So if I have an AI tagging me, the AI learns what is the perfect call that has happened, and then the investment that’s happening today is that next time a similar call happens, it tells that agent sitting across the universe, from the Philippines to the US and every country in between, which are the tabs you use to solve for this kind of query that is coming in, which reduces the time. And ultimately the machine learning ensures that the person — which right now is all person-dependent, and no AI; then some AI, and then the AI maturity keeps increasing — then you don’t need that person on the call for the same type. But what happens if the AI starts learning and starts creating a narrative ahead of what is required as a solution, which is what people are worried about? So then the question is, what is the regulatory framework that is required to ensure AI doesn’t go rogue, and that it doesn’t create a machine learning language which is ahead and drives its own narrative based on somebody who wants to drive a certain agenda within the customer? So it is a fear of the unknown, and then you map it back with customer behavior and what happens to the customer’s own business, which comes back to your brand and customer profile. So if I take a look at businesses whose revenues are under threat every day — if I take a look at OTT players, telecom companies, cable companies, anyone where customers have the ability to churn and have multiple choices — it could be credit card companies, they have choices. They can go anywhere and they treat it as a convenience and not as a brand. They don’t associate with the brand, probably only Amex has created that: I want to be with Amex. They charge me an entry fee, but I’d rather pay the fee, because when I use an Amex Platinum it gives me a certain affiliation to a certain standing. So that is where customers identify with the brand. But otherwise, as long as my credit card works, as long as I’m able to get balance transfers, as long as I’m getting an APR which suits my requirement, I don’t care who I am with — it’s a convenience which matters. So when it comes to that segment of customers, they want to adopt this faster because it reduces their cost to serve, which allows them a lot more money in pricing and customer acquisition, and it helps them either stay in the same place or pull ahead of competition, given the differential experience they have. But then I bring that back to something like healthcare or insurance, life insurance, or the segments of financial services which have massive regulatory nuances. You have a bad customer experience — the regulator can fine you billions of dollars if the customer experience goes wrong, and to that extent, that’s where the reticence is. And if I take a look at regulated industries between financial services and healthcare, financial services spends about 200,000 dollars per employee on technology, whereas healthcare would be about 25,000 dollars. So you already have an industry that spends 18% of America’s GDP on a certain vertical, which is healthcare, and within that you have so many broken systems, that the opportunity to drive an inflection point where you can use AI incrementally and get people the confidence that it’s going to make an impact — I think it’s still about 10 to 15 years away. But it’s going to happen. Again, as I keep saying, if the world is static, it can get to that perfect world, but every customer innovates, a new segment of customers comes in, so there will be a coexistence between AI and human intervention. So the way I see it: deep domain regulated industries will be a little tougher, and people will be more scared; and industries which are more consumer-oriented, where it’s about survival, where I have to defend my ARPU every day — in those industries the adoption levels are going to be high.
So what do you think the BPO industry is going to do in the next maybe 12 to 18 months to respond to this? Who do you think are going to be the winners and losers in this whole scenario?
So, absolutely. For me, the BPO players fundamentally — the table stakes are execution. You need to execute flawlessly in what you’re doing. You need a consulting layer. You need to understand your customer’s business. Gone are the days when you’re just executing on what the customers are telling you; now are the days when you’re telling the customer what the white spaces are, how things are working out. And third, you need domain expertise. You need to understand the industry vertically. You cannot be a horizontal player saying, hey, I’ll give you 50 seats in this country at this price — then you become a staffing company. So from being a staffing company, where you’re viewed as a vendor, to being a strategic partner who’s driving outcomes — that’s going to define who are the winners and who are going to be the losers. At this point in time, companies that have differential access to their customers’ data have the ability of driving superior outcomes. So anybody who’s spending a lot more money on AI operations and data annotation — massive data lakes are getting created. What is AI doing? AI has to be fed data, and the data has to make sense. It has to map customer journeys across various segments. So partners that have access to a differential set of data within the customers that they work for will be able to drive a different level of change — marry that with the intent to make the investments and share the outcomes with the customers. So it’s about four or five things that come together; they’re going to be the winners.
Fantastic. And where are you going to place your big bets, you think, with ResultsCX? You’ve talked about regulated industries, unregulated industries — where do you see your company going in the next couple of years?
So far I’m betting on a two-by-two matrix, Phil. For me it’s financial services and healthcare — the two verticals where I can build deep domain capabilities and drive outcomes. That’s one part. And the two horizontals are the whole customer experience paradigm in terms of how do I acquire a customer to how do I collect from a customer — the whole paradigm. And the envelope around that paradigm is my digital ecosystem: how do I drive everything from simple IVR management to self-help, which comes back to the question you asked in terms of customer loyalty and brand loyalty. So I see customers in three buckets. When I say the industry sees customers in three — and I’m being a little naive, but customers are either promoters, they are passive, or they’re detractors. Promoters are the ones that have the affiliation with the brand. They like the brand because the brand has done something good for them. Even if the brand makes mistakes, they’ll give them a chance. So it’s your Delta experience — Delta has been an outstanding airline, but they’ve had some challenges, and people still fly with Delta because they believe Delta gives them that. Similar with Amex. But for every other airline, it’s who do I have maximum miles with, who gives me the best free tickets, or which is the most convenient. There are no loyalties, so they are the passive ones. They are the ones in between that are looking for convenience and don’t care what happens. And then you have the detractors — the ones who would be upset irrespective of what you give them. So the promoters are the ones whose lifetime value is significantly higher than the cost to manage them, and they drive the highest market cap for our clients. The ones which are passive — you create the interventions to push them to being a promoter, which is sell more into them and retain them better, and you need data for that. So you move them to the right of the spectrum. On the left of the passive ones — which is what we tell our clients — if their lifetime value is greater than the cost to serve, you find how to make them passive. But if that’s not the case, if they’re equal or lesser and you don’t have the potential, let them churn. Let them be on your website and help themselves. Let them be on your IVR — they have to solve their problems on their own. Do not give them that omni-channel experience, because they have no gratification for the brand. Those are the customers you possibly don’t need, and you take that capital and allocate it to your passive to move them to promoters, and go deeper with your promoters. So that’s how I see the game playing.
Well, thank you so much for your time, Rajesh. It’s been great to hear your deep views on where we are and what’s happening, particularly in the CX industry, and I look forward to the continued dialogue in the future.
Wonderful catching up with you.
Yes, you too, very much so. Thank you, Rajesh.
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