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Let’s Make a Deal – A transitioning IVR market gives buyers negotiating power. 

Let’s Make a Deal – A transitioning IVR market gives buyers negotiating power.

11/1/2010

By Donna Fluss

Speech Technology

View this document on the publisher’s website.

Interactive voice response (IVR) systems are powerful solutions that reduce operating expenses and improve service quality when used properly. Growing pressure to increase the use of self-service automation in all types of public and private institutions has kept investments in IVR strong, even during the worst of the recession. Now the IVR market is in transition, and the beneficiaries are users who have more than 90 vendor choices and many system options.

Users are showing a strong preference for hosted and managed IVR solutions, as reflected in the increasing percentage of the market being captured by these vendors. I expect this trend to continue long after the economy recovers. Users have found the hosted/managed service acquisition model compelling and convenient, enabling them to purchase leading technology and applications without a large up-front investment or the need for in-house expertise. As enterprises migrate to hosted/managed service offerings, they are increasingly adding speech recognition, which is a standard part of most of these offerings.

The IVR market is highly competitive. DMG Consulting tracks close to 90 competitors, and very likely more operate under the radar. These vendors fall into six main categories: automatic call distributor (ACD) vendors, business process optimization firms, carriers/network service providers, dedicated IVR vendors, hosted ACD vendors, and speech technology specialists. Because this IT sector is so competitive, pricing is highly aggressive, giving users a great opportunity to negotiate outstanding deals. Organizations that have not negotiated a hosted or managed service deal in the past three years should seriously consider putting one out to bid because they will likely be able to significantly reduce their per-minute costs.

Market Predictions

In general, 2009 was not a record-setting year for the IVR market. DMG Consulting estimates that 2009 IVR revenue was only about $300,000 higher than it was in 2008. However, revenue has continued to shift from premises-based solutions to hosted and managed service offerings. DMG Consulting estimates that sales of premises-based solutions decreased by 8 percent between 2008 and 2009, while revenue from hosted inbound and outbound applications grew by 6 percent and 13 percent, respectively, during that two-year period.

That said, the IVR sector traditionally has been one of the best performers in the contact center market. Sales of these solutions have gone through slow periods during which growth was very small, but this sector generally maintained its relative size. The IVR market likely will not see significant growth due to already high penetration, but it is expected to hold its own and grow slowly during the next few years. However, while the overall IVR IT sector is not expected to be very strong, the hosted and managed service components are likely to realize excellent results. This has been the case for the past six years and is expected to continue into the foreseeable future because this acquisition model is so convenient.

DMG Consulting expects revenue for the inbound hosted/managed service IVR sector to grow by 8 percent each year through 2012. We also believe the outbound hosted/managed IVR sector will grow by 14 percent, 13 percent, and 13 percent, respectively, in years 2010 to 2012. Of course, the success of the market depends on the performance of the vendors.

By now, the benefits of hosted/managed service technology offerings—which include smaller or minimal start-up fees, ease of scaling up and down, and ongoing technology updates—are well-known. It is also well-appreciated that users can now avail themselves of all types of technology and applications using this alternative acquisition model. In a growing number of situations, vendors are selling the same solutions for premises-based and hosted implementations and giving end users a choice of financing methods.

In the past two years, DMG Consulting has done many financial analyses for clients considering purchases versus hosted solutions; with few exceptions, hosting is the clear winner for infrastructure investments, such as ACDs and IVRs, when operating expenses and ongoing technology enhancements are included in the mix. If, however, a department plans to put in an IVR and does not want to optimize or upgrade it for five years, then a premises-based solution will likely be more cost-effective.

Figure 1 (below) presents a list of reasons why users invest in hosted/managed service IVR offerings instead of premises-based applications. When trying to decide whether hosted/managed service is a viable option, identify the items from this list that pertain to your organization. If more than 60 percent apply, then it’s worth the effort to look into a hosted offering. Also, keep in mind that in today’s competitive environment, excluding hosted/managed service providers significantly reduces the number of viable contenders in the product selection process.

During the past 18 months, hosted/managed service IVR vendors have been the leading providers of innovation, particularly in the area of reporting, analytics, and self-service tools. Additionally, a growing number of hosted/managed service IVR providers now offer a variety of optimization services that are not available from premises-based IVR vendors.

While there are many well-known and proven benefits in using a hosted/managed service IVR solution, users still need to consider some disadvantages when deciding how to finance a new initiative. Figure 2 (below) lists the potential risks involved in using a hosted/managed service IVR solution.

As is the case with all IVR implementations, we have good vendors that stand behind their products and services, as well as vendors that are not as well-respected. To mitigate risks, DMG Consulting recommends all prospects ask for and contact references, who are often happy to share their war stories and provide tips to help avoid pitfalls.

Given the competitiveness of the IVR market, users who want to purchase or upgrade their IVRs are well-positioned to negotiate very favorable deals for their organizations. While vendors are complaining loudly about the aggressively low pricing required to win a deal, many of them are still highly profitable. However, quite a few hosted/managed service vendors are not profitable and are likely to either merge or disappear in the next two to three years. Additionally, the market is too crowded, and some competitors will go out of business. While this is less of an issue for users of hosted/managed service offerings, it is “ptive if an enterprise has to quickly find a new IVR partner. Therefore, users should carefully examine the financials of their preferred IVR vendors when making choices. They should also have a contingency plan ready so they will be prepared if they need to move quickly to a new vendor.

Figure 1: Hosted/Managed Service IVR PROS

  • It conserves cash;
  • It offers functionally rich alternatives;
  • It is designed to scale up and down easily, quickly, and cost-effectively;It is designed to scale up and down easily, quickly, and cost-effectively;
  • It doesn’t lock users into long-term investments. Users can negotiate a flexible contract, satisfaction and loyalty are earned monthly, and there is no big write-off when changing vendors;
  • It addresses disaster recovery and contingency needs without replicating equipment at multiple company-owned sites;
  • It makes it easier and more cost-effective to use at-home agents;
  • It handles virtual and geographically dispersed locations;
  • It dramatically reduces the time and complexity of opening additional contact center sites in the United States and other countries;
  • It reduces IT support costs, eliminating the need for IT staff and related management overhead (indirect cost allocations);
  • It eliminates hidden support costs that are generally not counted (such as data center real estate for servers, power, cooling, systems administration, database administration, help desk, change management, etc.);
  • It allows contact centers to adopt new features rapidly without additional license fees and internal/external upgrade charges; and
  • It makes new functionality available more frequently than on-premises providers, which can be used to achieve a strategic advantage.

Source: DMG Consulting, August 2010

Figure 2: Hosted/Managed Service IVR CONS

  • The user must depend completely on the vendor to provide a high level of service reliability and availability;
  • The user needs to negotiate with the vendor for reasonable service-level agreements and contract cancellation charges;
  • Termination of a long-term contract before it expires could be costly;
  • Quality of service, cost, and speed of enhancements are subject to changes in the hosting vendor’s financial position or business strategy;
  • The service provider might not be as responsive as an in-house team;
  • The vendor generally does not have resources at the client’s site. Instead, support is provided remotely;
  • The user must depend on the vendor to implement new features; and
  • Data security and backup are no longer under the user’s direct control.

Source: DMG Consulting, August 2010

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