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BPO services: Pockets of caution and selective resilience

In this report, we share our perspectives on the likely areas of disruption within BPO services and the factors contributing to a strong growth outlook of Indian pure-play BPO services providers. We believe that customer management services will see imminent deflationary impact, while industry-specific BPO could remain relatively resilient. However, we see some risks in sub-segments such as healthcare providers, which are attracting significant AI-related investments—84% of overall investments for healthcare administrative processes—alongside ongoing financial pressures. We expect a more gradual AI adoption among healthcare payers, with the immediate focus on offshoring to optimize administrative costs. We retain BUY on Sagility and REDUCE on ECLX and FSOL.

Deflationary impact significant and imminent in customer management BPO

Many enterprise use cases of GenAI and AI agents are aimed at infusing efficiency into call center operations, knowledge management and summarization. The current LLMs have better capabilities with significantly lower hallucinations in performing these tasks. We expect significant deflationary impact in the existing book of business for incumbents in the business, which is also reflected in the modest business performance of scaled peers such as TP and Concentrix.

Indian pure-play BPO could yet remain relatively resilient

Indian BPO pure-plays, such as FSOL and ECLX, also have significant exposure to customer management BPO services. However, their challenger positioning and ability to gain incremental wallet share aided by demand for right-shoring and outsourcing has enabled the companies to sustain robust growth rates. Further, the strong pipeline provides comfort on revenue growth. Nevertheless, we believe that the need for investments in capabilities will limit operating leverage. The sharp rupee depreciation might be a near-term tailwind, but eventually it will get factored into the pricing, leaving limited upside.

RCM services could face headwinds among industry-specific BPO

We continue to expect more gradual gen AI adoption for industry-specific processes, though there are a few nuances. Companies with exposure to the healthcare providers sub-segment face dual risks of (1) higher AI-driven disruption and (2) financial pressures impacting the businesses. Healthcare providers are ahead in commercial AI adoption (Exhibit 1). Planned AI investments have significantly increased, targeted at use cases, including ambient scribes, coding & billing and patient engagement processes. These processes attracted about 84% of overall AI investments aimed at addressing administrative complexities of healthcare payers and providers in CY2025 (Exhibit 2). The penetration rate of ambient AI scribes is likely to further increase in the next three years. Further, lower switching costs and shorter procurement timelines, specifically among ambulatory services providers, attract incoming competition, impacting overall pricing discipline in the market (Exhibits 3-5). AI investments in patient engagement services have significantly increased—up 20X yoy to US$100 mn in CY2025.

Significant funding channeled toward new-age competitors in RCM services

Multiple new-age companies are competing for spend share, primarily focused on various stages of RCM —medical documentation, front-office RCM & care navigation and back-office RCM. The appeal of Gen AI in the RCM process also stems from the fact that increased accuracy of documentation and coding activities could contribute to preventing downstream denials.

The surge in planned AI investments compared to the past year is also reflected in the significant increase in the valuations of new-age companies in the healthcare vertical. For instance, companies such as OpenEvidence and Abridge (focused on medical documentation) and Commure (focused on back-office RCM) are valued at ~US$5-6 bn (Exhibit 6). Incoming new-age competitors, flush with funding, coupled with shortening procurement cycles (higher among outpatient providers), would contribute to incremental downward pressure on pricing apart from that due to AI adoption. New-age companies in this market have benefitted from 85% of incremental spends, while incumbents continue to cede share (source: Menlo Ventures survey). Overall, AI investments targeted at simplifying healthcare provider processes were about US$1.3 bn in CY2025 compared to US$50 mn for payer operations (up 5X yoy off a low base).

We believe that scribing is among the areas that has now become commoditized and could be adversely impacted (Exhibits 7-9). Apart from new-age competitors, deep-pocketed players such as Microsoft too are aiming to streamline clinical and operational workflows of healthcare providers with Nuance’s Dragon Copilot offering. The company launched Dragon Copilot for nurses recently to support nursing staff to (1) seamlessly capture patient interactions, (2) draft flowsheets and notes, including summaries, (3) integrate it into existing workflows for ease of implementation and (4) with tight Azure integrations and also leverage integrations with dominant EHRs (Electronic Health Record) such as EPIC to ensure compliance with data integrity and privacy regulations.

Among larger industry peers, UnitedHealthcare recently launched Optum Integrity One, its advanced AI auto-coding tool to improve mid-RCM processes. The company indicated 73% productivity improvement for ambulatory providers and a 23% increase in productivity for health systems.

Healthcare provider’s financials remain pressured; another credit rating downgrade for Palomar Health

Most US healthcare providers continue to be impacted by the rising cost of care, inadequate reimbursements and regulatory & economic uncertainties. While these factors have resulted in cost reduction and cash conservation initiatives by providers and increased focus on RCM. However, the financial situation of a few healthcare providers that were already under some distress has worsened. For instance, S&P Global Ratings lowered its long-term rating to CCC+ from B and placed the ratings on credit watch with negative implications, meaning about 50% probability of another downgrade by possibly multiple notches within 90 days. This is the second downgrade by the rating agency of Palomar Health’s bonds in the past year.

Medical cost ratios likely to remain elevated for healthcare payers in CY2026

Healthcare payers are likely to continue to face headwinds from curtailed funding for Medicaid programs and elevated levels of medical cost ratios in CY2026. A pullback in funding for Medicaid programs is likely to impact the profitability of some payers in CY2026. Further, payers have also pulled back from offering select plans in a few markets with sub-optimal profitability in programs such as Medicare Advantage. CMS expects overall enrolled members in Medicare to remain flat yoy in the current annual enrollment period (AEP), while larger plans such as UnitedHealth, CVS and Elevance have indicated a reduction in overall memberships, while Humana expects mid-single-digit growth for the market and also for its health plans as well. We note that Humana had already pulled back its presence in a few markets in CY2025. Star ratings have remained stable yoy, with ~40% of overall health plans in Medicare Advantage program having over 4-star ratings, providing some hope of improved financial performance in CY2027 (Exhibit 10).

In the near term, health plans are likely to continue cost optimization initiatives such as offshoring and outsourcing as well as undertake targeted initiatives to roll out AI. Member care coordination and utilization management are among the top-3 priorities for 57% of payers. The focus on network optimization and plan design has increased in the past year and is among the top-3 priorities for 55% of payer respondents. Claims processing and payments are also among the top-3 priorities for 51% of respondents as part of a Bain survey. Call center operations feature the highest in terms of the implementation of AI, with about 20% of respondents indicating full rollout of AI (Exhibit 11-12).

The outcomes are consistent with the indications of larger health plans. UnitedHealthcare indicated that it is aggressively scaling its AI/ML capabilities to enhance member experiences and optimize core performance. The company indicated that about 95% of claims are automatically processed, about 85% of member inquiries are served digitally, and about 95% of members’ questions are resolved in the first interaction, demonstrating success of some of its technology initiatives even as the company continues to invest in strengthening its Optum Insight division to realize its potential. Elevance indicated the deployment of a digital virtual assistant and AI-enabled call center assist by end-CY2025. Further, the company has stepped up investments in automation to process claims faster while also leveraging AI to reduce low-value work for its associates. The company announced several hundred million dollars of targeted investments in AI and digital tools to enhance provider and member experience as part of its strategy to improve its star ratings. A detailed commentary of the business is presented in Exhibits 13-14.

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