I’ve been predicting for a couple of years that the worlds of business process outsourcing (BPO) and Software-as-a-Service (SaaS) would converge. In fact, you can also add managed services to the mix.

The reason for this prediction is that the BPO companies, especially the offshore companies, can no longer sustain their labor-intensive business models. Competition for skilled labor is intensifying, driving up operating costs and creating service continuity issues as workers jump between firms.

In response, the BPO companies must shift their operations from a labor-centric to a software enabled model. SaaS represents a natural solution for this business challenge. The BPOs will use SaaS to automate their existing processes and services, to expand their service portfolios, and to extend the reach of their operations.

The BPOs will use managed services to do the same in the IT infrastructure management arena.

The clearest example of this convergence process is Cognizant Technology Solutions Corporation, which last week announced its intention to acquire marketRx, Inc., a provider of web-based analytics and related software services to global Life Sciences companies in the pharmaceutical, biotechnology and medical devices market. This $136 million transaction follows Cognizant’s acquisition of IT infrastructure managed service provider (MSP) AimNet Solutions in September, 2006.

Although neither Cognizant nor marketRx refers to this acquisition as the coming together of SaaS and BPO, marketRX offers web-based Sales Management & Operations, Brand Marketing & Product Management and Market Research solutions which clearly complement Cognizant’s traditional services.

The acquisition also gives Cognizant deeper inroads into the Life Sciences sector by capitalizing on marketRx’s installed base of 75 customers that includes the 20 largest pharmaceutical companies and 4 of the top 5 biotech companies.

This transaction shows how the line of demarcation between SaaS and BPO is blurring. This point was also brought home in a conversation I had with the founder/CEO of a small payment processing services company last week who wasn’t sure whether to categorize itself as a SaaS or BPO company.

My answer was/is that it depends on the audience. Industry analysts and investors may be concerned about these categorizations, but most customers will see this company and larger vendors like Cognizant as business services companies.

The convergence of SaaS and BPO will enable business services companies to more economically develop and deliver their solutions. Therefore, I expect to see more SaaS acquisitions among the BPOs this year and in 2008.