One in four business process outsourcers will not exist as independent organisations within three years, according to analyst group Gartner.
The analyst group’s predictions come in a new report published in the aftermath of Dell’s proposed takeover of Perot Systems last week and this week’s surprise move by Xerox to buy up ACS.
Gartner warned end user organisations to consider their strategies carefully when signing up to BPO deals. Organisations should look for warning signs when evaluating BPO vendors to mitigate risk, the analyst said in a new report, Business Process Outsourcing Vendor Consolidations: Is Your Contract at Risk?”
“As providers are exposed to the economic crisis, loss-making contracts, and an inability to adapt to standardised delivery models, many will struggle to survive in their current form,” said Robert H. Brown, research vice president at Gartner.
“Some will be acquired and some will exit the market completely to be replaced by dynamic new players delivering BPO as automated, utility services.”
The report lists key indicators that may show which BPO suppliers could be candidates for acquisition or which might simply leave the market outright.
Some outsourcers have a “chronically unprofitable portfolio” of BPO deals on their books, the analyst said.
Much of this stemmed from a land grab of contracts, “without much thought as to how to transition them to a standardised, rationalised, profitable state of ongoing operations.”
End users should ask suppliers to provide information on their contracts and profitability. “While most vendors will be reluctant to share this information, those that stand the best chance of longevity will realise that BPO is a partnership and being open about profitability can limit long-term risk to both parties,” Gartner said.
The analyst group urged end users to examine potential outsourcers’ track record over the last three years, to se whether they are winning significant new business.
End users should also see if the outsourcer has lost significant high profile customers because of retendering at the end of contracts.
Basic financial data such as capitalisation and the degree of leverage also offers guidance about BPO suppliers’ future.
“In addition to the costs of the bid and proposal, large BPO deals usually require significant amounts of upfront cash investment on the part of the vendor. For this reason, more providers are making investments in platform-intensive approaches to BPO that require buyers to adopt their standard platform and service-level agreements, as opposed to the "lift-and-shift" strategy.
“Heavily leveraged vendors still invested in the lift-and-shift approach are the most likely to run into problems acquiring funding," Gartner said.
The analyst said BPO suppliers’’ exposure to financial services should also be taken into account. “While exposure to the banking sector is by no means an absolute harbinger of doom, sourcing executives should be aware of the potential impact if their provider has a significant amount of revenue (more than 85 per cent) as a financial services pure play BPO vendor.”
Finally Gartner noted that cancellation rates among it annual BPO buyer survey in 2008 rose sharply over 2007.
This means end users should build exit strategies into contracts and develop contingencies for contract termination, especially before signing the deal.
“BPO switching costs can be steep, so it’s important to understand contractual issue escalation procedures to ensure that all rational options are exhausted before initiating legal and/or termination discussions.”