Browse > Home / BPO Blogs / As BPO vendors enter the survival of the fittest phase, will your BPO or vendor be among the lucky ones?

As BPO vendors enter the survival of the fittest phase, will your BPO or vendor be among the lucky ones?

October 13, 2009

Gartner has recently released a study (entitled: “Business process outsourcing vendor consolidations: is your contract at risk?”) that predicts a gloomy future for many BPO vendors as they expect the industry to undergo a major consolidation by 2012 that will wipe out 1/4th of all vendors in their current form. By then, the closure of loss making units and acquisitions will leave behind a new type of BPO that delivers services as “automated, utility services” – in other words, only the strongest and best capitalized will survive.

Gartner has also determined six key warning signs that your BPO or BPO vendor may be on the endangered species list and these warning signs are:

Unprofitable BPO Deals. The headier days of outsourcing before the downturn has left some BPO vendors saddled with unprofitable or unstable contract portfolios or too much overhead. A case in point would be the layoffs of 500 Manila based Accenture employees last January after the projects they were hired for were scaled back or simply never materialized. Hence, clients need to have an understanding of just how profitable and stable their BPO vendors’ existing contracts are along with an idea about how much overhead they have. Those vendors who have the best chance for long-term survival will be more open to sharing such information.

BPO survival

Inability to Win New Business & to Manage Current Deal Flow. A BPO’s clients need to have an insight into the BPO vendor’s ability to win new business over the past couple of years and their ability to handle multiple deals at once. A lack of new business activity could be a sign that a BPO vendor is having trouble winning new business or has a backlog of business to deal with. However and as a someone I know who manages an RPO arm of a shared services type of operation said to me earlier this year, winning any new business (to justify their continued existence) in the then current economic environment was proving to be tough and he was also constantly being underbid by other small players based in India who were charging rock bottom rates by reselling so-called dedicated seats to multiple customers.

Loss of Existing or “Marquee” Customers. For some BPO vendors, the loss of a major BPO client may be disastrous if their remaining client base is small and if they have a significant overhead. Hence and during any due diligence process, clients should obtain references from a BPO’s marquee clients to determine how committed they are to their BPO vendor and also take into account their overall financial stability.

Inability to Make Upfront Investments. Overleveraged or risk adverse BPO vendors may not have the cash to bid on new BPO contracts while larger BPO deals usually require significant amounts of upfront cash investments on the part of the BPO vendor. Hence, BPOs that require their clients to utilize their standard platform will likely be in a better cash flow position or have the ability to raise financing. In other words, look for many midsize players to either merge or go out of business while smaller players may be able to survive by focusing on over looked niches or by catering to the SME market. 

Overexposure to Financial Services Clients. BPO vendors with significant exposure to the financial services sector were among the first to take a hit from the credit crunch and subsequent shakeout in the financial services industry. Hence and although the financial services firms are showing signs of recovering, experts advise that buyers of BPO services should be wary of vendors with a significant amount of revenue coming from this sector alone.

Rising Contract Cancellations and Re-insourcing Trends. According to Gartner, contract cancellations have risen sharply in their annual BPO buyer survey in 2008 verses 2007 as clients either suffered loses themselves or choose to move previously offshored work in-house. Hence, they are advising buyers to build exit strategies into outsourcing contracts and to develop contingency plans for contract terminations before signing any BPO deal as BPO switching costs are often steep. They also advise having a firm understanding of contractual issue escalation procedures and to have contracts that allow for plenty of other options besides termination.

Given the above industry trends, BPO vendors will need to strengthen and reinvent themselves while clients will need to be extra careful as we enter the survival of the fittest phase for BPO.

Share and Enjoy:
  • LinkedIn
  • TwitThis

Related posts:

  1. Satyam scandal – Can other Indian outsource vendors be Trusted?
  2. Outsource or own it?
  3. Will Obama’s proposed withdrawal of tax incentives to outsourcing companies impact India?
  4. Top five elements to include in a BPO contract
  5. India’s ITES/BPO Industry Turns to Domestic Market, New Geographies in Difficult Times


Written by JohnU · Filed Under BPO Blogs 

Comments

One Response to “As BPO vendors enter the survival of the fittest phase, will your BPO or vendor be among the lucky ones?”

  1. Sandy on November 23rd, 2009 1:19 am

    You should feel the BPO vendor is an extension of your own business. Today the leading BPO companies have process that involves the best combinations of people and technology to deliver results.

Got something to say?