Arecent Gartner report points out that one quarter of top business process
outsourcing (BPO) companies will not exist as separate entities by 2012.
Acquisitions and ascent of new vendors is likely to rearrange the BPO provider
landscape in the coming years.
According to Nasscom the current size of BPO industry is around $11 bn, and
is likely to increase in size to $50 bn by 2012. This growth is likely to add
almost 2.5% directly to India's GDP from export earnings, and provide direct
employment to about 2 mn people.
In some ways, the process of consolidation has already started. Last year,
TCS acquired Citigroup's captive. One of the biggest acquisitions last year was
that of a 75% stake in Cambridge Solutions by UK based Xchanging. Aegis also
went for an acquisition. Most of the top Indian companies like- Genpact, TCS BPO,
Firstsource, HCL BPO, Aegis, Aditya Birla Minacs, and Infosys BPO have done
acquisitions in the last two to three years.
Recently, UBS, Switzerland's biggest bank by assets, has sold its Indian back
office captive to multinational services firm-Cognizant Technology Solutions,
for around $75 mn along with a five-year outsourcing contract worth up to $442
mn. The acquisition will strengthen Cognizant's BPO practice, and also help it
expand its relations with UBS, an existing client.
Besides Aegis, Essar Group promoted BPO firm, is on an acquisition spree.
Recently, Aegis acquired 80% stake in iSmart Timex, a leading BPO services
provider in Sri Lanka, for an undisclosed sum. This is Aegis' fourteenth
acquisition. According to media reports, Essar Group is considering merger of
Essar Information Technology Holdings (ETTH), which provides common service
operations across the group. This merger will help Aegis diversify into areas
such as F&A, HR, and payroll; as well as bring industry specific knowledge
within the company.
iGATE and Infosys are also looking for acquisitions. Infosys is looking for
an inorganic growth in the BPO and KPO space.
So some amount of consolidation has already started in the BPO space, and is
further likely to accelerate in the coming times. If the economic recession
continues, small BPO firms would be available in market for a lucrative deal.
The US slowdown is pushing more third-party outsourcing firms and captive
operations to sell out "The Gartner report is correct. After a prolonged
expansion phase, consolidation is bound to happen. Also, looking at the current
market trends and customer demands, this consolidation could be on higher side
of 25% than lower," says Rajendra Sawant, chief technology officer, Adventity.
As the industry matures, there is bound to be some consolidation. The current
economic scenario also will contribute to this trend. Economic crisis, loss
making contracts, and an inability to adapt to standardized delivery models-
many will struggle to survive in their present form.
"Certainly, the way the industry is moving right now, there is bound to be
some acquisition and merger. The current economic crisis certainly has a role to
play in this. We ourselves are looking for growth inorganically. We are looking
for acquisitions in tier-3 and tier-4 BPO, specifically in BFSI and healthcare
segments," says Nick Sharma, CEO of CSS Corp, which has BPO operations. The
company is planning to start another 1000+ seater BPO in the Philippines soon.
This is seconded by Navin Joshua of vCustomer as well. The company is itself
scouting for an acquisition. "Since we are a cash rich company, we are
continuously looking for an acquisition, or an opportunity for inorganic growth.
Going forward, there is a likelihood of an increased activity in the mergers and
acquisitions field." says Navin Joshua, executive director, vCustomer. Adventity
is another BPO firm, which is looking out for an acquisition. "We are looking
for acquisition of companies offering services in mortgage and insurance sector.
Basically we have a real good mix of service offerings in this sector and would
like to expand the same through some strategic acquisitions," says Sawant of
Adventity.
Though recession has accelerated the consolidation process it is not the main
reason for it. "Indian BPO market is a volume business with margins going down.
So additional value proposition in terms volume and platform-based services to
reduce costs are the mantra of the business. To achieve these goals in shorter
time, consolidation is imminent," explains Sawant.
"As providers are exposed to economic crisis, loss making contracts, and an
inability to adapt to standardized delivery models-many will struggle to survive
in their current form. Some will be acquired, and some will exit the market
completely to be replaced by dynamic new players delivering BPO as automated,
utility services," says Robert H Brown, research VP of Gartner.
Six Points
The Gartner report further identifies six key signposts to watch for, that
might herald the predicted market shakeout; and identifies which BPO vendors
might be candidates for acquisition.
First is the case of chronically unprofitable contract portfolios. In the
economic recession, many BPO providers have started going for unprofitable
contract deals, without giving much thought about how to turn them into part of
ongoing operations. Secondly, it is critical for the vendor to work on a number
of deals, and a vendor should be able to cater to the needs of more than one
customer.
Another factor, according to Gartner, which can significantly contribute to
the expected change in BPO landscape is the dependence on financial services.
Financial services account for about one-third of the total BPO market; and this
segment was the first one to be exposed to credit crunch and financial meltdown.
Gartner believes that if more than 85% of providers' revenue is coming from the
financial segment, then it is a cause of concern for the vendor.
Another factor is that capitalization prevents funding for bidding on new
deals. According to the report, some heavily leveraged vendors may be unable to
obtain the necessary investment needed to bid on a business opportunity, however
attractive the proposition. In addition to the costs of bid and proposal, large
BPO deals usually require significant amounts of upfront cash investment on 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 who still invested in the 'lift and
shift' approach are most likely to run into problems acquiring funding.
In the scenario of platform becoming a norm, big and powerful BPO companies
are likely to make the maximum of existing opportunities, while smaller ones
would find it difficult to survive. This would further lead to more
consolidation in the market.
"It is clearly a volatile situation. Definitely a fewer players will exist in
the market. However, there is certainly opportunity for players with better
understanding and innovation in the market," says Joshua.
The report also highlights the fact that levels of BPO contract cancellation
and re-insourcing rises even higher. Cancellation rates among Gartner's annual
BPO buyer survey in 2008, rose sharply from the 2007 data. Consequently, Gartner
advises buyers to build exit strategies into contracts, and develop
contingencies for contract termination, especially before signing the deal.
Whether one quarter of the top BPO companies will exist as separate entities
by 2012 remains to be seen, but if present situation is anything to go by, the
outsourcing landscape will be going through a major transformation in the near
future.
Gagandeep Kaur
gagandeepk@cybermedia.com
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