BPO Obit warning by Gartner

MUMBAI, INDIA: A Gartner Special Report could be of help to CIOs and vendor managers develop, implement and manage programs to assess and mitigate vendor risks.

Specially, because it warns that one-quarter of the top business process outsourcing (BPO) operatives will not exist as separate entities by 2012.

Acccording to Gartner, Inc. market exit, acquisitions, and the ascent of new vendors will rearrange the BPO provider landscape in the coming years, and enterprises should look for warning signs when evaluating BPO vendors to mitigate risk.

"As providers are exposed to the economic crisis, loss-making contracts, and an inability to adapt to standardized 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."

Gartner has identified six key signposts to watch for that might herald the predicted market shakeout and identified which BPO vendors might be candidates for acquisition or outright market exit.

First is the case of chronically unprofitable portfolio BPO deals.

Gartner explains that some BPO providers are carrying unprofitable contract portfolios, largely stemming from too-much, too-soon pursuit of deals, without much thought as to how to transition them to a standardized, rationalized, profitable state of ongoing operations. Buyers' vendor selection teams should gain insight into prospective providers' deals to understand how profitable the vendor is. While most vendors will be reluctant to share this information, those

that stand the best chance of longevity will realize that BPO is a partnership and being open about profitability can limit long-term risk to both parties.

Second factor is that of sustained inability to win significant new business.

“It is important to gain insight into the vendor's track record of winning new business, particularly over a sustained period of two to three years. Handling multiple deals at once is a necessity in outsourcing, and buyers need to know that a vendor can successfully cater to the needs of more than one customer. A lack of recent new business activity can indicate that a vendor is choking on a backlog of business.”

It also highlights loss of visible, established marquee BPO deals to competitors because of 'Recompetes' at the end of a contract life.

Gartner says that for some exposed vendors, the loss of a major, or 'marquee', customer can be a leading indicator of trouble, especially if the remaining portfolio of business is small. It will always be prudent due diligence to seek and gain

a reference from any current anchor clients to understand how committed they are to the vendor and their experiences in dealing with them.

Next warning area is around exposure to the banking and finance sector.

“The financial services sector accounts for about one-third of the total BPO market globally, and providers with significant amounts of BPO revenue from the banking sector were the first exposed to the credit crunch and ensuing

financial meltdown.”

Subsequent mergers and acquisitions saw both current and prospective buyers of BPO "taken out of play" and this exposure could still leave many BPO providers vulnerable in the longer term. 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 percent) as a financial services pure play BPO vendor.

It also talks about levels of BPO contract cancellation and re-Insourcing rise even higher.

“Cancellation rates among Gartner's annual BPO buyer survey in 2008 rose sharply from the 2007 data. Therefore, Gartner advises buyers to 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 initiatinglegal and/or termination discussions.