Outsourcing shakeout, 25 percent to disappear, says Gartner

Twenty-five percent of today’s top business-process outsourcers (BPO) will not exist in the next three years according to a research note released yesterday by Gartner.
Gartner reported that economic pressures, poorly conceived contracts and the inability to adapt to standardized delivery models are all having a big impact. “Some will be acquired and some will exit the market completely to be replaced by dynamic new partners delivering BPO as automated, utility services,” said Gartner research VP Robert Brown.
Outsourcing is a controversial trend that is hotbed of discussion that saved IT companies’ money and created a loss of jobs for U.S. workers–is going through some critical times and putting enterprises at risk.
CIOs can mitigate the risk of being entangled with an inadequate BPO partner, Gartner said, by checking for signs of trouble.
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 initiating legal and/or termination discussions.
Gartner said that 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.
Warning signs that an outsourcing partner is in trouble include: The outsourcer is losing money, not winning new business and suffering the loss of marquee clients. Other signs that something may be amiss include poor capitalization that is impeding growth and high exposure to tainted financial firms. The bottom line, said Gartner, is to have an exit strategy, and to look carefully before you sign any new outsourcing contracts.
Gartner has detailed 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.
1. Chronically Unprofitable Portfolio BPO Deals
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. A buyers vendor selection teams should gain insight into prospective providers’ deal 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.
2. Sustained Inability to Win Significant New Business or Drive Growth and/or Profitability
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.
3. Loss of Visible, Established Marquee BPO Deals To Competitors Because of ‘Recompetes’ at the End of a Contract Life
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.
4. Capitalization Prevents Funding for Bidding on New Deals
Some heavily leveraged — or risk adverse — 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 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.
5. 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.
6. Levels of BPO Contract Cancellation and Re-Insourcing Rise Even Higher