Business process outsourcing market can fight back in 2011

Research from the independent technology analyst shows that while BPO is still enjoying a healthier growth rate than IT services, it has suffered badly from the global recession, with new contract signings drying up.

According to Ovum's IT Services Contracts Analytics, which tracks all IT and BPO contracts worth over US$1 million (about R7 million), only 105 contracts with a BPO component were tracked in the first nine months of 2010. This figure, although a slight improvement on the same period of 2009, is still very disappointing, bearing in mind that 2009 was a disastrous year for BPO signings.

However, Ovum finds that the business case for BPO is as strong as ever, as enterprises focus in on cost cutting. The downturn that has paralysed decision-making at potential outsourcing customers since 2008 may have created a pent-up demand for BPO that could translate into a spurt of contract signings in 2011.

Expiries being new opportunities

An increasing number of BPO contracts are expiring, bringing new opportunities to vendors to wrestle the work from incumbents. Ovum has details of 207 BPO deals (or IT service deals with a BPO component) that are set to expire in 2011, totalling US$12.2 billion (about R85.4 billion) in contract value. This is an increase of 15% on the US$10.6 billion (about R74.2 billion) total value of the 201 contracts tracked that were due to expire in 2010.

In terms of vertical markets, the largest opportunities in expiring contracts are in the manufacturing (31% of total contract value) and banking (24%) industries. Telecommunications (6% as well as both local (9% and central government (6%) also represent significant opportunities.

"While recovery from the global recession is likely to continue at a slow pace, the way the BPO market will address the changing needs and desires of potential customers will be more rapid," said Patrick O'Brien, Ovum principal analyst and author or a new report on BPO*.

A more complex and nuanced market has emerged

"Outsourcing back-office processes was once seen as a radical, aggressive move based almost completely on Indian labour arbitrage, but the market has become more complex and nuanced. The competitive landscape has changed dramatically, and the capabilities of vendors have improved drastically, while more and more geographic locations are positioning themselves for BPO work, opening up new low-cost possibilities for work in multiple languages."

There have been a number of mergers and acquisitions (M&A) in the BPO space recently, mainly in the multi-process human resources outsourcing market, in which the HR operations of Hewitt, HP, Convergys, and ACS have all been purchased for knock-down prices.

That wave of consolidation appears to be over for now. "In 2011 Ovum expects M&A to be characterised by BPO players buying niche technology companies with software that they can develop into exclusive platforms for vertically targeted customers. We also expect to see some movement in the opposite direction of major software companies, as software and services companies are on a collision course to fight for each other's business", said O'Brien.

*2011 Trends to Watch: Business Process Outsourcing