Unprofitable Contracts/Market Consolidation to Push 25% of BPO Vendors Out of Business

According to research firm Gartner, pressure from market consolidation and losses from deals is likely to 25% of BPO service providers out of business in two years.

The analyst house said in a statement reported by CBR, with providers increasingly exposed to the economic crisis along with contracts that run into losses and failure to adjust to standard delivery models, many of them will have a tough time surviving. In the near future, enterprise BPO agreements may put service providers at risk.

Some vendors are likely to be taken over, as was seen by Dell and Xerox making their entry into the services markets with planned takeovers of ACS and Perrot Systems, two BPO heavyweights. On the other hand, some of these firms will also go bankrupt with unprofitable deal portfolios weighing on them.

Gartner suggested in its guidance for business executives that is a necessity to understand what to look for with BPO vendors that are likely to go bust amid this shakeout. It warned that procurement teams are required to constantly evaluate profitability of vendors, while monitoring for evidence of nascent business activities. However, losing a big name client or overexposure to the finance or banking industry should be perceived as danger signs and these vendors should be avoided. Firms seeking BPO contracts are required to assess the impact, when making agreements with vendors that obtain 85% or more of their income from the financial services sector.

Gartner's 2009 BPO buyer survey reported a drastic increase in cancellation rates in comparison to 2007. The advisory firm stated that businesses need to develop exit strategies into agreements ahead of signing contracts - this would provide measures to terminate deals in case of an unforeseen incident. Furthermore, CIOs and business executives should take the responsibility of exhausting all possible options prior to termination of contracts.

The three main attributes of the BPO industry incorporate some degree of technology investment into the solution. These include front office, which include activities like contact center and call center management, horizontal back-office, i.e. accounting and finance, document management or human resources and vertical back-office processes like pensions administration in the financial services industry.

Hence, the BPO market has incredible potential. According to numbers from Ovum, Accenture, Capita, Xchanging, Vertex number and HP/EDS are among the top 5 BPO suppliers in the U.K. The U.K. BPO market is approximately £100 billion. Since there is much at stake in the BPO landscape, change is inevitable in the near future, said Gartner, adding that it is imperative that businesses scrutinize their potential suppliers closely.