A fourth of top BPOs won't exist in 2012: Gartner

One-quarter of the top business process outsourcing (BPO) operatives will not exist as separate entities by 2012, according to Gartner. Market exit, acquisitions, and the ascent of new vendors will rearrange the BPO provider landscape in the coming years.

The research and advisory firm cautioned enterprises and said they 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 standardised 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,” said Robert H Brown, research vice president at Gartner.
 
Gartner identified six key signposts to watch for that might herald the predicted market shakeout. The first, is the unprofitable contract portfolio, largely stemming from too-much, too-soon pursuit of deals without much thought as to how to transition them to a standardised, rationalised, profitable state of ongoing operations.
 
Losing marquee or major customer, is another reason that can be a leading indicator of trouble, especially if the remaining portfolio of business is small. 

The report further noted that some heavily leveraged — or risk adverse — vendors may be unable to obtain the necessary investment needed to bid on a business opportunity.

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. Add to this 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.