In addition to trying to do business in a tough economy, BPO suppliers are facing another challenge: a wave of renegotiations. "Pricing structures and service offerings that made sense during the boom don't make sense now," says Dan Masur, partner at Mayer, Brown and Platt, an international law firm based in Chicago, Illinois. "Today there's a need to slim down services."
Buyers wanted to "right size" their contracts to more accurately reflect their current economic status, the attorney explains. That trend will continue this year too, he predicts.
BPO Supplier Market Divides In Two
Last year the BPO supplier market became bifurcated into two distinct segments. The first group has become a specialist in one substantive area, either around a distinct process like finance and accounting or a specific industry like banking. These suppliers have built their offerings on a suite of tools and are moving to an application service provider (ASP) model of delivery.
Their buyers were often other start-up companies that had no interest in building the infrastructure necessary to perform these business processes. "They were happy to outsource their non-core processes to a supplier," says Masur.
The attorney says many traditional companies "would love to have the interesting tools these suppliers developed." But with the new laser focus on profitability, they can't justify them because they won't have an immediate impact on the bottom line. This new attention to results, in turn, affected their viability.
Many of the companies in this bracket were start-ups that are either gone (like Phoenix, Arizona based LeapSource) or faced financial challenges at the end of the year. Masur believes these struggles will continue in 2002. Larger companies may buy a company if it's hungry for the proprietary technology, he suspects.
The other segment of the BPO supplier market consists of large companies that started life as IT integrators. The leaders in this group-Accenture, CSC, EDS and IBM-are seeking "to expand their reach." IT outsourcing is becoming a commodity and their margins are being squeezed. They are turning their focus to BPO because of its high profitability, Masur continues. They feel they already have the core competencies in these processes from their work in the IT portion of the process.
The New Focus on Cost
Last year reducing costs was a primary focus of BPO outsourcing. "Before the economic downturn, reducing cost was either last on the list or not on the list at all. In 2001, reducing cost became the No. 1 corporate objective or the only objective," reports Masur.
This year Masur predicts buyers will have to decide if they want to deal with a financially challenged supplier that has a "spectacular product offering" they really want. Buyers may risk outsourcing to a company "with insufficient financial backing that makes them wonder if the supplier can perform over the long haul" if the offering is exciting enough. The attorney predicts some of the bigger BPO suppliers may step in and purchase these small, struggling companies to own the technology. Eventually "the tools may end up in the hands of a more stable entity," he predicts.
At the same time, buyers will continue to worry about cost. "Few companies are going to outsource a 'nice to have' project. The only deals that will get done in the near future are those that have an economic impact on the bottom line," says Masur.
This year, many traditional brick and mortar companies are adopting the virtual approach. Masur says he is currently negotiating a BPO transaction for a traditional company that is creating an Internet business arm. It is outsourcing the business processes at the outset. "I think we'll see more of this kind of thinking this year," the attorney says.
Buyers will also be willing to do joint ventures with their suppliers. Buyers want to turn a cost center into a profit center by selling a proprietary tool they have developed, like a successful return on assets tool. They will be open to structuring an outsourcing relationship where both parties share the financial returns.
Finally, 2002 is the year that the big IT integrators "will make a major push into BPO," he predicts.
Lessons from the Outsourcing Journal:
- Buyers want to renegotiate outsourcing deals they made during rosier economic times. That trend started last year and will continue this year.
- The BPO market is divided into two main parts: small companies that have developed their own tools and who are specialists and the big IT integrators who are concentrating on their BPO offerings.
- Traditional IT suppliers are entering the BPO market because of its profitability for them. They already have the process expertise because of their IT work in the field.
- Buyers with proprietary tools will be willing to form joint ventures with suppliers to share in the profits from selling those tools to others.
- Buyers will have to decide if they want to take the risk of doing business with BPO companies with great offerings but shaky financial foundations.