Gartner Says Increased Demand for Business Process Outsourcing to Create a Seller's Market in 2005

Analysts to Show How To Implement and Manage a Successful Outsourcing Partnership During the Gartner Outsourcing Summit, April 4-6 in Los Angeles, CA
STAMFORD, Conn.--(BUSINESS WIRE)--March 29, 2005--Worldwide business process outsourcing (BPO) is projected to reach $133.7 billion in 2005, an 8 percent increase from 2004 revenue of $123.8 billion, according to Gartner, Inc.

Gartner analysts predicted earlier this year that eight to 12 major BPO contracts, each exceeding $300 million in contract value, were likely to be signed between the fourth quarter of 2004 and the end of the first quarter in 2005. That prediction is rapidly turning into a reality. Gartner analysts now believe interest and demand for BPO will surge as more of these larger deals are signed.

Gartner defines BPO as the delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administers and manages the processes based on defined and measurable performance metrics. BPO has many markets. They typically include staff functions such as human resources, finance and accounting, and contact centers or vertical specialization such as insurance claims processing or banking payments.

"A year ago, BPO providers and prospective buyers held many discussions, but few deals were signed," said Lisa Stone, research vice president at Gartner. "The level of activity that we are seeing now reflects the fact that the value proposition behind BPO has been accepted by buyers. Through year-end 2005, prospective buyers will be energized, creating a seller's market,""

Ms. Stone said that prospective buyers should understand that as rising demand materializes into more completed deals, the top vendors of BPO services will be focused on this newly acquired business. For this reason, more vendors will be in a position to bid only on projects that have a high probability of resulting in a sale.

"If a company is considering new BPO projects, it must begin to develop a BPO strategy and make decisions soon," said Robert Brown, principal analyst at Gartner. "Companies must consider if BPO offers an opportunity for them to improve services without capital investment, offload noncore services or reduce operational costs. The sooner prospective buyers can start meaningful discussions with providers, the more likely they will be to get the BPO vendor's attention."

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Ex-Satyam BPO chief in contention for CEO post

Even as the buzz around Vivel Paul's candidature as CEO is still doing the rounds at Satyam Computer Services [Get Quote], insiders say the government is considering a person who was an integral part of the company till three months ago.

The name of Venkatesh Roddam, former CEO of Satyam's BPO subsidiary Nipuna, is being seriously considered, since Paul is not keen to return to India, according to highly-placed sources. The search for a CEO has been following founder Ramalinga Raju's disclosures of financial fraud January 7 and his subsequent arrest.

Roddam, who is taking a break from corporate life and lives in Hyderabad, said: "I'm not too sure what is happening. I am getting calls from close friends and relatives who are asking me about this."

Roddam did not, however, offer a direct reply when he was asked if he was interested in the post but suggested he was not averse to it either. "It is a fantastic company to work with. It's an interesting and challenging role. They have a competent board now, to provide all kinds of support," said Roddam who worked for Nipuna for about three years.

Last week, Business Standard reported that the government had exhorted the new board, whose six members it has nominated, to look within the company or identify a person who knew Satyam's operations well, for the post of CEO and CFO.

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New BPO Mantra : Divest and Rule

First global firms set up the BPO or business processing outsourcing units in India and other countries where they could get cheap labor to handle their myriad tasks. As time wore on, these global giants realized that their BPO units were a profit-making industry in their own right. And that’s when the recent trend of divesting outsourcing units began. Today, a growing number of multinational firms are divesting their outsourcing units, cashing out while maintaining their outsourcing relationships.

BPO is big business today and according to industry predictions, by 2010 India’s BPO operations alone will touch $25 billion from the current $7.5 billion. So if the BPO industry is so big, why are the multinationals selling out? Because they have found that there are other big, global outsourcing firms that can easily handle their requirements.

This means an unnecessary in-house unit could be a drain on precious resources. Probably what we are now seeing in the BPO industry is a trend similar to the ongoing changes in the steel industry. Consolidation seems to have become the keyword required for survival and growth.

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New Rules for the BPO Industry

Essar Group, a smallish Indian conglomerate, acquired a bit of fame earlier this year when Vodafone bought out Essar’s partner in Hutch-Essar, the fourth-largest Indian wireless carrier. Essar now has a 33% stake in Vodafone-Essar in addition to its own many Indian subsidiaries, including steel, oil refining, and shipping business. In the US, Essar causes barely a ripple, yet one of its subsidiaries here could be quietly rewriting the rules for the BPO industry.

The company is Aegis BPO Services, with its headquarters in Texas, which is the 8th- largest 8 BPO operator in India. Essar patched the organization together over the past 7 years through a couple of US acquisitions and some rapid organic growth. It now has about 8,000 employees and $225 million in annual revenues. This is according to Madhu Vuppuluri, president of the Americas for Essar, whom I met at a dinner at the Indian Consulate in New York last night.

The key thing to understand about Aegis is that half of its employees are in the United States—a far cry from the heavily India-centric approach taken by industry leaders such as Genpact and WNS. In fact, Vuppuluri tells me, the company even has a call center staffed by 300 people in downtown Manhattan, one of the most expensive places in the world to do business.

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