As companies look for more robust offerings, BPO providers turn to partnerships and mergers to build their repertoires.

by Phil Fersht

With so many outsourcing providers seeking to enhance their offerings in the Business Process Outsourcing (BPO) arena, we are seeing a spike in acquisition and partner activity as providers look to add process depth, industry expertise, technology enablement, and scale to their services offerings. But we believe enterprises seeking to move into five-year-plus BPO engagements need robust services for the long haul.

A BPO offering is dependent on a provider being able to deliver business processes that can be enabled by technology and delivered in the required language. Investing in all these resources upfront is costly, and for many up-and-coming providers, forging alliances to fill short-term solutions gaps is essential to a growth strategy. But, ultimately, it’s making the right decisions on the solution areas they acquire outright that will determine long-term success. Providers seeking to enhance BPO offerings can acquire other BPO providers; partner with other BPO firms;

acquire the shared services operations of an enterprise; or acquire software solutions that give them scalability and a unique differentiated offering. The table outlines many of the BPO-centric acquisitions made by leading outsourcing suppliers and what each deal achieved.

As the global services market continues to mature, enterprises are evaluating more complex services that encompass IT and business process services at a global level. We believe acquisitions are providing a platform for developing high-value BPO offerings. Partnerships have simply provided a mutual short-term opportunistic solution for the vendors, normally for the purposes of winning deals.

When we look back at BPO partnerships, it's hard to find examples that have genuinely worked. Take, for example, the recent partnership between procurement BPO supplier ICG Commerce (ICGC) and finance and accounting BPO supplier Genpact, which created a potentially powerful combination.

F&A BPO is a much larger and more lucrative market based on the major labor arbitrage advantages of moving transactional processes offshore; whereas procurement BPO has been a tougher sell to companies with the challenges of moving work into low-cost locations and transitioning unique expertise sets in distinct category areas over to third-party providers. The business case for procurement BPO is predominantly based on future savings from managed procurement expenditure and not on immediate savings from the bottom line through moving hundreds of positions offshore.

Moreover, procurement is one of the functions many firms have cut to the bone, and the only means to find new avenues of optimization is through having better technology and access to skilled staff that normally reside in regions where the procurement transactions take place. Most companies moving into procurement BPO today have already outsourced transactional finance work, have become experienced with outsourcing, and want to take a longer-term and more strategic view of managing their global sourcing mix. Hence, ICGC needs to be close to the F&A BPO action to get into the procurement BPO discussions.

Partnerships like Genpact-ICG Commerce are largely opportunistic; this helps both service providers team up for broader finance/procurement customer bids, where they are often vulnerable when competing with the likes of Accenture and IBM, which both possess broad Finance and Accounting (F&A) and Procurement BPO solutions.

While we view this partnership as a positive step forward for both providers, we believe Genpact should go farther and acquire ICG Commerce, as BPO solutions that cut across finance/procurement and payroll functions normally require process knowledge that must be shared across delivery staff and technology. It is often challenging to transfer these processes to two separate suppliers, whose staff work in separate locations, for different organizations with different cultures, and different technology platforms.

BPO services are only as good as the people delivering them; you need to know your provider is investing in ongoing quality improvements, enhancing the technology on an ongoing basis, and constantly developing its personnel. Outsourcing partnerships have proven to be more successful where two suppliers set aside budget to co-invest in developing a platform, or jointly establish a delivery center, as opposed to teaming up opportunistically to win deals.
For Genpact, the need to broaden solutions across business processes tied to core ERP is intensifying. Many BPO discussions are dominated by multi-tower IT-BPO suppliers pushing for bundled IT and business process options. HP with EDS should become a major force in broader BPO offerings, while Capgemini, Infosys, TCS, and Wipro focus on chasing broader engagements. They see the risk of Accenture and IBM running away with the high-end market if they can't scale up and bundle offerings more effectively.

Offshore IT and BPO services provider HCL recently acquired the financial services arm of UK-based BPO provider Liberata. HCL had a developing presence in financial services markets with its IT services offerings. With this acquisition, it can broaden its presence and provide more business-focused services. HCL’s new BPO offerings will afford it greater client lock-in, broader business relationships, and a deeper customer intimacy. HCL will deploy the newly acquired operations to go after new financial services clients operating across Europe and the U.S. The key differentiator of LFS is its existing ALPS (Advanced Life and Pensions System) platform, which has been developed based on Sungard’s AMARTA Tool Kit and provides capability for end-to-end servicing in Life and Pensions processes. 

The acquisition also brings skilled resources to HCL’s fold: Capability in the actuarial application “Prophet” and advanced unit pricing methodologies. These enable HCL to service asset management companies in fund pricing, net asset value computations, etc. As HCL pursues a strategy to enhance its BPO offerings, expect further niche acquisitions in the healthcare and financial services verticals in addition to broadening horizontal offerings in supply chain, finance and accounting, and knowledge process services.

Acquisitions are the most effective route to client lock-down. The battle is on to take control of the top clients, and long-term BPO contracts provide a great avenue for suppliers to lock down clients for the long term. They help providers build credibility and broaden their solutions. While many of these BPO engagements may not reap the profit margins enjoyed in the IT services sector, the IT and business transformation revenue a BPO engagement delivers make this a very attractive market for leading service providers. Developing services on a global scale, which encompass industry-specific acumen, ERP-enablement and process excellence, is the key to this market, and owning these capabilities is advantageous to today’s service providers. Winning in this market requires service providers to broaden their hybrid IT and business process services—by following a smart acquisition strategy.