The BPO deal space for acquisitions is looking hot again after a lull for over the last six months. The US slowdown is pushing more third-party outsourcing firms and captive operations to sell out, according to industry players and investment bankers.

Compared to the last quarter when both potential targets and buyers were in a wait-and-watch mode, large third-party BPO firms and integrated IT and BPO players are now keen on using their cash reserves to gain scale and new service lines, while potential targets that were holding out hoping for a recovery in their valuations are now interested in exiting before further value erosion happens

Many of the smaller players which are unable to scale up are now looking to sell out. Some of the investors in these companies were planning to exit through IPOs but given the market conditions they cannot go IPO now. Many multinationals with captive back office operations of less than 5,000 people are also in the market,” said one large IT and BPO player.

Cost-based approach won’t work, says Gartner official

We still see businesses making the mistake of buying BPO services using procurement managers who used to buy office furniture.

Adith Charlie

Mumbai, April 14 Mr Andy Kyte is Vice-President & Gartner Fellow at research and advisory firm Gartner Inc. In an exclusive chat with Business Line, Mr Kyte puts forth his view on happenings in the Indian BPO space.

Is it true that a lot of small to medium size BPOs are concentrating only on the top line growth by undercutting prices?

Yes, this is absolutely true. What we are seeing is a very natural state of market dynamics. If you are in a market where you have to compete for every piece of work, you really cannot focus on margins.

Any time when there are too many players in the market, the survival strategy is to win business at all costs. Doing so might not be very profitable, but it keeps you going. If by focusing on margins, you quote a higher price, you won’t be able to sell.

Unfortunately, the level of maturity among buyers of BPO services is pretty low. So, we still see businesses making the mistake of buying BPO services using procurement managers who used to buy office furniture.

Many clients just look at price-based negotiations all the time. Anybody who is involved in the industry knows that you need to have a much more complex set of evaluation criteria and that you need to understand how to pay the right price for the right service.

So it is natural; if the buyers want to buy on price, the sellers have to sell on price.

What will be the impact of such a cost-based strategy in the long run?

Eventually clients that want to leverage offshoring for the pure cost cutting logic will see a lot of deals going bad. At that point most buyers will realise that they need to buy quality and not just cheapness; the best prepared BPO vendors will develop branding strategies and delivery strategies to say that they can deliver quality and hence charge an optimum price.

Apart from the dollar appreciation, which are the other significant pain points for the Indian BPO industry?

The BPO industry has got a problem with the degree of fragmentation that exists in the industry and the difficulty of creating the true economies of scale that these vendors are looking for.

On the demand side, we are clearly not in a situation where in BPO players have more work than they can handle.

Since BPO has grown rapidly, it has attracted a lot of new players in the marketplace; the demand has not grown as much as the capacity has grown.

So it is quite a competitive environment at the moment. Moreover, all BPO vendors want to be able to achieve better price points, courtesy the rupee appreciation.

However, not all of the competitors are capable competitors and so they tend to depress prices. The reality is that this reduces margins even available for vendors offering high quality services.

Source : The Hindu