By Dan Berthiaume
Despite significant quarter-over-quarter and year-over-year declines in total contract value (TCV) of BPO contracts worth more than $25 million in Q1 2012, the global BPO market remains healthy. John Keppel, Partner and President, Research and Managed Services, Chief Marketing Officer, ISG, says that a trend away from $1 billion-plus “megadeals” is pushing down TCV figures, but hides robust underlying BPO activity.
Megadeals, TCV No Longer BPO Success Barometers
“Megadeals are a hangover from the old ITO (information technology outsourcing) days,” explains Keppel. “They are becoming less prevalent. The relevance of measuring megadeals will dwindle to nothing at some point in the near future.”
As megadeals become less important, so does TCV as a measuring stick for the health of the BPO industry. “Deal terms have shrunk,” Keppel says. “The likelihood of an outsourcing transaction lasting long enough to be considered a megadeal has diminished. And in the BPO marketplace, transactions have always tended to be shorter (than in the ITO marketplace).”
Thus, although ISG’s Q1 2012 estimate of $6.1 billion in TCV is down 30% from about $9 billion in Q4 2011 and down 27% from about $8.4 billion in Q1 2011, Keppel says that underlying annual contract value (ACV) of smaller deals is still healthy and that ACV is growing in importance as a way to determine the health of the BPO marketplace. There were no megadeals in the BPO industry during Q1 2012, and only one megadeal in the ITO industry during the quarter.
BPO Remains Vibrant Horizontally, Regionally
“I don’t think BPO has cooled off,” states Keppel. “There was a warm, buoyant BPO market all last year across major domains like F&A and procurement/supply chain. Call center was a little lighter. There was quite a bit of vertical-specific activity.”
Generally speaking, Keppel said a lot of the drop in Q1 2012 BPO TCV is a “hangover” from this year of strong performance. He also said the BPO market typically performs better in the second half of the year than the first, and that the second half of 2011 saw an especially robust BPO market.
“There was less of a hangover in BPO than ITO, but we certainly see the industry pausing for breath,” Keppel says.
Major BPO Regions Retain Health
The three global regions which currently account for the most BPO activity – Asia/Pacific, Europe, and North America, all show signs of retaining their general health, although Keppel says Europe in particular is battling some economic uncertainty.
“Uncertainty about the euro probably stopped a few organizations from initiating projects there in the first quarter,” Keppel says. “But the situation has stabilized somewhat and those projects should close later this year.”
Analyzing the first quarter BPO performance of the Asia/Pacific market, Keppel says overall it was “pretty solid,” but the lack of any megadeals make the region’s quarterly BPO numbers look worse than they really are. He says North America also “held solid,” with good traction across BPO domains.
Looking at the smaller regional BPO markets of Africa/Middle East and Latin America, Keppel says there was not a lot of activity in Africa/Middle East, but Latin America is showing promise in the area of ITO. “The stuff we are seeing in Latin America is much more in the ITO space than the BPO space,” he says. “But I don’t see why it will necessarily remain that way.”
Market Trends Follow Norms
In conclusion, Keppel sees 2012 as being a fairly typical year for outsourcing performance. “For TCV, we expect to see marked improvement in the second half,” he predicts. “I don’t think a slow start means a dire year. I don’t predict a huge second quarter unless some significant deals come through early.”
Keppel also sees a lot of contract restructuring activity in BPO which he expects will help boost market performance, both for providers with existing contracts and newcomers. “That business must be competitively fought for and won,” he says. “Incumbents win restructuring business about 80% of the time for 80% of the scope, so it’s good for the incumbent. But it also gives newer players an opportunity to broaden their BPO supply base.”