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By Lauren Bielski
Reducing key operational costs, always a plus in taking on a business process outsourcing contract, is now a strict requirement for BPO vendors who want to maintain a viable relationship with clients.
"It's no longer enough to talk about savings as a concept" during the contracting phase, said Shannon Parish, VP of marketing with ICG Commerce in King of Prussia, Pa. "In the current business environment, savings are audited, SLAs are monitored, and those savings need to drop, demonstrably, to the bottom line. Real savings are being used to fund innovation or improve the P&L."
Parish was speaking specifically about procurement BPO. Typically, companies spend up to 40 percent of their annual revenue on non-labor-related costs, including capital expenditures on IT, marketing and facilities. Traditionally, larger and mid-sized companies that have used procurement BPO specialists cut back on that percentage. But the emphasis has shifted from nice-to-have savings to must-have reductions
And the more rigorous performance standards have affected other types of BPO deals as well.
Indicator of Economic Strength
As a proxy, BPO contracts, regardless of type, are an effective overall indicator of economic health, in part because they are increasingly part of the operational fabric of many U.S. organizations. Changes in these services -- absolute number of deals, and the shape of those engagements -- are analogous to other large corporate actions, such as acquisitions, divestitures and major reorganizations, according to Saurabh Gupta, BPO analyst with Dallas-based Everest Research Institute.
A large portion of BPO deals -- of a variety of types -- are done in the financial services industry. Given what happened in this recession to banks and insurance firms, BPO activity is especially telling, said Eric Deitert, director of horizontal product marketing and analysis at Pegasystems, a business process management tech provider. Deitert, a former Gartner analyst, is focused on BPO and CRM practices at Pegasystems.
Unsurprisingly, the recession has caused a lull in certain types of outsourcing activity. Everest reported that the North American outsourcing market saw a 15 percent dip in transaction volume from the fourth quarter of last year to first-quarter 2009. The number of BPO deals dropped from 430 in 2007 to 302 last year, according to ValueNotes, a data processing and preparation firm based in Pune, India.
What other effects has the recession had? "Overall, activity was unabated. Yet, deals are smaller, and decision-making around them is more deliberate," acknowledged Stan Lepeak, managing director of research with global expert advisory services firm EquaTerra. "Mostly there is a concern around execution risk -- that is, that the deal won't somehow deliver. There are also concerns involving risk to reputation at a time of a 'buy America, hire America' mindset. So the sales cycle is much, much longer."
Those sentiments were echoed by Manish Motiani, VP of sales for financial services at Patni Computer Systems, a global provider of IT services and business solutions headquartered in Mumbai and London. "Absolutely, deals are taking longer to put together," said Motiani. "There is a rethinking that is going on in many sectors of corporate America: 'What business are we in? What is core, or essential? What should be spun off?' Companies also wonder what services should be contracted to providers and should these partners be closer to home, given how many people are out of work."