15 Jun 11 Business process outsourcing – Skilling up

If you were tracking the outsourcing industry, the news of the recent acquisitions (and some mergers), particularly those in the month of May would have made your head spin! Any MBA student will tell you that acquisitions are made to acquire clients, skills, people, increase geographic reach and so on. We would all agree – given that the acquisitions in the last few years in the outsourcing industry have been just for these reasons. But the mergers and acquisitions listed in the table below throw up an interesting trend, that of acquiring to enhance expertise and skills. The underlying rationale of acquiring new clients or adding headcount exists, but outsourcing companies are now acquiring skills – either in the service areas or in terms of verticals.

Outsourcing services clients have now matured and expect a lot beyond the cost and labor arbitrage. They seek vendors that can be partners and help them achieve better top lines and improve bottom lines. The outsourcing vendors are therefore examining their own capabilities, services, technologies and vertical domain knowledge. Whatever they don’t have is quickly added through these acquisitions.

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 Source: ValueNotes Research

Traditional BPO companies acquiring IT skills
One of the most talked about acquisitions this year – that of Headstrong by Genpact is a case in point. Genpact, in spite of being in the IT services space, had not garnered enough firepower to compete with the IT majors. This acquisition makes them recognizable in the integrated IT BPO “club”.

Today, most industry leaders in the outsourcing industry try not to verticalise IT and BPO services. Most offerings are integrated, with the business outcome rather than the process in focus. Traditional BPO companies are trying to acquire IT services and vice versa – offering a one stop solution to their clients.

Investing in cloud offerings
Offering BPO services on the cloud is a relatively recent phenomenon. Some horizontal services such as human resources and procurement are being offered on the cloud. While most outsourcing firms are developing platform offerings the organic way, some like Genpact have made some strategic acquisitions. The acquisition of Akritiv Technologies, a provider of cloud-based order-to-cash technology solutions is an example. Genpact, already a leading player in the Finance & Accounting (F&A) space, aims to strengthen its Business Process as a Service (BPaaS) solutions. One of the benefits of EXLService’s acquisition of Outsource Partners International (OPI) is the access to OPI’s source-to-pay platform.

Acquiring horizontal skills – analytics, revenue cycle management and so on
Traditional BPO offerings are fast changing, from the F&A or procurement or even contact center services to more industry specific and value added services.  Analytics, revenue cycle management for healthcare providers etc. are some services that are seeing huge traction in the market today.

Companies are either organically growing capabilities in the analytics space or trying to acquire skills. What was once done only optionally and intuitively by business heads is now a critical function. As a service area, analytics is now employed broadly across industries and corporate functions. We have talked about where this industry is headed in our recent report (titled – Where offshore analytics is heading in 2011, co-authored with HfS). Experian, an information services company, is reportedly looking at acquiring companies in analytics and the KPO space. Genpact’s acquisition of Symphony last year or EXL’s acquisition of Inductis about 5 years ago are examples of how key analytics as a service is in the growing outsourcing industry.

Domestic market in India is hot!
The domestic IT and BPO market in India is rapidly growing. With many of the major IT and BPO companies already established in this segment, new entrants are only making the market more dynamic. The domestic BPO market in India is estimated to be $1.4 billion in 2011, up from $1.1 billion in 2010. This presents a considerable opportunity, evident from the recent acquisition of Intelenet by Serco Group and the merger between Vertex and Shell Transource.

New verticals of interest, such as healthcare
An acquisition to enter new verticals is not a new trend. However, some verticals are seeing an interesting fillip, e.g. healthcare. The healthcare reforms brought in by the Obama administration are creating numerous opportunities for outsourcing providers (read more about this in our upcoming report). Dell’s acquisition of Perot in 2009 is a classic example. Perot’s industry leadership in the healthcare vertical was a key reason for the acquisition.  HOV’s acquisition of Sourcecorp also makes them stronger in this vertical. Headstrong’s acquisition not only gives Genpact the IT services capabilities, but also a stronger foothold in the capital markets vertical.

A recent news article indicated that the IT/BPO industry will see more acquisitions. It also added that at present there are about five deals in the $500 million plus range and about 10 in the $100 million range under negotiations. If this is true, the next few months will see a lot of churn and movements in this industry. Given that the BPO services have seen a better growth rate than IT services, one can easily speculate that there will be some major BPO acquisitions in the deals mentioned earlier

ValueNotes Research
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