The Hindu Business Line : Outsourcing industry faces consolidation

Forrester Research, in its latest report has said that global outsourcing industry could face sweeping consolidation in the next two years, mainly driven by low-cost global competition and broken business models.

It says that even the top-tier Indian firms will have to rely on acquisitions to compete with global giants such as IBM, EDS or CSC.

The report titled: `Are Barbarians At The Gates Of Outsourcing?' delves into the potential buyouts of global outsourcers by private-equity firms as well as the trend among the outsourcing industry's long-standing leaders' scramble to buy or be bought.

Equity buyers

It indicated that leading equity buyers believe there is an opportunity to make money fast in the outsourcing space, and that mergers and acquisitions could dominate this space mainly due to double-digit growth in new deals, long-term contracts, and the popularity of outsourcing.

Further, given the recent hostile takeover attempts in this space globally, the report sets expectations of seeing many of the leading outsourcers making aggressive moves to protect their businesses. For the top-tier Indian firms, the report asserts they will likely have to acquire either BPO firms with vertical industry knowledge or infrastructure outsourcers with experience of managing servers, desktops, or networks if they are going to compete head-to-head firms such as IBM, EDS, and CSC.

Not yet there

It further stated that "The level of experience required before a customer will trust its operations to a third party" is something the Indian outsourcers do not have yet. So they will likely have to buy their way in by acquiring firms - or similar firms - such as Getronics, Siemens Business Services, Unisys, or even French service provider Bull. The report ultimately concluded that in a leveraged buyout scenario of a major outsourcer, shareholders and the private equity firms will emerge likely winners; but the universal loser in all of this will almost certainly be the outsourcing customer.