The Hindu Business Line : Smaller pieces

The BPO scene is changing. Mega deals that bite off big chunks of the cake are making way for smaller contracts. And these are being won by multiple, rather than single, vendors.

TOO many cooks spoil the broth, goes the popular saying. But then there are exceptions. Take a closer look, for instance, at the business process outsourcing (BPO) industry. Around us, mega deals are making way for orders that involve multi-sourcing — where clients work with a number of services vendors, rather than a single outsourcer.

According to a Datamonitor report, the average size of contracts announced by IT and BPO services vendors globally in the first quarter of 2005 (January-March) fell 18 per cent to $68.9 million, compared to the year-ago period, partly due to the growing trend of multi-sourcing.

With this, the average deal size has shown a decline for three consecutive quarters.

The survey tracked new BPO contracts during the first quarter of 2005, worth a combined $6 billion. Some 15 of the BPO deals had a value greater than $100 million, the largest being Atos Origin's $1.6-billion contract with the UK Department of Health.

However, half of the BPO deals tracked during the quarter had a value of between $10 million and $50 million, showing that most of today's BPO activity is happening around mid-size contracts, rather than mega-deals.

The report further revealed that the trend — of multi sourcing and a dip in the order size — was particularly evident in the fast-growing HR outsourcing (HRO) sector.

Although the average order size in India is far lower (than the worldwide average), most industry players admit that they are beginning to see the global trend being replicated in the context of the local BPO industry.

Theoretically, this means that the same order now gets passed on to more than one player, but the Indian BPO vendor isn't really complaining.

For good reason too.

"Frankly, I believe this is very good for businesses like ours which are not focusing on the mega deals traditionally pursued by the global IT and BPO service vendors.

The fact is that many mega deals do not work out for the benefit of the customer, are often re-negotiated, and carry significant risks for both the vendor and the customer. Typically margins on these deals is also lower, at least in the initial years," says Pramod Bhasin, President and Chief Executive officer of BPO vendor GECIS, where GE recently offloaded 30 per cent stake each to General Atlantic Partners and Oak Hill Capital Partners.

More importantly, many vendors are just not equipped to handle the diverse nature of work required by these major contracts in a wide area of expertise and knowledge — thus driving the phenomenon of multi sourcing.

"For most companies operating out of countries such as India, China, Mexico and Hungary, like ours, the focus is not very large deals. Instead, we offer our customers lower risk, faster pay back, and a more flexible alternative with smaller deals, which, over time, could grow to be sizeable orders.

This is also true for many other IT and BPO service providers in India and offshore locations. As this industry matures in offshore destinations I believe this trend will continue, and it will benefit players in India, China etc," says Bhasin.

He believes that as offshoring takes centre-stage, work will flow to those companies and countries most equipped to deliver the best products — much in the same way as happens with buying products.

"While in some instances it may be advantageous to buy all services from one vendor, these will be infrequent — principally because the skills involved in the various services delivered, for instance Finance and Accounting, differ widely and substantially from those in IT," he says.

Even today, most customers run these functions separately for the same reason — they are different skillsets requiring different expertise and few vendors can provide both at the same level of capability.

Services will, therefore, be bought from those vendors who become `experts' in their particular areas, Bhasin says.

Agrees S. Viswanathan, Chief Operating Officer of NIIT's BPO subsidiary, NIIT Smart Serve. "Definitely the scale of contracts is going down and it has been quite evident in the last two-three quarters. Companies that started with handing out mega deals are now concentrating on growing their existing relationships. In addition, earlier, most of the orders were being bagged by large BPO companies, but now smaller players who have come up are securing relatively small orders, due to which the average size of an order, when calculated on an industry-wide basis, seems to have come down," he says.

Despite the decline in order size, the revenue realisations have not been impacted in any way, he says. This is because the number of orders has continued to grow steadily, compensating for the lack of voluminous deals.

For Rohit Arora, Chairman of eMR Technology Ventures, this phenomenon is not new, as companies that outsource to third-party vendors have always had a preference for a multi-vendor, multi-country, approach.

"This is for the obvious reasons of spreading vendor and country risks. Companies look at vendor competencies when choosing multi vendors.

As an example, BPO companies with a strong non-voice domain will capture the non-voice work and the ones with contact centre skills predominantly carry out those processes. This is not something new," Arora says.

With its revenues rising, eMR does not see multi-sourcing hitting the realisations of the company in any way.

`Small isn't in'

But not everyone agrees that BPO deals have shrunk.

According to Raman Roy, President and CEO, Wipro Spectramind, which recently rechristened itself Wipro BPO Solutions Ltd, even as more and more clients are looking at multi-sourcing due to its obvious advantages, the size of an average BPO contract is actually rising.

"Earlier, one deal, let's say of $10 million, was given out to one player. Now, the deal size has increased to $20 million and is being multi sourced to two players.

This means that while the proportion of the deal being contracted to one player is declining, the realisations per player are actually higher, on an average," he says.

As a result, the deal size has not seen major variations over the past few quarters. "There is currently a good mix of small and large deals in the industry and bigger deals are still going to large BPO companies, based on their skills such as competency, capability and investment," Roy says.

Interestingly, while companies seem to prefer the multi-vendor route, some are also looking at a multi-location model as a means of de-risking their business.

"There are clients who desire a multi-location and multi-country sourcing.

So the contract specifies that the BPO work would be done in India and the Philippines. Here, if the same vendor is unable to cater to the full requirement, the contract may get broken into smaller deals," he says.

Going forward, Roy sees the sector following the pattern traced by IT services companies. "Big players in the industry will play a bigger role, but there will be a place for smaller players," he says.

GECIS' Bhasin expects orders to grow in size as both customers and vendors get to know each other and build trust and credibility — although not to the extent of the mega deals that had been done in the past.

"The new trend is frankly going to benefit offshore service providers and will probably be accelerated by the entry of companies such as ourselves — primarily because I believe we offer a much more competitive, flexible, lower risk and faster payback product to our customers," Bhasin says.

The future, of course, is anybody's guess. But for now, the ITES industry seems to be in tune with another catch phrase — `More the Merrier'.

moumita@thehindu.co.in

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