2005 Market Activity…What Really Happened

Survey reflects similar findings among EquaTerra consultants and provider community. Strong growth is expected in 2006.

by Mark Hodges

Now that 2005 has concluded, it is useful to analyze actual BPO market activity versus perception for the year. It is important to take measure of the eighth year of significant BPO activity. EquaTerra’s quarterly surveys—in which we query our own global advisors and the industry’s service providers—present in-the-field insights into sector trends and projections. Each quarter, 70 to 100 senior advisors and nearly 20 leading service providers answer our questions on the BPO market. The headline from 2005 is “stability”—BPO demand, pricing, service provider capacity, and sales cycles did not vary significantly from quarter to quarter.

  • Strong 2005 BPO Demand. BPO market demand in 2005 was strong. Although its strength dropped from torrid in the first quarter, it does nothing to diminish clients’ continuing desire to invest in BPO. A majority of EquaTerra’s advisors cited increased levels of BPO market growth (versus flat or declining) in each quarter, with their citations ranging from 83 percent observing growth in the first quarter to 59 percent citing growth in the fourth quarter. In comparison, service providers cited market growth of 67 to 93 percent, depending on the quarter polled.
  • HRO and FAO Lead Demand. In 2005, HRO was the strongest BPO area. In fact, HRO has claimed the No. 1 spot every single quarter, ranging from 26 to 29 percent of cumulative advisor citations, followed by FAO, which ranged from 18 to 23 percent of advisor citations. Between 66 and 80 percent of total advisors polled each quarter stated that benefits and payroll were the strongest HR functional process areas in 2005. Providers’ responses validated the same findings. Within FAO, accounts payable was again cited as the leading sub-process by an overwhelming number of advisors (80 to 93 percent). Accounts receivable/credit and collections was the second strongest FAO demand, cited by 59 to 79 percent of our advisors; travel and entertainment (51 to 56 percent) was third. FAO providers confirmed these results.
  • Sales Cycle and Time-to-Contract. Last year, the sales cycle was also very stable quarter to quarter, as declared by 64 to 74 percent of EquaTerra advisors. A majority of BPO providers—71 to 82 percent—also cited a stable sales cycle. In our experience, the average cycle is 9 to 12 months. The time-to-contract is typically four to five months; this remained stable in 2005 despite heightened noise from Wall Street analysts worried about contract signings. EquaTerra defines time-to-contract as the period from the release of the RFP to actual contract signing.
  • Preferred Delivery Models. There is much debate over different service delivery models. While the concept of transformation is compelling to buyers, there is uncertainty over what it means, and how and when BPO can enable its achievement. In 2005, the preferred BPO delivery model was “outsource and transform,” according to EquaTerra advisors. The traditional “lift and shift,” “transform first and outsource later,” and the more incremental “outsource and continuous process improvement” models simply were not deployed as frequently.
  • Pricing. Throughout 2005, BPO pricing was cited as stable by 43 to 68 percent of EquaTerra’s advisors in each quarter. The majority of service providers also stated that pricing remained steady for three of four quarters in 2005. This pricing equilibrium between buyer and provider is healthy for the industry as a whole, with neither side currently gaining undue advantage over the other party.
  • Multishore. Advisors stated that the “offshore” or multishore component of BPO remained strong and stable, with 48 to 55 percent per quarter citing steady offshore usage. Service providers, on the other hand, claimed that offshoring was strong and rising practically every quarter, with citations ranging from 48 to 69 percent per quarter. Most of the offshore SG&A BPO work in 2005 was performed by multi-national BPO providers, notnecessarily pure offshore providers, a group that is stronger in the information technology/ITO market.
  • Contract Profitability. Finally, the health of the industry appears to be stabilizing. Consolidation among BPO providers has helped. In 2005, BPO providers cited improved profitability, reaching it in 12 to 24 months with returns on invested capital of 10 to 20 percent. This bodes well for a prosperous and productive 2006 as BPO continues to grow and mature.
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