Growing bigger by acting smaller.
Periods of rapid growth in new markets are often accompanied by contradictory trends. The growth of the business process outsourcing (BPO) market is no exception. Large, established service providers are integrating, merging, or partnering with other HR-capable service providers, presumably to attract more business. Yet, the facts also indicate that smaller service providers are entering the marketplace and capturing an increasing share of the HRO contracts. Although the big fish are still getting bigger, the ocean is definitely getting more crowded.
Genius has been defined as the ability to hold two seemingly contradictory things in mind without becoming paralyzed. So, I will count on the genius of this publications readers as I discuss some current BPO market trends that compel us to hold two seemingly contradictory trends in mind at once.
By all accounts, 2004 was a record year for BPO. The number of BPO transactions valued at more than $25 million in total contract value (TCV) grew 28 percent last year compared with 2003, while TCV grew at an even faster rate of 54 percent. The BPO juggernaut rolls on, but so does the competition among those who are fighting for business.
News of consolidations among HRO companies has been the headline for larger companies served by the Big Six (i.e., Accenture, ACS, CSC, EDS, Hewlett-Packard, and IBM). Examples of consolidations among larger providers include the Hewitt-Exult merger in September 2004 and the Towers Perrin-EDS partnership announced in 2005. There are also the alliances, ventures, and transactions between ACS and Motorola, CSC and Aon, and IBM and P&G. The evolution towards strengthening already strong players is likely to continue, with much speculation about who may be next to announce a consolidation or strategic partnership.
Contrary to conventional wisdom, we see some of these enhanced service providers slipping in BPO market share. Tracking of BPO activity on a quarterly basis through the TPI Indexa quarterly conference call that provides sourcing data and market trends to equity analysts, clients, service providers, and the media suggests that some of the largest service providers are actually capturing a shrinking share of BPO transactions. The small fish appear to be nibbling at the spoils of the big fish, or bottom-fishing on their own merits.
In 2004, compared to 2003 for industry-wide BPO contracts greater than $25 million, the Big Six lost a slight percentage of global BPO market share. The share loss that they incurred in 2004 occurred mainly in Europe, not the
Multi-process BPO, those outsourcing transactions including two or more business process functions, was still most prominent in 2004. Industry wide, there were fewer stand-alone HRO transactions on a number-of-transactions and TCV basis, but HRO is being featured more often in the industrys multi-process transactions. Look more closely at these HRO and HRO multi-process transactions and you find that Accenture, Hewitt, and Fidelity won the greatest number of contracts and TCV in this segment in 2003 and 2004 combined.
If you examine the value of industry wide BPO deals in 2004, you will find that in the broader market, mega-deal sizes have driven the average BPO deal size up. If BPO mega deals were removed from TPIs analysis of BPO, it would show that the average TCV declined in 2004, indicating that BPO generates smaller transactions on average in the broader market (TCV of more than $25 million). In other words, excluding mega deals, BPO transactions are generally getting smaller. More smaller BPO opportunities could actually create stronger market opportunities for the smaller service providers.
While growing bigger in some ways, the market is acting smaller in others. Effective and achievable solutions are not the sole domain of global giants. Delivery is now available globally, with a strong regionalization, especially in HR BPO. Companies are as comfortable with modular approaches to BPO and single-process transactions as they are familiar with BPO/ITO bundling, and Global Service Delivery is more commonplace for all segments of BPO. Think global, act local could become the mantra of the current BPO market.
From the safety of the beach, we will watch the fish continue to swim through the contradictory currents of BPOs growing big, acting small whirlpool.