Is IT-BPO bundling really on the rise?

Wednesday, 12 May 2010

The global ITO and BPO markets are growing every year. Though ITO is a larger market in terms of value ($230-250 billion), BPO expenditure is growing at a higher rate (10-20%), and is estimated to reach $300 billion by 2012. However, research has found that for both segments, average contract sizes and duration (now averaging at 76 months) have been decreasing over the last decade. To illustrate, Everest group found that in 1998, about 37% of contracts had a duration exceeding nine years, compared to only 18% of contracts in 2005.The recessionary environment was a strong contributor, leading to much contract revision and renegotiation in 2009, as clients chased cost efficiencies. Speculation led to the rethinking of many deals that made business sense in the previous financial year. Impact was also seen in the types of deals being made, and sourcing strategies adopted by global outsourcers. Due to market risks exposed by the recession, many companies resorted to multi-sourcing, ending up with access to several ‘best-of-breed’ vendors, but increased transaction costs. Another fallout was the rise of ‘bundled’ deals in the IT and BPO markets. The trend towards IT-BPO bundling Bundled deals refer to multiple services commissioned through one service provider, either at the same time or incrementally, in order to realize efficiencies in processes, performance and cost. The bundling of various IT services has been a growing trend, and the addition of business operations to the list is said to be the new normal. Client organizations can choose to source ITO services, including infrastructure services, application development and maintenance, and increasingly, BPO services such as back office operations and helpdesk services from the same provider. As an example, IBM secured one of the five biggest deals announced in April 2010 with Nordic bank Nordea to provide IT infrastructure and operations services. The new award extended a deal originally signed in 2003, and covers areas such as mainframes, mid-range servers, PCs, local area networks and helpdesk services. The ‘2008 Global Services 100’ survey found that demand for these services is rising. According to the survey, 54% per cent of respondents said that they saw customers seeking more bundled IT and BPO services than in the past. The survey further showed that around 48.4% of the global services providers polled offer both IT and BPO services; 21.6% provided only BPO services and 30% offered only IT services. While such IT-BPO deals are growing in demand, they are not yet as commonplace as projected by the industry. Research (from Accenture, Everest, TPI, etc.) suggests that there is a disparity in the type of services offered in bundling contracts. The bundling of IT outsourcing and application outsourcing is the strongest, in terms of number of deals in the last 5 years. The reasons are that the synergies in terms of processes, resources and governance are similar for these services, compared to BPO services. While major providers are developing capabilities across IT and BPO, the momentum for IT-BPO deals has not reached that of bundled IT services. A reason for this could be that there is often a lack of clarity for clients as well as providers, on actual financial gains that can be made from the bundling these services. Also, client organizations that are given to multi-sourcing arrangements often have concerns of increased risks from bundling, due to overdependence on a few suppliers. This is especially relevant as the clients are exposed to risks across functions with respect to IT-BPO bundling. Cross-selling opportunities for providers Service providers have much to gain from bundled deals that include elements from IT and BPO services. As a strategy, IT companies that have developed BPO capabilities have the opportunity to leverage existing client relationships to cross-sell BPO services. The route that many big players such as Accenture and TCS have taken is to project a consultative approach towards client engagements. The end results are comprehensive service deals that leverage capabilities in IT, BPO and infrastructure services. To this end, providers are developing strong industry solutions, with vertical specific offerings. This gives them an edge over pure play IT/BPO providers. Another way providers can achieve this is by developing platform based BPO services that give them control over the technology aspects of operations. There are also IT-BPO synergies possible for platform BPO services that are delivered over process clouds, something that a few Indian suppliers are currently experimenting with. Thus for the ‘bundling’ to really take off beyond standard services, there is a call for innovation in addressing client needs across operations and IT. And client organizations are more than happy to reduce costs (through technical synergies and lower transaction costs), be perceived as key clients (because of larger contract for provider) and achieve a degree of vendor consolidation through such deals.

 

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