Shakeout For Top Outsourcers Coming, Gartner SaysShakeout For Top Outsourcers Coming, Gartner Says

Twenty-five percent of today's top business-process outsourcers will disappear in the next three years due to economic pressures, poorly conceived contracts, and the inability to adapt to standardized delivery models, says Gartner. Ever the team player, Gartner also offers six suggestions that could indicate your outsourcing partner is not long for this world."Some will be acquired and some will exit the market completely to be replaced by dynamic new partners delivering BPO as automated, utility services," said Gartner research VP Robert Brown in a press release.

CIOs can mitigate the risk of being entangled with an inadequate BPO partner, Gartner said, by checking for these six signs of trouble. While most are pure common-sense essentials, Gartner's done a service by bundling them together.

1) Your BPO partner is losing money. Often triggered by an overeagerness to grab revenue without rigorously vetting the potential for making a profit, these deals can lead to more bad decisions as the providers become desperate for cash to fund ongoing operations. Gartner recommends what should be the painfully obvious: ask your provider if it's profitable. "While most vendors will be reluctant to share this information, those that stand the best chance of longevity will realize that BPO is a partnership and being open about profitability can limit long-term risk to both parties," Gartner says.

2) Is your partner winning new business? If not, the reason might well be that it's "choking on a backlog of business," Gartner says. "Handling multiple deals at once is a necessity in outsourcing, and buyers need to know that a vendor can successfully cater to the needs of more than one customer."

3) The loss of marquee clients. While your BPO partner might be inclined to dismiss such a loss as a move it initiated to balance its portfolio or pursue other interests, the more valuable insight will come from clients, particularly ones still with that partner. "It will always be prudent due diligence to seek and gain a reference from any current anchor clients to understand how committed they are to the vendor and their experiences in dealing with them," says Gartner.

4) Poor capitalization is impeding growth. In addition to the problem of a BPO vendor's inability to scale up to handle new work as pointed out above in #2, some BPO vendors could be unable to land new deals because they're poorly capitalized. And in my opinion, this is the most-valuable piece of advice among the six suggestions offered by Gartner: "For this reason, more providers are making investments in platform-intensive approaches to BPO that require buyers to adopt their standard platform and service-level agreements, as opposed to the "lift-and-shift" strategy. Heavily leveraged vendors still invested in the lift-and-shift approach are the most likely to run into problems acquiring funding."

5) Toxic exposure to tainted financial firms. Since financial-services clients account for about one-third of global BPO revenue, the recent meltdown in that sector could have caused huge damage to a BPO's finances or its ability to execute or both. Gartner's counsel: "While exposure to the banking sector is by no means an absolute harbinger of doom, sourcing executives should be aware of the potential impact if their provider has a significant amount of revenue (more than 85 percent) as a financial services pure play BPO vendor."

6) Lock down your exit strategies. Gartner says that since cancellation rates for BPO contracts were much higher in 2008 than in 2007, it's essential that CIOs have very precise exit strategies in place before any contracts are signed: "BPO switching costs can be steep, so it's important to understand contractual issue escalation procedures to ensure that all rational options are exhausted before initiating legal and/or termination discussions."

Gartner says it offers more information on BPO strategies here.