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BPO players to shrink 25 percent by 2012

Critical for companies to pick right business process outsourcing partners as quarter of top providers will cease to exist in three years, Gartner predicts in new report.

Come 2012, one quarter of top business process outsourcing (BPO) providers as they are known today to enterprises will cease to exist, according to new predictions from Gartner.

The shakeup in the BPO landscape will take the form of market exits and acquisitions, brought about by a variety of factors, the research house said Wednesday in a statement.

Robert Brown, research vice president at Gartner, explained: "As providers are exposed to the economic crisis, loss-making contracts and an inability to adapt to standardized delivery models, many will struggle to survive in their current form.

"Some will be acquired and some will exit the market completely to be replaced by dynamic new players delivering BPO as automated, utility services," he said.

Gartner recommended that businesses look for warning signs when evaluating BPO vendors, in order to mitigate risks, and outlined six key markers:

1. "Chronically unprofitable" portfolio BPO deals. Some vendors rush into deals without giving much thought on how to transition deployments to a "standardized, rationalized, profitable state of operations". When evaluating vendors, enterprises should gain further insight to understand how profitable each vendor is. Service providers should be open to sharing such information as it can limit long-term risk to both themselves as well as their clients.

2. Inability to win significant new business, or drive growth and profits. Clients need to consider a provider's new business track record over a sustained period of two to three years, as well as the vendor's ability to manage multiple deals at the same time. Lack of recent new business activity may suggest the vendor is "choking on a backlog of business".

3. Loss of visible, established marquee BPO deals to competitors. Losing deals to competitors after a contract has expired can signal trouble. When assessing a service provider, potential customers ought to exercise due diligence in seeking references from current clients to understand their relationship and experiences with that vendor.

4. Capitalization prevents funding for bids. Vendors that adopt the "lift and shift" approach are the most likely to run into difficulties obtaining funds to invest in larger BPO deals. To work around this, service providers are increasingly making investments in platform-intensive approaches to BPO that require buyers to adopt their standard platform and service level agreements.

5. Exposure to banking and finance. Service providers with significant amounts of BPO revenue from the sector, which accounts for about one-third of the total global BPO market, were the first to be affected by the financial meltdown. This exposure could still impact BPO providers in the longer term. Those looking at BPO contracts need to be aware of the potential impact, particularly when dealing with vendors that derive over 85 percent of their revenue from financial services.

6. Growth in BPO contract cancellation and re-insourcing. Cancellation rates in Gartner's BPO buyer survey in 2008 rose sharply over 2007. Enterprises ought to build exit strategies into their contracts and develop contingencies for contract termination before committing to any deals. In addition, executives must ensure all rational options are exhausted before initiating termination procedures.