Baird Report predicts continued consolidation in $150bn global BPO industry
This will be driven by client demand for cost savings, value-added services and emerging technologies, according to a new report from Baird, an employee-owned middle-market investment bank.
In the report, “Transformation of Business Process Outsourcing,” Baird notes that the BPO industry experienced a significant increase in M&A activity with technology-enabled service providers among the leading targets. As the BPO industry continues to evolve, new technology is being introduced at an accelerated rate, partly driven by the parallel transformation underway in the enterprise software market i.e. the shift from on-premise software to the cloud.
Baird expects more consolidation in the BPO industry given the fragmented nature of the market. Both corporate acquirers and private equity firms are building scalable BPO platforms that offer value-added services to their clients.
“Business process outsourcing continues to transform, driven by new business models, disruptive software and more diverse end markets,” said Kiran Paruchuru, Managing Director at Baird. “We expect these dynamics to continue to drive consolidation as companies adapt to meet the needs of their clients.”
The Baird report outlines multiple drivers of growth for the overall BPO market, including:
• Secular trend to outsourcing – over 70% of relevant services are performed in-house by clients, which translates to an outsourced penetration rate of under 30% a large untapped opportunity for BPO providers
• Lower costs – it is inefficient for clients to replicate specialised functions in-house that need significant fixed costs and capital expenditure cheaper instead to transform the function into a variable expense by outsourcing
• Focus on core business – clients are continuing to restructure their non-core business operations since the economic downturn to free up internal resources and management time on achieving their core strategic goals
The report covers six BPO subsectors:
1. Finance & Accounting (F&A), Fund Administration and Fiduciary Services
2. Governance, Risk and Compliance (GRC) Services
3. Human Resource Outsourcing (HRO)
4. Outsourced Customer Care (OCC)
5. Legal Process Outsourcing (LPO)
6. Insurance Related Outsourcing
The $10 billion outsourced GRC market is forecast to grow at 20% annually as the post-Lehman regulatory environment becomes increasingly difficult to navigate. Baird’s analysis of 220 M&A transactions shows that the highest valuations were commanded by BPO providers with a compelling growth strategy, technology enablement and attractive financial characteristics.