Study shows drop in global outsourcing deals

The Philippines may have to brace for a possible slowdown in the business process outsourcing (BPO) sector, currently one of the largest foreign exchange earners and source of employment for the country.

A new study from research group International Data Corp. (IDC) revealed that worldwide, the value of the top 100 outsourcing deals decreased 39.2 percent from $96.2 billion in 2006 to $58.6 billion in 2007.

Earlier, the Trade Union Congress of the Philippines (TUCP) said nearly 900 workers were laid off recently when a BPO provider, Advanced Contact Solutions Inc. (ACS), lost a major US-based client that filed for bankruptcy.

ACS is a subsidiary of Paxys Inc., whose shares are traded on the Philippine Stock Exchange. Paxys, in turn, is owned by Hong Kong-based All Asia Customer Services Holdings Ltd., which is also engaged in outsourced payroll processing and transcription.

ACS operates six contact centers with 7,118 seats located in Makati City, Quezon City, Lipa City and Cabuyao, Laguna. From January to September this year, it had a net loss of P100 million on revenues of P1.48 billion.

The firm blamed the loss on “declining business volumes due to the ongoing US subprime financial crisis as well as customer concerns regarding a major US client which recently emerged from bankruptcy.

ACS was referring to Plantation, Florida-based PRC, a teleservices firm. When it sought bankruptcy protection, PRC owed ACS a total of $14.8 million or P740 million. Instead of putting up its own call centers here to service the customers of its clients, PRC subcontracted the job to ACS.

IDC said the number of megadeals, or those deals valued at $1 billion or more, also declined substantially in 2007 to 14 from 29 in the previous year, showing what could be some saturation for these larger contracts.

“2007 revealed a substantial softening of the megadeal market, as the percentage of the top 100 total contract value constituted from megadeals declined from 65.1 percent in 2006 to 34.4 percent in 2007,” according to Terrance Strom, research analyst, IT outsourcing and utility services at IDC.

He pointed out that while not declaring the demise of the megadeal, the world may in fact be witnessing a cyclical saturation of the market. “Service providers will need to continue to invest in lower cost and more flexible delivery models, wisely expand their global footprint, and focus on emerging markets as the source of material growth in the years to come,” Strom said.

The IDC study showed the total value of megadeals included in the 2007 top 100 was $20 billion, a decrease of 68.1 percent from $62.7 billion in megadeals signed in 2006. The number of vendors signing megadeals was 11. AT&T, BT, and the Capita Group led the way with two megadeals each.

In 2007, IBM Global Services (IBM GS) captured $8.3 billion and 14.3 percent of the top 100 contract spend, followed by BT Group with $6.9 billion and 11.7 percent, and EDS with $6.2 billion and 10.6 percent. IBM GS maintained its top position in terms of the total number of top 100 deals signed with 16, followed by EDS with 10 and BT with nine.

The average contract value in 2007 decreased across every geography with Asia/Pacific and Europe, the Middle East, and Africa (EMEA) suffering the largest declines at 71.4 percent and 45 percent, respectively. Americas-based deals also declined substantially at 41.6 percent, while globally scoped deals showed the smallest decrease of 12.5 percent.

For the fourth year in a row, government contracts represented the largest share of total deal value with 27.9 percent of the top 100 contracts. However, contracts signed in the professional services industry represented the largest average deal size, followed by utilities and insurance. The transportation vertical accounted for the largest year-over-year growth, followed by professional services and utilities.

Earlier, the Business Processing Association of the Philippines (BPAP) expressed confidence that the current US financial crisis will be a boon to the Philippine BPO industry even as the association expressed optimism the sector will grow by 45 percent in terms of revenues each year inspite of the debacle facing not only the US but also the world.

BPAP chief executive officer Oscar Sanez projects that from $2 billion in 2004, the local BPO industry will increase its revenues to $12 to $13 billion by the end of 2010, with the Philippine sector getting 10 percent of the $130 billion in expected global BPO revenues in two years.

The local BPO sector ended 2007 with export revenues of around $5 billion and the number is expected to increase to $7 billion by end of this year. For the past three years, revenues have been growing by 40 percent each year. “We can attain a growth of 45 percent each year despite the financial crisis,” Sanez emphasized.

BPAP said it still expects growth in the information technology (IT) sector despite the global financial crisis, adding that the Philippine BPO sector will continue to grow by 40 to 45 percent each year despite the current turmoil that global economies and financial markets are experiencing.

“Though there would be a ‘cooling down’ in terms of growth numbers, we still expect growth,” it emphasized.

From less than 100,000 in 2001, the number of people being employed by BPO companies has grown to over 300,000 to date.

Sanez explained that because of the financial crisis especially in the US which accounts for the largest bulk of clients for the local BPO industry, many foreign companies will continue to look for solutions on how to cut costs, and outsourcing many of their corporate functions remains to be one of the best ways to cutting costs.

“The Philippines will still be in the best position to present itself as a viable outsourcing location because of its IT-BPO industry’s popularity and proven track record of its success,” BPAP added.

In an interview, Sanez said that unlike other local industries, the BPO sector is still doing very well. One of the reasons, he pointed out, is the fact that existing and potential clients are looking for biggest cost-saving solutions and that the Philippine BPO industry offers a good option.