Interview: In Slowdown Year, BPO Is Outperforming IT Services Business for Many Providers

There is never a dull moment in the world of business process outsourcing (BPO) and business process services (BPS). Everest Group, a research firm based in Dallas, has long been an invaluable resource for those looking to keep track of all the comings and goings in the industry.

This summer, the Dallas-based research group released its BPS Top 50 report that ranks the top companies in the industry and their growth within this $175 billion sector. To shed even more light on the trends and developments currently resonating through the BPS world, Cognitive Business News Executive Editor recently sat down with Rajesh Ranjan, partner and global head of business process services at Everest Group.

Loren Moss: I appreciate you joining us. It’s always good to get to talk to you and all your colleagues there at Everest Group. As you know, we have a lot of esteem for you guys and covered your activities over the years, and you recently released a 2023 edition of the Everest Group BPS Top 50, and I read the report. It’s a really interesting report. I found some intriguing things in there.

I know that one of the things that you do is — it’s not a capabilities report, it’s not to say “Oh look, we are in the top right of these squares about this or that” — but it’s really looking more objectively at the biggest providers and what the trends are that we can notice in the industry. And you noticed a slowing growth for providers for the past, in 2022 compared to 2021, I think that growth slowed to around 8% from the year before, which was around 12.5%. And that’s kind of scary. It’s still growth, but it seems to be slowing down. What would you attribute that to?

Rajesh Ranjan: There are kind of three factors behind that, Loren. The first factor is that, in 2021, there was a lot of COVID-related spend and government contracts that came along. So that actually was very helpful in driving 2021 growth. But it’s a one-time activity. So, as that one-time activity, you can’t do it again, right? So that was one factor. 

The second factor was that all these comparisons are in USD — US dollars — and USD actually grew very strongly compared to other currencies. What happens because of that is that, while you’re making probably similar money in euros or pounds, in USD it looks low, right?

And the third factor was, you know, you are already coming on from very high growth. 12.5% is pretty high.

Combined, all these effects start to catch up. So, for us, as we look into it, it was not a kind of base nor core structural issue. 

Let me now take you a further step back. If you look at 2020, that was when COVID hit, so the growth actually came down meaningfully. In 2021, what happened is your base actually came down. Most that were growing at 7% to 8% came down to 1% or 2%. And in 2021 there was a lot of spend that was happening. On top of it you have this government spend that came along — one time, very Covid-specific spending came along, which benefited everyone. And that actually was not there in 2022.

But there was the currency issue, right — USD getting much stronger compared to other currencies — and the higher base effect. All these things played out. So, in none of that you see any structural issue.

In fact, as we are looking at 2023, we expect the growth to be around the same number. And in this kind of “recessionary” environment, if you can grow at around 8% as an industrial or business service provider, that’s pretty good! That’s pretty good. So we don’t see any structural issue yet.

Loren Moss: You mentioned some sort of recessionary environment. If we are in a global economic slowdown, is that going to cause the buy side to reduce their spend with outsourcers? Or will it cause them to increase their spend by moving in-house operations to outsourcers at a cost-cutting move? I see kind of a seesaw thing. Like, it’s good for outsourcers or bad for outsourcers. How’s that going? How would that work out?

Rajesh Ranjan: Yeah, that’s an interesting question. Let’s stick to BPO. It’s very interesting, because as you know, when you are in that low-cost pressure, BPO becomes a good route for you to lower the cost, right?

So, the way we look at it, is that there are two spends that you need to look at from an enterprise perspective. And subsequently, what is coming to BPOs, right? One is the “as-is” spend: things that they are already outsourcing. That is part of the spend that comes into the industry. Now, what happens is — let’s say that transaction volume is coming down, in the spend that they’ve already outsourced — then your value, what is called “annual contract value,” what you’ll realize is it will come down. So that is “as-is.”

And then you have “net-new” spend: organizations who’ve not done outsourcing — or they have not outsourced second functions. That is “net-new.”

Once we start to combine these two, what we are seeing is that net-new demand is pretty strong. Because organizations that have not outsourced their functions, they are doing it. But specific pockets where the volume has come down because of recession, that is actually acting as kind of a negative factor.

For example, look at mortgage origination as a service. That is severely hampered. While they are outsourced, some providers may have been expecting to — let’s just say, I’m just making it up — $10 million going into the year. Because that’s the kind of value projection that they have had. But then it has already come down to half, because not much origination is happening. It becomes 5 million. But then there are other organizations who are kind of coming through and saying, “Hey, I don’t want to do it in-house, you can do it cheaper.” So it’s kind of a combination of all the things that play out.

On the net-basis we are saying, hey, the industry is going to grow at 7% to 8% in 2023 — which is actually a pretty good number.

Loren Moss: I would imagine, if we look at IT outsourcing, if we do go into an economic slowdown, then we would find that companies would maybe increase their level of technical debt. That’s to say, “let’s kind of hold off on these kind of infrastructure upgrades and things like that.” So it might be a net-positive for business process outsourcing, whereas specifically IT outsourcing might kind of have a more negative effect?

Rajesh Ranjan: Correct. Absolutely, that’s right. You know, in any economic downturn, Loren, we have seen BPOs remain resilient while IT outsourcing takes a hit.

Having said that, the one thing that is going to make it more interesting this time around is that it is not going to be as severe hitting the IT side compared to the previous downturns. The reason being that, in the past, IT was actually seen as just pure discretionary. But today, technology is part of the fabric, right?

Loren Moss: Right. It’s not 2008 anymore.

Rajesh Ranjan: Correct, it is not 2008 anymore, and it’s not considered as discretionary. You still want to prioritize on the budget, but you are not going to stop it. This is the juggernaut that has continued growing.

So, there are two parts to it here. One is, yes, IT is going to be more impacted compared to business process outsourcing. But even if you’re looking at IT, compared to previous downturns, it’s going to be less impactful. 

Loren Moss: We also saw, according to your report, that in the past year, IT grew strongly. I would imagine that’s kind of some of the effects with Covid. A lot of companies were moving to remote environments and they had to put into place the infrastructure. A lot of companies did not have the infrastructure to properly support remote work when it comes to security, when it comes to being nimble and agile and having their workers work securely from anywhere. There are some companies that already kind of knew how to handle people working from all over the world remotely. They had VPNs, SD-WANs or other types of infrastructure already in place. And then we saw other companies that were scrambling, kind of starting from zero. I would imagine that what your report reflects was the boom that Covid created in certain sectors across the board but really especially when it comes to IT outsourcing, right?

Rajesh Ranjan: Correct, correct. With one client, you know what they said? What started this transformation is not the CIO or CEO. Covid started it. So that’s why you absolutely are right.

Loren Moss: You guys covered the Top 50 when it comes to revenue combined, you have a weighted formula where you look at 70% revenues, plus then you have kind of a growth modifier in your methodology.

Of the top five, I noticed that two of them, I don’t think they are global firms. They might have operations globally, but their market — when we look at ADP and Paychex — those are US payroll outsourcing companies. Not really niche — that’s not the right word — but very specific providers. They do a few things, but they focus on HR. They’re not like Accenture, a firm that does all kind of different things related around IT and consulting. If you work for Accenture and your mom goes, “what does Accenture do?” you’re gonna have a bit of a difficult time explaining in a comprehensive way.

I think it’s interesting, because then we saw you’ve got also two large companies — Concentrix and Teleperformance — which are customer experience outsourcers. What does that tell us about the strategy of firms that are having success? Does that say that, it is better to focus on one certain kind of delivery model? Or is it better to work broadly? I guess, is it better to be horizontal or vertical? If you are a growth firm and you want to make it into the top 10, or the top 50, what does that say about strategy?

Rajesh Ranjan: Yeah, it’s interesting. We call it specialist vs broad-based. Accenture is kind of broad-based — they offer so many things — while the likes of ADP and Paychex are specialists. We can also dump Teleperformance and Concentrix as specialists though they do offer other services, but 80% of their revenues come from that.

It’s a very interesting question. I think, to me, it’s less about your portfolio, more about how are you creating value and what you do. That is the more important thing. If you ask: “why Paychex and ADP?” Because they created this platform that can cater to the need of such a wide group of companies in a model that is scalable. That’s fantastic, right? Versus Accenture who basically comes and says, “Hey, look at your back office and mid-office and transform your operations.”

So, the point I’m trying to make, Loren, is that it’s less about your portfolio focus, and it’s more about, whatever you have decided as a strategy, how well you are executing against that strategy. So to me, that’s the key take of it.

Just to say one more thing: ADP, yes, a large part of their revenue is coming from the US — but ADP is actually now a pretty global company, in the sense that they have something called multi-country payroll or global payroll. They process payroll for a lot of other countries. So they catered to the US-headquartered company with a global setup, but they’ve also entered a lot of other countries. For example, they are in India as well. They are processing payroll for us.

But that’s a side remark. The core thing is you know how well you execute against your strategy vs just what your strategy is.

Loren Moss: Not what you do, but how you do it. 

Rajesh Ranjan: Correct, correct. 

Loren Moss: As you were putting this together — you and your team at Everest Group — did you notice any surprising jumps? And did you notice any surprising falls? When you’re looking at it, did you say, “wow look at this, we didn’t expect that, this company has really shot up, maybe more than expected?” Or did you see any surprising drops as you put the report together?

Rajesh Ranjan: You know, there are a couple of things, which were kind of interesting. 

We were talking about three kinds of segregation. One is specialists like your ADPs and Paychex and others. Second is your Teleperformance of the world, or Genpact of the world, who provide a lot of the BPO services provide some bit of IT services and a lot of really good services. And then you have what we call the IT/BPS providers. Accenture is one of them. Impulse, BPrO, Tech Mahindra, IBM. All of these guys have significant IT capabilities, and they have meaningful BPO capabilities as well, and that’s their revenue.

One interesting thing that we found, Loren, is that for some of these companies BPO is the growth engine. Though IT is the big brother, BPO is the growth engine.

So, for example, if you look at Tech Mahindra — which is number two in terms of fastest-growing, as you can see in the article — the overall growth for them is probably somewhere in the single digits. But the BPO business grew 27%! And it has been kind of growing for some time in this high double-digits.

The other example is someone like Cognizant. Again, IT is the big brother, but now the IT growth has been kind of challenging. That’s well known and pretty challenging for them. Overall growth, if you look at it, has been pretty challenging, but the BPO business has grown very nicely, around 15% to 18%. And it actually now crossed 2 billion.

IBM is another example. You know IBM is a big tech powerhouse in our business. But in the BPO business, it’s small — but nonetheless growing much much faster.

This is very interesting. How do you associate a company? If you ask someone, Tech Mahindra? They’ll come saying “tech company.” Cognizant? IT company. IBM? IT company. But there’s BPO with very meaningful growth within their own organization.

Loren Moss: That’s interesting. It’s fascinating because if you look at companies you see kind of a cycle. You see a tech company, and they get these operations, and then they spin off these operations. I remember Xerox had outsourcing, and then Xerox spun it off and said, OK, we are going to be a technology company. It’s like they grow this — and then someone comes along, the board changes and they go, “Oh! Let’s spin this off and focus on our core.” And then a few years later they develop it again, and it’s almost like this cycle of growing and then spinning off.

Rajesh Ranjan: This is the place where the general notion is that IT is sexy. IT is hot. That is the thing, right?

But the thing is to ask what’s the piece we’re missing here? What is the need in the market? Where can I accelerate growth? It’s not about, “this is hot.”

On the investors’ side, of course, it’s always a function of revenue and margin. And IT margin generally tends to be better than BPO margin. Having said that — and I don’t think I’m in a position to reveal anything — but some of these companies, their BPO margin is better than the IT margin!

The point here is again, for many of these organizations, this part of the business is creating significant value. 

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