The New $12 Billion BPO Buzz

Hyderabad | Updated: Apr 12 2004, 05:30am hrs
Procurement outsourcing is all set to emerge as the next big opportunity for Indian business process outsourcing (BPO) companies as nearly half of the companies in the US, UK and Europe are considering outsourcing part of their procurement operations to countries like India in the next three years. While interest in outsourcing procurement activities is emerging strong, particularly among over $1 billion companies, companies in Italy, Germany, Austria and Switzerland are also expected to follow this emerging trend, according to a recent study by National Association of Software and Service Companies (Nasscom).

Procurement BPO is transfer of management and execution of one or more procurement management activities, transfer of entire procurement sub-segments or transfer of the entire procurement business functions to an external service provider. This has been done by the major companies for increased productivity, high revenue generation, cost reduction, business transformation and improvement of shareholders value.

According to the Nasscom study, the worldwide procurement BPO market has been estimated at $6 billion and is expected to touch $12 billion by 2007, with a compounded annual growth rate of 15.2 per cent. Procurement BPO is becoming a desired activity due to combined opportunities for cost reduction and the ability to focus more time on management of spend categories that are retained in-house.

According to the study, the key inhibitors of growth in this area include prolonged sales and decision-making cycles for the adoption of procurement BPO engagements and slower rates of adoption due to infancy of procurement BPO and insufficient precedent and success stories.

The study pointed out that interest in procurement BPO will continue to be strong and some of this will begin to translate into actual BPO engagements. Buyers will take steps toward adoption, with the overriding goal being that of cost reduction. Buyers will continue to demand a mix of IT and business services, as well as access to technology, within their procurement BPO engagements. They will also place a premium on and expect to see more elements of traditional project-based engagements, the study said.

Modest economic recovery towards the end of 2004, trigger events such as cost reduction efforts, need for process enhancements, increasing trend towards using external service providers thereby increasing market opportunity and increasing acceptance and adoption of technology towards procurement management and processes are some key drivers for this BPO to grow, the survey said.

According to the Nasscom study, discreet manufacturing vertical is the largest consumer of current procurement BPO followed by process manufacturing, services, communication and media and government segments. The competitive landscape for the Indian BPO companies include a good mix of procurement-specific and IT service providers. Some of the major competitors in this field include IBM, Accenture, EDS, CGE&Y and CSC. While all these players have procurement BPO as a standalone offering, they also have procurement BPO within larger multifunction BPO engagements.

While the US will be the major market for procurement BPO with a potential of close to $7.8 billion followed by Europe with around $2.9 billion and Asia-Pacific region with $1.4 billion.

However, Asia Pacific will have a higher CAGR of 18.3 per cent as compared to 15.1 per cent of the US and Europes 14.3 per cent, the study said.