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Six Warning Signs that a Service Provider is in Trouble

by: Karen Cayamanda

Wednesday, October 7, 2009 |

Twenty-five percent of existing BPO service providers will cease to operate in 2012. This is based on a recently published Gartner research which is part of the Special Report entitled “Assess and Manage Vendor Risks to Protect Your Business”. This can be attributed to the current economic downturn, lapses in outsourcing contracts, and not being able to adapt to standardized delivery models.

Vendor risk factors

With these factors in mind, Gartner noted that BPO buyers must take caution before venturing into any new outsourcing contract, and should be aware of the six warning signs indicating that a service provider is not stable enough to maintain a long-term outsourcing relationship:

1. Unprofitable outsourcing deals - According to the research, “Some BPO providers are carrying unprofitable contract portfolios, largely stemming from too-much, too-soon pursuit of deals, without much thought as to how to transition them to a standardized, rationalized, profitable state of ongoing operations.”

2. Inability to get new projects - It is a good sign if the service provider has the ability to constantly take on diverse requirements of different clients.

3. Loss of major contracts to other service providers - Losing a “marquee” deal spells trouble on the part of the vendor. “It will always be prudent due diligence to seek and gain a reference from any current anchor clients to understand how committed they are to the vendor and their experiences in dealing with them.”

4. Inability to bid on new BPO deals because of lack of enough funds - Some service providers cannot take on new BPO contracts because of lack of enough capital. Moreover, the so-called “lift and shift” strategy in which a business process is moved offshore to reduce costs because of lower salaries will eventually create problems for service providers that rely on it because they still need capital for the resources required to do that outsourced task.

5. Exposure to banking / finance sector - With the current financial crisis, those service providers with revenues coming from the finance or banking sector will be in a tight spot. If the outsourcing partner has more than 85 percent of revenue from the banking sector, the buyer should know if this will affect their business operations.

6. Increasing levels of contract cancellation and insourcing - Gartner says that before signing an outsourcing contract, buyers must come up with a plan on what to do when contract ends. Moreover, contracts must be crystal clear, tackling not only the issues that may arise for the first year but also the steps to take in case the buyer decides to expand or have a new project.

During these tough times when outsourcing has become an avenue for companies primarily to cut costs, it is essential to pay close attention to your outsourcing partner. Know the warning signs and be constantly aware of what is happening in the BPO industry. Have a clear picture of what you want to achieve before signing any outsourcing contract.

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