The business process outsourcing (BPO) market continues to show healthy growth despite the economic downturn. Worldwide, BPO services will grow from $110 billion in 2002 to $173 billion in 2007, at a 9.5 percent compound annual growth rate (CAGR).

• Enterprises around the world are attempting to focus their investments on their core business processes and are increasingly looking at outsourcing non-core business processes.
• The economic downturn and increasing competition is putting cost pressure on enterprises that attempt to optimize their internal operations by reducing the cost of transaction processing in non-core areas.
• In some industries, a shift in regulatory environment is leading enterprises to achieve even higher cost efficiencies in operational management and to focus on their front-end processes. This is true in the financial services, utility and telecommunications industries.
• Industry consolidation continues to create opportunities for outsourcing as back-office functions become redundant after a merger or an acquisition.
• New technology and media are creating opportunities for outsourcing entire lines of products and services using these new technologies, such as online payroll, online benefits administration, online order management, online transaction processing and so on.
• Globalization is driving multinational enterprises to outsource business processes to local service providers to gain local process expertise, for instance in finance or human resources (HR) management.
• The high level of competition is making markets more volatile. This makes it more sensible for companies to outsource to third-party service providers to ensure better upward and downward scalability.
• Early adopters of BPO services — primarily large organizations — continue to expand their relationships to include new process areas. For instance, companies that have outsourced their payroll functions begin to outsource other HR or finance and accounting (F&A) functions.
• BPO suppliers are solidifying their market offerings. Both the number of suppliers and the diversity of their offerings are increasing, providing more choice to late adopters, particularly in the midmarket and new vertical industries.
• Both the demand and supply of BPO services are beginning to mature in Western Europe, Asia/Pacific and Japan.

• As in other IT services markets, the BPO market is experiencing the impact of geopolitical instability and economic uncertainty. Many large BPO contracts were stalled or postponed and will not be signed until late 2003. The sales cycle for BPO decreased in 2000 and 2001 but increased in 2002 to average at about 12 months. We expect the sales cycle to stay in the one-year range for most large contracts.
• The first wave of BPO adoption by large enterprises will come to the five-year mark at the end of 2004, by which time many contracts will be renegotiated and possibly reopened to competition . Although some of the contracts will be expanded to include new process areas, the overall effect of the renegotiation will be a slight slowdown in BPO growth in 2005.
• The growth in the offshore delivery model for BPO services will have a deflationary impact on the revenue of BPO providers, as end users begin to negotiate contracts with the new offshore pricing models in mind. The growth in offshore delivery capabilities will have a positive impact on the volume of BPO contracts, but the total impact of offshore services will be slightly negative on the growth of BPO revenue, as early as 2003. The midmarket will be slower to adopt BPO in a significant way than large enterprises. Demand for BPO in the midmarket remains fragmented and dependent on new solution implementations. The growth in new delivery modes for BPO (for instance, the business service provider [BSP] model) will not reach maturity until after 2005.

• BPO is growing faster than any other IT services segments.
• Outsourcing is becoming the primary channel for selling other IT services, as opposed to discrete, project-based services.
• BPO services give access to new buyers within user organizations and expand the IT services opportunity.
• The world is gradually moving to a scenario in which BPO contracts are channels to market for a number of other IT services lines.