The Business Process Outsourcing (BPO) & Contact Centers sector has shown clear signs of optimism despite recent global concerns related to increased skill shortages, trade protectionism, and political gridlocks. Total sector revenue is projected to reach $60.3 billion by 2025, with a compound annual growth rate (CAGR) of 2.4%, according to IBISWorld.1
M&A Activity and Valuations Outperform Historic Levels
In 2021, merger and acquisition (M&A) activity in the BPO & Contact Centers sector increased 77% year-over-year (YOY), with 48 transactions announced or completed as the prospect of capital gains tax increases motivated sellers to consider a liquidity event. The persistence of ultra-low interest rates has generated a cash-flush environment, with both strategic and private equity buyers demonstrating a willingness to pay higher premiums for accretive acquisitions. As a result, EBITDA purchase multiples in the BPO & Contact Centers sector have averaged a robust 10.2x over the past three years, outpacing the broader Businesses Services industry average of 8.2x, according to Capstone's Middle Market Valuation Index.
Although strategic buyers continued to lead the BPO & Contact Centers M&A market, accounting for 58.3% of deals in 2021, private equity firms engaging in add-on acquisitions comprised 29.2% of transactions in 2021, an increase of 10.6% YOY. Armed with a record $1.4 trillion in dry powder, sponsors have bolstered platform investments with advanced digital capabilities. In a recent example, Trilantic Capital Management-backed 24-7 Intouch acquired Goodbay Technologies for an undisclosed sum (October). The acquisition enabled 24-7 Intouch, an operator of contact centers and provider of various BPO solutions, to expand its digital communication channels, enhance its customer experience solutions, and enter new markets. "Our new acquisition is an exciting opportunity to strengthen our core digital offerings to technology, media, and fintech customers while also making us an industry leader in digital customer service solutions for the gaming vertical," said Greg Fettes, Co-Founder and CEO of 24-7 Intouch, in a press release.2
What Does 2022 Hold for the BPO & Contact Centers Sector?
COVID-19 has been a major disruption for labor-intensive industries, and the BPO & Contact Centers sector is no exception. Several factors are expected to shape the sector in 2022 and beyond, providing valuable revenue opportunities for innovative market participants.
1. Utilization of New Technologies
BPO and contact center companies continue to implement cloud computing, social media, software, and automation to effectively address market challenges, manage talent shortages, enhance products and services, reduce costs, and accelerate growth. Three major trends are projected to accelerate BPO technology in 2022:
• Heightened Emphasis on Process Automation - Advanced technologies, such as robotic process automation (RPA), have been increasingly adopted by sector participants in recent years. RPA uses bots and artificial intelligence (AI) in user interface systems to complete work faster, resulting in lower operational expenditures. Initially, RPA has been implemented with the simplest, most repetitive tasks such as processing claims or data entry. As the technology advances, we expect RPA to enhance more sophisticated tasks and ultimately aid in the complete automation of back-office functions.
• Increased Focus on Social Media Management Tools - In 2021, 72% of the U.S. population had at least one social media account, which has created an opportunity to obtain an unprecedented wealth of consumer data and feedback that can enhance a company’s ability to analyze upcoming trends and innovations, according to PEW Research Center.3 Rather than traditional call center software programs, BPO companies have now invested in real-time customer engagement that enables them to gain first-hand product insights and turn client challenges into new products and solutions. These new service offerings, representing a huge market opportunity, range from social media monitoring to business intelligence and actioning customer response.
• Elevated Investments in Cloud Computing - An increasing number of small- and medium-sized businesses, now approaching 80%, are adopting virtual storage systems rather than directly investing in data centers, hardware and software, and the personnel required to implement new technology, according to Forbes.4 This trend will accelerate as cloud computing becomes more mainstream, mature, and cost-effective. The benefits of this technology include greater collaboration between BPO and contact center providers and clients, with standardized systems offering higher data security, simplified administration, and greater flexibility and scalability.
2. Upscaling of Skills in BPO Centers
Twenty-five years ago, BPO services were typically restricted to telephone contact centers. Outsourcing has dramatically expanded over recent years to include internal business functions such as accounting, human resources, web design, coding, and other tasks. Delivery of these services requires a higher skilled worker, and the demand for enhanced competencies has accelerated as lower skill jobs are replaced with automation. This requires BPO companies to significantly invest in training, development, and technology to increase the skills of their workers and reinforce the company's market position.
3. BPO Companies Attract Startup Clients
Startup businesses have become increasingly targeted as clients for BPO companies as the smaller market is less competitive and provides BPO firms with a higher margin profile. In addition, by starting relationships early with small, fast-growing clients, BPO companies can expand alongside their startup customers. Startups with small recruitment budgets often look overseas for cost-effective talent, making them an ideal BPO customer.
4. Increased Transparency in Partnerships
In the past, BPO offerings were considered a “black box” service, focused on overseas labor with little transparency or sharing of technology, organizational details, and limited points of communication with the client. Driven by broader and deeper relationships, BPO and contact center services have now been characterized as more of a true partnership rather than simply a source of cost-effective labor. These relationships now require a greater sharing of proprietary data, systems, and technology between clients and BPO providers. In some countries, such as the U.K., the government has taken steps to ensure greater transparency. For example, financial services companies in the U.K. must notify either the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) of any outsourcing contracts to ensure compliance and transparency, according to Thomson Reuters.5 Capstone expects the trend towards transparency to continue in the coming years as more countries adopt similar policies.
5. Politics to Impact BPO Investments
In the U.S., the change in administrations in Washington has impacted policies on trade, taxes, visas, global agreements, and regulations that are more favorable to the BPO & Contact Centers sector than the previous administration's America First policy. Worldwide, countries with stable and predictable political environments, and favorable economic policies, are slated to see the greatest growth investment from global BPO firms. Long-established outsourcing destinations like India, the Philippines, and Malaysia will continue to see growth. In the continuing search for alternative cost-effective locations, several additional countries are emerging as top destinations for 2022, including Mexico in the Americas; Bulgaria and Romania in Europe; and Egypt on the African continent.
6. Longevity of Work-From-Home Models
As the COVID-19 pandemic drove many BPO and contact center businesses around the world to a work-from-home environment in early 2020, outsourcing companies are considering the costs and benefits of adopting this business structure for the long term. The remote work model enables savings on real estate costs and increased flexibility for BPO and contact center services providers, as most serve clients across time zones. Common disadvantages of work-from-home models in the BPO & Contact Centers sector include a lack of collaboration between workers and communication failures with clients, although a greater implementation of the technology mentioned above should provide an effective solution.
To discuss the trends above, provide an update on your business, or learn about Capstone's wide range of advisory services and BPO & Contact Centers sector expertise, please contact Managing Director Bob Balaban.
1. IBISWorld, "Business Process Outsourcing Industry Report," https://my.ibisworld.com/us/en/industry-specialized/od4794/industry-at-a-glance, accessed December 20, 2021.
2. 24-7 Intouch, "24-7 Intouch Acquires Goodbay Technologies," https://24-7intouch.com/blog/press-releases/24-7-intouch-acquires-goodbay-technologies/, accessed December 19, 2021.
3. PEW Research Center, "Social Media Use in 2021," https://www.pewresearch.org/internet/2021/04/07/social-media-use-in-2021/, accessed December 19, 2021.
4. Forbes, "The Data Center of the Future," https://www.forbes.com/sites/insights-vertiv/2020/01/22/the-data-center-of-the-future/?sh=18e69b7b5a3a, accessed December 19, 2021.
5. Thomson Reuters Practical Law, "UK Outsourcing Regulation and Requirements," https://uk.practicallaw.thomsonreuters.com/9-501-5068?transitionType=Default&contextData=(sc.Default)&firstPage=true, accessed December 19, 2021.
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