A recent study says growth in mergers and acquisitions are driven by industry's demand for scale; CRM component of outsourcing is small but "growing rapidly."
Posted Jul 19, 2007
Investment and consolidation in the outsourced customer care industry is at its highest level ever, and is poised to continue its growth, according to a new report. Investor interest, as measured in mergers and acquisitions (M&A), reached record levels in dollar amount and number of transactions in 2006. The sector ended the year with $8.2 billion in total global M&A deal volume, including a record $7.4 billion domestically.
The report--"M&A Market Analysis: Outsourced Customer Care Industry," by investment bank Robert W. Baird & Co.--classifies the outsourced customer care industry into four broad categories:
- consulting services;
- customer interaction services (customer service, technical support, marketing services, and sales);
- CRM technology hosting; and
- fulfillment and logistics.
The report states that the outsourced segment comprised $58 billion, or 19 percent, of the $300 billion worldwide customer care market in 2006. Baird estimates that, by 2010, these outsourced services will account for 25 percent of the global customer care market--$92 billion of an estimated $377 billion total.
Customer interaction is far and away the largest segment of this market, accounting for 84 percent worldwide in 2006 (83 percent in the U.S.). However, CRM technology outsourcing, which Baird classifies as having a customer care component, is on the upswing as well. "Although currently very small, this segment is growing rapidly as it brings sophisticated CRM capabilities to small-to-medium sized companies which might not otherwise be able to afford it," the report states. "This segment is expected to reach worldwide revenues of $2.5 billion and U.S. revenues of $1.5 billion by 2010, representing five year [combined annual growth rates] of 14.6 percent and 12.7 percent, respectively."
The notion that customer care falls beyond most companies' core strengths seems to be a key factor. "Growth in outsourcing of services, including customer care services, is being driven by competitive pressures forcing corporate clients to improve their organizational focus and structure. Outsourcing a variety of non-core functions allows management to focus on core business operations, free up resources, and better utilize existing assets," Brian Doyal, a managing director at Baird, said in a statement.
The conventional wisdom is that outsourced care is, almost by definition, an improvement over in-house options. "Specific benefits of outsourced customer care include higher quality service at reduced costs, access to best practices and specialized expertise which would be difficult and costly for an in-house staff to replicate," said Doyle, who is also head of Baird's business and technology services investment banking group.
The report covers a number of key industry trends, including:
- an increase in the overall focus on customer service;
- market globalization;
- the competitive dynamics of offshore locations;
- the rapidly-expanding use of at-home agents; and
- the impact of new technologies.
But Baird says the major trend is consolidation. Economies of scale; increased globalization; and diversification of product, market, and geography are pushing more companies than ever before to seek to combine forces.
Baird also expects continued activity to be driven by the growing demands of corporate clients--the kind of clients who favor vendors with the resources to invest in new technologies and to offer facilities across multiple geographies. Kiran Paruchuru, a vice president in Baird's business and technology services investment banking group and one of the report's authors, said that acquisitions are a key path for outsourcers seeking to achieve operational scale. Scale, he added, will allow outsourcers "to meet the growing demands of their customers and deliver services globally, have specialized industry expertise and handle multiple, large programs."
"We believe the outsourced customer care industry is in the early stages of a significant consolidation wave which will result in long-term fundamental changes to the competitive and operating environment," said Steve Bernard, CFA, director of M&A market analysis at Baird and another of the report's authors. "The primary industry growth driver will be the continued migration of services performed by in-house personnel to outsourced providers."
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