The advent of a BPO-enabled M&A economy.

Driven by pressure to deliver quick returns, and coupled with a shaky IPO market fueled by scarce capital and low valuations, the economic logic supporting continued consolidation within industries seems to be increasing in appeal.

According to a 2003 Boston Consulting Group study, mergers and acquisitions in this weak economic climate offer a sound business strategy. "Winning Through Mergers in Lean Times," which analyzed 277 merger and acquisition transactions that took place in the U.S. between 1985 and 2000, found that mergers that took place during periods of below-average economic growth have a higher likelihood of success and generate more shareholder value.

The study found that deals made during strong economic times destroyed value, on average, and deals made during weak economic times created a value 14.5 percentage points greater and returns 8.3 percentage points higher than the returns of the market as a whole. In addition, companies are even more readily willing to explore joint ventures, mergers and acquisitions with the advent of IT, F&A and HR business process outsourcing (BPO).

BPO is a growing strategic M&A tool used to outsource non-vital functions through highly specialized support service centers, paving the way for easier, swifter and more successful M&A consolidation--thereby enabling a new era of business growth strategy I coin the "BPO-enabled M&A Economy." I call on the nation's top corporate leaders to tell me what they think. Are we going to see greater round of consolidation ... and will the early adopters of BPO lead the way?

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We already have seen the impetus of M&A activity in larger corporations during this downturn economy. It can be seen in the IT sector (i.e., software giants like PeopleSoft), and is currently on the horizon in the telecom industry, with rumored megamerger of Bell South and AT&T. Further, we have already experienced the effects of over-inflated purchases in a strong economy, with the collapse of France Telecom and WorldCom after their buying sprees.

I believe any type of outsourcing, especially BPO, has the potential to make M&A easier. With outsourcing, there is off-balance-sheet financing so corporations can variable-ize their cost structures and get fixed costs down, which helps in valuations.

There are three major areas where BPO in a M&A activity can assist: 1) greater transparency when performing due diligence on operations such as F&A; 2) outsourcers standardize operations and procedures, therefore make it easier to change hands and place a value or expense on the service, as well as make the scope of work more easily identified; and 3) BPO helps alleviate the most complicated parts of the deal in verification of the operational assets, the human resources and the financial accounting liability.

For example, with BPO, Company A can simply take over the outsourced HR component of Company B from its outsourcer, with no disturbance to company A's operations. While BPO does help potential buyers make an acquisition, it can be of equal benefit to a seller, actually clearing the way to divest subsidiaries or sell the entire corporation, if that is the strategic mission.

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In the next five years, BPO will continue to grow as a critical tool for the successful CEO. Since 2000, BPO has begun to change the landscape of business. In a tough economy, new business imperatives will require getting help. BPO can really help, if it is executed properly.

Only the very fittest will survive these times. You must have the ability to tap into a new global marketplace, to properly manage an evolving, always-on, full media network and newer IT technology, as well as use world-class skill for execution. With cyber access, it has become increasingly easier for fierce, crushing competition to come into your business from anywhere in the world. No one can go it alone anymore. So, the selection of a Provider for BPO becomes the critical decision, not whether or not to use it as a strategic tool.

For those not familiar with BPO, it has not been given due credit--the main reason for dissatisfaction with BPO implementation is a lack of trust. Both parties often cannot see the ROI on their relationship. However, where trust grows, confidence in expanding the role of the provider also grows--including into M&A activity. The CIO trusts the accuracy of the data; the CEO trusts the accuracy of the process, and the results. And, BPO can offer a swifter consolidation opportunity. The BPO provider is looked upon as the change agent, capable of enabling the right moves for the client company.

In this global economy, with free flowing access to new markets, a very different style of company is emerging, with unique mergers and unusual partnerships. And one thing is for certain-choosing and trusting the right outsourcing provider will be mandatory to survive and succeed.

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William Bangert

Group Vice President of Global Sourcing,

Gartner, Inc.

Patrick O'Malley 

Sr. Managing Executive Consultant

Former President,

Sprint Business