Liberata and Xchanging - changing the BPO model

Samad Masood, Analyst

Liberata and Xchanging, the two UK BPO players owned by private equity firm General Atlantic, have announced a procurement outsourcing deal worth £250m over five-years. The deal covers Liberata's existing BPO contracts, for which Xchanging will take over procurement of IT, temporary labour, facilities management, telecoms, utilities, travel and marketing.

Xchanging typically reduces procurement spend by between 10% and 25% over the life of its contracts, according to David Rich-Jones, Xchanging's executive director of procurement. These savings are shared with the client, in this case, Liberata. The two companies are also exploring the potential of partnering in this manner on future Liberata BPO deals, where Xchanging can act as a sub-contractor for indirect spend.

Comment: Subcontracting of IT between suppliers on large outsourcing deals is nothing new. But by outsourcing a core process such as procurement - which is often a key driver of early cost savings on BPO deals - Liberata is really starting to move the BPO model forward. This deal might bring Liberata some much-needed margin gains on its existing deals, and enable it to focus on its main strengths in managing vertical-focused local government and life & pensions sector processes. Ultimately, it is another sign of the immaturity of a market where many of the key players are re-assessing what their strengths are, and where they should best focus their efforts.

In the long-term we could even see Liberata trying to turn into a broker of outsourcing services, something that CEO Bob Gogel sees as a possible direction. But for now he knows that the industry is not really ready for this model, and we agree. Although there are already consulting and S/ITS firms that work as "prime" contractors broking large outsourcing deals, BPO deals are still primarily built on the back of the management skills and assets (IT and otherwise) that players such as Liberata have built up through their previous deals. Currently, this combination of assets, skills and vertical knowledge, is still one of the key differentiators when bidding for deals.

For Xchanging, this deal is a very good sign. Not only does it further establish it as a leading procurement services provider, but it opens the way for new opportunities to subcontract to other BPO players in the market. However, striking such deals may be a bit complicated at first, particularly when one considers that Xchanging's other back-office services compete with most of the UK top ten BPO players.

Although both Xchanging and Liberata claim GA had no role to play in the deal, the fact that they share a major investor surely reduced the barriers to working together. This certainly wouldn't be the case if Xchanging tried to offer this service to Capita or Vertex.

On the other hand, the unpredictable and "lumpy" nature of growth in the market has been driving players to focus more on their strengths, looking at only a few key opportunities in only a handful of vertical market segments. Indeed, this is one of the reasons Liberata struck the deal with Xchanging. If this trend continues, it could make it easier for "co-opetition" between BPO players, and therefore provide more opportunity in this area for Xchanging in future.

Samad Masood is an analyst in Ovum's UK software and IT services practice, and specialises in IT services, outsourcing and offshore services. Samad covers a range of outsourcing and services companies in the UK IT services market, as well as focusing on the leading Indian offshore providers. Samad is also responsible for maintaining Ovum's UK contract database service.