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Larger LPOs Gain At The Expense Of Smaller Players
Larger LPOs Gain At The Expense Of Smaller Players
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Friday, June 29, 2012:
The financial results of firms in the Indian legal process outsourcing (LPO) industry reflect the challenges they face as a result of the global financial crisis. Despite a slowdown in growth since 2008, there are clear indications of revival. However, growth in the industry is being driven by the large pure-play Indian LPO companies, viz. Integreon, Intellevate, Pangea3, and UnitedLex. Smaller companies appear to be lagging behind.
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This was one of the findings of a report titled “Legal Process Outsourcing: Financial Performance Review” published by ValueNotes, a market intelligence and consulting firm. The report analyses the key financial ratios of 32 “pure-play” Indian LPO companies, which exclusively provide LPO services.
LPO companies with revenues of more than INR 100 million have been able to sustain positive operating margins in each of the last five years. Among them, the large companies - with revenues of over INR 500 million - have consistently achieved double-digit operating margins. This is the result of consistently high revenue per employee in the segment. Small companies (revenues INR 25-100 million) have typically reported operating losses in each of the last five years, barring a few exceptions.
Hit by slowing growth, rising costs and under-utilisation, smaller companies have been forced to take on more debt. Arun Jethmalani, Managing Director of ValueNotes, says, “An area of concern for the small LPO service providers is their inability to maintain consistent operating profits, resulting in rising debt levels.”
The overall scenario for the larger service providers in the Indian LPO industry looks promising as the quantum of their revenue and profit growth outweigh short-term liquidity problems. The situation is gloomy for the smaller service providers. They will need to urgently address the challenges of a falling top line coupled with rising costs and debt that they are unable to service. It is critical for them to improve the key metrics of sales growth and revenue per employee (RPE) to turn profitable and stay in business. This dichotomy between the performance of the larger and smaller players indicates a consolidation phase in the LPO industry in India. |
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