India-based BPO pure play Firstsource took another hit on margins in Q311 on its quest to fuel revenue growth. In the three months to 31 December, the EBIT margin more than halved to 3.5% vs. 9.3% the previous year, and was down from 4.4% the previous quarter. Revenue meanwhile was up 3.3% in constant currency (ccy) to Rs5.77bn (£74.1m), and up 1% qoq (ccy). This is now the third consecutive quarter that Firstsource’s margins have slumped (see here and here). Firstsource said it was ‘largely driven by investments and cost of growth towards recently won large deals’.
The company did manage to win $160m worth of new business in the quarter, including a ‘long term strategic partner’ relationship with an unnamed UK-based telecom and media client. The UK is a growth market for Firstsource thanks largely to its major deal with Barclaycard (see Firstsource confirms Barclaycard contract), and this latest contract should help ensure that growth continues. Q3 UK revenue was up 10.6% to Rs1.84bn (£23.3m), although the EBIT margin fell to 15.5% vs. 26.8%.
The margin issue is a concerning trend for Firstsource, which looks like it is being forced towards the commodity end of the offshore BPO market. The company has a number of challenges. First is its high attrition rate, which averaged c61% in Q3 (vs. 55% in Q2) across its different geographies on an annualised basis. Onshore attrition (US and Europe) is the lowest, but this still stands at c38% annually, and undoubtedly also adds to the cost of delivery here.
Then there is Firstsource’s ‘lift and shift BPO’ model, which we believe lacks the flexibility to manage these uncertainties in its cost base. While many of its offshore peers are moving fast to a platform-based BPS model, and with that greater automation and a healthier margin upside (see Offshore suppliers upping the stakes in platform-based BPS), Firstsource does not appear to be making the necessary investments.