India-based BPO pure play Firstsource took another hit on margins in Q211 after seeing them halve in Q1 (see Shine fading from Firstsource growth). For the three months to 30 September, Firstsource’s operating EBIT margin slumped to 4.2% vs. 9.7% in Q210, and headline revenue grew 5.8% to Rs5.3bn (£66.8m). UK revenue meanwhile grew 20% to Rs1.7bn (£21.2m), and the gross margin fell to 18% vs. 31% in Q210.
Firstsource’s margins have clearly been badly dented by its last big onshore-based BPO deal with Barclaycard in the UK (see Firstsource confirms Barclaycard contract) for credit card collections, which saw 700 Barclaycard employees in Stockton transfer to Firstsource. Firstsource is now seeing declining demand for this collections business, which it expects to continue in Q3, as well as ongoing lower volumes in its UK mortgage business. So we would expect UK margins to come under further pressure over the coming quarters.
Firstsource is a classic example of a BPO provider still focused on ‘lift-and-shift BPO’, which is predominantly a cost-out, labour-arbitrage driven game. Of course following clients onshore may help grow the top line, but as evidenced by the Barclaycard deal, is at the expense of the bottom line. Firstsource is falling further behind India-based peers like Genpact and EXL Service (see Genpact and EXL storm ahead in Q3), which are investing to build full line business process services (BPS) capability, and generating healthy double-digit operating margins. Firstsource has a big task on its hands just to try and keep up.