Tim ZylaAfter years of steady multiples and a brief pandemic-era surge, valuations across the business process outsourcing industry have entered a prolonged reset — one increasingly shaped by artificial intelligence, labor economics and investor skepticism about traditional delivery models.
For Amanda Quinn, principal at Quinn Growth Advisors, the shift has been slow, structural and unavoidable.
I agree that it’s a slow value reduction,” Quinn said. “The market is telling us the value in labor-only delivery is going down.”
Rather than a sudden collapse, Quinn described AI’s impact on valuations as a gradual erosion of the labor-centric business model that historically underpinned BPO multiples.
Next Coast Brokerage Vice President of M&A Spencer Ewald said he too is expecting the decline to take place gradually, but also said pure market conditions are part to blame for the drop. “We went through a period that comes around once every 10 years,” said Ewald. “During COVID, central banks dropped interest rates to zero, money flooded the market, and everybody was throwing money around. … The typical nearshore BPO valuation has always been four to six times earnings, maybe seven if you’re really good. That went to eight, 10, even 11 — and then the party ended.” (Next Coast Brokerage is the M&A consulting arm of Nearshore Americas).
“As that value of labor is dropping, then BPOs are going to need to offset that value erosion with software revenue of some type, which thankfully has much higher margins and commands premium valuations” Quinn said.
She said this transition period is likely suppressing valuations even for well-run providers.
“Valuations may start to dip or are in that transition because of the broader market and the labor going down,” she said.
Multiples Reset, and Continue to Fall
From the public-company side, Chad Carlson, who previously served as CEO of StarTek and ResultsCX, said negative market reaction began last year when Klarna, a Swedish fintech, announced a boost to performance from AI customer service agent use.
“I think that’s when the public market really started to wake up to the potential risk of it,” Carlson said.
Quinn said companies that were valued at eight to 10 times EBITDA just a year ago are now seeing valuations that have been cut in half.
“We’re four to six (times EBITDA) now,” she said.
She said some investors are already modeling further downside, adding that recently on her podcast, a guest predicted future values of two to three times EBITDA becoming common in the future.
Ewald said he would not be surprised to see those valuations in the future, but noted the nearshoring world is somewhat isolated from the effects of AI on the market because the amount of savings to be had with lower-wage employees is less than markets like the U.S.
“Nearshore is a little more protected because wages are lower. It’s harder to justify AI when you’re paying $6 an hour than when you’re paying $25 or $30 in the U.S.,” he said. “You’re not getting some massive price break on AI software yet, so the ROI just isn’t there for a lot of nearshore operators.
Margins Up, Revenues Down
Some have pointed to the same structural tension unsettling investors: AI can improve margins, but often at the expense of revenue — a difficult equation for public companies.
“It can absolutely help margin performance, (especially through efficiencies of BPO’s back office)” Carlson said. “Revenues are going to come down. That’s a really difficult dance to walk as a public company.”
Quinn described the same dilemma from a valuation mechanics perspective.
“You’re going to need to supplement it with software revenue of some type and much higher margins,” she said. “The rub comes into, how do I price it?”
In her view, most of the industry has not yet solved that problem.
“I think the industry hasn’t quite figured that out yet,” Quinn said. “What does pricing look like?”
Labor Models Lose Investor Appeal
Underlying the reset is a growing consensus that labor-only delivery models no longer command premium valuations.
“There’s a slow reduction in the value of labor being the only delivery mechanism,” Quinn said.
Carlson framed the issue bluntly. “The industry itself is a bit of an oxymoron, because it’s been a commoditized custom solution business,” he said.
AI could accelerate investor scrutiny of that contradiction. “If you have a large client who all of a sudden says, ‘We can do this,’ and all these jobs, (agent counts and revenue begin to) vaporize,” Carlson said, “It’s gonna be a constant drip, drip, drip on the industry.”
While AI dominates headlines, some experts have also expressed concerns about balance sheets as valuations drop.
Some publicly-traded companies have taken on debt that some investors are viewing as unsustainable given current market conditions, which have given investors further reason for pause.
Quinn said AI represents a structural break rather than a temporary downturn.
“This is a fundamental disruption,” she said. “AI has made a permanent change in the valuation. There’s no way to really grow your way back to it.”
The implication is clear that valuations will only recover if BPOs successfully evolve beyond labor-driven economics.
“BPOs starting to have much higher margins than they do today with the labor-only model … That’s where the margin potential can become really interesting,” Quinn said.
Add comment