The BPO boom seems to be attracting companies in large numbers. After the likes of captive players like GE, and pure-play companies like Daksh, the latest entrants in the BPO ring are software majors like Infosys, Wipro and Satyam. Srikanth R P & Stanley Glancy look at the strategies Indian software players are adopting to tap a market that is estimated to grow to $21 billion by 2008

The timing could not have been better. After a disastrous year, when Indian software companies were testing different survival strategies, they discovered a messiah in Business Process Outsourcing (BPO). While there has been a debate on whether there are actually any synergies between the type of work that software companies do and what they would be doing in the BPO space, for the moment, Indian software companies seem to be blinded by the huge potential this new field holds. The list of Indian software companies entering the BPO segment reads like the who’s who of the Indian IT industry. Players like Infosys, Wipro, Satyam, TCS, Digital Globalsoft, HCL Technologies and Mphasis BFL have all got into the game, either through subsidiaries or separate units within the same company.

Gaurav Dua feels that with the low-end market getting increasingly cluttered, software companies should leverage their past experiences and best practices to focus on the high-end market

Will the BPO plan work for Indian companies?
For Indian software companies, entry into the BPO business is clearly a way to not only increase the topline, but also to address a larger part of the market space. Looking at the way pure-play BPO companies have been grabbing business, Indian software services companies too have been increasingly searching for a way to get into the BPO business. While the differences between software development and BPO far outweigh similarities, Indian players clearly don’t want to miss out on an opportunity which even non-IT companies are seizing.

Says Gaurav Dua, senior research analyst, technology practice, Frost & Sullivan (India), “Hit by the global economic slowdown and tech meltdown, software firms are looking at constant revenue streams and steady net margins. In such a scenario, BPO represents the best opportunity. By foraying into the BPO segment, software services companies are looking at improving cost efficiencies by moving operations offshore for their existing as well as potential clients. Also, in the services industry where customer relationships play a vital role, having a presence in the BPO space would place software firms in a vantage position against competition. In addition, by controlling the maximum levels in the value chain, software companies can not only commit high-quality levels to their clients but also look at long-term strategic outsourcing alliances with them.” While the opportunity is certainly huge, Indian companies have to realise that software services and BPO are dissimilar, and require different skill-sets, though there may be some skill-sets which could be transferred to the BPO subsidiary. Says Ravindra Datar, senior analyst for IT services & BPO at Gartner, “BPO is a strategic move with long-term commitments and long-term implications. Selling and delivering business processes require different skill-sets compared to traditional IT services outsourcing. Even the decision makers that need to be targeted are different, at the CEO/COO level, and the issues they need to be convinced about for BPO services are very different from what a CIO needs to be convinced about for IT services. However, as Indian IT services vendors have built a credible India brand, it would be easier for such companies to convince potential clients to sign on the dotted line than it would have been without this recognition.”

Current scenario
In India, the BPO players can be differentiated into: -

• Captive units set up by companies such as GE,
• Third party service providers such as Daksh and,
• Software companies just entering the BPO space.

While currently most software companies are more or less doing the same type of work that is being done by pure-play BPO companies, analysts believe that as the BPO industry matures, customers would prefer to move their mission critical work to Indian software firms.

Avinash Vashistha supports the acquisition option as the market is hot and says that those who wait or try to build competency on their own will find the going difficult

Till last year, big companies in countries like the US typically outsourced their service needs to companies like IBM, EDS or CSC, and India was looked at only for outsourcing trivial tasks. But as the global slowdown took its toll, these companies started looking at India as one way of pushing up their bottomlines by cutting costs. Looking at this trend, a host of Indian companies started looking at the BPO market by either going in for acquisitions or by forming separate subsidiaries.

Strategies of Indian players
Infosys has set up a separate subsidiary named Progeon for its entry into the BPO space. Says an Infosys spokesperson, “Our BPO foray is part of our initiative to increase the length and breadth of our services and extend relationships with our clients. But we set up the BPO company as a separate entity as the skill-sets, resources and execution model are different from that of our core business.” Infosys has also decided to go in for a build-option rather than a buy-option, by forming a separate subsidiary. As Infosys has a strong client-base, the company thought it prudent to tap its existing clientele, which would enable it to grow organically.

On the other hand, the strategy of Wipro has been to buy and then build. For instance, Wipro made a smart move by picking up a stake in Spectramind, thus giving it a competitive edge against other Indian players. Says Balakrishna R, practice head for BPO at Wipro, “The key for us was to get a quick start with an established player and experienced management team. It would have been time-consuming to build this from scratch. Additionally, the investment in Spectramind is a fair investment from a financial standpoint. The call centre business has good growth potential, and this investment allows us to participate in this business opportunity as we go to market initially with this offering. With this strategic investment, Wipro has strengthened its BPO offerings with the inclusion of backroom processing services and customer contact services in its portfolio of services.”

While the build-or-buy decision varies from one software company to the other, both the options hold interesting pointers for the rest of the industry to follow. For instance, going in for a build option allows a company to scale up as per market needs. Additionally, this option offers a company like Infosys the opportunity to gradually scale up operations to align completely with existing software service practices. Moreover, a build option gives a company complete management control and better quality control. But while this option helps a company to fine-tune its BPO practices over a period of time, in terms of go-to-market strategy it could prove to be a long wait.

So which strategy should Indian companies adopt? While both models offer benefits, most analysts Express Computer spoke to favoured the buy option.

Says Dua, “In my opinion, it would be ideal for Indian software companies to enter the BPO space by taking a stake in an existing BPO company as it gives them faster time-to-market. As the acquired BPO player will bring with it industry best practices and trained manpower—in addition to the customer base—there is a faster return on capital invested.”

Manish Modi says Datamatics is looking at leveraging its domain expertise in the knowledge management and data processing space

Adds Avinash Vashistha, the managing diretor of neoIT, “At this point of time we believe that Wipro has the smarter strategy. The BPO industry is still young, but there are some good players that have built core competencies and maturity. While they may have the core competencies, the big players have the brand recognition. As the Wipros and Infosys of the world move forward with their BPO strategy, I think we will see more companies take the Wipro approach and either buy the competencies of the smaller (but specialised) BPO firms or forge creative partnerships. In the end, companies that team up with the right partner or buy the right company will be ahead of the curve. This market is hot, and those who wait or try to build competency on their own will find it difficult.”

While only time will tell which strategy works best, for the moment both the majors are chalking out extensive plans to tap the BPO space. Infosys is looking at working together with Progeon to provide the client a complete range of services that not only takes care of its technology requirements but also process outsourcing needs.

Progeon is banking heavily on the Infosys brand name and its methodologies to gain a competitive advantage. The frameworks developed for business process management which will be used by Progeon will be based on the Infosys Influx methodology, which enables client processes to be transitioned and executed smoothly. Initially, Progeon will focus on the lucrative banking, financial services and insurance (BFSI) sector. Within this sector, the focus will be on transaction processing and accounting services. The company will offer these services in multiple forms—as business process re-engineering, shared services platform, and business intelligence services—in addition to the obvious cost advantage of executing the work in India.

Wipro too is counting on its immense experience in the software services space to help create the same kind of brand in the BPO space. Additionally, Wipro’s strengths in terms of quality by its SEI-CMM, SEI-PCMM, SEI-CMMi and Six Sigma processes will be complemented by Spectramind as it is the first Indian company to achieve COPC certification using the Six Sigma platform.

Says Balakrishna, “BPO is a key strategic initiative for Wipro and will be a growth driver. We see synergy in terms of a common client-base and an expansion of our service offerings. The key message is that in this space value is delivered in three waves. The first wave is delivered by moving operations offshore. Wipro already has a strong presence here and has an established and proven process for transitioning and sustaining operations. The second wave of value comes from process optimisation. This comes in two ways—by redesigning the process; and by changing the IT solution that supports the process. These processes are transaction-driven; processes such as Six Sigma can be very effectively used to take out cost on a continuous basis, which constitutes the third wave.

This along with Wipro’s financial stability and strong account relationships helps us in being a serious player in this space.”

Ganesh Natarajan expects BPO business to contribute 15-20 percent of Zensar revenues by 2004 and says that IT services companies are best equipped to enter the high-end of BPO

The third important player in the Indian IT industry, Satyam, has also joined the BPO race through its subsidiary, Nipuna, which is looking to start operations by setting up a 250-seat facility. Like the other two majors, Nipuna too would concentrate on lucrative sectors like insurance and banking, besides manufacturing, automotive, transportation, energy and utilities. Like its peers, Satyam too is betting on its quality initiatives to act as a differentiator. Nipuna will be using Satyam’s eSCM, an e-services capability model developed by Carnegie Mellon University with help from Satyam. This model could give Nipuna an edge as it is specifically aimed at the BPO space. The model provides guidelines to BPO players to establish processes that will enable them to develop and enhance their capability.

Says S V L Narayan, spokesperson for Nipuna, “This model is different from other quality and capability models since it addresses activities critical to successful outsourcing, not only in the contract execution phase but also in the pre-contact and post-contract aspects of an outsourcing engagement. As our processes will be fine-tuned to match the standards of eSCM, we will be in a better position than our competitors to deliver quality services consistently.”

Besides the big three, a host of other companies from the top and middle tier are also looking at making a mark in the BPO space. Here’s a look at the strategies these companies are adopting.

Zensar: While most software companies are concentrating on the low-end of the BPO business, Zensar is looking at playing in the high-end segment. Says Ganesh Natarajan, the company’s managing director, “Zensar sees BPO as integral to its practice-based organisation. We focus on a few sectors, and within that provide comprehensive outsourcing solutions that include consulting and IS architecture creation, package implementation, application development and maintenance, and BPO. I believe that IT services companies are best equipped to enter the high-end of BPO, while commoditised call centres can be set up by anybody with deep pockets. Hence our interest is in the MSP and ASP space, in addition to providing data centre and Web helpdesk support for clients.” Going forward, Natarajan expects that BPO would contribute 15-20 percent of the company’s revenues by 2004.

Datamatics Technologies: This company insists that BPO is nothing new to it. Says Manish Modi, the managing director and CEO, “Datamatics was the first Indian company to offer outsourcing services in India (for Wang Labs) way back in 1983. Datamatics has had very extensive experience in setting up and managing dedicated facilities for companies such as EDS and British Airways. Over the years, we have been able to evolve the processes and methodologies necessary for an outsourcing relationship. We are now positioned as an end-to-end BPO solutions provider to the publishing, legal, healthcare, tax and financial accounting industry verticals.” To position itself differently in future, Datamatics is looking at leveraging its domain expertise in the knowledge management and data processing space. Besides these services, Datamatics provides clients with services like claims processing, taxation write-up, and accounting.

NIIT: The IT training industry was among the most affected sectors in the global tech meltdown and its resultant aftermath. But companies like NIIT have managed to survive by constantly evolving their business model. After trying its hand at training and then services, NIIT has now forayed into the BPO space. SmartServe, the company’s 560-seat facility in Gurgaon, provides services like back-office operations, contact centre operations and helpdesk support to verticals like insurance and financial services. It also provides support for remote learning services. NIIT SmartServe recently bagged a $10 million order from UK-based Misys Independent Financial Advisory Services (MIFAS), a leading provider of software products for the international banking and healthcare industries. With this deal, NIIT now plans to shift its focus to other verticals like healthcare and banking.

According to Ravindra Datar vendors should explore the approach of taking up a small bit of the entire process, demonstrate the capability to do it well, and then gradually expand the scope of the relationship

VisualSoft: Primarily a product company, VisualSoft is now looking at making a mark in the BPO space after its success in the software services arena. The company will be concentrating on high-end data processing and areas
like helpdesk for IT support.

Kale Consultants: As part of its strategy, Kale Consultants is focused on the airlines segment. In this space, Kale’s key BPO clients include Qatar Airways, Air Luxor and Canadian North. The BPO strategy has worked out for Kale; during FY 2001-02—its first year of BPO operations—the BPO segment contributed an impressive 13.4 percent to total operating revenues.

Cognizant: This MNC player is actively looking at India to build its BPO expertise. Says Raju Bhatnagar,
head of the BPO division at Cognizant Technology Solutions, “Our strategy is to first approach our existing customers with whom we have a relationship and who are looking at outsourcing their business processes. To begin with, we will concentrate on the banking, financial services and insurance sector, which contributes more than 35 percent of our IT services revenue. Later, we will look at the healthcare sector, which contributes more than 25 percent of our IT services revenue.” While the focus will remain on the mid- and high-end of the BPO market, Bhatnagar says that it will also take on some portion of low-end work as a bundled offering, thus projecting itself as a one-stop shop for outsourcing.

What strategies should Indian companies adopt?
While BPO currently looks like a goldmine with every company worth its salt rushing in, a few years down the line this industry too will face the same issues of competitive pricing as the software services industry. One way to address this issue is to focus on niche areas. The other is to move up the value chain and learn from the mistakes in the software services space. Says Bhatnagar, “Indian companies should stop playing the low-cost game. They need to begin to establish themselves as providers of high-quality services and move up the value chain. There are enough opportunities with existing clients to demonstrate how processes have been re-engineered and quantifiable benefits delivered to clients. These are stories that should be told more often to prospective clients to show that we are in the top rung.”

Another view floating around is that Indian companies should aggressively take the acquisition route and build competencies. Says Dua, “New BPO vendors need to enter into strategic alliances with established BPO vendors and gradually increase their stake to gain complete management control. Some of the bigwigs of the IT software industry who are sitting on huge cash reserves should loosen their purse strings and acquire already-established BPO vendors. Such a move would provide these companies direct access to the existing clientele of the BPO service provider, besides drastically increasing the return on capital employed. Indian companies should also focus on high-end BPO services. With the low-end market getting increasingly cluttered, software companies should leverage their past experiences and best practices to focus on the high-end market.”

Raju Bhatnagar says that the main focus of Cognizant would remain on the high-end segment

Considering that Indian companies learned hard lessons in the software services space, they would do well if they spread risks by concentrating on emerging sectors. Says Datar, “Presently, services related to human resources, supply chain management, and payments dominate American BPO spending, while sales, marketing and customer care services, finance and accounting services, and administration-related services lag behind in American spending on BPO. However, in case of offshore BPO spending, most of the spending is done on sales, marketing and customer care services, followed by accounting and administration-related services. This means that the offshore market is yet addressing a very small piece of the total potential. As US companies gain more confidence in the capabilities of offshore vendors, and on security aspects, the offshore business process outsourcing market in these areas (human resource, SCM and payment services) could be expected to boom. This is the potential area for future growth.”

The other important aspect is to avoid the temptation of going in for a price war. While price is an important deciding factor, the lowering of prices should come from the ability to do so without eroding margins, by developing improved processes that allow the vendor to cut the cost of operations. To address this issue, Datar says that vendors should explore the approach of taking up a small bit of the entire process, demonstrate the capability to do it well, and then gradually expand the scope of the relationship—instead of opting for an all-out total process outsourcing approach.

Whichever way the industry goes, one hopes that the lessons Indian players learned in the software services space will help them chart their directions as they look for great times in BPO.