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Destination success on BPO road
When the global IT slowdown triggered the BPO wave, India
decided to get on board. But as the industry began to consolidate, challenges
associated with it came to light, and players had to carry out strategic initiatives
to grapple with them. Chitra Padmanabhan reviews what is still a sunrise industry
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Moving up the value chain is important for better
price realisation and customer retention, says Atul KUNWAR |
When Lord Macaulay made the English language compulsory in India way back in
1835, his intention was to break the Indian affinity for local languages. Little
did he know that more than a century later this very segment of English-speaking
Indians would drive the business process outsourcing (BPO) business. That move
by the British has today made India a key player in the BPO field. A dual advantage
of cost savings and ready availability of skilled manpower is India’s USP.
After establishing itself as an IT services hub, India did not face much resistance
in establishing itself as a key outsourcing destination. Secondly, there were
ample case studies in the form of captive centres set up by companies like GE,
Amex and British Airways, all of whom have realised significant benefits through
their BPO endeavours during 1996-2000. More than the availability of IT talent
in India, the availability of low-cost English speaking manpower has greatly
contributed to the flourishing of BPO business here.
2003 can well be defined as the year of the BPO explosion. According to the
Nasscom Strategic Review 2004, in 2002 the global BPO market was approximately
$773 billion. By 2006 the potential BPO market may increase to $1 trillion.
The Asia-Pacific BPO market is expected to account for 18 percent of the total
BPO market in 2006.
Apart from rapid growth, BPO players were seen grappling with issues that kept
surfacing all through the year. In a maturing industry, the early players typically
have to deal with a lot of teething problems before things start moving smoothly.
At present the Indian BPO space is going through such a phase and will continue
to do so for the next two to three years. Issues ranging from increasing attrition
levels, the need to scale up rapidly and billing pressure have received maximum
attention during the year. New laws are being enacted, and players are experimenting
with new business models and addressing quality issues. In the overall perspective,
the Indian BPO business model has been proven, and the benefits look sustainable
in the medium and long term.
Enter software firms
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| Source: Nasscom |
Shrinking margins in the IT services space prompted software
firms to get into the BPO business. Though the Indian market is characterised
by the presence of both pure-play BPO service providers and IT companies that
have got into the BPO business, there is a raging debate among industry experts
as to which is better. Experts believe that though there is no marked quality
difference between the two, software firms do enjoy an inherent advantage. “One
cannot draw a common thread between the business model of a software firm and
that of a BPO outfit, but the fact remains that a software firm leverages its
position to promote its BPO outfit,” says Roy Sinai, chief operating officer
for Mphasis BPO services. Be that as it may, industry trends suggest that IT
services companies will continue to acquire BPO outfits as they scale up; a
lot of acquisitions have happened in this space during the last year, leading
the Indian BPO industry to consolidation. All of this is fundamentally changing
the competitive landscape in the industry. According to the Nasscom Review,
more IT services companies are expanding their offerings to include BPO by creating
their own capacities or by acquiring BPO players. The recent acquirers include
iGATE, Zensar, Polaris, Mascot Systems and iSmart.
Why does it make sense for software companies to get into the BPO business?
IT services companies have considerable maturity and experience dealing with
international clientele. When US- and UK-based companies first realised the
merits of outsourcing, their first priority was to look for a vendor who would
ensure complete security of data; this made them more open to familiar vendors.
“From a customer’s point of view, expanding relationships with existing
software service vendors results in savings in cost and management time,”
says Sinai. Since IT services companies already enjoy a certain level of rapport
with their customers, it was only a matter of extending the relationship to
include BPO offerings. Additionally, vendors could target a larger wallet share
of the customer’s IT spending budget by cross-selling different services.
They began by initiating a contract, either through software services or BPO,
depending on the customer’s requirement, and then expanded the relationship
into other services as customer comfort increased.
Even at the beginning of 2003, customers were gradually getting attuned to accepting
that outsourcing was the only quick way of cutting costs. But the stringent
quality checks put on Indian BPO outfits continue till today. Customers who
wish to outsource part of their processes like to first check on the quality
of services offered by the BPO services provider. This is done either through
studying the track record of the service provider or by looking at the quality
of infrastructure. “Since quality certifications are yet to become a norm
in the BPO space, customers tend to judge a service provider through the company’s
track record,” says Raju Bhatnagar, president and chief operating officer
of ICICI Onesource. An IT services company has more opportunities to explore
international avenues. As Indian vendors enter the big league of global competition,
they will tap much larger contracts. Large customers prefer vendors who are
capable of providing end-to-end services. Some of the large companies often
require bundled services from the same vendor, which is why software services
companies are finding it increasingly important to become one-stop-shop vendors.
A healthy financial position goes a long way in creating a favourable impression
with clients. Software services companies, apart from having a familiar brand
image, find a unique advantage due to their cash-rich balance sheets. From a
customer’s point of view, it not only projects financial soundness but
also enables the company to pump in funds for scaling up the business. “The
BPO business is capital-intensive. The aggressive growth potential of the sector
requires significant up-front investment in physical infrastructure and equipment,”
points out Akshaya Bhargava, chief executive officer and managing director for
Progeon. Also, because profitability in the initial stages is poor due to the
high break-even point, there is a possibility of the business generating negative
cash flows in the initial years. Many of the current venture-funded BPO players
are finding it difficult to raise adequate finance to meet such cash flow requirements.
On the other hand, most software services companies currently hold about 30-50
percent of their total assets in cash and equivalents. They are therefore in
a position to meet capital investment requirements, as well as fund operating
cash flow requirements.
Having a presence in the BPO as well as software services
space can also help companies reduce the volatility of an economic slowdown.
BPO relationships are less likely to be affected by a downturn since they are
long-term and revenue models are annuity-based. Currently, a large share of
the growth in the BPO space is concentrated with the larger vendors. Factors
for this include customer preference for size and scalability, delivery capability,
track record, client references and management background.
Moving up the value chain
| An IT services firm can leverage its position to scale
up its BPO outfit, because of which a lot of BPO acquisitions have happened
during the last year, says Roy Sinai |
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The BPO space has matured in terms of the kind of services
being offered to consumers. Offshoring opportunities vary from standardised
corporate centre activities such as accounting and payroll to niche and vertical-specific
opportunities like clinical trial support for pharmaceutical companies, claims
processing for the insurance sector, account opening support for the banking
sector, etc. “Low-end activities such as telesales are getting commoditised
due to low entry barriers. Moving up the value chain is important for better
price realisations and higher stickiness of the relationship with the customer,”
says Atul Kunwar, managing director, global outsourcing operations, eFunds International
India. With increasing competition in the BPO space, players are striving to
differentiate themselves either by getting into niche areas or by offering attractive
price benefits. “Changes in service offerings bring about a change in the
entire landscape of the BPO space. On the recruitment front, BPO companies will
prefer people with specialised qualifications. This is very different from the
current trend of fresh graduates being recruited by these companies,” affirms
Neeraj Bhargava, group chief executive officer of WNS Global Services.
Leveraging the relationship with customers, companies are all set to pitch for
offering additional services due to the already existing comfort factor with
clients. Customers would like to move their core processes to a familiar entity
for reasons of data protection. So far the industry was undergoing an experimental
period where clients were testing the viability of the BPO option. This they
did by outsourcing only those processes which were essential to the company
but were not part of their core business. Clients are now willing to experiment
further by outsourcing their critical but non-core processes. “In order
to outsource additional processes, customers would look at the suite of services
being offered by their current service provider, and if their requirements matched
then they would be more than willing to outsource the same to the vendor,”
says Bhargava. Players are now adopting the proactive approach of scaling up
activities and building up the necessary infrastructure in anticipation of such
a trend, which provides an excellent opportunity for service providers to build
on their niche offerings.
Vendors today are adopting one of two ways to scale up. They either climb the
value chain by offering more critical services in the same domain, or adopt
a horizontal model by moving into sophisticated areas that require the deployment
of highly-skilled professionals, e.g., those familiar with US GAAP accounting.
In claims and servicing jobs, the relationship with customers may start with
low-end jobs such as simple claims and policy servicing processes, but as customers
gain confidence they are more open to moving important processes such as complex
claims, risk analysis and underwriting. Similarly, for a credit card customer,
low-end processes would include services such as
data entry and processing of applications, but high-value jobs would include
processes such as credit evaluation and fraud detection.
In the next two to three years, customers are likely to gain more confidence
in the outsourcing model. Based on the spectacular showings exhibited by some
existing players, customers are already becoming increasingly demanding in terms
of continuous quality and productivity improvements. They no longer evaluate
the offshoring performance as a one-time cost reduction or process improvement
over the parent location, but desire year-on-year (YOY) improvements in process
metrics. The encouraging fact is that Indian BPO service providers have not
only managed to improve metrics YOY, but have also demonstrated significant
achievements within the first year of operations.
Getting more work
Customers are usually not open to moving core processes in one go, but like
to do so in a gradual manner. A number of large customers prefer to outsource
business to multiple vendors and also set up a captive unit of their own. In
some cases they are asking the vendor to build a centre on the build-operate-transfer
model, in which case the vendor would grow the centre to a certain size and
then hand it over to the customer at the end of the pre-determined period. Customers
still like to retain business-sensitive information in-house. At the same time
they like to adopt a multi-vendor strategy by contracting pilot projects to
several vendors and then selecting the most efficient one to scale up quickly
since most vendors are only a fraction of the size required by the customer.
The new players in the game have a lot to gain from such a model since it brings
about a good opportunity to gain domain expertise, access large business and
develop a reference customer list.
Backlash
Even as the Western media and union outcry against shipping jobs overseas continues
in the West, big industry names are very keen to outsource IT work to India.
Throughout 2003, many American politicians tried to discourage outsourcing through
legal means. A number of states in the US (such as New Jersey) introduced bills
that sought to curtail outsourcing to countries such as India in order to ‘protect’
local jobs. Despite all this, BPO was the most high-profit sector in the IT
industry during the year. Thousands of jobs were created by BPO firms since
there was no shortage of business. A study titled ‘Top Ten Predictions
for Asia Pacific in 2004’ conducted by Gartner clearly mentions that though
the BPO backlash is heating up, it would cease to be a major issue by the end
of 2004 or early-2005.
Way forward
The Indian BPO industry has passed through three distinct phases. The first
saw MNCs such as GE and American Express setting up large captive centres. The
second witnessed the emergence of a number of VC-backed third-party vendors.
In the third phase, a number of established software services companies have
ventured into the BPO arena. This has primarily been driven by factors such
as cross-selling opportunities (by leveraging existing customer relationships)
and end-to-end service offerings. In the last few years, the number of captive
units have grown to almost double the number of third-party service providers.
Going forward, there will be increased emphasis on quality certifications.
BPO outfits will move to smaller towns and experience a reduction in attrition
levels, leading to further consolidation.
- Relative immaturity
of suppliers: Given the relative infancy of the BPO industry, vendors
have not yet reached levels of maturity displayed by IT services vendors.
This has resulted in higher risk levels and consequently a higher need
for due diligence.
- High-level
customer control requirements: Vendors have succeeded in providing adequate
infrastructure and high-quality, cost-efficient resources. However,
most still lack process expertise, systems and practices that need to
be acquired from the customer organisation. This often demands much
higher levels of operational control by the customer, thereby requiring
continued management focus on the outsourced process, thereby diluting
the achievable cost savings.
- Mediocre support
infrastructure: Several offshore locations are still struggling to achieve
adequate levels of support infrastructure such as telecommunications,
power, roads, airports, etc. Lack of adequate infrastructure is causing
bottlenecks in expansion of capacity.
- Management
practices: For both customers and vendors, offshore relationships challenge
the staff, their style, and formal and informal information systems.
It is therefore important for the management to create policies and
practices to incorporate flexibility in business process and labour
allocation. Regulatory and legal issues also become important as countries
deal with the political issues that offshore outsourcing can raise.
Thus, it is imperative that customer organisations support relationships
with offshore vendors and assure that objectives, contracts, delivery
models and measurements are aligned.
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Source: NeoIT |
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Phase I (1996-2000) |
Phase II (2000-2002) |
Phase III (2003-2008) |
| Drivers of Offshore |
Pioneers and size-driven factors. |
Increasing adopters and strategy factors. |
Bandwagon and competition factors. |
| Examples |
GE, AMEX, British Airways. |
AXA, Ford, HSBC, Citibank. |
Accenture, EDS, Bank of America |
| Main Characteristics |
- Operational cultures previously seen only in Western shared-service
centres were developed.
- Large operations with high-quality infrastructure were built.
- Precedent was set for legal shift work for both men and women.
- Pioneers demonstrated that UK and US regulators and other major stakeholders
would not prevent processing work from being moved offshore.
|
- l Risk profile improved dramatically, though the supply market was
still perceived as immature.
- Companies started setting up new operations as part of other strategic
initiatives. For example, government discussions regarding the opening
of the Indian insurance market to partial foreign competition gave global
insurance companies a vested interest in building offshore processing
centres in India—they hoped to position themselves for the domestic
market if and when it opened up.
- The early risk takers demonstrated the advantage of size.
- Credibility of the business model was reinforced, and perceived risks
were dealt with satisfactorily. These included some complex issues such
as how to apply the European Data Protection Act, how to move highly-skilled
work offshore, and how to manage media in the home market
|
- l The business model has been proven and
the benefits look sustainable in the medium and long terms. Many of
the obstacles from previous phases are likely to be overcome
- Resolved issues
include:
- Public relations—Early
players in Phase I and II showed that the public relations risks of
moving jobs offshore are manageable.
- Regulation—Regulatory
interferences in moving of processes and data offshore has not materialised,
although it is crucial to be aware of US and UK financial service watchdogs'
guidelines for outsourcing, supplier selection and data protection.
- Labour costs—Fear
of rising labour costs offshore has been dampened by the relatively
high number of unemployed English-speaking graduates, along with the
continuing supply every year as the Indian government focuses on education
as a way of increasing the size of the Indian middle class.
- l Data communication
line costs—With increasing liberalisation of the telecommunications
industry in India, these costs have fallen.
- Quality of
third-party suppliers—The number of credible suppliers have increased
dramatically. Phase III has now arrived for a large number of players
in the financial services sector. The risks are manageable if offshore
outsourcing is implemented correctly. Companies not offshoring are beginning
to realise the competitive disadvantage of not doing so.
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| .Source: IBM Business Consulting Services |
| Month |
Acquiring company |
Target |
Deal value
($ million)
|
| March 2003 |
Automatic Data Processing |
ProBusiness Services |
496.5 |
| April 2003 |
Paychex |
Interpay |
182 |
| June 2003 |
Parthenon |
Capital EdiX Corp |
64 |
| January 2003 |
Affiliated Computer Services |
CyberRep.com |
45 |
| July 2003 |
Daksh eServices |
Etelecare International |
30-40 |
| June 2003 |
National Processing |
Bridgeview Payment Solutions |
32.3 |
| April 2003 |
HIG Capital |
Oasis Outsourcing |
30.2 |
| March 2003 |
Welsh Carson Anderson & Stowe |
Mutual Energy Service |
30 |
| November 2003 |
Essar Group and Deutsche |
Bank Aegis Communication Group |
28.7 |
| June 2003 |
Northgate Information Solutions |
Carapeople |
22 |
| June 2003 |
Exult of PriceWaterhouseCoopers |
Business Process Outsourcing Operations |
17 |
| October 2003 |
Datamatics Technologies |
CorPay Solutions |
13 |
| July 2003 |
Perot Systems Corporation |
Healthsource India |
10 |
| October 2003 |
LogicaCMG |
Experian |
NA |
| October 2003 |
Keane |
Worldzen |
NA |
| November 2003 |
SPI Technologies |
Kolam Services |
NA |
| India’s BPO industry
has witnessed robust growth over the last few years and continues to attract
significant business from both the US and Western Europe. The level of growth
is however beginning to stretch the capacity of support infrastructure provided
at the state and local government level. While national issues like infrastructure
and telecommunications are being adequately addressed, local infrastructure
like roads, bridges, airports and urban transportation are becoming a bottleneck
to expansion of capacity. This has fuelled the growth of BPO outfits in
places which are based away from core business centres.
During its inception, the
BPO industry was largely concentrated in business centres like Delhi and
Mumbai. Due to their cosmopolitan nature, these cities were preferred
over others and there was a good availability of English-speaking employees
with a neutral accent. However, as there was further development in this
space, more BPO companies came up in Bangalore and Chennai. According
to the Nasscom Strategic Review 2003, among the cities representing the
BPO sector, the National Capital Region (NCR) has emerged as the largest
with 53 companies based here. Mumbai comes second with 45 companies while
Bangalore and Chennai are at third place with 35 companies each. Hidden
amidst the growth story is the fact that operating costs for BPOs in India
are steadily increasing. Salary levels have been rising by 10-15 percent
per annum over the last two years, and the demand for specialised BPO
facilities is fuelling a property boom in at least five out of the top
eight cities in India, according to a Nasscom-KPMG study on the attractiveness
of key locations in India for BPO.
During the last year, BPO
service providers experienced problems due to a very high attrition rate
and rising cost of training employees. This prompted them to look at smaller
locations like Pune and Chandigarh, where the churn of employees is much
less as compared to business hubs like Mumbai and Chennai. Apart from
bringing down attrition costs, companies are now looking at taking into
consideration all factors before choosing a particular location for optimum
utilisation of resources. “Location choice is integral to the overall
offshoring decision process for most companies. The choice of the right
location, in terms of costs as well as availability of specific resources,
can be critical to the overall benefits achieved,” says R Venkatraman,
executive director for KPMG Advisory Services.
Assessment of some locations
* Mumbai-Navi Mumbai-Thane:
Mumbai as a business centre is witnessing increasing pressure on urban
infrastructure, leading to higher costs of living. However, efforts are
being made to identify new business hubs through infrastructure initiatives
related to public transportation, land release, etc. Attempts are also
being made to leverage the availability of high quality talent and managerial
experience to provide high-end services like research and analytics.
* Kolkata: Kolkata has some
of the most prestigious educational institutions in the country, but has
witnessed a brain drain due to lack of adequate and attractive employment
opportunities in the BPO and other sectors. Efforts being made by the
government through infrastructure and urban development as well as marketing
are leading to captive investors now establishing BPO operations in and
around Kolkata.
* Jaipur: As a prime tourist
destination, Jaipur has had the relevant infrastructure in terms of transportation,
hotels, airport and social orientation to support the conditions to attract
and retain global BPO players. But it has lacked the social outlook or
work opportunities to drive BPO employment preference among youth. Efforts
at improving facilities, adding specialised educational institutions,
and using anchor clients to build employment opportunities would help
in improving future attractiveness.
* Chandigarh-Mohali: As
a planned city, Chandigarh has established itself as a liveable city with
an ability to attract talent for BPO requirements. The lack of focus on
BPO infrastructure and the inability to develop and retain local talent
for BPO employment has led to larger companies still staying away.
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| Source: Nasscom-KPMG Study 2003–2004. |
|
Source: Press reports. STPI. NASSCOM. KPMG. 2003
–2004.
|
| Service Lines |
2001-2002 |
Revenue |
2002-2003 |
Revenue |
2003-2004 |
Revenue |
| |
Employment |
($ million) |
Employment |
($ million) |
Employment |
($ million) |
| Customer Care |
30,000 |
400 |
65,000 |
810 |
95,000 |
1,200 |
| Finance |
15,000 |
300 |
24,000 |
510 |
40,000 |
820 |
| HR |
1,500 |
30 |
2,100 |
45 |
3,500 |
70 |
| Payment services |
7,000 |
110 |
11,000 |
210 |
21,000 |
430 |
| Administration |
14,000 |
185 |
25,000 |
310 |
40,000 |
540 |
| Content development |
39,000 |
450 |
44,000 |
465 |
46,000 |
520 |
| Total |
106,500 |
1,475 |
171,100 |
2,350 |
245,500 |
3,580 |
chitra@expresscomputeronline.com
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