Business Process Outsourcing: Is It mere Hype Or Reality?

Sibabrata Das

Mumbai, July 26: India is increasingly seen abroad as a low-cost business process outsourcing (BPO) destination and a major competitive threat. Research and advisory firm Gartner has estimated the country’s revenue from offshore BPO to grow from $1.2 billion in 2003 to $13.8 billion by 2007. Other analysts also have been bullish about the country’s potential.

But do they have the picture painted too bright? Is the BPO story more a hype than a reality? “The hype has drawn in several companies to look at exploiting the business opportunities. Several unrelated players, even from real estate and industrial houses, have got into the business because of the hype,” admits Gartner vice-president and research director Sujay Chohan.

But, as Mr Chohan says, “BPO is a long-term business opportunity. There is a strategic shift in the way companies are evolving. It is a highly captive and long-relationship business.”

There is a deep commercial interest among big global companies to explore offshore BPO from the country. Cost-saving is the biggest driver. One of the main proponents to outsourcing is General Electric, which had started operations here in 1997. Why? “GE is saving about $270 million, which is 8-9 per cent of its IT budget, by outsourcing to India. It plans to increase that to $400 million by 2003,” says a JM Morgan Stanley report.

Convergys and several other captive players are aggressively expanding operations. Third-party and domestic IT services-led BPO companies are also hotting up the race. Says Transworks CEO Prakash Gurbaxani, “with several companies moving support to India, the business model is proven.”

The new entrants are not only MNCs and captive players but also the domestic IT services sector players. But in the short-term, Mr Gurbaxani says, the captive players will grow quicker. Agrees Edelweiss Capital CEO & MD Rashesh Shah, “several overseas players on the captive centre front will make an entry and the trend will be on offshoring rather than outsourcing.”

The picture is not that rosy. BPO companies are plagued with commodisation, pressure on billing rates, and narrow margins. “The problem is that the pay- back in BPO business is over a long period. Many players are realising that,” says Mr Chohan.

The truth is that BPO business will no longer remain with the VC-funded start-ups. “Those days are over,” says Mr Gurbaxani, adding, “the competitive landscape is changing. There is need for access to capital as competition is coming from large established players. Earlier, we had to compete with young start-ups only.”

Mr Gurbaxani should know. Transworks was entirely acquired by Indian Rayon and Industries, an Aditya Birla Group company, for a total consideration of about $13 million. “We needed capital to fund our growth,” he says. Transworks is planning to have another centre this year and add 500 seats.

The consolidation phase has arrived. Says a third-party BPO firm, 24/7 Customer’s CEO PV Kannan, “the weak players are already in the market to be routed out. We will see a later phase of consolidation amongst the bigger players after two-three years.”

Adds a Daksh spokesperson, “the tier-3 and 4 players are taking a back seat by either getting subsumed into the larger organisations or doing only commoditised processes where margins will continue to be under pressure. This will bring them to the point of whether they can sustain themselves as a stand-alone or not.”

Mr Shah shares the view that there will be a second round of investments and consolidation. “There will be emergence of new areas of focus in the BPO sector like claims and transaction processing.”

The hype has died down to a certain extent. Serious players are entering the fray. But fierce competition has pulled down rates by 40-50 per cent during the past 12 months. Deals are being done for $10-12 per agent per seat on an average. But some crazy deals have also been done at $7-8. For bigger players, the average billing rates are $11.50-$14. Worse, commodisation in this sector has happened much earlier than anticipated.

Margins have also fallen. But Mr Kannan does not agree that margins can’t be protected. “The average billing rate, which has fallen by 20 per cent during the past two years, is because volumes from a single client have gone up. With this, the cost of running the operation has also fallen for us. We are able to operate on an average 15-20 per cent margin on annualised basis.”

Mphasis BFL believes the challenge is not so much on margins. “There have been cases where we have walked away from uneconomical pricing. We can afford to do that as we have a good client base. Our rates continue to remain constant - $12 an hour. It was $13 three quarters back. We anticipate a marginal but not dramatic fall,” says company CFO Ravi Ramu.

Deal sizes are getting bigger. The average deals now are between 100-500 seats, says Mr Gurbaxani. Earlier, this stood at 25-30 seats. Most of the deals for 24/7 Customer, says Mr Kannan, is $6-10 million per account. “That shows how the industry has matured,” he adds.

BPO companies have to deal with a high rate of attrition, estimated above 50 per cent. “The industry is trying to get together and decide not to poach, particularly employees who have not completed at least one year in a company. We are also stressing on relieving letters,” says Mr Kannan.

The threat with MNCs setting up base here is in retention of our employees, admits Mr Ramu. There are other areas of competition to worry. But Mr Kannan believes MNCs are focussing mainly on moving their customers from the US to India. “They are more keen on seeing that their existing customer-base in the US doesn’t come to us. We are trying to attract people who have never outsourced from India,” he says. Daksh feels that MNCs have challenges on the HR front, despite starting the entire process of back-office work here.

Captive centre players are also posing a deep threat. But a few of them, says Mr Kannan, are planning to get out. “We are in talks with a credit card company which has set up its captive centre in India but wants to exit. Perhaps, it overestimated the amount it would save by going captive. Maybe, it realised this is not its area of core competency,” he adds. His company recently raised $22 million from an American VC fund.

The domestic IT services companies which have expanded into BPO operations have a long way to go, despite having a distinct advantage over their larger clients. “They are late entrants. There is a time lag and they have catching up to do. Third-party operators like us should capitalise on that opportunity,” says Mr Kannan. But Wipro’s Spectramind is growing fast. Infosys’ Progeon and other IT services-led BPOs promise to offer an end-to-end solution for their clients.

The trend will be to specialise on specific verticals and build domain expertise. Says Tracmail chief operating officer Arjun Vaznaik, “companies will have to quickly move up the value chain by creating niches of specialisation. This can be in back-office accounting, technology support, claims processing or asset recovery services. The challenge is to counter the issues of commodisation and profitability.”