The Hindu Business Line : BPO sector feels the heat of rupee rise, US sub-prime crisis

The unrelenting march of the rupee — which hit a nine-year high against the dollar — was the major pain point of the industry. This, coupled with nagging fears of the US sub-prime crisis impacting the sector, rising costs and depleting manpower, made companies realise the need to tweak their business models.

In order to be competitive and cash in on the robust demand environment, BPO captains decided to command higher billing rates on outsourcing contracts. Another move was to add or enhance ‘high-end, high margin’ knowledge services capabilities.

“It has been a challenging year due to the dollar-rupee volatility. Indian companies are feeling intense pressure on their margins due to this reason,” said Mr Rohit Kapoor, COO & Co-founder of EXL Service Holdings.

The rupee rise is a major test for BPOs as they bill in dollars for the work done entirely offshore, while expenses are met in rupees.

According to analysts, one per cent rise in the rupee translates into a 50-basis point negative impact on BPO margins.

“While some companies have put in auto escalation clauses in their contracts, others have linked pricing to the exchange rate,” said Mr Ameet Nivsarkar, Vice-President of industry body Nasscom.

(An auto escalation clause in a contract provides for an increase or a decrease in wages or prices or benefits etc. depending on certain conditions).

Mr Pawan Sharma, Head of Diversified Financial Services & President at KPIT Cummins Global Business Solutions, is of the view that customers are increasingly becoming receptive to accommodate such changes, as they have realised that only if the outsourcee is profitable will the outsourcer benefit.

Companies like Spanco Telesystems have convinced some of its clients to bill in rupees instead of the US dollar, said Mr Sandeep Soni, Executive Director and CEO of the company.

Alternatively, firms increased exposure to high-margin service lines such as finance and accounting, legal process outsourcing, risk management services, analytics, advisory and process re-engineering services.

Mr Susir Kumar, CEO, Intelenet Global Services, says growth in the sector primarily came from steady increase in scale and depth of existing service lines, addition of newer vertical-specific niche business services and continued expansion of service portfolios.

Guidance lowered

The US sub-prime crisis did impact firms who had direct exposure to the US mortgage market.

WNS Holdings Inc became the first major Indian BPO company to initially lower its guidance due to the crisis, and subsequently raise it upwards to $295 for the year in October. In any case valuations of BPOs suffered, because of immense speculation about the impact of the fiasco on the industry.

Domestic space

Back home, the focus was on overhauling processes for improving productivity, increasing hedge cushion to cover forex movements, and penetrating the underserved domestic BPO space.

The domestic BPO space came to be seen, both, as a primarily hedge against further rupee appreciation and a new growth opportunity.

Till a few years ago, the domestic BPO space was untouched by major players because of lower margins. The appreciating rupee has narrowed down the margin gap between international and domestic outsourcing operations. “The difference is hardly 200-300 basis points now,” according to Mr Soni of Spanco.

Firms such as Spanco and Vcustomer announced their maiden foray into the domestic front, while HTMT, Infovision, Intelenet and Mphasis strengthened their tentacles to this market.

Attrition and wage inflation continued to haunt the industry. The move to set-up shop in Tier-II and Tier-III cities did pay off, as companies are able to bring infrastructure costs down by at least 15 per cent, according to Mr Nivsarkar of Nasscom.

staff Security

The rape and murder of a Wipro BPO employee in November came as a shock to the industry. BPO firms promised to overhaul security measures in place especially for women employees during late hours. However, many security experts still remain unconvinced.

The space saw hectic M&A activity in 2007. In one of the largest cross border acquisitions, Firstsource purchased US-based MedAssist Holdings, by paying $330 million. However, the company refused to comment on a questionnaire sent by Business Line.

The year also saw Intelenet being acquired by an affiliate of The Blackstone Group and the management team, for a reported sum of $200 million.