The Hindu Business Line : Big guys do it better

Not everyone can do what needs to be done. Size matters. The big guys are growing into their own in the BPO market, controlling costs and seeing stability in billing rates. The little ones are watching, for now.

A SMALL team of techies operating out of a room at vCustomer Services' Delhi facility holds a very unique place in global networking giant, Cisco's, scheme of things for the Indian market. The team manages a Voice over Internet Protocol (VoIP) network, built using equipment provided by Cisco, to carry voice and data back and forth from India to the US. The business process outsourcing (BPO) company is one of the very few such firms in India to have a full-fledged VoIP-based infrastructure and its success would give great mileage to Cisco's India business.

"Implementing the VoIP network is a big challenge. If you don't do it the right way, big trouble can happen," says Vikas Gupta, Assistant Director - IT, vCustomer Services.

But then why on earth did vCustomer decide to go in for a technology that is relatively new in this part of the world, when it could have stuck to the time-division-multiplexing or TDM-based infrastructure that its peers use? After all, the TDM-based technology has been around for a very long time. The reason is simple: cost. By using the VoIP network, vCustomer has cut its capital expenses by half. The VoIP technology gives it flexibility. You need less equipment, and every time you make a change in your network, you spend less on service engineers.

Move to Noida in the outskirts of Delhi. At EXL Services, Oracle ERP software, and executives trained in Six Sigma practices make sure that each penny spent is accounted for. The company makes sure that its employees too are aware of and responsible for the cost factor. So when prices of meals had to be hiked, EXL asked its employees to share a part of the increase.

At rival Wipro Spectramind, every effort is being made to ensure that seat utilisation is increased so that better economies of scales are achieved.

The boys are being separated from the men in India's IT-enabled services (ITES) industry. And the men are busy controlling costs and stabilising billing rates, as India's ITES industry continues its astonishing growth.

The top-tier BPO firms, after initial years of heavy investment in building capacities and their brands, are now on their path to profitability and a completely different league. Industry observers believe that the next financial year may even see some of them going public.

"The better managed BPO companies have been able to squeeze significant cost advantages from leveraging economies of scale," says Arjun Saxena of Inductis, a US-based management consultancy. He says that large BPO firms today are in a position to pass on expenses incurred on account of training, technology set up and transition management. Saxena cites the example of two large BPO vendors whose wage bills remained flat over the last 15 months, while transport and fleet management costs declined by 15 per cent over the same period.

"Corporate overheads, sales and general expenses and telecom costs keep coming down," says Rohit Kapoor, CFO and President at EXL Services. He says that even if salaries and other personnel expenses went up, this rise is offset by the decline in other expenses.

Inductis' Saxena says that operating profit margins may have come down over the past two years, but they are still in the twenties in terms of percentage. "This rate is still very respectable and around three times higher than what US players manage to eke out," he points out.

"The billing rates are now quite standardised for the tier-one vendors," says V. Jayashankar, Vice-President and Head, Technology Group, at Kotak Mahindra Capital Company. EXL's Kapoor also says that such companies are regularly invited to all RFPs (Request For Proposals) that are out in the industry. "All of us are growing fairly fast that today we don't want to win business only on the basis of prices."

According to Raman Roy of Wipro Spectramind, price is one of the many variables that decide deal. "There have been instances when we have walked out of deals that wouldn't have been profitable for us," Roy points out. Clients are also being choosy in selecting the vendors, as they outsource critical aspects of their business such as customer care. But often they try to get a better deal from the vendor by citing the low prices quoted by smaller players at the time of the pitch.

Quality of service is one aspect that top-tier vendors now try to capitalise on. All large-scale players such as Wipro Spectramind, Daksh and EXL Services play up their efforts to improve the quality of services. EXL's Kapoor says his company would send a team of experts to their client to document the procedures involved in providing the remote services. This standardised format will be used by employees to ensure that quality of service is maintained throughout, even if a new agent comes into the team. The company also provides a dedicated manager at the client's site if the number of agents working for that particular client is large. Wipro Spectramind claims that it has the best of the breed of managers to take care of its various business units. These companies have also established centres in various cities across the country to eliminate fears of geo-political risks in the minds of customers. Now many of them want to have centres in other parts of the world too. For instance, Wipro Spectramind is expected to announce a centre outside India shortly.

Having financial back-up from well-known venture capitalists and financial companies also helps.

Experts believe that the next financial year may witness a few BPO companies going public to raise funds. "There is no dearth of business coming to India and I see fairly good volume growth for tier-one companies," says Kotak Mahindra's Jayashankar. "There is very good shift utilisation as well as ramp-up happening among them now."

According to Saxena, US-based call centre major, Convergys enjoys a Price Earning (P/E) Multiple of 25, while some smaller BPO firms have a P/E of around 30. "For a company with quality parentage (such as GAP/Citi for Daksh, Oakhill for EXL), attracting a P/E of around 35 on IPO should not be too difficult, the only other caveat being that overall market sentiment should hold up at current levels," he says.

EXL's Kapoor, who indicates that his company might look at a public issue next year, says that BPO firms that operate out of India with a front end in the US should get higher valuations than others, given their cost advantages.

But what will smaller players do, if only the fittest will survive? Many of them would likely merge with one another, or they get acquired by larger players, with the VCs playing the role of a catalyst, experts say.

Global corporations such as Accenture, EDS and CSC have announced plans to significantly increase their India operations and that will give tough competition to large domestic players. When that happens, the rules of the game will change once again.

vipin@thehindu.co.in

Picture by Shaju John

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