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Bharat Kumar

Are the ITES arms of IT companies doing their act independent of the parent or is their survival dependent increasingly on synergy with the parent? eWorld checks out the scene.

Child is the father of man - Wordsworth.

WE fully agree. By the time you are done reading this, you will discover that BPO services, which now function as little known arms of IT services companies, could well rule the roost in time to come. Now, have you ever wondered why IT companies start ITES (or BPO) operations? After all, there isn't too much common between offering software services to the human resources department of a company and actually taking over the entire HR function from that company for a fee. The latter is what a true business process outsourcing (BPO) service does.

The trigger for this story came from a casual conversation with the BPO chief of an Indian top 10 IT company. Only 15 per cent of current revenues in the BPO arm could be linked to efforts by the IT arm. In other words, 85 per cent of BPO revenues had no connection whatsoever with the IT arm and came from independent efforts of the BPO sales team. But that, he feels, could change in the future.

eWorld then became intrigued by all the BPO arms that IT companies have begun in the last 3-4 years. We felt it is time now to check whether IT companies are truly better placed to offer BPO services. IT companies that have BPO arms strongly believe that the parent's foot in the client's door helps immensely. Especially for a new business.

B. Ramalinga Raju

Says B. Ramalinga Raju, chairman, Satyam Computers Ltd, outsourcing of resources is different now from what it was. Clients establish relationships with fewer vendors but have stronger and larger relationships. According to him, now, top management such as the CEO or CFO of the client looks at almost every client-vendor deal.

Deals are no more project-based but relationship-based.

Kris Gopalakrishnan

Infosys' chief operating officer and deputy managing director, Kris Gopalakrishnan, agrees with Raju in that top management in client companies is involved in outsourcing. Further, he says, "there has been a demand from customers for process outsourcing services. That prompted us to start Progeon, our BPO arm."

By inference, if you offer one service to a client, it becomes easier to sell a bouquet of services to him at one go. Raju feels that there is no essential difference between IT and BPO.

Both are support services, he says. The advantage to the client now is that every time he needs something, he doesn't go shopping.

The client has at his beck and call a few vendors who can offer a range of services.

If there is so much synergy, then why do companies have distinct BPO arms, with separate leaders, infrastructure and even brand names? Says Raju, "BPO brings in differences because of the nature of work involved and the kind of manpower skills, which are different from that required for IT. BPO has its own peculiarities."

Satyam is an example of a company in which 80 per cent of its BPO customers are the IT parent's customers as well. Mphasis-BFL is another company much of whose BPO clientele comes from the IT parent. But Mphasis stands out in that it wants to merge its IT and BPO arms. Wipro Technologies has already done that with its acquisition of Spectramind. According to K.R. Lakshminarayana, Corporate Treasurer, Wipro Ltd, "Twenty per cent of our BPO revenues come from customers of the IT services business. And, 75 per cent of the current BPO pipeline is from IT services customers."

Lakshminarayana says that the company is integrated at the customer level and at the management level. What that means is that there is a joint sales force that addresses customer needs while their leaders have control across the IT and BPO arena. However, at the location-level, it is yet to be integrated completely. He says, "In addition to employee profiles, operating margins are different for the two businesses.

R. Chandrasekaran

Also, in BPO, the vendor's investments are higher. But in the case of research and development, a telecom client would invest in a switch for us to work on". Cognizant, which has been reported to be on the lookout to acquire BPO players, feels there is synergy between IT and BPO businesses only when the latter calls for a differential offering. Says R. Chandrasekaran, managing director and executive vice-president, Cognizant, "With a focus on a vertical industry, for example insurance, there is synergy between BPO and IT."

He gives the example of claims processing in insurance. An IT company develops the software engine for a claims process, the actual processing of claims is a logical extension. This, he believes, could provide value to a customer

However, he clarifies only some kinds of BPO offerings can be offered as part of a bundle. It is not the same with a commoditised service such as voice-based call centre services where it is difficult to offer a difference.

Non-IT players

If an Indian IT company claims expertise in processing claims in insurance just because it has been selling software to this industry for 20 years, then isn't an Indian insurance company better off selling those skills? Says Chandrasekaran, "We believe that the concept of core competence will prevail." He says that it would be best for Indian players in insurance, retail or FMCG to focus on their competence.

A BPO business requires process maturity; domain expertise and quality control that IT companies have built over time.

They are better equipped to handle BPO activities for different industries depending on their vertical focus.

Restructured sales force

Ranjit Narasimhan, Chief Operating officer of HCL BPO, an arm of HCL Technologies, also agrees that there is synergy between the two. "HCL already has a presence in verticals such as insurance, retail, insurance and banking. Domain expertise makes for a key differentiator. People in our BPO arm are undergoing a LOMA (Life Office Management Association) certification course. Such a certificate would endorse the candidate's expertise in the insurance industry."

Last year, HCL restructured its operations so as to become focussed on verticals. Says Narasimhan, "Ours is now an integrated offering. Our BPO sales person, who focusses on the insurance industry, is physically located along with sales folk selling IT services to insurance."

Patni Computer Services is another company that restructured its sales force recently. The combined sales operations are so tight that it says it might not be able to say which business comes first, the BPO or the IT. Says Deepak Khosla, General Manager, Patni, "We don't tell the client we have a BPO shop or an IT shop. We understand his requirement and tell him what solution is possible."

Interestingly, HCL Technologies recently proposed but later postponed a decision on merging its BPO arm with itself. Says Narasimhan, "There are tax advantages available to a BPO. The merger issue will be taken up at a later date."

BPO: lower returns

While on the topic of different arms for BPO and IT, Narasimhan brings up a significant point. He says that typically, a BPO takes up 3.5 times more investment but yields only 40 per cent of revenues of a like-sized IT operation. Investments to ensure quality of offerings are critical because a BPO deals with a customer's customer (be it for voice or other transactions). Given this, why haven't companies invested in IT services itself instead of in BPO? After all, if an internal rate of return for an IT investment is 60 per cent and that for a BPO is about 40 per cent, which would you prefer?

Satyam's Raju says that there is a different way of looking at this. "Clients to whom we have been offering IT services felt a need for a BPO offering. IT companies are only capitalising on an opportunity to offer BPO services." He feels that investments are marginal and less important compared to the access it gives. Satyam, he says, has in excess of 100 Fortune 500 clients, has attained maturity with respect to process expertise and a brand image in 45 countries where it is able to attract talent. These, he feels, come in handy for the BPO business and if unused, would mean a waste of resources and soft assets.

Phaneesh Murthy

Phaneesh Murthy, CEO, iGate Global, feels that BPO margins could rise above IT margins. In the case of BPO, he feels, larger deals, close to 100 per cent offshoring and lower cost of resources, could mean more margins. He said, "Choice of processes, amount of value added to a process and the business model in which you operate will dictate your margins. This can even exceed IT margins." Which means that IT brings in the tools to make a process more efficient. This is where the synergy comes over the long term. Typically, a BPO business would bring in orders that could stay for 3-5 years with fixed annual revenues. One way to grow is to ensure that the service vendor saves immensely. And IT expertise could reduce use of resources, enhance the capability of a process and save on costs, manpower and time.

Ravi Ramu

Says Ravi Ramu, Mphasis Chief Financial Officer, "Integrating sales forces, leadership and all that is important. But that isn't the only thing. We should be changing our mindsets with regard to viewing IT and BPO differently." He agrees that BPO has its own peculiarities but the call now, he feels, is to be able to truly integrate IT and BPO. "IT services without a BPO function is dying and will be dead. To a large client, the issue is not saving $80-100 million a year. How do you help him save $2 billion annually?"

For Mphasis, ideas have changed over time. A couple of years ago, it was considering an IPO for its BPO arm MsourcE. Now, the company has dropped that plan and is to merge the BPO company with the IT parent. Ramu says, "This is unchartered territory. Integrating IT and BPO arms is a new phenomenon and there is some way to go" The punch line comes when he says, "The management of a BPO arm should not be IT-focused. Would you expect a 50-year old parent to see things in the same light as his teenaged son? Likewise for the young BPO arms that need to be integrated with IT offerings." And he says, "There will come a time when a vendor gets a BPO deal and IT would only be a part of the offering. After all, IT is only a tool to make processes efficient."

Till now though, there haven't been instances of players getting IT orders, thanks to the relationships that their BPO arms have with clients.

Pure-play BPOs

For all the synergy that the IT industry touts between IT and BPO, pure BPO providers haven't felt the pinch. Datamatics Technologies and ICICI OneSource are examples. The first has an IT parentage and the second has an IT company as part of the group. But neither has any link with the IT arms. Says Manish Modi, CEO, Datamatics, "We have been independent of the IT parent in the last 14 years of existence. Now, though, we will start collaborating on the sales side." ICICI OneSource's CEO, Ananda Mukherjee, says that his company does not share clients with ICICI Infotech, which is the group's IT arm. Both Mukherjee and Modi categorically state that they haven't ever lost an order just because they don't have an IT ally. According to Mukherjee, "There is little global evidence to suggest that an offering including IT and ITES has any advantage over a pure-play strategy. It's an entirely different business that you want to increasingly make more efficient over a long time. Also, decisions on outsourcing IT and on ITES are made by completely different business units."

bharatk@thehindu.co.in

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