The Hindu Business Line : Breaking free

The Indian Business Process Outsourcing (BPO) industry is at a point of inflexion. Having grown upwards of 30 per cent for the past several years to $8.4 billion in 2006-07, the less-than-a-decade-old BPO industry is staring at the next level of growth.

Projected to cross a significant milestone of $10 billion revenues this fiscal, the BPO industry is waiting to come out from the shadows of the Indian IT services industry that has made rapid strides in the global outsourcing arena.

Traditionally, the BPO industry has been clubbed with the IT services industry. But suggestions are now being voiced by industry stalwarts to decouple it from the IT industry and treat it as a separate entity when it comes to policy issues.

The recently held Nasscom ITES-BPO Summit saw some high-decibel demand to treat the industry as a separate entity as regards extension of tax holiday. The 10-year tax holiday under the Software Technology Parks of India scheme comes to an end by 2009.

The demand comes amidst a set of challenges faced by the industry, including a stronger rupee, rising wage inflation and attrition, and emerging threat from newer low-cost destinations to wean away the clientele. The rupee appreciation in the long term will not only impact the bottom lines, but also erode the country’s competitiveness.

‘Significant size’

“BPO companies have attained a significant size to be recognizable as an entity,” says Kiran Karnik, President, Nasscom. “Export revenue of $8 billion is substantial for any sector. Every large IT services player in the country has a sizable BPO presence and in fact you can already see sub-segments emerging within the ITES-BPO industry, such as legal process outsourcing, knowledge process outsourcing and data analytics, among others,” Karnik adds.

Justifying the need to consider the de-linking, EXL’s president and co-founder, Rohit Kapoor, says the government needs to extend the tax holiday for BPO companies for at least five years beyond 2009.

“Today’s IT services and BPOs differ in the skillset requirements and pose different people management issues. Another way to look at the IT services and BPO industry is to look at their sheer size and growth potential. The market capitalisation of the top five IT players is about $100 billion, while the same in case of ITES firms in India is $5 billion. Still, the market size for ITES and BPO is bigger than IT services. This means that the BPO industry needs to be given time and room for growth to enable it to become more competitive, particularly at a time when other countries are wooing investments,” Kapoor adds.

Quality, diversity

The BPO industry has come a long way from predominantly offering voice-based call centre services and data entry-type of work in the early days to widen its services portfolio to high-value non-voice based back-office offerings such as finance and accounting, investment banking research, credit card and insurance claims processing and technology support services.

Built on the advantage of low-cost human resources, the Indian BPO industry has moved on to add quality and diversity as its differentiators.

Companies have successfully scaled up their operations and have been expanding overseas. The industry has seen several changes over the past few years. Indian players have also been fairly aggressive in plugging their strategic gaps to enhance their service portfolio by acquiring firms overseas. Several players, such as FirstSource, WNS, EXL and Genpact, among others, have gone public in recent years. Also, the leading Indian IT services firms merged their BPO entities with self and phased out their BPO brands.

While Wipro phased out the Wipro-Spectramind brand, Infosys phased out the Progeon brand after it acquired the minority stake from Citigroup and renamed the company Infosys BPO.

In a bid to cater to their diverse client portfolio, Indian BPOs are seen aggressively adding multi-lingual capabilities by expanding their operations to emerging low-cost destinations such as the Philippines, Vietnam, Western Europe, the Czech Republic and Latin America.

Recently, many Indian players announced plans to set up operations in Mexico, the Philippines, Romania, and China. The declining cost advantage due to the stronger currency and rising wage inflation is forcing Indian vendors to ramp up their operations in emerging low-cost destinations.

HR, Infrastructure among challenges

“Going forward, the two major challenges facing the sector would be human resources and infrastructure,” says Karnik. “Clearly, the growth of the industry is creating issues pertaining to HR, not so much as demand and supply of people but suitability of professionals.”

BPO is already a major employer and as the industry grows in the next five to 10 years, it will have to look seriously at HR issues, Karnik adds.

Another major challenge would be to create infrastructure to support the manpower requirement such as power, office space, and transport, Karnik adds.

Outlining the challenges, EXL’s Kapoor says BPOs face issues related to wage inflation on the people side and foreign exchange fluctuations, among others. “The currency volatility in the recent quarter did have a major impact on the operating margins of BPO firms. The month of April alone saw the rupee appreciate by around 7 per cent. This kind of a steep appreciation makes it difficult to adjust customer contracts and manage cost structures,” says Kapoor.

Gaurav Gupta, country head, Everest Group, says Indian suppliers are adopting multiple strategies to overcome the challenges. From providing a cost saving arbitrage, suppliers are now offering end-to-end, integrated offerings.

Nasscom estimates the total addressable offshore market size to be in the range of $120-150 billion currently with the offshore penetration at around 9 per cent. The India-based BPO vendors account for 46 per cent of the offshore BPO market, having grown at a compounded growth of around 45.5 per cent over FY04-06.

Buoyant Domestic Market

Indian players could look to offset the emerging challenges by tapping into the domestic market. The demand for BPO services on home turf has witnessed noticeable growth in the past few years. The domestic BPO market touched $1.2 billion in 2006-07 from $0.9 billion in the previous year.

Players such as FirstSource, MphasisBPO, Serwizsol, Aegis BPO are fairly active here.

Buoyed by the potential, several players are actively looking at the domestic market a lot more strategically, says Gupta. The unfolding retail sector, financial services, insurance and telecom offer tremendous potential for outsourced BPO services, he adds.

Everest estimates that the Indian insurance sector would outsource processes worth $10 billion over the next five years.

The emergence of the BPO industry has provided a new hope to the burgeoning youth populace of the country.

BPOs in Tier-II and Tier-III cities have changed the entire face of the cities by providing not only direct but also indirect employment.

The industry employs close to 5,53,000 people, coming close behind the IT sector, and holds out great hope for young graduates without any other career choice.

“BPO will emerge as the largest private sector employer in India over the next few years,” predicts Pramod Bhasin, Chairperson of the Nasscom ITES-BPO Forum.

Over the next five years, Gupta predicts a consolidation in the Indian supplier side, where currently there are more than 3,000 players.

Further, hybrid business models would emerge wherein clients would go for a mix of captives and third party. The role of BPO industry in the Indian economy will become significant and “we see global deals emerging from India,” Gupta adds.

vishwa@thehindu.co.in

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