The Hindu Business Line : `Either you are big or niche or dead'<br>Mr Akshaya Bhargava, CEO and MD, Progeon

ARTICULATE, composed and knowledgeable. Presenting Mr Akshaya Bhargava, CEO and MD spearheading Progeon, the BPO subsidiary of Infosys Technologies. Charting the BPO (business process outsourcing) strategy of handling end-to-end processes for Progeon's clients, Mr Bhargava and his team are generating quarterly revenues of $15-20 million and likely to end the year with over 6,000 employees. Read on for his take on the bigger picture in BPO.

Do you think scale is an issue when you try to sell end-to-end BPO (a business model that offers a complete range of processes in any domain)?

Customers do not worry about scale. Scale is relevant only within a segment and we want to achieve that within each of them. We offer services across six segments. To me scale is about $100 million in each segment. So, it can grow to $600 million.

How is this model different from ones that derive a large proportion of revenues from voice-based services?

It is not the same as selling voice. In voice, you share infrastructure in shifts. That is how they make money. But in the Progeon model, you keep a workspace for one customer and you keep it for that customer forever. This customer may use it for one shift and for the other two shifts it is sitting empty. There is idle capacity in our model, but we think that is important for the risks end-to-end. We are able to create a completely sealed environment for a customer, with total data protection, network and information security. Our whole metrics are different and our managers get paid differently.

How will the BPO industry evolve in India?

My personal view is that in BPO there is no such thing as a small BPO. You have to be large. You have to be specialised. You want to be voice that is great. Non-voice, that is great too. But do not be both. There are a few world-class voice companies and they are good at it. If you do not want to be a voice company, do not get distracted by it.

For me, strategy is about deciding what you do not want to do more than deciding what you want to do. If you look at all religions in the world, or say the Ten Commandments, which is all about "Thou Shall not".

It is an empowering notion. Voice business is run on capacity utilisation and on efficiencies; our end-to-end model is about minimising operational risks, redundancy and some of those things. Voice and non-voice can mix only when they are a part of an end-to-end process.

Progeon offers customers a range of service options. How do you can mix and match the variables?

For a company like us, we will be underplaying our strengths if we do not do that. More and more BPO will be about outsourcing and not offshoring. The difference is that if you are a customer, you should be able to come to me and listen, I have this piece of work and I want you to do it. And I want you to do it, even though only 80 per cent can go to India. I want you to clean up the house. You cannot say, I will do everything except the kitchen. Increasingly, you will have to have an onsite-offshore model. Otherwise you cannot provide a complete solution to the company.

What is your view on consolidation in the BPO industry?

The answer is scale. If you can get to scale, you will survive. The scale is not just about economics, it also about attracting good people. If you are not growing and you are not large enough, you will not get the best people in this industry. There are three parts to scale. One point to scale is where the customer has no reason to doubt your capabilities and you can demonstrate enough.

The second dimension is to be able to attract and retain people who want to become experts. Third, it must give you the ability to proactively build tools and applications. If you have the ability to do these three, you have scale.

I think consolidation will happen. Five years from now, there will be two or three independent BPOs who will have crossed that point to scale. I think there will be no more that two or three IT companies who will manage to build the BPO business, which will be tightly integrated with their IT business.

There will be four or five international players who will have built a good India footprint, which is hard to do. And what is even harder is to integrate their India footprint with their international operations. So, we are talking about only a handful of players. Beyond this, there will some niche players. Either you are big or you are niche or you are dead.

What do you think is the sustainable level of margins are for BPO in the medium term?

It will be between 20 to 25 per cent. The reason is that with net margins of 25 per cent, my gross margin is 44 per cent and S G & A (Selling, General and Administrative expense) is about 20 per cent. Is that my long term S G & A. No as for Infosys, it is about 14 per cent. As revenues go up, S G & A will go down.

Will pricing based on per-transaction basis become the norm in the BPO industry?

I do not think transaction pricing is going to come quickly. This is an illusion we will chase for several years. What we will see in between is the move from pure time and material to fixed price.

The reason why we will not see transaction price is because nobody in customer organisations understands transaction price. If the customers do not know it, how can I bid for something that can be of value to us. As a company, if I do not understand my own transaction price, I would be uncomfortable agreeing to any proposal you might give me, no matter how attractive the proposal is.

Is transaction pricing used by mature companies in the US?

It is there in human resources services. Nobody is across domains. Take ADP. It is the biggest payroll processor in the world. ADP will give you a transaction price. But their transaction price is based on systems. They have their own payroll systems. You cannot tell them to do it on your system.

You have to hand them your payroll and they will migrate the data for you. This is the price you will get. They have spent millions of dollars in building that system. Until an Indian BPO comes to that point where they can invest $40-50 million in a platform, you will not get there. It is still some years away but we will get there.

Today, the kind of fixed price contracts that we can do centres on processes. I will take your order management. You have 300 people doing it. You do it for $ 50 million, I will do it for $20 million. Never mind how many people are doing it. Never mind how many people I keep and how much of work goes to India.

What are the risks in the models that have been adopted by the industry today for large-sized deals?

You must have the financial ability to handle the risks. Most companies do not have that today. Secondly, you must have the profits to absorb the risks; otherwise the shareholders can kill you. Over and above this, you have taken the execution risks and so you must understand the domain well.

I will make less money in the initial years, but make huge margins in the latter years. In order for this to play out, the duration of the deals must be at least 5 to 7 years; otherwise you will not have long enough to amortise the value of the contract. That is the model where the industry is heading.

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