The Hindu Business Line : BPOs: Tremendous headroom

"Global demand for offshore (BPO) delivery will continue to remain strong in the long term and there is tremendous headroom for growth" says Mr Niteen Tulpule, Director-Corporate Finance, KPMG, in an email interview with Business Line. "Demand for jobs is likely to remain high and this will be on a pan-India basis in the future."

He believes that there is a big opportunity in the KPO (knowledge process outsourcing) space and that one will witness a lot of M&A (mergers and acquisitions) activities, especially in the analytics segment.

However, he turns a little cautious when asked about the potential of the domestic BPO market. "With much lower cost arbitrage within India, outsourcers need to have a very different mindset and cost structure to be able to service this sector and remain profitable."

Excerpts from the interview:

Cost arbitrage played a big part in US companies offshoring work to India. Wage costs have increased manifold in this sector in the last couple of years. And so has the infrastructure cost. What is the scenario on the BPO front and the likely impact on job opportunities and the salary structure?

There are multiple locations that are now competing with India from a cost perspective. However, Indian BPO companies are now focusing on providing higher value-added services. Also, the sheer quantum of English-speaking graduates and engineers is much higher in India than any one alternative destination. There are several emerging cities, where wages as well as attrition is lower, allowing India to compete on the cost front.

For some time now, we have heard companies talking about `moving up the value chain'. Can you give specific examples of this? And what is the next step up the value chain?

Indian BPO companies have grown from providing just voice-based marketing and CRM (customer relationship management) services to transaction processing, and to establishing shared services centres for outsourcing functions such as accounts, receivables and HR. They are now building capabilities on high-end analytics in finance and marketing. This is even reflected in their M&A activity which has evolved from early-stage transactions occurring in the low-end services space (acquisition of Spectramind by Wipro, and of Daksh by IBM). The next stage involved larger players achieving scale or markets (acquisition of Minacs Worldwide by Transworks and of Trinity Partners by WNS).

The current situation that has emerged involves companies adding capabilities through KPO acquisitions (acquisition of Marketics Analytics by WNS and of Scope e-Knowledge by Quattro).

Indian companies have been migrating from voice-based services to other low-cost destinations such as the Philippines and China so that they can focus on higher-end work. They retain voice-based services in India to some extent so that they are able to provide a complete end-to-end offering to their clients. Most of the higher-end work such as transaction processing and procurement-related activity is now carried out in India.

We have also heard of KPO as an opportunity especially in areas like analytics. Does this really hold potential and do you see this taking off?

India's KPO segment spells a huge opportunity area in the technology space. According to industry reports, the KPO industry opportunity could be as high as $10 billion by 2010. While KPO is younger and smaller, it is likely to be a fast-growing area for segments such as legal process outsourcing, market research outsourcing, analytics, pharma outsourcing, engineering outsourcing and animation outsourcing. Each of these segments has shown impressive growth rates last year.

Players in the KPO segment are typically small to mid-size firms with pockets of expertise in their respective niche domains. While standalone KPOs may find it difficult to grow beyond a point, there may be significant opportunity for cross-sell as part of a large IT/BPO company. There is likely to be a rise in M&A activities, especially in the analytics segment.

Indian BPOs that have acquired KPO delivery capabilities in India are increasingly looking at acquiring small and niche players in the US and Europe to improve their front-end capabilities.

Indian companies for long ignored the domestic market. Do you expect a change in strategy from Indian BPO providers? What are the likely growth drivers in the domestic BPO market?

The rapid growth in key sectors such as telecom and FS (financial services), and a need from the industry to focus on core business along with an eye on profitability, are driving the potential in the domestic market. Reduced telecom costs and improved infrastructure are facilitating this growth.

However, with much lower cost arbitrage within India, outsourcers need to have a very different mindset and cost structure to be able to service this sector and remain profitable. Focus on efficiencies is an imperative. Large companies that target the domestic sector need to marry their best practices with the cost consciousness of small players.

What are the challenges relating to rural markets for BPO expansion and the potential, especially relating to non-voice?

Key factors that favour the BPO initiative in alternative destinations are low cost of operations and lower employee attrition levels. Some of the challenges include underdeveloped infrastructure facilities, lack of power, and poor telecommunication, transportation, education, and other support facilities.

Skill upgradation of rural BPO staff is also a critical factor for improving service quality levels. Within the non-voice space, low-end jobs such as data entry and processing can be migrated to rural markets.

D. MURALI

S. P. SRINIVASARANGAN

(Illustration by R. Rajesh)

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BPOs: Tremendous headroom