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BPO sector weathers the slowdown storm

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More get on outsourcing bandwagon; some MNCs shed captives.

Adith Charlie

Mumbai, Dec.25

2009 will be remembered as a year of great uncertainties and challenges for India's back office industry.

Reeling under the impact of the global meltdown, business process outsourcing companies had to fire-fight their way by tweaking the fundamental way of doing business in the endeavour to counter thinner margins and volume reductions during the first part of the year.

Yet, industry pundits believe BPO companies have been able to mitigate the slowdown effect better compared to their software industry counterparts. This is because BPO spends are part of a company's operational budgets which, unlike capital expenditure budgets, cannot be deferred for a long time. Relief did set in towards the second half of the year with deals, earlier on the backburner, starting to see light of day, driven by changing macro-economic dynamics.

Fewer transactions

Explains Mr Deepak Patel, CEO of Aditya Birla Minacs: “Due to recessionary pressures, work that was already outsourced was impacted by lower transaction volumes, but at the same time businesses expanded the scope of work that was outsourced. As such, the first half (of 2009) was impacted by lower transaction volumes and the second half saw expansion of scope.”

Mr Raj Patil - President, BPO and Chief Client Services Officer, Americas of Mphasis BPO, is of the view that in the last 3-4 months “there is a sense of speed and an urgency to move and take decisions.” In the first half of the year, when new deal wins were hard to come by, companies started deepening relationships with their existing clients, even if this meant giving in to pricing pressure and offering discounts.

Pricing pressure

Depending on each vendor's specific situations, rates had to be dropped on ‘incremental costs' basis.

“Clients would say, give us a pricing discount for say one year and share the pain with us. And this would be in lieu of a three-year deal being converted to a five-year one,” said Mr Susir Kumar, CEO of Intelenet Global Services.

In order to protect margins in the face of pricing pressures, vendors continued to look to service customers from low-cost destinations. Intelenet set up centres in low cost centres such as Puducherry and Dehradun. Mphasis BPO shored up operations in existing centers of Ahmedabad, Vadodara and Puducherry.

Several positives

There have been several positives for companies who have been able to stand their ground despite the economic turmoil of last year. In fact, the recession provided more opportunities in the BPO space as companies were keen to increase profitability by trimming their SG&A costs, according to Mr Abid Ali Neemuchwala, head- BPO, Tata Consultancy Services.

For the $6 billion TCS, BPO services contribute more than 11 per cent to overall revenues compared with five per cent a few quarters back, added Mr Neemuchwala.

Many client companies have gone through the painful process of downsizing in the last one year. Even though they are now seeing a pick-up in their businesses and hence require hiring additional staff, they are still uncertain about the longevity of this revival.

Such firms are taking the safer route: Engage an offshoring firm for functions such as finance & accounting, payroll and other back office work so that you need not control staffing. And this line of thinking is propelling many off-shoring shy sectors to open up.

“Historical outsourcing ‘laggards”— new industry entrants such as CPG (consumer packaged goods), retail, logistics and media and entertainment start on outsourcing journeys side-by-side with more experienced industries such as financial services, who ramped up their initiatives in response to the worst economic conditions in 60 years,” said Mr Anup Gupta, Chief Operating Officer of WNS Global Services.

Agrees Mr Kumar of Intelenet: “If companies were earlier outsourcing 20 per cent then, they have increased it to 30 or 35 per cent,” he feels.

Back office divestures

Another discernable trend last year was the pronounced waning of the era of captive back office centres of multinational companies due to the inability to control operational costs.

“Many clients revisited their captive shared service centre strategy with the recognition that third party service providers can deliver the same or better levels of service at lower costs with less administrative hassles,” said Mr Gupta of WNS.

This was also necessitated as many financial institutions were under pressure from their boards and investors to raise funds by selling off non-core assets in order to tide against the liquidity crunch.

Some of the recent captive divestures include UBS' captive to Cognizant Technology Services, Monitor Group's to Integreon, AIG's to MphasiS, and Schneider Logistics and Amex's captives to EXL Services. These deals were bundled with a long tenure services contracts from the parent company thereby ensuring revenue visibility for the back office company.

On the other hand, companies such as Caliber Point (a subsidiary of Hexaware Technologies) and Integreon are also looking to work as subcontractors for those captives who do not intend to sell put in the near future. While many captives seem to be sceptical for the time being, only time will tell whether this model would be better than a complete divesture.

Related Stories:
Downturn halves IT/BPO mergers, acquisitions in Jan-July
Outsourcing deal volumes up in Q2

(This article was published in the Business Line print edition dated December 26, 2009)
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