Whereas in the early days of the IT services boom in India, the difference in cost between what India had to offer and what could be achieved in the U.S. was large (perhaps 10X), that cost saving is smaller for BPO. So there may be less room for error for Indian companies trying to tap into BPO — and the service is real time, which brings its own challenges.
Either way, BPO is here in full force. And it’s just a question of who will actually reap the benefits of a sector that Nasscom and McKinsey have predicted will generate 1.1 million jobs and revenues of $16.2 billion for the Indian economy by 2008.
The Landscape
Thus far, three basic types of BPO plays have emerged — third party provider startups, third party providers built from more established entities, and either shared or fully owned projects initiated by companies hoping to “insource” their own business processes in India.
Clearly important for the future of startups and all third-party providers is whether at the end of the day it makes real sense for predominantly U.S. corporate clients to outsource a function or “insource” it. Many large multinationals — GE, American Express, HSBC — are setting up their own captive centers in India. There is an argument that you can spread overhead costs over many clients with a third party model, and thus outsourcing may make more sense. But the argument for insourcing is that a company has more control over the quality. And, relatively speaking, it isn’t that expensive to set up India centers anyway. Furthermore, as companies try to outsource true business processes — far beyond the simple commodity tasks of hawking AT&T long distance plans over the phone — insourcing would seem a more comfortable fit for corporations with closely held business processes.
Startups are surviving, however — and proliferating with the help of still eager VC money. There is a clear market opportunity for simple commodity call center work. On the surface, the story looks good: inexpensive resources doing work for the developed world. However, given the drivers behind commodity BPO (call centers, transaction processing centers, etc.), the real story is that with so much money chasing it, competition will build up and pricing power will vanish. When that happens, clients will not support a profit-making pricing structure. Commodity BPO providers are no doubt already aware of this issue, and there is a flight to create differentiated higher value capabilities. The jury is still out on how many third party BPO companies in India offer those higher value services. Everybody claims to have them, few really do.
The downside with non-commodity services is that there is a lot of missionary work required to acquire clients. BPO startups in India have already generated some revenue traction through call centers, and some small players are already breaking even in these commodity businesses where clients are easier to acquire. In contrast, significant legwork will need to be done by BPO firms seeking to develop the client relationships and capabilities necessary for a differentiated BPO company. And such companies will take time to deliver returns. No doubt differentiation will be critical, and venture investors will likely be well advised in the not-too-distant future to focus on companies that go beyond commodity services.
Regardless of the troubles that BPO startups are running up against, and possibly in anticipation of an impending flight to consolidation, the cash rich Indian IT services giants are also getting solidly into the BPO game. Wipro invested in Spectramind, Infosys took in $20 million from Citigroup for its back-office unit Progeon, and TCS invested in Intelenet. Clearly these firms bring a wealth of client relationships to the table, and may try to up-sell BPO to their many IT clients.
Going Forward
As the BPO industry in India matures, there are creative businesses being built. BPO companies are being formed to service unique industry verticals — everything from cross border paycheck disbursement in different currencies to the oil refining business.
And as joint “insourced” projects mature, deeper, higher-value, BPO capabilities will be developed and lead to stronger third party BPO companies (see story “Wendt, Back to India” p. --).
As this exciting opportunity in India evolves, siliconindia will cover timely developments and new business models each month. The siliconindia prediction: We may be seeing a BPO bubble environment. There could be a short term (three to five year) opportunity for investors to make money on startups, but the real winners (whatever their origin) will position themselves nicely for the long run.
