Will BPO remain as India's pride?
Date: Thursday , May 01, 2008
Neighbors' envy, India's pride - that's how the BPO industry was for India in all these nine years of its existence since 1999. But currently, the pride of India's status as the world's back-office and service hub is on the verge of collapse, due to the heat of the recession in the U.S., rupee appreciation against the U.S. dollar, and an escalating competition from China and other developing countries. Further, a steep upswing in wages, a scaring talent crunch, and soaring attrition rates have added fuel to the crisis.
Still, Indian software and services industry body NASSCOM predicts that the country's revenue from back-office outsourcing is likely to grow nearly five-fold to $ 50 billion by 2012, from the current $ 11 billion. Som Mittal, President, NASSCOM says, "There will be some slowdown but growth will happen." Also, he expects the BPO industry to grow at 22-23% in future to achieve the $ 60 billion export target.
In fact, nobody has a clue to what kind of affliction the U.S. recession will bring to the BPO industry in India. The initial jolt came when WNS, an Indian BPO, reported 23 percent decline in income in Q4 last year, as its clients' earnings suffered because of the U.S. subprime crisis. WNS lost its key client First Magnus in August 2007 when it filed for bankruptcy. Since then the U.S. subprime crisis has seen many mortgage companies file for bankruptcy, leading to loss of business for some Indian BPO firms.
Bangalore based iGate Global Solutions and Infosys BPO both serviced GreenPoint Mortgage, the mortgage arm of CapitalOne that declared bankruptcy in late 2007. About 5.5 percent of iGate's revenue in the quarter ended September 2007 came from U.S. mortgage companies, down from 7 percent in the previous quarter. The impact on Infosys BPO was not much, because the firm offered services to different segments in banking and finance and the subprime crisis did not have a remarkable effect on it. The latter part of 2008 will be a testing time for the Indian BPO community, as they are expecting the downtrend to continue.
Yet, they are hopeful of bouncing back. "In spite of a significant customer loss, we continue to see strong growth across many sectors. The overall BPO growth story is spreading across many other industries, including consumer products, retail, and manufacturing," says Neeraj Bhargava, CEO, WNS.
However, the subprime crisis will impact the revenues of BPOs with greater exposure for at least some more time. So, the smaller Indian BPOs that service mortgage companies in the U.S. are likely to be severely affected, meanwhile the larger players have started diversifying their target markets more aggressively, moving from the U.S. to Europe, Asia, Latin America, and the Middle East, opine the experts. A report by a research firm, ValueNotes Database shows that the U.S. based buyers made up for 56 percent of the total BPO & KPO contracts in 2007. This will reduce in 2008 as the probable U.S. recession is making vendors aggressively de-risk their sources of business. Also, some Indian vendors have laid down strategies to enhance their mid-market coverage via select acquisitions. At the same time, the intensifying global competition is encouraging the larger vendors to look beyond Fortune lists.
While a slowdown in the U.S. economy is weakening the dollar against the Indian rupee, the exacerbating margin is already pinching the Indian BPOs. The Rupee appreciation is a major test for them as they bill the work done entirely offshore in U.S. dollars, whereas expenses are met in rupees. And the worst part, as we all know, is that the IT expenditure budget of the customer does not increase. It remains where it was. Thus, some service providers are trying to ward off this pressure by increasing prices for newly contracted services and restructuring pricing in existing contracts. According to analysts, one percent rise in the rupee translates into a 50-basis point negative impact on BPO margins. Therefore, some companies also have convinced their clients to bill in rupees instead of the U.S. dollar.
Nevertheless, Indian BPO industry also has got a silver lining. Experts believe that the recession may create more opportunities because of the cost advantage. As the western clients look for ways to cut back spending, Indian BPO firms stand to benefit. For instance, Infosys issued on April 2008 a better-than-anticipated outlook in terms of revenues and profit for 2008-09. Technology Partners International (TPI), a Texas based firm that tracks outsourcing deals, said that in the first three months of 2008, companies such as ABN Amro, NV, and Citibank NA have started asking IT firms to handle their processes that had, until then, been managed internally. So, if the U.S. recession continues, there will be a positive impact on the Indian BPO scenario, predicts TPI. But the question is that how long will the 'cost advantage' prolong?
Cost Advantage Vs Talent Crunch
Talent crunch is another daunting issue Indian BPO industry is facing since more than three years. The situation is especially grave for the IT and ITES sector. NASSCOM predicts that given the current growth, the demand-supply gap will increase to 2,06,000 by 2009. The lack of skilled labor has already resulted in a rapid increase in salary for Indian professionals and the country is in danger of loosing its low-cost advantage. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. The London-based HR firm ECA International recently predicted a 14 percent jump in average wages in the Indian multinationals this year. But, says Mittal, "India still has a fairly large cost advantage despite wage inflation."
Also, the root cause for the shortage of skilled manpower is the poor quality of higher education in the country. Of the 2.5 million university graduates that India produces every year, human resource managers at multinationals consider only 10 to 25 percent as employable.
Of late, retaining middle and senior management teams is proving to be a growing challenge. There is significant movement between jobs at this level. This is a key risk as it has the potential to derail growth and stability of the BPOs. Interestingly, nowadays some large BPO companies have tied-up with colleges to train the talent while they are doing their college degree. This has proved to be an effective model for cost reduction as well as manpower retention.
Domestically, the fresh trend is that the surge in real estate prices, attrition, and talent crunch in the Indian metros are forcing BPO industry to move to tier 2/3 cities in the country, according to a study by the consultancy firm Everest. Movement to lower-cost cities within India is likely to result in additional 15-30 percent reduction in operating costs despite lower employability and higher management costs, says the study.
The Chinese dragon
The BPO sector is looking at improving productivity, as now companies also need to fight competition from China which is trying to replicate India's model, says a NASSCOM survey. Also, countries like China, Morocco, and Hungary fast emerge as the preferred choices of IT service providers, says a Pierre Audoin Consultants (PAC) study. The Chinese Yuan has appreciated less than the Rupee and the Chinese government has been offering various incentives to its BPO companies. In the coming three to five years this may happen owing to a rising gap in educated workforce coupled with strong government emphasis on IT-BPO sector between the two countries, believe analysts. The software and services revenues in China are estimated to grow at 22 percent to reach $ 28 billion by 2010.
According to NASSCOM education initiatives member Sandhya Chintala, Within 10 years China would lead in the BPO industry and India will be at third position, followed by the U.S. "It's because of lack of trained manpower. About 60 percent of India's population is coming under the age group of 16 to 35. It is crucial to train this age group," she says.
The road ahead
While the BPO industry battles such issues, outsourcing growth expectations stand tall. As a result, many companies are gearing up to face the future with aggressive plans coupled with innovative strategies. They have been seeking ways to convert each customer into a value-reinforcing and revenue-generating resource. Service providers have added offerings such as finance and accounting, legal process outsourcing, risk management services, analytics, process re-engineering, data analytics, and customer value analysis, transforming from single-service cost centers to dynamic sources of customer data and incremental revenue for clients. This has in turn helped client organizations to enhance their customer relationship management programs with their external service partners.
However, smaller BPOs with low-end commoditized services are the worst affected by margin pressures, and the worst is far from over. These players will find it difficult to raise prices, and will be unable to pay enough to retain the best talent in coming times, predicts a report by ValueNotes Database. So in order to survive, the smaller players will have to provide very niche services, which add value to a company's business, on the lines of a KPO, says Anish Zavery of KPMG research firm.
Emerging BPO models
The newly emerging model is integration of IT and BPO. The customer organizations are now moving from piecemeal contracts to transferring ownership of entire processes to their vendor 'partners'. This presents a large opportunity for IT vendors like Satyam who have already integrated their BPO and IT arms and also started knowledge services and analytics practices. And a key ingredient of the 'integrated' offering will be the creation of platforms, especially for back-office and transaction processing services. Platform BPO will allow vendors to de-linearize growth through large-scale productivity payoffs and pay-per-use revenue models.
Hence, says ValueNotes report, in 2008 the KPO will rise to the next level of maturity and move from the staff augmentation model to a value-added role, in which the service provider partners with, and even consults the service user, and the services provided have the potential to directly impact the buyer's business objectives.
In essence, currently, India certainly leads with more than 70 percent of the global BPO market. And if all goes well, the future looks certainly bright. But with regard to challenges being faced by the industry, it needs government-industry partnership in terms of producing and nurturing industry specific talents and in making operations better to combat the competition. But, how to mitigate the imminent challenges posed by the global happenings? Will innovation or emerging BPO models save India in retaining its pride? -The '$ 50 billion question' is haunting the Indian BPO landscape.