Expansion of Domestic BPO Companies into Smaller Cities, a Boon Date:   Friday , July 02, 2010 The Indian domestic market is going through a crucial transformational juncture over the last few years – rising from a 'good to have presence’ to a ‘high potential opportunity' for the country’s IT-BPO sector. Until a few years back, the domestic business opportunities did not even figure on the agenda of Indian ITES companies. However, recession in the US economy and the domestic IT/ITES sector’s resilience helped the market to earn a respectable position in the strategy roadmap of IT/ITES service providers. At a time when companies are developing strategies to tap the missed opportunities in the domestic sector, the market is witnessing intense interest from customers as well as outsourcing services providers that are not only based out of India, but are also players at a global level. The key factors which will continue to fuel the growth of Indian BPO market are: •According to IMF forecast, the Indian economy will continue to register a healthy GDP growth of over 8 percent for the next 5 years. To keep pace with such an exponential GDP growth across the economy, the Indian companies need to concentrate their focus on their core competencies while leaving IT/ITES in the hands of third party IT service providers. •Another key reason driving the growth is the increasing globalization. The Indian enterprises are pursuing their dream to get global; as these companies intend to expand their presence across the world, they will need to inherit the global best practices where the ITES services will come handy for them. •The number of service providers having end-to-end capabilities to provide outsourcing services has increased over the years. This growing number of vendors, along with increasing maturity of Indian enterprises towards benefits of availing outsourcing services, will act as a catalyst for the growth of the domestic IT market. •A steep decline in the connectivity costs is gradually building new business models that will be able to meet the rising customer demands and the service level agreements. The domestic BPO opportunity is scattered into a number of verticals; whilst telecom and banking were the early adopters, currently constituting over 60 percent of the total pie, some other emerging verticals include government, aviation, healthcare, retail, transportation and logistics, and media. From a service line perspective, the domestic BPO market is following the same curve as that of BPO export market to move up the value chain. The service lines are evolving from being predominantly voice based to a mix of voice and non-voice services. Moving forward, in the next 2 to 3 years, opportunities will not only be limited to back office process augmentation, but will also be extending to processes through which enterprises will be able to reap the benefits of economies of scale along with a single window view of all processes across locations and business units. However, the challenges that remain are insufficient processes and standardization approach within the buyer’s organization. Also, fear of losing control continues to be an inhibitor for the next generation growth of the domestic BPO market. According to Springboard Research, the Indian domestic BPO market was estimated to be $2.6 billion in 2009 and is expected to be a $5.8 billion industry at the end of calendar year 2010, registering a faster growth rate than the export market. Currently, close to 75 percent of the industry is captive in nature while the remaining 25 percent is with the third party BPO service provider. As the industry matures, the Indian domestic market is witnessing increasing consolidation activities for the past few years. After the economic downturn, many companies are wary about continuing with their captive center operations in India and thereby started to pull out their well-established captive BPO investments. Over the last couple of years several large captive centers, including Deutsche Bank, Citigroup, and more recently UBS, have pulled out of their BPO business. Despite the fact that cost structures of captives are typically higher when compared to third party service providers, there are certain benefits like protecting confidential information in-house. However, the domestic third party BPO companies are using this opportunity to acquire captive centers to build scale and for acquiring new technologies, particularly to increase geographic reach as well as to inherit new capabilities. The key challenges for the domestic BPO market are almost similar to those in the export segment. They include rising operating cost, lack of skilled man power, and absence of an industry ready curriculum along with high attrition rates. To address these challenges, the companies are expanding their horizons beyond traditional metro cities. This provides enterprises with ways and means to avail multilingual skills as well as taking advantage of lower cost of operations like rents and salaries. However, this is not an easy task as massive public-private partnerships in education and training is needed to reduce the gaps in the skill levels in the tier-2 and tier-3 cities. This has resulted in the emergence of rural BPO model, which was well received among the vendors. In addition to overcoming the language barrier, this model has also helped to reduce cost of operations and managing the attrition rates. Going ahead, adopting the right business model will determine the success of individual vendors in the marketplace. Trends like ‘moving from CAPEX to an OPEX based approach’ will get traction in the marketplace, as clients will necessarily pay only for usage and will not have to worry about payment for licenses. Various other business models like 'transaction based' or 'outcome based' are emerging in the overall ecosystem. All these models are playing a vital role in expanding the market as well as becoming a strategic ploy in the Indian outsourcing business. With maturity of the domestic market, the customers' requirements are changing very fast and vendors will need a great degree of customization and understanding to be successful in this front. They will need to think ahead of the curve on business models, pricing, and have to build in capabilities that cater to the Indian market. Profitability is the other area, which will be determined on the vendors’ effectiveness in delivering by way of cost structure, people management, and value creation. The author is a Senior Analyst, IT Services at Springboard Research