Scarred by the US economic downturn, the Indian IT industry has suddenly discovered the BPO opportunity, and every IT forum that’s worth its name is discussing BPO threadbare. Does the promise warrants the hype being created.
Today, the industry, chastened by the widespread economic slowdown, seems to have found its new pin-up boy (or trend), that goes by the name of BPO or Business Process Outsourcing. The tremendous hype generated over the apparently endless potential of BPO presents a peculiar sensation of déjà vu. The question that now remains to be answered: will BPO too go the way of its over-hyped predecessors, fizzling out without a whimper?The Indian IT industry, in its evolution over the last one decade, has always seen one trend hogging the limelight on a periodic basis. If it was computer education and training in the early 90s, Y2K was the star during the closing years of the last century. Then as the dot com boom first soared high and then took a steep nosedive, it was the turn of B2B and B2C, followed by the SCM and CRM mantra.
What is Business Process Outsourcing? Gartner defines it as the delegation of an IT-enabled business process to a third party who owns, administers and manages the business process according to a defined set of metrics. The processes that can be outsourced include human resources, finance and accounting, supply chain management, customer care, etc. According to Gartner, spends on BPO typically comprise 6 to 7 percent of company’s top line. The IT research and consulting major also predicts that by 2005, the number of outsourced business processes will have doubled compared to 2000. As a result, BPO services worldwide will grow from $119 billion in 2000 to $243.5 billion in 2005 at a 14.4 percent compounded annual growth rate (CAGR).
The following figures suggest that Chohan is neither wide off the mark nor is he being unreasonably optimistic. According to Nasscom, in FY 2000, the BPO market in India (captive and independent players) generated revenues of over $533 million or Rs 2,398.5 crore, and employed over 45,000 people. These revenues have increased considerably in FY 2001 and amount to $891 million or Rs 4,187.7 crore, which in effect translates into a revenue growth of 70 percent and employment for over 70,000 people. This growth is estimated to continue in FY 2002 and by FY 2003 the market opportunity for BPO is set to be over $4.4 billion or Rs 21,120 crore.
The components of the BPO market in India are HR, finance and accounting, transaction processing, content development, engineering, design, remote education, market research, data search, network consultancy, etc. Many believe that the opportunity for BPO for India is essentially still in the early stages of evolution. This BPO market is in its early high growth phase and is growing at an exponential rate leading to India’s emergence as a preferred global outsourcing hub, primarily because of India’s several unique advantages.Says Sujay Chohan, country director (research and advisory), Gartner India, “BPO has the potential to drive India’s economic growth through the next decade. India has strengths like experience, language proficiency, entrepreneurial zeal, skilled workers, expertise in new technologies and a cost advantage.”
“BPO is becoming part of the new model for managing international growth,” says Rajan Sachdeva, manager, Accenture, a major player in the BPO arena. The benefits of this model are clear: Management can focus more time and attention on building core business, without the distraction of back-office operations and administrative issues. Also, management can avoid having to invest in office facilities and computer systems, thereby freeing up investment capital that can be used to better advantage elsewhere. Another benefit, feels M D Ramaswami, CEO of Dell International Services, is that local outsourcing firms can provide valuable in-country experience and really help new entrants get things done more efficiently. The outsourcing teams are mostly nationals who have an in-depth knowledge of business practices, tax and labour laws, regulatory issues, and social customs in their home countries. “They can make everything so much easier for outside investors from obtaining government permits, to setting up financial/administrative systems, and to getting the entire business up and running quickly”, feels Robert Azman, vice president, Global Service Ctr. Operations,E-Funds, who has actively moved into the BPO space in India.
Advantage India
According to Aruna Jayanthi, principal, Cap Gemini Ernst & Young India, the two most important advantages that Indian possesses is the positive image of the “India” brand that has been built in IT services over the past decade, in addition to the collective knowledge gained through a first mover advantage. Adds Sanjay Patel, CEO, iBackOffice, “When you have a very large population of educated and highly motivated people that are trained for “white collar” jobs and overlay that with a cost structure that is 10-20 percent of western world costs, there is no competition for what India can provide to a global economy and a globalising workforce.” Borrowing from Michael Porter’s landmark publication regarding the competitive advantage of nations, countries do have to position themselves on a global basis to ensure they are capitalising on their resources. According to Patel, India has invested in its people for several decades and now the payoff is inevitable.
And the US economic slowdown has turned out to be a godsend for India’s BPO industry. The slowdown is forcing US companies to look at outsourcing IT and business processes offshore. Buyers cannot afford to cut on business processes, feels Atul Vashistha, CEO, neoIT “They have to look at retaining the process but move it offshore on a cost effective delivery base and it is here that India comes into the picture.” Key success factors like an English-speaking workforce combined with cost-effective high quality service delivery, positions India well in leveraging the BPO boom. Even the much-maligned government seems to be playing its cards well in the form of regulatory incentives in promoting the BPO industry. According to L S Ram, CEO of Crossdomains, these sops might be due to increased demand for trained staff and foreign exchange inflow as well as an open-minded approach towards economic planning and policies. Whatever be the motives, as long as the desired results are obtained, no one is complaining. Lastly, according to Kishore Mirchandani, CEO of itAccounts, rapid improvements in communications infrastructure, thus attaining parity with global levels as well as time zone advantages, which facilitate 24x7 operations are the other advantages for the Indian BPO industry.
Value proposition
Says Aashish Bhinde, director, View Corporate Advisors, the VC firm that funded India Life Hewitt and Tracmail, two major BPO players, “Unlike other fields where the client will require some work to be done or buy some services, in BPO we have to convince the client as to why he should outsource his work. Most often he already has an in-house department which handles this work. So we have to offer him better services than those provided by this department and also provide him with cost savings by doing so.” But for this one needs deep domain expertise. The salary ratio between India and the US is 1:10. Taking this into consideration, net savings of 50 percent can be given to the client. Therefore, the company saves almost 20 percent in terms of salary. Feels Ram, “Only a company that has already outsourced some work to India will outsource their HR and other high end work to us. HR is a sensitive department and so the company would not outsource unless they have full confidence. Old clients are only concerned about the quality of services provided. New clients have to be told about the benefits of outsourcing to India.”
Supply chain management solutions: Procurement, Distrib-ution, logistics, Warehousing and Inventory etc.Where are Indian companies placed in the value chain in offering services in the BPO domain? Are they really moving up the value chain? According to Gartner, BPO is composed of 4 broad segments viz. as follows:
- Operations: R&D, Manufac-turing, analytics/ QC etc.
- Business administration: Finance and admin, HR & Payroll, Billing, indirect procurement, Payments processing etc.
- Sales, Marketing and Customer care: customer selection, acquisition, retention etc.
In terms of defining a value chain for the BPO market, the business administration segment constitutes the bottom of the value chain, while the operations segment constitutes the higher end of the market. Supply chain management solutions and sales, marketing and customer care segments constitute the intermediate layers of the value chain. According to Jayanthi, most Indian companies today operate in the business administration segment, while a lot of activity is currently taking place in sales, marketing and the customer care segment. Within the business administration segment, there is a change in focus from routine non-critical business process outsourcing (payroll) to outsourcing of more business critical processes (like claims processing in the insurance sector). Segments like operations and sales, marketing and customer care are predicted to be growth drivers in the medium-to-long term (3-5 years). In the short term, industry growth is likely to be driven by the business administration segment.
Currently Indian companies have been bagging basic people-intensive projects, but what must be kept in mind is that this whole movement towards BPO is still relatively new and is only now beginning to gain momentum. The future trend will be to not simply outsource a single function, feels Chohan, but to outsource a whole process, i.e companies will outsource the whole HR department as opposed to only outsource their payroll function. So, Sachdeva feels, while initially the move will be to outsource people intensive processes, as capabilities develop and companies demonstrate maturity, they will move up the value chain to offer more comprehensive services, i.e agree to take over ownership of the whole business process. But as of now, it is the market for people intensive projects that is very huge and which is currently offering a great opportunity for Indian companies.In the Indian market, the BPO vendors especially in the CRM and transaction processing segments are gaining momentum. Opines P V Kannan, CEO, 24/7 Customers, “So far companies in the BPO segment have focused on business development and building delivery capabilities and have grown organically. In the medium-to-long term, Tier I companies seek to scale up rapidly, and the rest will expect consolidation to occur either by acquiring Tier II/Tier III companies or mergers among Tier II/Tier III companies.” Currently Indian companies offer specialised services or multi-process solutions. Examples of such treasury back office management, fund administration services and multi-process solutions like customer support, telemarketing, etc. Going forward, the companies will build expertise in multi processes or segments in an effort to offer value-added services to their clients, feels Milind Chalisgaonkar, CEO, mSource.
Some like Ramaswami agree with Agarwal and reiterate that many Indian companies have already moved up the value chain. Today, for example, Dell does technical support for US-based customers which is a very complex level of BPO. A few years back the whole advent of BPO into India started with small, non business critical activities but now companies like Dell are doing mission critical activities like technical support in India. Infrastructural improvements, especially in the areas of power and telecom along with traditional advantages of a huge, flexible talent pool and cost efficiencies are also helping companies in moving rapidly up the value chain.Indian companies in the BPO space today are primarily focused on call centre work. Call centre work in most western markets is a traditionally low paying, high turnover job that few make careers out of. In fact, the large majority of agents at work in US call centres have little to no university education. Says Patel, “In India we are substituting that labour pool with a college educated workforce that is looking to build a career in a burgeoning industry hence we can attract good talent.” Feels Sanjeev Agarwal, CEO, Daksh, “Similar to what we observed in the software development space where western companies initially looked at India to outsource the maintenance and development of mainframe programs (COBOL primarily) and then quickly realised that India could actually serve as a global competency development centre, with the BPO space we are going to see history repeat itself we will move from traditional call centre work to doing more high end tasks such as accounting services, human resource management, etc.”
Indian capability
However, Mirchandani feels that the amount of time taken to migrate a process depends on a number of factors and is very subjective. Once an organisation has decided to outsource any of its processes, the provider will conduct a diagnostic review of the business processes, which till then was being followed by the organisation, to understand and provide the organisation a tailor-made solution. Thereafter, typically, a Client Service Agreement (CSA) will be drawn up setting out the outsourcing services proposed to be offered to the organisation, the cost thereof and the timeframe within which the implementation would be completed. Once this is done, an implementation team will conduct the migration of the process applying defined workflows.What is the average time frame for an organisation to fully migrate its processes? The migration process, according to Vashishta, also known as transition and knowledge transfer, takes anywhere from two to nine months depending on the business process being outsourced and the experience of the provider. Call centre migration (for a small percent of total call centre operations) could take as little as three months. Document management as little as two months, while an Application Support and Maintenance project that is focusing on outsourcing a huge chunk of the project of may take up to nine months to fully migrate i.e. reach a steady state. The migration process milestones are typically transition plan, policy and procedures guide, transition start, knowledge transfer, transition complete and steady state. service level agreements formulated and agreed at start of transition get revised if required, and confirmed by the time the transition process reaches a steady state. It helps to have a third-party program management company to assist in the process.
Hurdles on the way
Infrastructure and telecommunications are still key issues hampering growth in the country. Besides these, Indian companies face challenges overseas, specifically in terms of acceptance of Indian solutions, proven capability and processes, brand, cultural issues and costs. According to Ramaswami, the key challenges are whether infrastructure ramp up is going to match business ramping up, and the ability to find suitably qualified manpower when BPO becomes increasingly complex.
There is also a misconception in the Indian mindset that all one needs is IT infrastructure to start a BPO company. Chohan feels that nothing can be further from the truth. BPO companies are typically capital intensive and investments have to be made up front to be in a position to scale quickly, since once decisions to shift entire departments are made, then the requirement to take on work loads should exist. Having understood this, Indian companies have a long way to go in developing process capabilities, building customer confidence and delivery models. Besides this, Ram feels that they have a major weakness in inadequate marketing and branding skills.
Even if all this is overcome, emerging BPO companies will face resistance in the form of threatened job security, performance issues, loss of control, higher than expected costs, and technology and cultural issues from potential customers. Organisations need a tremendous amount of support, commitment and action from the government to put on the fast track basic infrastructure projects, or at least create special, liberal economic zones within the country. The government and industry associations also need to work closely together to create visibility and promote the vast opportunities in BPO to attract entrepreneurial talent within the country.
The BPO industry is a very challenging business and requires outstanding execution skills. Given that customer service is intricately tied to a company’s brand, companies conduct detailed due diligence before taking the outsourcing decision to India. Indian companies need to build outstanding management teams, have adequate capital, build extensive human resource orientation and a strong customer acquisition engine in the US to succeed in this business. Developing “quality” processes that help deliver outstanding customer experience is a clear imperative for building scalable businesses, feels Agarwal.
Business Process Outsourcing requires a good understanding of a customer’s business process, domain knowledge and expected service levels. Providers have to demonstrate their ability to deliver service and not just provide skilled resources. Business process outsourcing is a critical function and cannot be treated as tactical function it needs to be a strategic initiative. “Strategy formulation and third party program management are key to a successful outsourcing experience,” reiterates Vashishta. The buyers need to have intimate knowledge of the country and its service providers. This is where, Vashishta proudly proclaims, neoIT’s services assurance program, neoQA, plays a significant role. This was the program used by HCA, the largest hospital chain in the USA, prior to award of contract to Syntel.
According to Siraj Irani, head-resource management, World Network Services, “China, Philippines, Ireland, Japan and other countries offering similar services and could provide stiff competition to India in the future.” To compete with other countries like China, Indian companies are finding it necessary to become more quality conscious and migrate up the value chain, without losing sight of the cost advantage that India offers.
Going forward, does India have the potential to capture a significant chunk of the BPO pie from the present paltry 0.5 percent? According to Jayanthi, India should attempt to not only increase market share but also attempt to move up the value chain and offering higher margin services. The movement towards the higher end of the value chain may not lead to high top line growth but is likely to improve margins in the industry. The business administration segment has the potential to increase India’s market share, but this segment is more price-driven rather than quality driven (thereby weakening the case for sustained competitive advantage). On the other hand, the other three segments offer hope for building and sustaining competitive advantage. In her opinion, India could expect to garner about 2-3 percent of the market by 2007-no small figure in itself.
This article first appeared in Express Computer.
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