Indian BPO ? too much hoopla

It is facing grown up's problems even before it can properly grow up

The business process outsourcing (BPO) industry has taken over as the growth engine of the overall software and services industry. Last year BPO exports grew by 46 per cent, compared to 30.5 per cent by the overall sector.

In the current year BPO exports are expected to grow by another 40 per cent. The top BPO companies are virtually doubling their turnover every year. So everything should be hunky dory and investors should be rushing in to grab a share of the action and rewards.

But the reality is a little more complex. The industry is growing at a breathtaking pace and there is a buzz all over the developed world that that their jobs are shifting to a list of countries headed by India at an alarming pace.

But the industry in India is passing through a degree of angst, and that too under the glare of publicity. Those who know the software industry recall that it was quietly left to grow for well over 15 years until the Y2K boom made the country at large wake up to its promise.

When the global IT slowdown, the first setback for the software industry, came in 2002, the industry had already put in two decades of uninterrupted growth. In contrast, warning bells are ringing about aspects of the BPO industry when it is in effect only in its fourth year of existence.

The concerns are several. One, a BPO industry is certainly growing rapidly in India but how much of it is the Indian BPO industry?

Two, the barely five-year-old industry is in the throes of rigorous consolidation, raising the question of whether it has acquired features of grown ups even before growing up.

Three, the industry is not growing healthily as it remains seriously skewed at the call handling end without noticeable growth in other, more complex sectors.

Four, this skewed growth has led to severe price competition when such a young industry should be busy acquiring new skills and going up the value chain.

Five, are the venture capital funds to blame for some of these features? Hence the sixth and final issue: what is a healthy game plan for the industry?

Raman Roy, chairman of Wipro Spectramind and an acknowledged pioneer of the industry, has publicly raised some of these concerns. He points out that, with the exception of Wipro Spectramind, there are only two Indian companies with a total headcount of 5000-6000. Among captives, GE has crossed 10,000 whereas even IBM plus Daksh is below 10,000.

In contrast Convergys has a global headcount of 30,000. Hence his sharp poser: "Is there a glass ceiling at 5,000?" He is impatient with the pace of growth of Indian companies and asks why we are not creating companies and taking them global at a sufficient pace when India accounts for less than three per cent of global BPO delivery.

What is more, well over 70 per cent of the value created in India is accounted for by non-Indian companies, both captives like GE's which are their own offshored operations and captives of global third party vendors like Accenture.

The number of Indian BPO companies of any size is dwindling, and standalone ones among them (those not owned by bigger companies like Wipro or ICICI) are getting even fewer. The scope for India to grow its own Convergys or Exult is getting narrower by the day.

K Ganesh, another industry pioneer who set up Customer.Asset which was subsequently taken over by ICICI OneSource, articulates it for everyone when he asks: "Is independent value creation for the Indian shareholder possible anymore in this sector? How can we still create a pure Indian BPO story?" There are two billion-dollar plus listed IT companies in India and a third will be listed soon. Will Indian BPO ever get there?

There are some easy answers to this. What is important is jobs and skills getting created in India. Being able to boast a BPO sector index at the Indian bourses is a secondary issue.

Besides, IT also began the same way with the concept of offshored development in India being proved first by Texas Instruments. So many caution against questioning the industry's potential even before it has had a chance to grow.

Indisputably, the Indian BPO sector is very small, compared to international standards, and has attracted far more attention, both domestically and internationally, than its size deserves.

Size really matters when it comes to deal sizes. Indian BPO operations are competing in the up to $ 50 million deal space. Three to five-year deals are in the $ 50-60 million range. The big global players like IBM and Accenture usually do not focus on deals below $ 500 million.

So the first task before Indian BPO companies is to address deals in the $ 50-500 million space. Akshaya Bhargava, CEO of the Infosys's BPO subsidiary Progeon, notes that there has been a hollowing out of global BPO companies which were operating in the $ 500 million deal space, the same way as has happened in software. So this is a space which is open for Indian companies to get into provided they get their act together.

Ganesh's solution is for the stronger Indian BPO operations to make front-end acquisitions in the mature markets of mid-sized companies in the $ 50-100 million turnover space (that is, buy a US company to provide a front end to Indian operations).

This is because, partly to tackle the backlash against offshoring and also to manage transition better, it is necessary for serious players to near shore (that is, outsourcing work to a company in US) around 10 per cent of positions.

Very large deals are inevitably being delivered, even by the likes of Accenture and IBM, out of multiple centres across the globe to mitigate risk and ensure redundancy. IBM's acquisition of Daksh, for example, was partly driven by Sprint requiring that IBM acquires an Indian footprint. Companies like WNS and vCustomer don't have a problem in this regard as they have a dual (Indian and mature market) operation.

But others are sceptical about acquisitions on these considerations. Raman Roy feels you don't need a front office for deals below $ 300 million.

Prakash Gurbaxani, CEO of TransWorks, which has been acquired by the Aditya Birla group, also feels that global acquisitions, simply to secure a front end, is not the answer.

Different companies have different solutions to current issues and challenges but all agree that BPO is one industry where size matters and you can't get size without deep pockets.

Hence Gurbaxani sees the Indian BPO play taking two identities, both of which are already happening. One is IT services companies offering BPO services which makes Infosys and Wipro develop the same model as IBM and Accenture. The other is for large non-IT companies to develop or acquire a BPO business like ICICI OneSource and TransWorks.

The ownership pattern of the business is important as the role of venture capital funds in driving some of the current developments in the industry has come in for sharp comment.

Raman Roy created a stir at the recent Nasscom BPO summit by declaring that the mad rush to grow the topline by competing on price at the call handling end of the business, which is becoming the bane of the industry, is the result of VCs urging the companies funded by them to grow the topline. Valuation still being topline driven in the industry, a strong trend in topline growth enables VCs to exit profitably.

Gurbaxani both agrees and disagrees with this line of argument. For close to 20 years, he recalls, the Indian software industry lived and grew without funding from VCs.

Thus, its growth in a particular direction was not driven by exit pressure from VCs. The VCs agree that they have different masters and have to show returns at the end of the day. Their investment cycle is 6-7 years, which is not like day after tomorrow. Plus, they are not quitting India, they are constantly looking for new entrepreneurs with new ideas seeking to develop new offerings.

Gurbaxani also doubts if VCs with stakes in Indian BPO companies are still following the topline valuation model. There are two ways to build a business, either following the valuation route or value to customer route. Early stage valuation is speculative, not related to business success. Early stage dotcom valuations were high when they were not making money.

Fascinatingly, their valuations were much lower when they actually started making money. Also, there are VCs and VCs. Waburg Pincus and General Atlantic, for example, will have a much longer staying power than a VC with a much smaller corpus.

Bhargava makes a telling point. He is periodically asked internally to define how long a particular offering will take to generate positive cash flow.

Implicit is the point that when a company like Infosys tells its shareholders that a particular business will take so much time to bring in rewards, they are willing to give it time. So if you're a great company with a good track record, you can, up to a point, avoid short term investor pressure, from VCs or ordinary shareholders.

So, other than getting an owner with a long-term perspective, which way does robust growth lie for Indian companies? Sujit Baksi, president of vCustomer, does not want to put all call handling work in one basket.

He distinguishes between inbound and outbound calls. He does not see much value addition in outbound tele-marketing. But this is not so with inbound technical support work.

Also, it depends on the nature of pricing. If it is time and material, the incentive for value addition is less. If it is transaction based (getting paid by the number of transactions handled), there is an incentive to improve the efficiency with which transactions are handled, affecting margins.

He says: "The industry is growing healthily but consolidation is also taking place. Low value outbound call work is facing price competition, but technical support and back office work is going up the value chain."

Gurbaxani says that call centres will have to do more and more parts of a transaction, ultimately end-to-end work. There is definitely a movement in that direction but the progress is slow. Migration from one process to another takes time, adds Bhargava, as you have to invest a lot in knowledge management systems.

Ganesh feels Indian BPO has potential in higher value-added work in areas like equity research, data analytics, publishing, tele-radiology, but these typically don't grow spectacularly in volume. Raman Roy's recipe is: "Don't compete on costs, invest in quality." There is a huge opportunity for growth in topline provided the issue of quality is addressed.

Bhargava admits that attrition, a major issue with the industry, is its own creation. If you invest in training your staff and create the right sense of loyalty among them, you will neither poach nor have your staff poached.