Business process outsourcing (BPO) players are becoming wary of losing business to major Indian and global IT firms that have a larger global footprint, and offer clients end-to-end solutions which include BPO services.
A case in point is that of India’s largest IT services provider Tata Consultancy Services recently acquiring the back-office operations of Citigroup for $505 million (over Rs 2,400 crore) even though pure-play BPO majors like Genpact and Firstsource were in the race. “It is not a new thing for the IT companies to acquire captives and then convert them into third-party providers. This trend has been observed for the last six-seven years but in the current situation, this is significant as the IT and BPO companies have a similar customer base that is based on the offshore model. Also, both these are people-intensive businesses,” explains Akhilesh Tuteja, head of IT advisory, KPMG.
TCS is not the only IT company to have bought a BPO firm. India’s third largest IT services provider, Wipro had bought Spectramind eServices from Quatrro for about $175 million. Infosys Technologies, Satyam Computers and HCL Technologies have their separate BPO arms. Satyam had acquired Nipuna, which then became its BPO arm. HCL Tech had acquired Deutsche Bank’s captive, which is now HCL BPO.
Because of synergies in the two businesses, IT firms can use the same infrastrucure and deploy similar resources to provide BPO services to clients, note analysts. Not only do IT companies benefit from this trend but clients can also get the services at lower costs. They can save their overhead costs as the IT companies can provide them BPO services along with IT services. For instance, Infosys BPO (formerly Progeon), won the insurance business of GreenPoint Mortgage, in a competitive bid with a pureplay BPO. Similarly, TCS BPO had some time ago won the BPO work of one of the top five retail companies in the US.
Vinu B Kartha, principal of research and advisory firm Tholons, said, “BPO is the logical extension for IT companies because IT is like a business process. The IT compaies can use the skills of their people on a large scale. They can also offer BPO as a package with their IT services.”
“All Tier-I IT vendors are doing well with their BPO arms and the others are focusing to strengthen them. They are eyeing new segments like pharmaceuticals and healthcare because these offer better margins and there is less competition in this space,” explains Kartha.
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BPO companies account for around 27 per cent (around $11 billion) of the total software exports revenue of $40 billion, but are growing at around 37 per cent CAGR, according to Nasscom. IT service exports, on the other hand, have grown by 28 per cent to clock revenues of $23.1 billion. However, economies of scale is an issue. “Though the expansion of IT companies in the BPO business is a concern for the BPOs, the former can expand on the transaction side of the business and not on the customer services side. The IT majors are selling technology to the BPOs and the pure play BPOs have an edge because this is their domain,” explains Avinash Vashishtha, CEO and MD, Tholons.
Some pure-play BPOs see this as healthy competition but others perceive this as a threat as the IT companies can provide BPO services in addition to their IT services and at a lower cost to the customers. For instance, during the July-September quarter earnings call of Genpact, its president and CEO Pramod Bhasin admitted that with global IT companies wanting to expand their BPO business, there is increased competition.
To counter the threat, analysts say BPOs must assume leadership in a niche segment such as technical support, retail operations or any other like TCS became the largest provider of financial services by acquiring Citigroup Global Services (CGSL). The process, it appears, has already begun. Genpact, for instance, already has a centre in Gautemala and is planning to expand its footprint in Africa by opening a 300-500-seat facility in Morocco in the next quarter. This can be used to derisk its business. “We will diversify geographically and are strategically looking at captives and non-captives in the market. Our target company should be a combination of solution and platform-based services,” explained Bhasin.
“BPOs can offer domain knowledge and expertise that the IT companies can’t,” reasons Rohit Kapoor, president and CEO of Nasdaq-listed EXL ServiceHoldings. For instance, one major client is said to have opted for EXL Service instead of one of the top six Indian IT service providers. Kapoor says that to increase their footprint in the US, EXL is eyeing looking to acquire companies with capabilities in the US.
“Outsourcing can’t be prevented completely (referring to the Obama factor). We are waiting for the valuations to come down and then we will acquire companies in the $50 million range and create jobs there.” EXL is working with insurance clients but also added clients in the utilities vertical this quarter. Legal process outsourcing is another area where the company plans to add four to six clients in the space by 2009. EXL has also hired a head for its LPO division.
Raman Roy, promoter of Quatrro, too, has taken up the challenge put up by the IT companies sportingly and said, “Competition is good for all players and it also offers variety to the clients. There is always a market for all players. All will get their share of clients because small customers are always scared to go to big companies.”
Aparup Sengupta, CEO, Aegis BPO, concurs that “this is a high-visibility business and for large deals, clients will always prefer the BPOs because we have the ability to sustain them and do then at a scale.” Aegis gets almost half a billion dollars in revenues from the US and had recently merged the Nasdaq-listed PeopleSupport with itself, taking the company’s headcount to 30,000 employees across 31 locations worldwide. The company will have presence in the US, Philippines, India and Costa Rica. Aegis has nine centres in the US, which are outsourcing centres catering to clients in the US. Around 67 per cent of Aegis BPO’s revenue comes from the US and the rest from India.