IT or BPO? We've both

BPO and IT services are converging

MphasiS derives nearly 40 per cent of its revenues from its business process outsourcing (BPO) operations and 60 per cent from its other activities, says Ramu.

"We are becoming a more balanced IT and BPO company, perhaps the only one in India, " adds Ramu.

So far, most Indian IT and BPO companies have been independent outfits that derive much of their revenues from either one of the two businesses.

For instance, companies such as Wipro Technologies and Infosys Technologies derive more than 80 per cent of their revenues from IT operations; their BPO business is marginal to them.

The standalone BPO businesses of General Electric or ABN Amro derive their revenues from call centre operations or bill processing.

That's changing, though. All the IT service companies are now zeroing in on the MphasiS model and setting up BPO operations.

Infosys created Progeon and others like Wipro resorted to acquisitions, buying Spectramind in mid-2002, something that led to Wipro becoming the biggest third-party BPO company in India.

MphasiS went in the other direction "� it acquired two software companies to build its software part of the business. Similarly, banking software product company i-flex Solutions acquired BPO firm Equinox.

"The Equinox acquisition gives us a running start in the BPO business. It also helps our product strategy as it has a platform-based services approach," Deepak Ghaisas, CEO, i-flex, India operations, said in a recent interview.

The Delhi-based HCL will gradually organise itself on the lines of industries like retail, telecom, banking and insurance. Each will have a head under whom there will be BPO sales and delivery persons and technology sales and delivery persons.

The heads will deal with clients, ffering the entire range of services, letting them decide whether to take the entire package or just pick from the bouquet of offerings.

It's easy enough to see why IT service companies want a presence in the BPO industry. India's new growth industry has shifted from IT services to BPOs, says Rajiv Prakash, associate director, at consulting company KPMG India.

Prakash's view is backed by fresh research by McKinsey and PricewaterhouseCoopers. A McKinsey-Nasscom report projects nearly 21 per cent of the country's export revenues emerging from BPO services, at an annualised growth of around 60 per cent "� more than twice the growth of the IT services industry.

The report says that Indian software companies, which thrived and grew into billion dollar businesses backed by a steep growth in IT services in the past decade, will see the growth rates of their core business slow, compared to their BPO business.

The Indian IT-enabled services (ITES) industry is expected to grow by 40 per cent in 2004-2005 to clock revenue of $5.1billion (about Rs 22, 312 crore), according to a PricewaterhouseCoopers report, up 46 per cent from $3.6 billion in 2003-2004.

The BPO market is expected to grow to $5.7 billion in 2005, up from $3.6 billion in revenues in 2003-2004.

IDC estimates that the global BPO market will grow to $1.2 trillion in 2006, up from $300 billion in 2004, with both American and European companies planning to outsource businesses that account for nearly 23 per cent of their revenues versus five per cent today.

Ramu swears that the convergence of BPO and ITES is the future. "We see the whole thing as an integrated outsourcing model," he says. According to him, a company can offer IT services integration along with any back office and call centre operations, both of which can be improved with technology.

"We want to have the capability of servicing all our client's needs," S Gopalakrishnan, chief operating officer of Infosys, told a business magazine.

Integrated IT service providers can offer clients a basket of services. For instance, Ramu says that MphasiS can offer a credit card company services ranging from application development to call centre operations to back office processing.

Wipro officials point to a Fortune 500 company that chose Spectramind for outsourcing technical support when the company clubbed its IT solutions experience and domain expertise.

KPMG officials say that it makes sense for IT service companies to move into BPOs because technology drives most BPO activities and Indian companies can apply their knowledge and application of technology to business processes.

Infosys, Wipro and Satyam are migrating to the fast-growing BPO businesses, leveraging their intrinsic strengths in technology, processes and offshoring.

Multinationals like IBM and Accenture, which predominantly sold high-value IT solutions, are trying to set up low cost offshoring operations in both IT and BPO spaces in India.

Accenture, IBM and EDS, among others, added nearly 25,000 people by the end of 2004, according to industry estimates. With 175,000 people globally, IBM Global Services has barely 4 per cent of its staff in India and Accenture with more than 100,000 employees has now 11,000 people in India.

But both Accenture and IBM plan to increase their India staff strength to around 25 per cent of their workforce by the end of the decade.

With consulting and strategy businesses stagnating and margins under pressure, Accenture is said to be looking at offshore operations in India, which offers 45 per cent gross margins, providing half of its annual revenues.

McKinsey's roadmap for Indian IT services companies foresees a few Indian companies moving from application, development and maintenance jobs in the US to embracing BPO, higher value added IT services such as system integration and adding areas such as Japan, Europe and China by 2008.

Global corporations generate cost savings in the range of 40-60 per cent by offshoring work to India, where Indian companies offer 20 per cent higher productivity than companies in other countries such as Canada, Australia and Phillipines, says a PricewaterhouseCooper official.

However, while it is easy to enter a BPO business by drawing on huge cash reserves and technology knowhow, it is more difficult to marry a high margin, higher cost ITES business with a low margin, low cost BPO business.

Initially MphasiS did try to keep these as separate entities. But it is now trying a more integrated approach, says Ramu, to achieve synergy in marketing.

Some say that it is tough to offer a single set of services because clients today can choose different services from different providers across the world and the integrated service approach has to offer value.

Also it is tough to manage an integrated IT-BPO business, which has two kinds of employees with IT consultants paid much more than call centre staff.