Size matters: Small is not always beautiful

BPOs that are unable to scale up are discovering that they cannot win repeat business.

The BPO sector appears set for major change, leading to consolidation. The smaller BPOs are going out of business, unable to grow. Most vulnerable among these are the single-client generic BPOs (voice-based units or call centres, including those that do back-end work for firms abroad).

"Their inability to scale up for want of quality and infrastructure will not allow them to get repeat business," says an industry source.

Generic BPOs that are 8,000-9,000-seaters are targets for acquisition. Cases in point are Msource, which was amalgamated into MphasiS (which itself has been taken over by EDS), and Daksh which has merged into IBM.

Earlier, Spectramind was taken over by Wipro and TransWorks was taken over by the Aditya Birla group. Only the top two or three BPOs seem safe from takeover threats.

Manpower availability has yet to become an issue for generic BPOs. As of now, there seems to be a continuous supply of people to man these BPOs.

However, this supply, until now mainly from cities, can dry up over time. Efforts to tap the semi-urban and rural markets to ease the shortage will take a year or two to produce reults.

Smaller BPOs also have a cost problem, as they have to pay more than the bigger players to attract talent. The higher salaries are a "reactionary process", says Indraneel Mukerjee, chairman and CEO, iProdigy (a consultng firm in the organisational development and learning space), as they are vulnerable to poaching from bigger firms.

The latter are continuously scaling up and looking for trained personnel; employees of smaller BPOs are easy pickings. People want to be associated with a well-known rather than a little-known brand and so appear ready to work for bigger firms, despite lower compensation.

"It is a chicken and egg situation. Firms won't make investments if they do not have clients and if there is no infrastructure they will not get clients. Hence, executive intent has to be clear and the right kind of investments need to be made," saysMukerjee. Quality has to be ensured and employee well being ensured to keep growing.

Says a BPO employee: "A few months ago when I joined the company, the board that displayed the client-list had eight names. I have seen the list grow shorter and shorter, and it is down to just three now. This has happened just in the last few months." The problems arise when the transition management of a firm loses focus.

Says Vivek Kulkarni, chairman and CEO of Brickwork and former Karnataka IT secretary: "Small BPOs face big risks while using intermediaries to secure business and in the process lose on margins. They also face problems relating to economies of scale." Their cost of manpower is about 20 per cent higher than that of big firms, adds Kulkarni.

Right from hiring to training and transportation, smaller BPOs face higher costs per head. This tells on their margins. For instance, small BPOs face transportation costs that are 50 per cent higher, since vehicles will have lower occupancy. A viable BPO will be a 5,000-8,000-seater, says Madan Padaki, founder and CEO of MeritTrac, a talent assessment firm.

Interestingly, niche BPOs and KPOs face no survival risks. There is still scope for them to grow, since they offer specialised services for which there is a steadily growing demand, without much price competition. So they can pay higher compensation and retain staff. While generic BPOs pay Rs 10,000-12,000 a month, a similar sized KPO pays Rs 15,000-19,000.

Industry insiders feel there is a need to organise small BPOs so that they are able to seek some concessions from the government, to survive.