POs to tap local market despite low margins

The domestic market for business process outsourcing (BPO) -- which is growing at a compound annual growth rate (CAGR) of 50 per cent -- is catching the attention of BPO companies that have traditionally catered to the international market.

Gartner predicts the domestic market -- expected to reach $1.2 billion (Rs 4,920 crore) by end 2007, according to Nasscom -- will be driven by the telecom, banking, financial services and insurance (BFSI), government and retail sectors. Currently, there are just about 3-4 major players that cater to this market. But the number is bound to increase. For instance, Firstsource -- with 96 per cent of revenues being contributed by US and UK geographies --  is now looking at increasing its Indian revenue shares from a mere 4 per cent to 10 per cent in the coming financial year. Similarly EXL Services, is working on a strategy to increase its focus in the domestic market.

Arup Roy, senior research analyst-IT services, Gartner, opines the Indian domestic market is yet to mature to the concept of outsourcing services. "Indian companies till now have been outsourcing the IT component of their operations but transactions being outsourced are at a nascent stage," he says. "Many companies are realising the potential of the domestic BPO market. Entering into the domestic market requires experience in servicing industry verticals and proven expertise in delivering impact and efficiencies for customers," says Radhika Balasubramanian, COO, Sparsh BPO Services. Sparsh has nine contact centres across six locations -- Mumbai, Pune, Kolkata, Gurgaon, Bangalore and Chennai. It currently employs over 8,000 people & operates over 6,000 seats across all the locations.

The deterring factor among the players to cater to the domestic market is low margins. They also have to forgo tax exemptions that otherwise are available when catering to the international market. Gartner notes that catering to international markets give companies margin of at least 30 per cent whereas back home it is 8-10 per cent.

But not all agree. "Our domestic margins are around 13-15 per cent and the international margins are 18-20 per cent," says Aditya Gupta, president InfoVision. However, he believes that unlike international operations, the profits are not tax free. InfoVision, the Rs 200 crore company has 40 domestic and 10 international customers contributing in the ratio of 70:30 respectively. The company has set a revenue target of Rs 1,000 crore by 2010. "Companies have got used to earning operating margins (EBITDA) in the range of 18-20 per cent plus there are additional attractions which the domestic market does not have," he added. The company's focus in the coming years will be public sector units (PSU), government and BFSI.

Ananda Mukherji, MD and CEO, Firstsource, says BPO operations in the domestic market are almost equal or in fact better than the international market. Rather he believes the deal sizes are almost similar to the international market. Though the Indian BPO segment is predominantly voice-based, the newer entrants are focusing on services that are platform-based. Raju Venkataraman, president and COO, Firstsource said; "We realise there is a huge demand for services in the domestic market. Moving forward we will be looking at providing solutions that are platform based and more on the processing side." Firstsource already serves ICICI Bank, ICICI Prudential and Hutch. It recently opened four centres in Vijaywada, Kochi, Hubli and Trichy to provide BPO services to Hutch.

But there are skeptics too who believe Indian companies are still "testing models". An analyst, who did not wish to be named, says; "Large PSU organisations, especially banks are looking at shared service centres. The reason being if the cost arbitrage is not a criterion they do not see the advantage of third party outsourcing."