That’s what BPOs see in this global financial storm. Is this sector poised to come of age, and out of big brother IT’s shadow?
HTMT Global Solutions, the business process outsourcing (BPO) and call centre services outfit of the diversified Hinduja Group, is believed to have deferred its annual day party, which usually takes place in December. Some others in this industry have asked their employees to travel by train, or bus, instead of flying. Still others have halved the size of the cups in which employees get free tea and coffee, and are ferrying seven in cabs meant to carry five. Genpact and vCustomer are believed to be serving local water brands, instead of the global brands served earlier.
So what is the big deal, you might ask. Aren’t these the usual stories that emerge in times of slowdown, such as the current one? Well, yes, they are, but they are unusual if you look at the context, which is large companies, in manufacturing as well as services, resorting to large-scale layoffs and/or production cuts.
In comparison, the stories in the first paragraph here may be prescribed bedtime reading for children. More so because they emanate from the BPO sector, a fledgling one whose life depends on business from overseas, and which could have been the first to wilt in the current global turmoil. On the contrary, BPOs seem to be deriving positives.
Not so poor cousin
BPOs have for long been looked upon as poor cousins to information technology companies. BPO employees are labeled “call centre” workers, capable only of low-end, data-entry work — a Bholanath who had to masquerade as Billy and employ a fake foreign accent to please customers of clients who shouldn’t find out where their call was being taken.
Perhaps the current crisis may mark the coming-of-age of India’s BPO sector, which remains sanguine even as big brother, the IT sector, is facing the heat. BPOs, on the other hand, are talking of new avenues opening up for them as companies look to cut cost and, as part of the exercise, outsource more of their work.
Karthik Sarma, chief people officer with WNS Global Services, points out that BPOs are different from IT companies in many ways. Any economic downturn leads to cuts in IT spending, which is discretionary. But such cuts don’t affect the BPO industry. A majority of its revenue is connected to annuity-based long-term contracts. “BPOs still are into basic transaction work like claims processes, and so on,” says Sudin Apte, senior analyst with research house Forrester.
Software body Nasscom’s figures indicate that the BPO sector recorded revenue growth of 31.6 per cent, amounting to $12.5 billion in 2007-08, of which export revenue accounted for over 87 per cent. IT companies grew at 28 per cent. Consequently, the BPO sector’s share of the country’s services sector has increased to 2.2 per cent of India’s gross domestic product.
A Valuenotes Database study says India’s BPO sector will earn Rs 22,800 crore in revenues in 2011-12, three times more than the Rs 6,900 crore in 2007-08.
Already, as KPMG executive-director Rajesh Jain points out, the size of BPO contracts has increased to between $5 million and $50 million. A year ago, many of the deals used to be worth less than a million dollars.
“We are well positioned, since our work is non-discretionary. For instance, though the BFSI sector accounts for around 43 per cent of our revenues, we have not revised our guidance for the coming quarter. While new business will be affected, the flip side is that new companies will open up new doors. The telling factor is that the BPO sector remains the fastest-growing industry in a recession,” says Pramod Bhasin, president and CEO of Genpact, India’s largest BPO outfit.
BFSI is the abbreviated name for banking, financial services, and insurance — the areas most affected in the current global crisis.
“It is indeed a bad situation, demand has certainly dropped. There are no buyers. Companies abroad are faced with shrinking top- and bottom-lines,” says Sandeep Aggarwal, executive vice-president, sales, solution & transition, Intelenet Global Services.
Not so bad for him, though. “This is exactly what offers BPOs an opportunity to manage costs on behalf of those firms. We are seeing a distinct ramping up of offshoring while the onsite business is reducing,” he says.
In expansion mode
At a time when increment letters have given way to pink slips, BPOs are increasing their headcount, attributing their optimism to business ramp-ups (as opposed to the sentiment IT firms are reflecting) over the last couple of months and an increased acceptability of offshore work.
Valuenotes says Indian BPO firms would collectively employ 540,000 in four years, nearly four times the current number of 140,000. A Dun & Bradstreet India study says the BPO segment continues to hire in large numbers. The profiled companies registered a 23 per cent increase in their combined employees’ base in 2007-08.
Besides, the current crisis has given BPOs what they had been praying for: A sharp fall in attrition. From a heart-wrenching 30-40 per cent, it is down to a more manageable 20-30 per cent. For Satyam BPO, month-on-month attrition has come down by 15 per cent. Genpact reported a drop in attrition rate for the nine months ended September 30 this year to 26 per cent from 30 per cent in 2007. In case of 24x7 Customer, the drop in attrition has been 10 percentage points this month. This is encouraging them to rationalise the “boom-time bloated salaries”.
BPO firms have also begun to train their sights on the domestic market. Leading lights like Intelenet, Firstsource, HTMT, and Genpact are increasing their India business by eyeing greater revenue and opening more centres in the country. Firstsource sometime ago said it was increasing India’s share in its revenue from 4 per cent to 10 per cent.
Bhasin of Genpact says the company’s organic growth plans entail expansion and rejuvenation of its global and India business plans. The company is keen on acquisitions in Indian metros.
For Intelenet, the domestic market accounts for 25 per cent of revenues. The company plans to increase this by opening more facilities in Tier II and III cities, especially in Punjab, where it already has a centre in Mohali. Essar Group’s Aegis BPO, which opened a centre in Lucknow this month, has set aside $100 million (Rs 480 crore) for expansion in India and, as the company follows a linear business model, is contemplating a headcount increase of 25-30 per cent. HTMT plans to expand in Nashik, Kochi and Tamil Nadu.
The D&B study asserts that India is expected to remain the prime outsourcing destination because it is extremely competitive when it comes to salary costs, and also because Indian outsourcing firms have matured into truly global companies that can offer best-in-class services at very competitive prices. India has the second-lowest BPO salary base of $7,500-$8,500, just a little above China’s $7,000-$8,000. The Philippines, on the other hand, has an average salary of $9,000-10,000. Besides, India has the advantage of a large and ever-swelling pool of technical graduates. It is also one of the largest producers of English-speaking graduates — including engineers and management graduates. A high number of such graduates means that companies can offer higher-value-added services to clients.
Growth drivers
The growth drivers will be value-added services and opportunities in newer geographies. Consequently, various research & analysis, HR and translation services are expected to be the growing service lines for the next two years. BFSI, healthcare and telecom are the most promising verticals.
Amid increasing competition and margin pressure, judgment-based work (broadly categorised as higher-end and value-added) provides outsourcing firms the opportunity to offer services at much higher price points. In terms of services offered, traditional BPO services continue to be the most popular service line, with a 53.9 per cent share of the total range of services.
Opportunities do exist in the form of emerging verticals such as knowledge process outsourcing, legal process outsourcing, and engineering process outsourcing — all mutli-million dollar addressable markets.
The vertical composition is changing. Historically, the highest proportion of services offered was to the BFSI vertical. Its share of the overall pie of services fell to 28 per cent in 2007-08 from 31 per cent in the previous year. Similarly, the share of the healthcare vertical decreased from 12 per cent to 11 per cent. On the other hand, the retail & consumer vertical’s share remained stable at 11 per cent.
The verticals that grew the most during the year were aerospace, government and defence, services and logistics, and telecom.
“While the BPO industry is bound to be impacted by the financial crisis, firms have taken measures to mitigate some of that risk. The industry has started providing services to a wider set of verticals, thus reducing their exposure to any one vertical,” says Manoj Vaish, Dun & Bradstreet India’s president & CEO.
Diversification into related areas of outsourcing is an excellent opportunity to counter the threats to both top- and bottom-lines, notes Patrick O’Brien, senior BPO analyst at Datamonitor.
Geographically speaking, BPOs are moving to Tier II cities and rural areas to cut costs. Rural BPOs are the next revolution waiting to happen, according to Ashank Desai, chairman of Mastek. The low cost of operations and considerably lower employee attrition rate are the two key factors that have encouraged many BPO organisations to extend their operations in small towns and villages.
Fighting IT
A threat however looms. BPOs are becoming wary of losing business to big Indian and global IT companies that have a larger global footprint and offer clients end-to-end solutions including BPO services.
Synergies in the two businesses enable IT companies to use common infrastructure and resources to provide BPO services to clients. Clients get the services at lower costs by cutting overheads.
However, although the expansion of IT companies into the BPO business is a concern for BPOs, they take relief in that fact that IT companies can expand on the transaction side of the business, not on the customer services side. To counter the threat, analysts say BPOs must assume leadership in niche segments, such as, technical support or retail operations.
The process, it appears, has already begun. Genpact, for instance, already has a centre in Gautemala and is planning to expand its footprint to Africa by opening a 300-500 seat facility in Morocco in the next quarter. This can be used to reduce risk.
“BPOs can offer domain knowledge and expertise that IT companies can’t,” says Rohit Kapoor, president and CEO of Nasdaq-listed EXL ServiceHoldings. His company is working with insurance clients, but has also added clients in the utilities vertical this quarter. (With Shivani Shinde & Kirtika Suneja)
| Cost-cutting: Striking a delicate balance The economic slowdown has affected companies in various ways and they are looking to cut costs at every opportunity. Pramod Bhasin of Genpact, India’s largest BPO, says “cutting fat is imminent, but should be done with sensitivity”. |
One cost cutting measure being adopted by companies is canceling year-end parties. HTMT Global Solutions of the diversified Hinduja Group is believed to have deferred its annual day party, which usually takes place in December, though others like Quatrro and eClerx are going ahead with theirs to boost employee morale.
The expectation level (from performance) is very high, and performance is being monitored frequently, according to employees who prefer anonymity. Travel expenses have been cut. Employees are being asked to travel by train, or bus, instead of flying.
Some BPO outfits have halved the size of the cups in which employees get free tea and coffee, and are ferrying seven in cabs meant to carry five. Genpact and vCustomer are believed to be serving local water brands, instead of the global brands served earlier.
Employees are being encouraged to take leave, as there are not enough projects, and the insecurity level is high.
| Sunny side up BPOs are talking of new avenues opening up for them as companies look to cut cost and outsource more of their work. An economic downturn leads to cuts in IT spending, which is discretionary. But such cuts don’t affect the BPO industry, a majority of whose revenue is connected to annuity-based long-term contracts and which are into basic transaction work. Indian BPO firms would collectively employ 540,000 in four years, nearly four times the current number of 140,000. |
The current crisis has given BPOs what they had been praying for: A sharp fall in attrition. This is encouraging them to rationalise the “boom-time bloated salaries”.
BPO firms have also begun to train their sights on the domestic market.
India is expected to remain the prime outsourcing destination because it is extremely competitive when it comes to salary costs, and also because Indian outsourcing firms have matured into truly global companies that can offer best-in-class services at very competitive prices.
Judgment-based work (higher-end, value-added) provides outsourcing firms the opportunity to offer services at much higher price points.
Opportunities exist in the form of emerging verticals – KPO, LPO, EPO – all mutli-million dollar addressable markets.
The industry has started providing services to a wider set of verticals, reducing its exposure to any one vertical.
