The BPO no one talks about

Nasscom doesn't track them and they're small beer compared with the big boys. But the number of BPO companies that cater to the burgeoning domestic market is climbing

Paging company Microwave Communications was finding the going tough, with its subscribers switching to cheap mobile phone services.

Indeed, the Delhi-based company's number of subscribers dramatically halved to only one lakh more than two years ago. Microwave Communications, it seemed, had no option but to close and call it a day.

That's when it hit upon a novel business opportunity. Two years ago, Microwave offered its 750-odd seater call centre backbone in over 10 cities to companies that wanted to outsource some of their business processes.

Microwave is in fine fettle now. Business process outsourcing (BPO) accounts for 50 per cent of its over Rs 40 crore turnover, with paging operations accounting for the rest. It now has over 100 clients, including Hindustan Lever, Hutchison Max, BSES and ICICI Bank.

Says Deepak Malhotra, chairman of Microwave Communications which is part of the HFCL group : "We expect to grow by at least 50 per cent this year and we are adding another 300 seats to cope with the growing demand. Without the BPO business we would have been in serious trouble."

Say hello to BPO companies that cater to the Indian market. They operate far from the arc lights. They don't hit the headlines like BPO companies Wipro Spectramind or eDaksh, both of which cater to the overseas market.

The National Association of Software and Service Companies (Nasscom) doesn't track them at all. What is more, with turnovers that range between Rs 30 crore and Rs 50 crore, they're small beer compared with the big BPO boys with their revenues of over Rs 300 crore.

But their numbers are burgeoning, as is the size of the market in which they operate. According to industry estimates, the domestic market could well be worth over 10 per cent of the international BPO market (around US $ 1.7 billion). That's a cool Rs 799 crore or so "� and it's growing smartly at an annual clip of 50 per cent.

The potential size of the business could be huge. BPO analysts say that Indian companies now outsource only 5-10 per cent of their business processes but this will go up to 40 per cent within the next three years.

According to the Bangalore-based Crossdomain, the BPO company that deals with human resource (HR) issues, there are 43 million employees on the provident fund rolls, but companies currently outsource only 1-2 per cent of their HR functions.

In marketing, companies spend over Rs 3,000 crore annually on below-the-line activities but only 25 per cent of this is outsourced to third party companies.

The Delhi-based Solutions Integrated expects this to rise rapidly to 50 per cent in the next two to three years. And in financial services, India has only 5-6 million credit card holders but this number is expected to climb to 100 million in five years "� something that once again offers large business opportunities to companies in the credit card processing business.

Says Ravi Datar, analyst at Gartner, the IT data tracking company: "The size of the market cannot be gauged as a large part of business processes is done in-house in India. But the rub off effect on Indian companies of the benefits of BPO is already showing. We expect rapid growth."

Datar is right "� the action is heating up. Crossdomain, set up by a group chartered accountants three years ago, is now negotiating with a plantation company which wants to outsource HR processes for a staggering 1,30,000 employees "� something that which will virtually double Crossdomain's size.

It has roped in ICICI Ventures as an investor. It offers Indian companies HR expertise, ranging from pay roll processing and tax planning processing to answering HR questions. The company processes data on over 1,50,000 employees of companies and banks such as Hindustan Lever, Sun Microsystem and Standard Chartered Bank.

Solutions Integrated (which hopes to hit a turnover of Rs 52 crore this year) is expanding its client portfolio. Solutions offers marketing expertise to clients, including making direct calls to customers, retail merchandising and even offering companies manpower.

Says Srikant Sastri, Solutions' managing director and co-founder and a former advertising executive: "We expect to grow by 50 per cent every year in the next three years. Earlier IT, telecom and the media constituted the bulk of the business. Today, others like fast moving consumer goods and consumer durables companies are willing to outsource and they constitute 30 per cent of our business."

BPO companies also underline the advantages of servicing the domestic market. Says ATS Services managing director Tushar Chopra: "Unlike in an international business, the political risks are low here, contracts are virtually permanent "� with international clients, they are for a short duration "� and competition is limited. The business mostly involves convincing companies to outsource what they are doing in house."

On their part, Indian companies are realising that there are compelling reasons to outsource. Reason one: BPO companies point out that the net savings to companies that outsource could range from anywhere between 15 per cent and 25 per cent.

But, says Crossdomain executive director L S Ram: "In companies which are 20-30 years old the cost savings can be as high as 40 per cent. Plus you have converted a fixed cost into a variable cost, which gives you the flexibility to upscale or downscale."

Reason two, as mobile phone service provider Hutchison India's Delhi boss Rajiv Sawhney, points out: "The strategy is to concentrate on your core business and outsource the routine tasks which they are better equipped to do."

Against this backdrop, it's no surprise that big financial investors have been quick to spot potential winners and have started investing in them. Quite some time ago, Citigroup Private Equity acquired a strategic stake in the Delhi-based ATS Services which offers financial services outsourcing expertise (data entry, document verification, risk verification).

Chopra, a former Citibank executive, aims at doubling ATS's Rs 10 crore turnover this year. ATS has already started making cash profits in the second year of operations and its clients are virtually doubling the number of seats they take every three months.

Meanwhile, BPO companies are leveraging their unique strengths. Paging companies, for instance, are using their single common toll free number facility across the country that customers can dial to attract clients in the inbound calls business.

Says Rajeev K Sehgal, CEO at Modi Telecom which has converted a part of its paging operations into a BPO: "With competition increasing, there is a need to improve customer service levels through direct contact. We are offering clients one number across the country which customers can easily call to redress their complaints. That is a big market."

Modi Telecom has over 20 clients, among them telecom, insurance and FMCG companies, and 80 per cent of its revenue comes from the inbound call business.

Finedge, the Delhi-based BPO call centre company, is going a step further "� it is educating clients, especially FMCG companies, on the advantages of a 24-hour customer service number.

Says Rakesh Seth, chief executive of Finedge, who got into the business after seeing the popularity of telemarketing and toll free customer service numbers while he worked for Nestle in London : "The margins in inbound calls are much better than in outbound calls. We are trying to convince clients that they spend five times more on acquiring a new customer than on retaining an old one, and in 49 out of 50 cases dissatisfied customers change brands."

For all this, however, BPO companies that focus on the home market face several challenges. Their net margins of around 20 per cent are virtually half of those of BPO outfits that concentrate on the foreign market. Then, the overseas BPO market is expected to grow by over 65 per cent a year, much faster than the domestic market.

They could also face some competition "� many BPO companies, including international majors, have begun eyeing the domestic market, especially with surplus capacities being built up.

At the moment, BPO companies that focus on overseas business stand to lose their export-oriented unit status and tax benefits if they use their infrastructure in the morning for domestic clients. But the government evidently is thinking of making the rule a bit more flexible.

But the BPO companies that focus on the home market are unfazed. They argue that working in the domestic arena offers them an edge. Says Chopra: "Because our margins are lower, we have been forced to be more efficient. So we are better poised to compete by offering lower prices than BPOs that cater to the international market."

Citing an example, Chopra says that his cost of data entry processing work is 30-50 per cent lower than that of the big boys that have a large infrastructure.

Others echo Chopra's point. Says Seth: "Their overhead costs and the low margins will always make them only marginal players in this business. We have a definite cost advantage."

That assessment finds some support from at least one BPO that focuses on the external market. Says Manish Modi, CEO of Datamatics which runs a BPO business: "I don't see any reason why companies like us will focus our attention on domestic business when the international market is so huge and we have just scratched the surface."

In fact, some of the BPOs whose business is primarily domestic are trying to sally forth into the external market. Crossdomain, for instance, expects 65 per cent of its revenues to come from international business in the next three years.

Says Ram: "We wanted to build the business in India first as we did not have the expertise and domain knowledge earlier. Now we are poised to move out also."

Solutions wants to get into the international arena in order to hedge its risks. It has already set up an office in Singapore and has started work on international projects.

Confirms Sastri: "We want to hedge our bets. We did not have the money initially to aggressively bid for international business. We are moving slowly and hope to get 15 per cent of our revenues next year from international business."

That may be an idea whose time has come. But what's unquestionable is that the domestic market will grow every year as more and more Indian companies realise the economic advantages of outsourcing "� and BPO companies that have a presence in this market could well be tomorrow's stars.