GROWTH OF BPO SECTOR AND ITS EFFECT ON INDIAN ECONOMY (RAMAN ROY TEAM) INTRODUCTION TO THE BUSINESS SCENARIO OF BPO Business process outsourcing (BPO) is the transmission of processes along with the associated operational activities and responsibilities. It refers to the increasing trend of relocating entire business functions to either self-owned or third-party service. It can be defined as the act of utilizing the services of a third party by a company in order to perform its back office operations . It has become a global necessity for the organization in order to retain their competitive advantage. Corporations globally including government departments are outsourcing their requirements to service provider who are located within the geography of nations or across the globe. India has emerged as the key outsourcing destination. This has been possible due to skilled manpower (who can converse well in English), IT infrastructure and cost arbitrage. However, advantages like cost arbitrage may no longer be valid. Therefore, there is a need to examine current issues in BPO industry. One of the key drivers of BPO industry is its PEOPLE. TRENDS IN BPO SECTOR As per Nasscom, BPO sector can be divided into 3 phases of growth-: Phase 1 (1996-2000): Pioneers- It was basically into captive model. The companies use to have their own call centre. Phase 2 (2000-2003): Rise of the third party vendors. Processes were outsourced to different vendors who used to work on behalf of the companies (clients). Phase 3 (2003-ongoing): Cautious followers are able to survive. Vendors who are able to survive cost reduction and provide good CSAT (customer satisfaction) are able to resist this cut throat competition. A BRIEF INTRODUCTION ABOUT RAMAN ROY Raman Roy is widely regarded as the “Father” and “Guru” of the Business Process Outsourcing industry in India. A Chartered Accountant based out of the NCR -Delhi region he is currently the C.E.O of his VC funded BPO Company Quattro. He is a pioneer three times over, having successfully led the captive BPO initiatives of: •
American Express – Started BPO business in India with American Express’s Japan and Asia Pacific support in 1984 in Delhi.
•
GE Capital - CEO of GE Capital International Services (GECIS)
•
Spectramind (now Wipro BPO) - The venture-funded Spectramind, with an enviable leadership team and a proven track record, was acquired by Wipro in July 2002.
OBJECTIVE OF THE STUDY 1) To find trends or development of BPO industry 2) To see the influence of foreign exchange in BPO sector 3) To find out the impact of recession on BPO sector 4) Determine the effect of interest rates 5) Revenue generation in BPO sector
METHODOLOGY ADOPTED FOR THE STUDY 1) Tabulating and estimating the revenue generated by Indian BPOs 2) Tabulating and estimating the revenue generated foreign companies who have outsourced their business in India 3) Comparative analysis of these two market players with plotting, pie charts and finding out the share of each market player in BPO industry 4) Finding out the kind of market which BPO sector is currently in and who are the key players and competitors 5) Tabulating the last five years data and analyse the revenue generated by all the leading market players in the industry 6) Drawing pie chart for the leading market player in terms of revenue for 2007-08 in order to determine the impact of recession High levels of absorption The rapid growth of Indian ITES-BPO in the last eighteen months has contributed to a continued mismatch between the demand and supply of experienced resources in the industry. Consequently employment generation and attrition levels remain high. Indian ITES-BPO added approximately 73,500 jobs in FY 2003-04 – with the number expected to double in the current fiscal. Even so, demand for experienced professionals outpaced their supply and attrition levels in the industry remain between 25-40 percent. Vendor maturity - managing people risk In spite of the relatively high people risk - attributed to the high turnover and attrition - Indian companies displayed increasing maturity as companies deployed innovative employee retention strategies. These included - employee recognition schemes, career planning services, educational guidance and assistance and a greater emphasis on improving the quality of work-life. As the companies rapidly ramp up scale, they are increasingly facing a shortage of mid-level executives to manage the growth. As a result there is tremendous pressure to pull-up the above average performers and prepare them for the next level of leadership. The opportunity to rise rapidly in this industry, on the basis of exhibited performance, is a great motivator for the industry workforce. INFLUENCE OF FOREIGN EXCHANGE ON BPO SECTOR The sharp appreciation of the rupee in relation to the dollar and, to a lesser extent, the euro, the pound and the yen has naturally affected the booming software exports and the BPO industry. The rupee could become even stronger. The BPO industries are reportedly operating on thin margins. An analysis of the recently released first quarter (April-June 2007) results of the top four information technology (IT) companies — Infosys, TCS, Wipro, and Satyam — is noteworthy for two reasons. First, it shows how these companies fared at a time the dollar lost more than 7 per cent in rupee terms. Secondly, it provides insights into how they might cope with a dearer rupee over the medium term. It needs to be stressed that the financial performance of these companies continues to be impressive, although it may not have matched the lofty standards the share market has routinely come to expect of them. These four companies account for more than 40 per cent of receipts from software exports that totalled over $29 billion in 2006-07. For the domestic stock markets the relevance of these companies can hardly be overstated. A company such as Infosys counts not only in an evaluation of other IT stocks but also in deciding the behaviour of the stock market as a whole. Unlike merchandise exporters who secured a partial relief by way of a Rs.1400 crore package of concessions, the IT and the ITES sectors will have to grapple with the consequences of a stronger rupee in a number of more nuanced, and often unique, ways.
IMPACT OF RECESSION ON BPO SECTOR Consequences of US recession on India job market Worst affected because of US recession will be the service industry of India. Under service industries come BPO, KPO, IT, ITeS etc. Service industry contributes about 52% to India's GDP growth. Now if that is going to get hurt then it will also hurt India's overall growth but very slightly. India is not going to face a major impact due to US recession. People may say that there is going to be a huge job loss due to recession. and will cite the example of TCS firing about 500 employees but these were employees who didnt perform and for cost cutting one have to reduce Non performing asset and that exactly what has been done. There is no threat to the skilled people. According to NASSCOM India will have a shortage of about 5 million skilled people in IT/ITeS. So there are lots of opportunities.75 per cent of its revenues come from the US. Low demand for services may force most Indian Fortune 500 companies to slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides companies from ITeS and BPO, automotive components will be affected. During a full recession, US companies in health care, financial services and all consumers demand driven firms are likely to cut down on their spending. Among other sectors, manufacturing and financial institutions are moderately vulnerable. If the service sector takes a serious hit, India may have to revise its GDP to about 8 to 8.5 per cent or even less. As per Raman Roy, Father of Indian BPO industry, recession is not a decrease in consumption. it is just that the rate of growth has changed. Recession actually provides the opportunity to create value for customers at different price points. According to Lokendra Tomar, senior vice-president, Integreon, a BPO firm, says recession is likely to have a dual impact on the outsourcing industry. Appreciating rupee along with poor performance of US companies will affect the bottom line of the outsourcing industry. Small BPOs, which are operating at a net margin of 7-8 per cent, will find it difficult to survive. According to Dharmakirti Joshi, director and principal economist of CRISIL, along and severe recession will seriously affect the portfolio and fixed investment flows. Corporates will also suffer from volatility in foreign exchange rates. The export sector will have to devise new strategies to enhance productivity. EFFECT OF INTEREST RATES ON BPO INDUSTRIE Because of the slowdown of Indian economy and BPO industries the interest rates have also gone down. Bank has reduced their interest rates due to lack of business. REVENUE GENERATION IN BPO SECTOR Revenue is generated on the basis of volume / seats a BPO has or is required for any process. For eg. if a process is outsourced to a vendor, client provides the data on the volume and a charge per unit is defined in the agreement. Then the vendor is paid on the basis of volume (no. of calls*price per call). The average revenue earned by BPO industry in 2007 in India was $ 13,811 million.
REVIEW OF ARTICLES 1) Outsourcing Chak De (Lift Them) or Chuck Them BPO India (By Ajay Ohri) The Business Process Outsourcing (BPO) Industry is one of the largest providers of employment in India. They employ an estimated half-a-million Indians, mostly in the 20-35 age groups, and these numbers are only increasing. Thus, the number of people who are directly affected by the Indian call centre industry is nearly 1.5 million Indians including dependents. For a vast majority of them, the BPO industry is considered a boon as it enables them to earn wages much more than was possible previously.
The industry is by large un-regulated compared to other industries and has grown rapidly unchecked over the few past years. It has had systematic issues, especially related to coping with human resource management, in times of rapid growth .Indeed most BPO Human resource personnel are either recruiting or trying to control attrition. A Few Issues The BPO industry is marked with some operational issues and they are enumerated as follows: Lack of Labor Guidelines: There is very little over-time pay and it, thus, leads to systematic overworking or understaffing of resources in both small and big BPOs. The understaffing is also responsible for the erratic quality or projects due to rush jobs. Labor regulation has been avoided because historically Indian regulations have been misused to offer hassles to industry rather than relief or solutions. Recently, a committee headed by Arjun Sengupta had submitted a draft of the Unorganized Sector Workers’ Bill to cover the workers in this sector. Lack of Health Guidelines: There can be medical counseling (without too much expenses) to cope with effects of prolonged night-shifts, or sitting in chairs, especially chronic back-aches, and personality counseling. This shall help especially when there are project requirements for extended over times. Employee Retrainabilty: There can be career counseling to help young employees plan a career in a still turbulent sector (Not everyone will be a team leader). There is no provision for re-training for workers being laid off and there is little chance of unemployment benefits in India. Retrenchment in this sector happens at a larger scale usually when companies lose a few big clients as in the recent mortgage sub prime crisis or even earlier when a big computer maker of American-origin shifted. The insecurity of being laid off leads to further attrition. In this scenario, companies that offer skill enhancement and re-training are likely to have a sustainable edge in human resource management Attrition - An urban legend: Despite the noise about attrition by industry players, most of the attrition is actually and subtly encouraged to keep operating margins down. This is because attrition enables middle managers to cut down costs temporarily by making other team members stretch, and replacing them by un-experienced younger members. It is also very easily explained as due to market conditions or poaching by other companies. The solution for having an industry wide database lacks sensitivity to individual personal rights and seems to point the finger almost entirely on employees for attrition. 2) Growth of BPO in Indian Economy (By Akinchan Buddhodev Sinha) In spite of tough competition, India has emerged as a global leader in the Business Process Outsourcing (BPO) industry. India has the advantage of having large English speaking and computer literate workforce, which are considered as important perquisites for the success of BPO sector. It explores the factors that have contributed to the success of BPO industry in India. Sound infrastructure is crucial for the success of any industry including BPO. The author throws light on the improvements achieved in the telecom, aviation, power, offices, hotels and road facilities that have facilitated the growth of the BPO industry. He examines the role played by the human resource in making India a BPO hub. The article also discusses the initiatives taken by the government including policy concessions, tax exemptions and removal of procedural hurdles to enable the growth of the BPO sector. In the last section the article throws light on the future of BPO industry in India, especially its contribution towards GDP, exports and employment generation. The author observes that BPO industry has witnessed transformation from back office service operations to handling core functions and is playing a significant role towards growth of the economy. The author emphasizes the need for continued efforts to maintain the lead in this industry.
3) BPO & KPO: Emerging Trends and Challenges (By Anandan Pillai & Meenu Bhatnagar)
During the post-reform period, India has emerged as an ideal destination for many multinational companies. Various demographic, economic, political, social and financial factors contributed towards India being considered as a favourable destination. The success of the BPOs in India led to a lot of criticism in western countries regarding loss of jobs and shift of economical benefits to India. In spite of these concerns, India has successfully moved towards the next value chain of Knowledge Process Outsourcing (KPO). It throws light on the emerging trends and opportunities in the KPO industry for India in the fields of engineering research and design, medical services, legal process outsourcing, pharmaceuticals, equity research, education and training. The article discusses the porter’s five forces in the context of the KPO industry namely, industry competitors, potential entrants, likely substitutes, buying power of employees and outsourcing entities. The authors believe that the KPO industry will be driven forward by domain knowledge structured and packaged to the needs of the client. India has to prepare itself to face the challenges posed by this sunrise industry. Finally, the article discusses the emerging challenges for the KPO industry in India.
4) India’s IT & BPO sector: What contribution to broader economic development(By Nirvikar Singh) Until now, India has barely participated in the manufacturing export boom that has long fuelled East Asia’s growth. It has, however, established itself as a leading exporter of software and information technology (IT) -enabled services to OECD markets. Software has been a leading growth sector over the past decade and expectations are that it can continue in this role for some time to come. Yet, the industry and its major participants face new challenges and potential constraints on realising that potential. There is also the question of how far the benefits of the software/IT sector’s growth are reaching the Indian masses as opposed to a small, educated elite. To explore the prospects for India’s software industry and its contribution to broad-based economic development, the OECD Development Centre, in co-operation with the State Government of TamilNadu and the Union Government of India, held an international conference on 11-12 November 2002 in Chennai, India. The conference completed the Centre’s 2001-2002 Programme of Work on “Globalising Technologies and Domestic Entrepreneurship in Developing Countries
5) Individualism– Collectivism as Predictors of Employee Attitudes Towards Union Membership: An Empirical Study Of Employees Of BPO Sector in India (By Dr. Santanu Sarkar) This article speaks about the which was Business Process Outsourcing (BPO) sector is thriving in India but before the ITes S market can really open out beyond the call centre model of business, sparks of trade unionism are now visible in the BPO and call centre industry in India. Nevertheless, there is a widely held view that important changes are occurring in the character of employee attitudes and it is argued that employees’ collectivist work orientations are in decline. This study investigates to what extent employee from BPO industries is going to get involved in unions. Drawing on data from survey of BPO industries in India, this paper explores the attitudes of employees towards union membership and identifies the determinants of this attitude. At first using Triandis (1995) framework of horizontal and vertical individualismcollectivism, the sample employee’s cultural orientation was measured. Next, consistent with some previous researches a measurement approach was employed that assessed individualism and collectivism as discrete measurements of organizational levels. Finally, test was done to detect whether the dimensions of I-C (HI, VIs, HC, and VC) and organizational individualism and collectivism (OI and OC) are valid determinants of employees’ attitude towards union membership. The influence of interaction of vertical and horizontal I-C with OI and OC on attitude towards union membership was also measured. Analysis indicated that HI and VI predicted attitude with greater significance compared to HC and VC; and OC significantly predicted the attitude while OI could not. The 1st order interaction of HI with OI and OC was able to make significant influence on attitude, and so is the interaction of VC with OI, whereas 2nd order interaction of VI with OI with OC was found to be able to make an influence on employees’ attitude. Identification of influence of 1st order and 2nd order interactions of variables can help organizations diagnose their employees’ culture and identify potential levers
for organizational change efforts in terms of true organizational culture change and employees’ perception changes,
6) The Impact of Business Process Outsourcing on Firm Performance and the Influence of Governance: A Long Term Study in the German Banking Industry (By Markus Fritsch & Kim Wüllenweber) This article says that does BPO pay off at the firm-level? Although there are several studies which analyze the potential benefits of BPO, there is a virtual absence of research papers on BPO outcomes. Based on an analysis of 137 Business process outsourcing (BPO) ventures at 254 German banks in a period between 1994 and 2005, we found that the outsourcer’s financial performance in terms of profitability and cost efficiency was increased significantly compared to industry peers without BPO. The increase stems not from workforce reductions but rather from increased employee productivity. Further, we show how BPO governance ensures BPO success: individually negotiated outsourcing contracts help to improve cost efficiency and profitability measures. Relational governance based on trust has only positive effects on profitability. As BPO offers unique potentials that are accompanied by distinctive risks, organizations are unprepared for their governance (Aron, Clemons et al. (2005); Mani, Barua and Whinston (2006)).When BPO benefits depend heavily on leveraging capabilities by aligning structures and resources between exchange parties, intensive cooperation is necessary ensure that they are attained. In the BPO context, a great degree of embeddedness is critical from a governance perspective. However, relational governance has not been seen as a substitute for contractual governance in embedded relationships (Heide (1994); Sobrero and Schrader (1998)). Contractual mechanisms legally define obligations and therefore complement relational governance. As governance can even comprise institutional arrangements that are close to hierarchy based governance, the degree of integrative governance (quasi-integration or equity holding) might provide organizations.
7) Talent management strategy of employee engagement in Indian BPO employees: key to retention(By Jyotsna Bhatnagar) This article speaks about talent management becoming an area of growing concern in the literature, the purpose of this paper is to investigate talent management and its relationship to levels of employee engagement using a mixed method research design. The first phase was a survey on a sample of 272 BPO/ITES employees, using Gallup q12 or Gallup Workplace Audit. Focus group interview discussion was based on reasons for attrition and the unique problems of employee engagement. In the second phase, one of the BPO organizations from the phase I sample was chosen at random and exit interview data was analyzed using factor analysis and content analysis.
8)
The impact of BPR/BPO strategy, internet-based technology
investment and BPR type on BPR performance (By Chao-Hsiung Lee, Shaio-Yan Huang, Chin-Shih Ou, Ling-Yao Chiu) Business Process Reengineering (BPR) has been a popular business improvement strategy over the past decade. We structured a cross-sectional analysis based on the 'Business Process Management' (BPM) survey. The ANOVA analysis is used to compare the BPR performance of 'Core BPR' with the BPR performance of 'Non-core BPR', and to compare the BPR performance of 'non-core BPR' with the BPR performance of 'Non-core BPO'. Besides, we investigated the impact of the BPR/BPO strategy, internet-based technology investment and the BPR type on the performance of implementing BPR by multiple regression analysis. It indicates that 'BPM' strategy is associated with the performance of BPR. Reengineering core or critical processes can derive better performance of BPR. Besides, the BPR performance of reengineering non-core or noncritical business processes differs significantly from that of outsourcing non-core or non-critical business processes. It is supported that the intensity of internet-based technology/systems investment is positively related to the performance of BPR.
9)
Offshore outsourcing An E-Commerce Reality: Opportunity
for Developing Countries ( By Purva Kansal) This article speaks about the attempt of developing countries who try and influence the rate of investment especially foreign private investment and there economy. These Recent development in information technology and internet have led to a simple solution to this- offshore outsourcing. Outsourcing as a strategy has been around for many years. Traditionally, companies used to outsource their activities to independent suppliers who were best but the choice was made from the suppliers located in the vicinity of the outsourcing company for easier coordination and control of the activities of the partner. However, due to development in e-commerce, distance has become a relative term. Exchange of information in a fraction of minute, irrespective of physical distance, but made it possible for companies to widen their horizons and look for independent suppliers in different nations.
10) Determinants and Impact of Foreign Institutional Investors: An Indian Perspective(By Puneet Jain) Growth of Indian economy is a bit shy of 9% mark. The latter is a rough guide which the foreign investors reckon with, before committing large sums of money for investment. India is one of the biggest and fastest growing developing economies and has attracted the most investor attention in recent years. After liberalization of the Indian economy in 1991, it has become one of the hotspots for global investment. Foreign investment (both Foreign Direct Investment and Foreign Institutional Investment) helped to boost India's economic growth and transformed several sectors of the Indian Industry into globally competitive entities India is also the world’s second fastest growing economy and boasts of highly competitive private companies, a booming stock market, and a modern, well-disciplined financial sector. The Indian stock markets witnessed unprecedented buoyancy during 2006-07 (Dalal Street,2006).Strong macro-economic fundamentals, positive investment climate and sound business outlook drove the bullish trend. The results show that the industry has recorded a robust growth during this time period and has created great opportunities for investment. Further, the research compares India with four other leading developing countries (Brazil, Russia, China and South Africa) during 2006-07 and concludes that India is one of the fastest rising stars among all these major emerging economies with its economic growth rate running at over 9% annually.(Economic Times, Feb 2007). In order to tap the true potential of the economy, the Indian Government and financial community need to be pro-active in promoting the country as a safe destination for foreign capital, while at the same time ensuring that the vital interests of the economy are not adversely affected.
11) Antecedents of Business Process Outsourcing in Manufacturing Plants( By Indranil R. Bardhan, Jonathan Whitaker, Sunil Mithas) This research explores the relationship between investments in information technology, manufacturing plant strategies and their impact on business process outsourcing (BPO) in Manufacturing plants. Using survey data from US manufacturing plants, we develop a theoretical framework for studying the antecedents of BPO at the plant level. Our analysis suggests that the level of Information technology (IT) investments, as a percentage of plant sales, are positively associated with the outsourcing of plant production activities. We also find that plants with higher levels of inhouse Software infrastructure is less likely to outsource plant support business processes. Furthermore, we find that plant manufacturing strategies and other plant-specific characteristics, such as production Volume and the degree of worker unionization, also have a significant impact on the types of business processes that are outsourced. Managerial and research implications of our research into the antecedents of BPO are summarized.
12) Modelling and Analysis of Indian Outsourcing Industry: A System Dynamics Approach (By Santanu Roy, Sunita Sharma and Vikrant Bhushan) India is emerging as one of the biggest markets for offshore services. Business process outsourcing (BPO) is the delegation of one or more information technology (IT) intensive business processes to an external provider that, in turn, owns, administrates and manages the selected processes based upon defined and measurable performance metrics. Offshore outsourcing is an umbrella term covering a range of IT and business services delivered to companies in developed countries by personnel based in developing countries. Though Indian outsourcing industry is growing, the attrition rate is also rising in this sector. So is the backlash against outsourcing. In order to survive and grow in this scenario, Indian firms must ensure that their services are not only cost-effective but also qualitatively superior. The present study probes into these issues. The study aims to explore the structure of Indian outsourcing industry through the methodology of system dynamics. A system dynamics model has been developed, validated and simulated over time to understand the trends that characterize this industrial segment. The implications of the results of the study are discussed.
MARKET LEADERS IN BPO SECTOR AS PER NASSCOM NASSCOM Announces BPO Companies Rankings for the year 2006-2007 and 2008-2009 on the basis of the revenues generated: 1. 2 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
Firstsource Solutions Genpact WNS Wipro BPO HCL BPO Services ICICI OneSource IBM Daksh Progeon Aegis BPO Services EXL Service Holdings 24/7 Customer Mphasis BPO Intelenet GlobalServices GTL TCS BPO
Steady growth was observed across the following key service categories: -Finance & Accounting -Customer Interaction -Human Resource Administration These three segments accounted for a estimated 89 per cent of the industry revenues in FY 2004-05. With steady demand observed across these key segments, it is estimated that the segment composition will not change significantly in the current fiscal (FY 2005-06). Key highlights of the Indian ITES-BPO sector: • • •
ITES-BPO employee base has grown to 415,000 in FY 06 from 316,000 in FY05 The domestic market for ITES-BPO also witnessed a significant increase in demand with the estimated value of work outsourced (by domestic clients) growing by over 55% to USD 860 million in FY 2005-06 Companies are increasingly focusing on security, innovation, operational
excellence and sustained total cost competitiveness
BPO MARKET ESTIMATES Revenue \ Year(In Billions)
2003-04
Domestic BPO
0.3
Overall BPO Revenue
3.4
INDIAN MARKET SIZE ESTIMATES OF BPO 1) Nasscom has estimated that the Indian ITES industry will gross over $5.7 billion by 2005 (based on a conservative year-on-year growth of 65 percent by Nasscom).
2) Nasscom-McKinsey: In 1999 they estimated by 2008 it will be $17 billion but it has been revised to $21-24 billion by 2008. Indian can capture 25% of global BPO offshore market. 3) Gartner: $1 billion (2002), $1.2 billion (2003). $13.8 billion by 2007. Gartner does not incorporate animation, medical or other (legal) transcription services, GIS, market research, data search, research and development, network consultancy and other non-business processes in its estimates on the ITES market size and potential. Revenue \ Year Offshore BPO Revenue
2002 1,322
Indian BPO Revenue 912 Total BPO Market
2003
2004
2005
2007
CAGR
1,825
3,017
6,439
12,563
24,230
78.91
1,205
1,961
3,928
7,412
13,811
69.35
157,033
173,070
9.45
110,167 121,687 131,171 143,090
CAGR in % 2002-07
2006
Figures in $ million Source: Gartner Dataquest (May 2003)
CONTRIBUTION OF BPO REVENUES IN INDIA • • •
Figures of 2007-08: $52 billion (growth of 28%). $40.4 b from exports, $11.6 domestic. Of the exports, IT grew by 28% to 23.1 b and BPO exports went up by 30% to $10.9 b Figures of 2008-09*: $62-64 billion Estimated figure of revenue generation for the year 2010*: 110 billion
GLOBAL BPO REVENUE ESTIMATES Global Market Size Estimates of BPO • • • • •
As per Gartner $712 billion in 2001 As per Gartner/Dataquest: $ 544 billion in 2004 As per Gartner: $173 billion in 2007, of which $24.23 billion would be outsourced to offshore contractors As per IDC: $300 billion in 2004 As per IDC: $1.2 trillion in 2006
BPO REVENUE NUMBERS BY CATEGORY VERTICALS India's BPO Market Estimates(In Billions)
Key Service Line
1999
HR Customer Care Payment Services Content Development
5.4
Administration
1.3
Finance
0.7
4.1 2.9 2.6
2001 3.54.0 8.08.5 3.03.5 2.53.0 1.52.0 2.53.0
20022003
20032004
20052006
0.45
0.75
1.65
8.3
12
15
2.3
4.3
6.2
5.1
5.5
6.7
3.25
5.4
8.4
3.25
5.4
8.4
REVENUE GROWTH OF BPO’S IN INDIA
BPO Growth in India 2002-2003 2003-2004 2004-2005
Revenue(In $billions)
28.4 36.6 50.95
The following sections highlight some of the new areas of opportunity (vertical markets and services) being addressed by Indian ITES-BPO companies: • •
•
BFSI is amongst the most mature verticals in terms of offshore ITES - BPO adoption. This segment is estimated to account for approximately 35-45 per cent of offshore ITES-BPO, and has the greatest service line depth. Pharmaceuticals and life sciences sector is a relatively new sector with rapidly growing ITITES spends and significantly under-penetrated offshore potential. According to recent reports, worldwide technology spends in the life sciences industry, which totaled USD 17 billion in 2004, is likely to exceed USD 49 billion by 2011, growing at a CAGR of 16.3 per cent. Legal services segment is a relatively newer segment that has witnessed recent interest and is believed to hold significant market potential to grow to USD 6 billion by 2010.
EFECT OF RECCESSION ON THE MARKET LEADERS IN BPO SECTOR In a year when outsourcing of application development and maintenance projects has slowed down, top customers such as Bank of America, JPMorgan and Citibank continue to send more back office projects to India, as they seek to lower their cost of operations by up to 40 percent. According to Nasscom, India’s back office outsourcing industry will grow at 18.4 percent this year to reach $14.8 billion. Outsourcing of IT services will clock a lower growth at around 13.5 percent this year, and could even decline to single digit growth if the situation does not improve.“The Indian BPO industry is likely to maintain double digit growth rate as most of the work done by them is ‘keeping the lights on’ or non-discretionary,” said Everest Group principal & country head Gaurav Gupta. The current recession is forcing companies from other verticals such as media, entertainment, healthcare, energy and utilities to consider outsourcing of back office work.“BPO business is largely annuity in nature where the contracts are for a longer term making it slightly more immune from economic recession,” said Intelenet EVP Sandeep Aggarwal says. “A CFO is constantly looking at gaining control on the cost structure,” said Gartner senior research analyst Arup Roy. According to a Gartner study released in April, 2009, Indian BPO providers have
proved to be stiff competition to western BPO providers, accounting for 5 percent of market revenue generated among the top 150 providers in 2008. Gartner expects this increase in revenue to be maintained, with the BPO market share of Indian vendors expected to nearly double by 2010.Meanwhile, Infosys BPO CEO Amitabh Chaudhry said that the BPO growth story is primarily driven by captive outsourcing. Captives have not stopped outsourcing, they have in fact increased their pie,”
SWOT ANALYSIS STRENGHTS OF BPO SECTOR The strengths of BPO sector are as follows: • •
• • • • • •
• • •
Education level doesn't matter so much Good work environment Many benefits like free food, coupons Time flexibility Attractive life style Transportation facility Handsome salary Plays major role in employment in India As per NASSCOM the BPO sector is expected to grow in a very fast rate in future. Encourages foreign investment Plays a very important role in the multiplier effect in the economy.
ITES- BPO(In USD Billion)
2002-03
2003-04
Exports
2.5
3.1
Domestic
0.2
0.8
Employment (no. of people '000's)
171
253
WEAKNESSES OF BPO SECTOR The weaknesses of BPO sector are as follows: • • •
•
•
Constraint on middle-management resources because of immaturity of the BPO industry. Government bureaucracy and poor physical infrastructure. Weak enforcement of legal system and prevalent corruption. Industry is moving towards mitigating data privacy and security concerns. However, there is an urgent need to tighten cyber laws and enforce data protection and privacy laws. Expanding on the importance of infrastructure, it would be difficult to shift BPO business to the second tier cities in India, as is being talked about now, unless physical access to them became easy. Foreign clients would prefer to jet in and jet out. The thought of driving a few hours over rutted roads after a long air journey from their country, just to reach the Indian vendor's facility puts them off. Instead of pursuing accretion of real estate and bodies, it would be more rewarding for Indian vendors to build on the existing capabilities to provide higher value added services/utilities. True, most customers expect cost savings from off shoring. That will not change dramatically but cost savings alone would not suffice — leading firms expect process expertise, project management experience, quality and access to rare skills as well! That's what continues to drive the current race to India. With the emergence of pure vertical plays in the off shoring space, Indian vendors should stop chasing "pure outsourcing" deals and begin to emulate a "business services'' model.
• •
•
Scope for small vendors will decrease. Future viability of small vendors in the BPO space. Due to what he termed "componentization,'' where domain expertise rather than body count is important, tremendous opportunities were emerging for small but specialized vendors. MNC BPO firms operating in India, such as Accenture and IBM Global Services, have an advantage over Indian BPO firms in that they have management relationships as well as global footprints that clients are beginning to demand. However, it is still a fair game if Indian vendors counteract with global expansion and leverage their past reputation as purveyors of quality and lower costs. However, Indian third party vendors have a long way to go when it comes to competing for business with the captive off shoring facilities in India of their foreign clients. This is because of the huge gap in domain expertise between the Indian vendor and the captive facility. Security concerns are more in BPO sector. Security breaches in Indian BPO firms are a serious concern for their clients, though enlightened firms there realize that security breaches can and do happen in the West as well. Indian firms have not helped their case with underinvestment in HR, particularly background check of potential employees and governance processes, What could worry the client firms more is the reaction from their customers. Victims of personal data security breaches are showing their displeasure by terminating relationships with the companies that maintained their data, according to a new national survey in the U.S., sponsored by New York City law firm White & Case. Even more disconcerting, the survey also reveals that 5 per cent of Americans have hired lawyers upon learning that their personal information may have been compromised.
OPPORTUNITIES IN BPO SECTOR The Opportunities In BPO Sector Are As Follows: Worldwide spending on Business Process Outsourcing (ITES-BPO) services totaled approximately US$ 712 billion in 2001. IDC projects that by 2006, the potential ITES-BPO market may increase to US$ 1.2 trillion, with an overall compounded annual growth rate (CAGR) of 11 percent. While traditionally the key driver for ITES-BPO activities has been cost reduction, companies are increasing viewing these services as strategic and essential elements for organic growth. The Indian ITES-BPO Scenario According to NASSCOM, the Indian ITES-BPO industry registered a growth of 59% and clocked export revenues of Rs. 11,300 crores (US$ 2.3 billion) up from Rs. 7,100 crores (US$ 1.5 billion) in 2005-06. The industry is projected to register a growth of 54% to clock revenues of US$ 3.6 billion in 2007-08. India is a popular choice for customers seeking outsourced services because it is able to offer a 24X7 services and reduction in turnaround times by leveraging time zone differences. In certain Remote Services categories, Indian players have achieved high productivity levels with the emergence of BPO vendors with deep process skills and the ability to offer integrated outsourcing solutions. At the core of India’s great attraction as the outsourcing destination is its unbeatable value proposition – PQR (Productivity, Quality and Rate) factor. India has emerged as the most preferred destination for ITES & BPO with revenues growing well above industry average at a rate of 59% this year contributing about 25% to the total software and service exports. •
Captive ITES-BPO players have almost doubled their share, growing by a phenomenal 90%. Captive units grew from US$ 710 million to US$ 1350 million
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Third Party Vendors have increased their presence from US$ 769 million in 2006-07 to US$ 985 million
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Absolute growth in the ITES-BPO segment increased from US$ 549 million in 2007-08 to US$ 856 million
Key Service Lines
2001(In Billions)
2008(In Billions)
(2001-2008 ) CAGR %
Human Resources Logistics Purchasing Engineering/R&D Marketing Sales FOM Administration Legal Finance/Accounting TOTAL Source: IDC
7,373 140,700 5,288 69,798 76,666 107,412 120,635 36,644 111,273 36,356 712,145
25,555 308,651 12,185 123,882 108,340 165,736 172,329 53,396 163,962 64,872 1,198,908
ITES-BPO Growth
28.2 17 18.2 12.2 7.2 9.1 7.4 7.8 8.1 12.3 11
Export by Vendor Type (US$M)
Third Party Vendors Captive Unit
20052006 530 400
20062007 769 710
20072008 985 1350
The key trends witnessed in the Indian ITES-BPO market are: •
Significant increase in capacity: The quantum of new investment in the industry increased
by around US$ 300 million to reach US$ 800 million by the end of 2002. The increase in capacity was equally divided between captive centers (subsidiaries of multinationals ñ such as HSBC, Standard Chartered, AOL, Dell, Hewlett Packard) and Indian third party providers such as Daksh, Wipro Spectramind, EXL, MsourcE, among others.
1. Continued focus on Customer Care and Administration: According to preliminary estimates made by NASSCOM, customer care and administration were the fastest growing segments in the ITES-BPO space, with a projected growth of over 75 percent in 2002- 03. The high growth rate can be attributed to the presence of experienced third party vendors (who scaled up operations) and entry of captive players. In addition, the availability of a fairly large talent pool also attracted investors and customers alike to this segment.
2. Continued dominance of US and UK markets: NASSCOM’s preliminary estimates suggest that the English speaking geographies dominated export revenues of the Indian ITES industry accounting for over 90 percent of the industry total.
3. Enormous interest by potential customers: Not only did existing customers scale up business (in terms of number of processes offshore or seats utilized or expansion by captives); the sheer cost and productivity gains realized by them generated tremendous interest among almost every significant Fortune 100 company to explore offshore ITES-BPO from India.
4. Rapid maturity of third party vendors: Most leading third party vendors further consolidated their leadership position by investing in infrastructure, quality standards, employee training and re-skilling, expanding service line/process offerings, investing in marketing front-ends and personnel with domain and process skills.
5. Increased presence of IT services companies: A large number of IT service companies expanded their offerings to include ITES-BPO by creating their own capacities (Infosys, Patni, Satyam, HCL, Cognizant, and Syntel) or by acquiring ITES-BPO players (Wipro deal with Spectramind).
6. Emergence of several under-the-radar opportunities: The industry expanded its radar of opportunities to new service lines such as package software implementation, System Integration, R&D engineering and new management as new horizon for robust growth.
7. Geographical diversification of capacity: A number of players set up additional centers in new cities drawn by attractive incentives offered by many state governments, and in an attempt to diversify risk of running a single location center and to take advantage of lower labor costs in other cities. The average no. of employees in the ITES-BPO sector is 190 but the range is huge and varies from as low as 4 people to as many as 16,000 people. The encouraging trend in this area is the presence of MNC Captive units that account for 45% of the industry and are a vital determinant of the long term competitiveness of India in this sector.
8. Changes in ownership structure: Two MNCs have divested part of their stake in their captive units, British Airways in WNS and Conseco in EXL. They have capitalized on the market value of their firm by bringing in a strategic investor(s). The unit then competes with third party vendors, claiming domain expertise as a differentiator while targeting new customers. Venture capital funds such as Oakhill, General Atlantic Partners, West bridge Capital, Warburg Pincus, among others are reported to have invested close to US$ 300 million in ITES-BPO companies in 2002. M&A transactions are on the rise and some IT service companies choosing to buy rather than build in order to rapidly scale up.
9. Changing customer behavior: A number of large customers prefer to outsource business to multiple vendors and also set up a captive unit on their own. In some cases, they are asking the vendor to build a center on a build-operate-transfer model, in which case the vendor would grow the center to a certain size and then hand it over to the customer at the end of the pre-determined period THREATS IN BPO SECTOR The Threats In BPO Sector Are As Follows: India which has been an unrivalled force in the BPO domain will face stiff global competition. Russia, China, Australia, South Africa, New Zealand, Mauritius, Fiji, Malaysia, Philippines and Ghana are the countries that top the list as potential threats to the Indian BPO market. Where the Philippines focuses on voice services, Malaysia has zeroed in on transaction processing and South Africa on other BPO operations. Certain countries are even relying heavily on their proximity towards the US. Despite the boom and support that BPO sector has fetched, there are certain grass-root level setbacks too. These setbacks are strongly propagated to be threats resulting into backlash to the BPO activity in India. The setbacks are as follows: • • • • •
Lack of maturity in service line, increasing competition among e-logistics providers and management resistance are the main deterrents to the outsourcing in the logistics sector. Discretionary cuts in budgets, low growth due to industry maturity and decentralized nature of facilities management are the main deterrents to the outsourcing in the facility & operations management sector. Privacy concerns and technical nature of subject matter are the main deterrents to the outsourcing of legal services. If all above is not enough, the companies which are outsourcing non-core processes from third party service providers are literally placing their fate in the hands of another company, which appears to be a normal setback of BPO at the outset. Some companies which jumped BPO market in India are now looking to sell their assets being unable to scale operations up to the required level. As per the NASSCOM report, recently there were about 200 Indian companies offering BPO and related services looking for buyers.
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Companies rush into BPO market without understanding the kind of operational and marketing issues they would have to cope with, and the kind of gestation periods to be expected before profits can start flowing in consistently. As a result, many facilities that were set up are lying vacant, and the failed enterprises have to either close down or get acquired, as they have neither funds nor clients. The rapid growth of India’s ITES-BPO industry has not been taken too well in developed countries from where jobs are coming to India. Recently, in the US, bills have been tabled in five states namely; New Jersey, Maryland, Connecticut, Washington and Missouri that sought to ban the transfer of state data processing contracts to developing nations. In the UK, three of the country’s biggest trade unions have come together to fight the loss of jobs to India.
One of the factors spurring BPO expansion in India is the healthy competition between cities. The top five cities are Chennai, Bangalore, Delhi, Mumbai and Kolkata, with Bangalore targeting the IT market, Chennai and Kolkata focusing on accounts and Delhi and Mumbai taking up follow-up of payments and high-end job analysis, respectively. Quite understandably, Bangalore leads the pack, with its professional approach to attracting and retaining clients. These threats can be avoided to make the India number one in the Call Center Industry. Today’s India is a land of huge opportunities for global investors. The reforms process that the nation embraced a decade ago is now paying off. India’s economy is sizzling and is one of the fastest growing in the world. It has also seen a surge in foreign investment lately.
CONCLUSION BPO Sector is one of the fastest growing sectors in India which has got lot of growth opportunities in future. As per NASSCOM BPO sector has got maximum growth potential.
REFERANCES Links used for the study http://news.indiamart.com/news-analysis/rupee-impact-and-the-16346.html http://education.indiatimes.com/educationTimes/getArticleDetail.do? sectionid=26&pageno=1&articleid=2009011920090116150247694324ffb5b&image=NA http://www.fibre2fashion.com/industry-article/9/877/impact-of-recession-in-american-economy-onindia3.as http://www.books.iupindia.org/IB11020000009.html http://www.oecd.org/dataoecd/59/12/2503442.pdF http://www.nasscom.org/ http://callcenterservices.today.com/2008/04/11/threats-to-the-indian-bpo-sector/ http://www.hindu.com/biz/2005/10/17/stories/2005101700061700.htm http://www.bpoindia.org/
