The Tough Get Going
Voice & Data magazine, August 01, 2008

The BPO industry is adopting various technologies and strategies to fight the pressure caused by the US recession

The Indian Business Process Outsourcing industry is in the throes of another evolutionary change as the US recession finally begins to take its toll. The industry is looking at various strategies and technologies to survive and thrive amid growing pressure of the US recession.

US recession has its roots in the housing crisis, rising oil prices further adding to the crisis. The rise in unemployment in the US is yet another problem. The recession is forcing the US companies to slow down with many mortgage firms closing shop.

As a result, the outsourcing pie itself has come down. This is probably an important reason why the industry body Nasscom has scaled down the growth projection for the industry to 21-24% from 23-24%, as projected earlier. A study conducted by Nasscom and research firm Everest earlier this year estimates that between 2008 and 2012, the industry will see a CAGR of 28-30%, which could go to as high as 45-50% if supply constraints are eased.

“Client spending has become prudent, forcing us to re-look at the value we are adding to our clients. There is an increased accent on usage of productivity tools, maximizing utilization of resources, and overall improvement in operational efficiencies on projects. Clients continue to outsource, sometimes contracts have taken longer to close and projects have been delayed,” says Ramesh Gudalur, president, MphasiS BPO.

The industry is divided on the effect of recession. Most industry players believe that the recession is likely to help the Indian outsourcing industry in the long run. This is if the industry focuses on value additions. The US recession will also force the smaller companies to focus on differentiating factors. It is the next step in the evolution of BPOs, as the industry looks at ways and means to reduce operational costs and increase profit.

Mohit Rampal, country manager, India & Saarc, 3Com India says, “Clients are taking a longer time to close deals, and there is uncertainty regarding change in policies as a result of the presidential election.” “We have witnessed some measure of caution from our prospective customers to outsource, primarily because of the uncertainties in the economic policies that might come about after the presidential elections,” says Narasingarao Dataram, executive vice president, Strategic Operations, e4e Business Solutions.

The US recession is likely to help the outsourcing industry in the long term, but not without some effects in the short term. “The large players will continue to invest in technology, since they realize that the business is going to grow. There is already a shift toward more value adds, and they would want to cash in on that,” says Gaurav Gupta, principal country head (India), Everest Group.

“Hiring has slowed down. There is a delay in decision making as well among enterprises,” Swapan Baida, MD, India & Sri Lanka, Aastra telecom. While the BPO industry as a whole is thinking of strategies to combat the impact of the recession, legal process outsourcing firms are seeing an upsurge in demand. This is mainly because the credit crisis-related litigation jobs are getting outsourced to India.

Global Expansion
The most obvious strategy of the BPO players is to reduce the dependence on the American market, and to look for other markets. “The Indian BPO industry, which was heavily focused on the US market, has now begun to successfully farm projects out of newer markets in Europe and the Asia Pacific,” Gudalur of MphasiSs says.

The appreciating rupee provides a perfect platform for Indian companies to open centers in countries like Bulgaria, Poland, Romania and the Czech Republic in Europe, Mexico in Latin America, and China, Philippines and Vietnam in Asia. This is also led by the fact that most clients now demand global delivery.

“The US recession has not impacted the BPO industry negatively. This is because many companies are looking at cutting their spends by moving more processes off-shore. There are clear signs that the volume of work being outsourced/off-shored is on the rise including first time outsourcers. The volume, however, is getting distributed among several countries, including India, the Philippines, and Latin America. So, if a BPO provider is predominantly India-based, it may have some effect on them,” says PV Kanna, CEO of 24/7 Customer. “We changed our delivery structure to a global delivery model in 2008. This has helped us to ensure that we are able to serve our clients from several geographies and not be restricted to India,” he added.

The move to smaller countries is led by big players who want to move overseas for talent as well to service global customers. Most clients now require global delivery. 24/7 Customer is increasingly moving offshore and believes that around 40% of the company's delivery will be from outside India. According to Nasscom, Indian companies are present in seventy-seven cities in twenty-five countries.

“Client spending has become prudent, forcing us to relook at the value we are adding to our clients. Also, there is an increased accent on usage of productivity tools, maximize utilization of resources and overall improvement in operational efficiencies on projects”
Ramesh Gudalur, president
MphasiS BPO

“BPOs are very seriously looking at workforce management tools and are exceedingly moving away from excel sheets”
Dhananjay Ganjoo, VP, Enterprise
Nortel India

“There is an obvious movement toward `pay-per-use' model, which helps both the vendor and the client. The overseas clients are looking at more value addition with reduced cost and this model offers that”
Pankaj Garg, president of IKF's
Global Telecom Operations

Besides expansion in different countries, BPOs are also expanding in tier-2 cities in the country. Companies are fast moving to smaller towns to reduce operational costs, since the cost of real estate and manpower is much lower than the in metros.

“We have leveraged our India base by tapping the huge domestic market, where we see a high level of profitability and potential in the years to come. We will also explore the possibility of opening centers in tier-2 and -3 cities to reduce costs and boost the bottom line during a recessionary phase,” says Dataram of e4e.

For small BPOs dependent on the US, the going might be tough. Clients are increasingly looking at value additions and BPOs with commoditized services will be forced to differentiate their services from the run-of-the-mill or face extinction.

“In the short term, the US recession is impacting the BPO industry as new efforts are being put on hold. However, in the medium to long term, the recession will accelerate the growth in the BPO industry. The biggest challenge to growth is the increase in wages and real estate costs in India,” says Rinku Wadhwani, managing director, Cipher Dynamics.

Cipher has deferred some technology spend in line with growth. “We are looking less for new technologies and more for reducing the cost of existing technologies for our internal needs and the needs of our clients,” adds Wadhwani.

The recession in the US market is also forcing BPO companies to seriously look at the burgeoning domestic market. According to Nasscom, the domestic Indian outsourcing market was around $8.2 bn in FY 2007. BPO companies are mostly looking at two types of companies for the domestic market, global companies planning to enter the Indian segment and the big Indian companies. The main drivers for companies interested in the Indian space are: the booming Indian economy, global aspirations of the Indian firms, and the rupee appreciation.

Verticals spurring the domestic demand are telecommunications and financial services. Consumer goods and airlines along with travel, hospitality, retail, and media are likely to demonstrate a significant demand for outsourcing services in the country. Genpact is seriously considering the Indian market and believes that the contribution of the domestic market to its revenue will be substantial in the coming years. They are not the only ones. IBM Daksh, Firstsource Solutions and Intelenet Global Services are some other BPOs considering the Indian domestic market.

“We would be focusing on new markets as part of our strategy to mitigate the impact of the recession. There would be an increased concentration on the booming domestic Indian BPO market. We will also build domain-based expertise with a client-centric approach to our solutions,” says Gudalur of MphasiS.

Platform for Success
Platform BPO, which is increasingly finding favor with the industry, will go a long way in reducing the cost for the vendor since the same platform could be used to service other clients as well.

While the concept of Platform BPO has been around for some time, it is only now that it is picking up. The concept works especially in the bearish time since it reduces dependence on human capital. While investments are high in developing a platform for different verticals, the services are based on the number of transactions. The platform model is also known as Software-as-a-Service (SaaS) for BPO.

Infosys BPO believes that Platform BPO will constitute a substantial part of its revenue by the next financial year, and that the adoption of new models would be higher during the recession because of its flexible cost structure.

While earlier clients used to have their own technology platforms through which vendors used to deliver the services, this is no longer the case. Some clients started insisting that vendors have their own platform and deliver services through them.

TCS is another company betting big on Platform BPO with plans to add more platforms. The company is looking at areas such as retail and banking among other sectors and will be developing these new platforms on its own. Besides, the company is also looking at partnerships to develop platforms for other verticals. IGate is also planning to have presence in the platform BPO segment.

Earlier, clients preferred their own platform because of security issues because in platform BPOs the same infrastructure will be used for different clients. However, this has become popular in the current bearish market where companies are looking to reduce operational cost.

“A key ingredient of the 'integrated' offering will be the creation of platforms, especially for back-office and transaction processing services. Platform BPO will allow vendors to de-linearize growth through large-scale productivity payoffs and pay-per-use revenue models. Acquisitions of companies with proprietary platforms will also pick up, although acquiring cannot help vendors do away with investments in capabilities for customization and backward integration,” says 'BPO 2008: The Year Ahead', a report by ValueNotes Database. Service providers endorse this view as well.

“There is an obvious movement toward pay-per-use model, which helps both the vendor and the client. The overseas clients are looking at more value addition with reduced cost and this model offers that,” says Pankaj Garg, president of IKF's Global Telecom Operations. IKF is a telecom solution and managed telecom solutions provider.

“Customer requirements vary, and solutions are framed on customer's requirement. In order to provide optimal and cost effective solutions, we adopt open source and hosting model, by which we operate in the opex model rather on the captive model. Solutions like SaaS and hosted solutions will help because there is a much lower capital expenditure involved and fewer budgetary hurdles. Collaboration and remote meeting products will minimize travel costs,” says Dataram of e4e Business Solutions. e4e is a global business services company with services being offered in application and infrastructure management and transaction processing services for various verticals.

There is a trend toward bundling of deals, combining both operations and technology. Setting up a platform requires huge investment. In this scenario, the smaller BPOs will find the going tough.

The Vendor Perspective
Most technology vendors report that there is no decrease in the technology spends of BPO companies, and they haven't experienced any impact as a result of the US recession. “We have recorded a growth of 14.5% in H1 of this year, as compared to H1 last year. As far as the number of new customers is concerned, there has been an increase of 55% new enterprises in the first half of this year. So we don't see any major impact of the US recession,” says Rajeev Soni of Aspect Software.

Commenting on the trends in the technology spend of the BPOs, Soni says, “The industry is certainly moving toward more productivity-based solutions. There is also a clear preference for Unified Communications-based technology, which offers high productivity at lower TCO and uses the existing infrastructure as well. Basically, they (BPOs) are looking at technologies to further enhance productivity.”

There is a movement toward efficiency improvement projects, which will go a long way in reducing the operational cost in the big BPO companies. “There is definitely an increase in the purchase of technologies to record the conversations, but this is because it is now a law. BPOs are also very seriously looking at workforce management tools and are exceedingly moving away from excel sheets,” says Dhananjay Ganjoo, VP, Enterprise, Nortel India.

Vendors view the current US recession as an opportunity and believe that BPOs would be forced to spend on technology to survive. “Small BPOs, especially the ones focused on North America, would be affected strongly. But the large BPOs would be able to weather the storm, and, in fact, will continue to make large investments in technology. Large BPOs realize that it is an opportunity, and the thrust is on value-adds. So they would in fact increase their investment in technology,” says Gupta of Everest Group.

Cable&Wireless, which was recently awarded international long distance and national long distance licences by DoT, is focusing on providing full communications suite to the clients. “For instance, we're now providing full communications suite to Aviva, comprising seventy-two separate services, including voice telephony, data, local and WANs (IP-VPN and MPLS) and, international services. So the clients are looking at the full range,” says Sunanda Das, managing director, India Operations, Cable&Wireless. “We believe that US recession is a market opportunity for us,” adds Das.

“The US slowdown is both positive and negative for us. While earlier we used to focus on the snazziest products, now we work on customized solution on how to meet the client objective. This change in perspective has come because contact center is no longer a standalone application, but it has to be connected to all the application. For instance, in the Bharti deal, every time a call was transferred to an agent we would lose money. So, we developed the IVR in such a way that most calls would terminate at IVR itself,” says Ravi Chauhan, leader, Global Multimedia Applications, Nortel. The company is working with prominent BPOs like FirstSource, Spectramind and WNS.

Many believe that because of the lost business, especially in the mortgage segment, there is a lot of capacity lying unused. “The industry is under pressure to make full use of the available resources and is looking at technology to increase productivity,” says Garg of IKF.

Overall, the future seems bright and sunny for the BPO industry.