Despite the backlash from the west, the Indian BPO industry is booming. Some may flourish more than others


It’s no secret that a furore has broken out in the US about jobs being outsourced to countries like India. It’s also widely known that India’s business process outsourcing business is flourishing. The big question, however, is: where does BPO go from here? What sort of BPO companies will gain from future trends?

According to Forrester Research, the core BPO market worldwide will be worth $145 billion by 2008. And Indian BPO companies will benefit from this. The market, according to Forrester, is likely to fragment into four segments: simple bulk transactions, such as credit card or stock trade processing (estimated value: $58 billion in 2008); shared services like finance and administration, indirect procurement and humen resources ($57 billion); high-volume vertical processes, including policy administration, claims and loan process applications ($6 billion); and niche vertical applications, such as environmental data reporting and chemical process control monitoring ($24 billion).
Logically, Indian BPOs operating in these segments will gain, though no one’s making any precise predictions as yet.

Despite intended legislation in the US and union backlashes in Britain, the Indian BPO juggernaut has rolled on. And the positives of outsourcing and offshoring work to destination India far outnumber the downsides, so much so that Indian IT industry’s poster boy Kiran Karnik is combative enough now to say that offshoring to India is mainstream and it is up to American and European companies to combat what their state governments and labour unions throw at them. 

Not surprisingly, therefore, the BPO trickle is slowly turning into a flood. More than Indian companies setting up operations, it is the multinationals that are coming in droves.

The BPO phenomenon has largely been a story scripted, directed and acted upon by ‘insourcing companies’ - multinationals that have set up their own captive call centres. Admits Karnik: "The BPO business is currently driven very substantially by captive units and MNCs.” Adds R Mohan, president and CEO, IT division, HTMT Ltd: “ Ideally, companies should outsource their non-core work to third party service providers (TPSPs), while retaining critical core activities within a captive unit, but that is still far away.” 

He claims that captive centres continue to be set up with an overall strategy to keep all core and non-core activities within. Some captive centres and traditional outsourcers are likely to enter the third party services market. General Electric is an example of this. “As these expand, it is conceivable that these BPO captive centers will be spun off as independent mega-suppliers,” Mohan adds.

So is the BPO industry an outsourcing opportunity after all? Or is it more amenable to insourcing? The answer to it is not clear yet, but what is clear is that while IT services outsourcing and offshoring is okay with MNCs, when it comes to BPO, it is a different story. 

In the fast growing banking, financial services and insurance segment, MNCs like GE, American Express, Standard Chartered, ANZ Grindlays, HSBC, ABN Amro, Fidelity and the World Bank have all been outsourcing their IT requirements to companies like Tata Consultancy Services (TCS), Wipro, Infosys, Cognizant and Satyam. But they have chosen to do their BPO themselves. And there seems little exception to this rule.

When it comes to other verticals like transportation, manufacturing and airlines, companies like P&O NedLloyd, Conesco, Dell, Convergys, WNS, Ford, McKinsey, HP, Bechtel Axa have also set up their own BPO centres.

According to Nasscom figures, insourcing companies have more than doubled their presence compared with third-party vendors. According to the report, the number of insourcing companies grew from 710 to 1,350 in 2002-2003. In contrast, the number of third-party companies grew modestly from 769 to 985.

Although the absolute numbers seem high even for third-party companies, market sources peg the revenue contribution of captive units to be over 65 per cent of the export revenue, compared to less than 35 per cent by third-party ones. Agrees Raju Bhatnagar, president and COO, ICICI OneSource: “This is a natural process of outsourcing evolution. 

Organisations are always more comfortable in getting processes executed by their own subsidiaries in the initial stages of engagement. Large-scale outsourcing commitments will remain within captive centres for a while because of the nature of control and complexity of product lines. Once a degree of credibility is created with their own subsidiaries, the least “risky” process is outsourced to a third party vendor who gradually moves up the value chain.” 

Bharat Chadda, senior vice president and country manager, Sutherland India, one of the biggest third party BPO providers in the country, points out: “The reason for the growth in captives is their need to protect intellectual property rights or a high degree of security and privacy considerations, and by the need for better control of operational performance and to mitigate operational risk. These reasons will drive enterprises to source services from India under a captive umbrella.”

But the Indian BPO industry is only four years old. Those operating in the BPO space first began with e-mail support to foreign companies, followed by voice and inbound customer care in 2001. They have just begun offering services like technical support, insurance claims processing and telemarketing. 

Says P.V. Kannan, founder and CEO of the Bangalore-based 24/7Customer: “Most of the players are in the process of getting the basics right. Any future development will be based on getting our fundamentals right in the current scenario. Our experience indicates the industry will gain a whole new dimension this year.”

Industry watchers predict that much akin to the software industry where the strongest example of offshoring and outsourcing has been the banking and financial services segment, a similar story is waiting to be played out in the BPO space.

Interestingly, the build, operate, transfer (BOT) model in offshore outsourcing is gaining ground. In the BOT model, a company (incubated company) enters into an agreement with another firm (incubator company) to build an asset, including manpower, own it for a certain period, and then transfer the asset to the firm, for which it gets a fixed income for the agreement period.

Consulting firm McKinsey & Co and Nasscom estimate that the size of the outsourcing industry will be $ 21 billion to $ 24 billion in 2008 from the $ 1.4 billion in 2002. Now, that’s a huge opportunity and this is just the beginning.