Is the Bubble About to Burst?

It’s been a while since the dot com boom and bust. Valuation

hype had AOL buying out a mighty Old Economy horse Time Warner. Several other

‘‘unbelievable’’ deals followed and a multitude of dot-coms were riding

on a high. As wannabe entrepreneurs latched on to the bandwagon, the solidity of

revenue models took a backseat. Raking in the moolah by getting yourself seen

became the mantra of the times. The dot-coms came crashing down, but not before

they had created a few fast millionaires.

Nearly

80-85% companies bid adieu to their multi-million greenback dreams. But there’s

no stopping dreamers. So it is that yet another bubble stares us in the face. It

is the same old story–high valuations, low entry barriers, and van-loads of

excited wannabes. The passage of time has not killed the enthusiasm of rookie

entrepreneurs–and the protagonists this time round are the golden boys of

Indian IT. Yes we are talking about the BPO (business process outsourcing)

space.

Can they survive the shakeout?

Though smaller in scale than the effervescent dot-coms, the BPO bug has

bitten many. And substantiating this hoopla are some heavy numbers. One estimate

places 320-330-odd companies in this space and about 300 of these are finding it

difficult to keep their heads above water. While some among them are conducting

business at ridiculously low price points, others are trying to lease out

additional and unused capacity to other players.

When the ITeS concept struck India back in 2001, various industrial groups

and entrepreneurs in India jumped on to the bandwagon. Anybody with a spare

warehouse and some liquid money believed he could mint money from this seemingly

great and simple business idea. But to everyone’s surprise, the simplicity of

the job turned out to be a big hoax. Huge challenges related to delivery,

infrastructure management, people management, client acquisition and associated

relationship management were evident.

The initial exuberance resulted in a build-up of overcapacity and

commoditization of services. Too many players in a largely immature industry

resulted in hasty pricing decisions. Smaller players grabbed business

opportunities without understanding the actual costs associated with a full

delivery cycle. A shakeout was inevitable. As Infowavz International CEO Zia

Sheikh said–"At Infowavz, we don’t come up against more than 15-20

firms in any competitive situation." ...And dreams seem to be turning into

purposefully-forgotten dust.

Chicken and egg...



Two years ago, good personal contacts earned you eggs (contracts). Companies

which did find the eggs are now finding many more. Over the last two years, a

few companies have either managed to get themselves funded by venture

capitalists or have been acquired by deep-pocket rivals. Now, almost all top

players have big boys backing them. Says Pradeep Saxena, president of eFunds

International–"These players have moved beyond the start-up phase and can

talk and handle big league projects."

Given the number of people in the BPO segment and the depth and breadth of the industry, it’s likely that there’ll be a very high level of fragmentation in the years to come.

But the age old dilemma continues to haunt small- and medium-sized players.

These players do not have demonstrable success stories and find it difficult to

attract customers. This forms a vicious cycle. As a result, smaller companies

have been resorting to price cuts as a means to get around this perception

problem. This has brought down the billing rates across the sector. Rates are

stabilizing now (see Stability at Long Last? on Page 24 ). Low entry barriers,

combined with high growth potential, prompted lots of players to make a foray

into the field with less than 200 seats. Says Sheikh–"While good ones

like Spectramind and Customer Asset have been absorbed into larger groups like

Wipro and ICICI, respectively, others have collapsed either because they couldn’t

win business deals or because they failed to successfully deliver on client

expectations when they managed to win contracts."

Agrees

Gurbaxani–"The industry has matured faster than expected and I think the

shakeout phase is over. Lots of smaller companies that had set up basic

infrastructure but did not have the necessary organization to deliver have shut

shop or have sold out." When the the shakeout happened, the first option

for a majority of players was to sell out. According to industry estimates,

Delhi alone has about 50-60 companies looking for buyers. Other players are

exploring various revenue models to pull on as long as they can. For instance,

Gurgaon-based Cybiz Call (with about 400 seats) has been leasing idle capacity

to other players as part of its regular business model.

The

rationale behind this concept of leasing out idle space is to hold on till you

can. This is the situation in over 90 call centers across the country–all left

without projects. Adding to the woes of existing BPO players is the entry of

deep-pocketed software companies into this segment. Says LS Ram, executive

director of Crossdomain Solutions, "Only companies possessing these

competitive advantages, in addition to cash reserves, will be able to make it in

the market."

So, is this the end for small players? Or can they sustain themselves for

some more time? Says Gurbaxani, "Sustainability is a function of the client

portfolio they currently have." If a player has a couple of clients

(typically from Fortune 500), along with pockets deep enough to be able to ramp

up to several hundred positions each in the next six to nine months, and the

organizational ability (infrastructure, processes and people) to deliver against

client expectations, the chances for survival are bright.

Future-scope



The current situation does not suggest an optimistic scenario. The current

landscape is steeply positioned against being small.

To begin with, small players do not have the ability to achieve a large scale

and are turned down by customers who prefer to deal with larger Indian companies

with a lot of success stories to talk of. Small companies are also incapable of

availing the huge economies of scale and cannot get quality employees... But

there’s hope.

Captive MNCs will lead the growth in the Indian BPO segment. A few homegrown companies will be at the top but the majority of firms will be at the bottom rung of the chain.

So what will the industry look like in 2008? Why 2008? That’s Nasscom’s

favorite year–for that is when Vision 2008 will come to a close. Nasscom

estimates revenues from BPO to be in the range of $21-24 billion. To generate

these numbers, India would be employing over 1 million people in this sector.

Consider this–today, with over 100,000 people in this segment, the average

number of employees in the ITeS-BPO sector is 190. Even if we assume the average

number of employees going up by a factor of 10 to roughly 2,000, India would

still need about 500-odd companies to cater to this demand. Taking a leaf out of

the software industry book, there are now about 2,500 companies with a workforce

of 4.25 lakh, or an average of about 170 employees. One doesn’t expect the

number to change dramatically over the next few years. There was lot of talk

about consolidation in the ITS industry but it has been over a decade and the

number of companies continues to grow.

So there’s hope for small players. The BPO space is expected to follow a

model similar to the ITS segment. Says Sheikh, "Unlike the IT services

space, where the top five players dominate the market and there is a second tier

of another ten companies that are scalable and doing well, there are going to be

a higher number of winners in the BPO space."

But how does one validate that? For one, BPO covers a much wider gamut of

business processes. Second, the number of people required is much larger than

IT.

For instance, while a $1-billion organization might have a requirement for

30-50 IT professionals, the same organization could have BPO requirements

running into several hundred people. As such, the scalability in BPO and

the breadth and depth of work can be much larger than what we have seen in IT

services.

Given the potential, the hierarchies in the year to come seem clear. At the

top end will be captive centers, MNCs and, of course, homegrown top-notch

companies. The second tier will be the medium and small players with skill-sets

in niche areas like technical support, content development and R&D. Says RT

Outsourcing’s Sanjeev Kakkar, "It is important for a BPO company to

define its niche segment. For example, we are in technical support and do not

have any competition from over 90% of the companies in the industry."

At the extreme end of the spectrum will be the smaller players–with 50

seats and less–and they will employ a major population of the total workforce.

Alternatively, these players will have the opportunity to do low-end work in the

value chain. For example, big players may outsource their low-end e-mail and

Web-based support/services to small players, as it may stop being a good

opportunity–given the higher overheads.

Says Rohit Kapoor, president and CFO of EXL Service–"The process is

beginning internationally, with several large service providers in the US and

Europe beginning to look at further outsourcing to remote facilities like India.

This will ultimately begin in the Indian BPO space too."

Some others disagree. Says Gurbaxani, "I do not think this can happen

without the consent of the end-client. And some of the larger players are using

idle capacity, but not much work is being sub-contracted." Adds S

Varadarajan, vice-president (talent engagement and development) at Wipro

Spectrami-nd eServices, "With sub-contracting, we lose accountability and

control over things–s0 I don’t think this will take off anytime soon."

So will we see Indian companies heading the global BPO listings? Yes, if

global corporates focus exclusively on core competencies and leave outsourcing

to Indian companies. There’s no doubt that this is happening, but there’s

another interesting phenomenon to be noted here–captive centers. Global

companies are setting up their own operations in India. Currently, the model

seems to be that of partnership and then moving out on their own. Says

Varadarajan, "Certainly, captive centers will be an important component of

the Indian BPO picture."

The trend is likely to continue. And these companies will be the major

employment generators in the Indian BPO segment.

There’s no denying that the shakeout has begun, and that not many players

expected it to happen so soon. Companies are revisiting the dot-com days where

the dictum was ‘Cash is King’. Without deep pockets, not many can withstand

the long haul. However, unlike the dot-com era, there’s a real opportunity in

this one and players can encash on it, but only if they manage to stick around.

Clearly, the real growth (and therefore real revenues) is yet to come. And

only those who manage to survive the current shakeout can shake a leg, or two,

then...

Yograj Varma