A Promise Puffed-up?

Apparently, the Gartner report centering on the BPO rush in India is giving

companies a chance for introspection and a rethink. According to the report, the

offshore opportunity for India is $6 billion, and not $24 billion, as stated by

Nasscom. Gartner bases this number after a study of the global market, where of

the total of $127 billion worth of BPO business, 60% is being sourced from

within the US. Also, only 5% of American companies surveyed are outsourcing to

offshore sites. Gartner, therefore, opines that investor expectations about the

size of the BPO business have been largely exaggerated. It adds that India will

have to compete with near-shore countries like Canada and Mexico and offshore

countries like Philippines and Ireland for business from the US. The segment,

therefore, needs to be treated with cautious optimism, lest it go theÂ

dot-com way, characterized by overvaluation and capacity gluts, Gartner says.

The mood



Nasscom,
meanwhile, is sticking to its projections–saying the $24-billion growth target

for Year 2008 remains achievable. But whatever be the forecast, it is time for

BPO firms to indulge in second thoughts about their business. There are signs

that there’s been a glut in the BPO segment. Huge investments were made but

many (like Spectramind) were acquired by larger IT firms. Most that boomed fast

were start-ups without prior experience in business processes, with many call

centers extending into the BPO space. Continuance of the hype will overvalue

assets and create higher investor expectations–investors will find these

attractive, but many will end up falling prey to fly-by-night operators. With

unused capacity being created and competition getting intense, billing rates

will dwindle, further reducing margins.

These signs and the Gartner report have triggered another rush–of ‘experts’

predicting that the high valuation of the ITeS segment will last only another

six to eight months. Most ITeS firms that were consolidated last year enjoyed

high post-investment valuations. For instance, Wipro bought Spectramind for $10

million, which is twice the revenue on a 24% stake. And it’s not just the

experts who are cagey–even venture capitalists say valuations will remain high

only through 2003, after which they will start falling and stabilize.

Survival skills



But it looks like the BPO industry and venture capitalists are undeterred by

Gartner’s report. For them, even $6 billion is a huge opportunity. "We

remain optimistic about investing in this segment. And this optimism will

continue for the whole of 2002 and most of 2003, after which it will come down

to more realistic levels," says Akhil Awasthi, vice-president at Baring

Private Equity Partners. His company has funded two ITeS companies–Bangalore-based

MsourcE and Chennai’s Slash Support.

While MsourcE handles BPO for financial institutions, Slash Support offers

technical support.

The winners of tomorrow in this space will be those that specialize in

particular areas and move up the value chain–this will help them convert

low-end businesses to ones with higher margins. Of the hundreds that are in the

BPO space, only 8-10% are expected to survive the race. Note that ready

successes like MsourcE and Daksh eServices are already strategizing on key

verticals.

Admitted then, that ITeS will not go the dot-com way, for there’s enough of

a revenue model here. But the need of the hour for investors will be to spend

cautiously. The real differentiator in the future would be in value-addition and

high-quality services. Clearly, past experience has shown that neither companies

nor countries can continue to have cost as a competitive advantage forever. The

opportunity for India is right now, before it slips away.

Radhika Bhuyan in New Delhi