BPO: Growth All the Way, Despite the Backlash

	Consolidation was the flavor of the BPO industry in 2003-04-it witnessed big-ticket M&As ICICI OneSource/ FirstRing and Indian Rayon Transworks
	Though the backlash raged on, growth remained on course. The BPO sector grew by around 45%
	Domestic BPOs moved beyond call centers, as serious BPO work got done. Many non-voice players even moved into high-end analytics
	Post Lehman and Capital One, QoS (quality of service) became a major issue for the industry

	Top 10 MNC# BPO Players
	Top 20 India--centric" BPO Players
	Top 10 Captives# in India
	M&A Factsheet for 2003-04
	BPO Growth by Horizontals
	Moving Back-The Real Picture
	Manpower by Horizontals

For the Indian BPO industry, the year 2003-04 was surely one of mixed
sentiments. On the brighter side, as per Nasscom estimates, the industry that
catered to the overseas market grew by about 54% to reach Rs 16,380 crore from
Rs 11,300 crore it clocked in 2002-03. Add to this, the Rs 1,425 crore
contributed by the domestic industry, which grew by nearly 50% from Rs 950 crore-primarily
from the call centers run by the banks, telcos and the hospitality sector. As a
result, the total Indian BPO pie was pegged at Rs 17,830 crore, up 45% from its
total of Rs 12,250 crore in 2002-03. On the flip side, however, the spectacular
success story was interspersed with the constant pressure of backlash-threats
that started sounding imminently real, especially in view of the numerous
anti-outsourcing bills mooted in the US and the aggressive stand adopted by
labor unions in the UK.

According to DQ estimates the Rs 17,830-crore Indian BPO pie in 2003-04
primarily comprised four constituents-the MNC captives who contributed around
56%, the India-centric third party BPO service providers with around 29%, the
MNC BPOs with around 8%, while the remaining 7% came from the domestic call
centers that were primarily captives.

The Big Guns

Within the India-centric third party BPOs, the Top 20 contributed nearly
70%, while the remaining 300-odd players accounted for the rest. The scenario is
not much different from software exports, where the Top 20 contributed more than
60% of the overall pie. Perhaps, this explains the spate of consolidation within
the industry in terms of a number of M&A activities that happened during the
year. And, that is a trend that is likely to continue in 2004-05. Barring some
niche players, most of the smaller ones are likely to be absorbed by the Top 20
who are readying to scale up.

Companies like eFunds, EXL Service, vCustomer and 24/7 Customer had more than
55% of employees involved in inbound voice work, about 12% were engaged in
outbound voice, 25% were in back-office processes and about 8% in e-mail
support. Wipro Spectramind, at Rs 437 crore, headed the revenue list in this
category, followed by WNS Global Services which clocked Rs 414 crore. On the IT
services side, the list included HCL Technologies BPO Services, Progeon (Infosys),
mSource (mPhasis), etc. Other prominent names were Nipuna (Satyam), SmartServe (NIIT),
Optimus (Polaris) as well as the BPO operations of Patni, Mastek and Zensar.

Pure-play BPO companies, which narrowly missed the Top 20, included Tracmail
(partially restructured into TWS Holdings), Allsec Technologies, Vetri Software,
Global Vantedge and iCall India. While Daksh, at Rs 284 crore, was a prominent
member of the Top 20, it has since been acquired by IBM and would join the MNC
club next year.

Captive Success

Captives were the first to come to India during the late 90s led by the now
legendary GE Capital (mainly voice) and American Express (primarily
back-office). In 2003-04, this category contributed nearly 49% in revenues,
though their number was less than 15% of the active BPOs in India. GE Capital
International Services (GECIS) headed the Top 10 list of captives followed by
Dell and American Express. Not surprisingly, the BFSI sector dominated the list
of Top 10 captives-other than GECIS and Amex, it included e-Serve, Scope
(Standard Chartered captive), HSBC and JP Morgan Chase. Technical
support/helpdesk was represented by Dell, Global eBusiness (HP) and AOL, while
P&O Nedlloyd, one of the largest container carriers in the world, was an
interesting inclusion. Outside the Top 10, there were BFSI captives like
ABN-Amro (ACES), AXA, Prudential and Morgan Stanley, whose revenues would be in
the same region as the No. 10, P&O Nedlloyd, in the list.

Foreign Origin, No Bar

A smaller chunk of 8% of the overall pie was contributed by the MNC
third-parties who had mostly come to India during the last three years following
the US economic slowdown. The year 2003-04 was the one that really saw most of
these companies substantially scaling up their operations in the country and
included customer interaction companies like Convergys, Sitel, Vertex, and Sykes
as well as broad based BPO companies like Accenture, EDS and Deloitte Consulting
in the Top 10 list. Some other prominent players who did not make into the Top
10 included Deloitte Consulting, CSC, TeleTech and LiveBridge.

India Shining

The year also saw the domestic BPO industry taking a big leap to reach Rs
1,240 crore. This was mainly driven by a host of captive call centers that
either came up or scaled up their existing operations. The main thrust came from
the banks, the telecom service providers, the hospitality industry as well as
travel and tourism. The Tatas started the E2E Serwiz Solutions, the first big
organized domestic call center in the country. Reliance Infocomm added more than
2,000 people in its call center providing support in multiple languages. Even
banks like ICICI and HDFC substantially beefed up their call center operations.

Contrary to popular belief, the domestic sector was not only about call
centers-India also started seeing serious BPO work getting done. While players
like Datamatics increased their proportion of work like share registry, more and
more share market and mutual fund-related work started getting outsourced. In
addition, players like Accenture started offering domestic BPO services as part
of their overall infrastructure management portfolio. Indo-Rama Syntheitics
outsourced their Finance & Accounting services to Accenture, while
enterprises like Dabur, Bharti and Tata Steel also started outsourcing some of
their core processes to BPO providers.

M&A Games

Consolidation was the buzzword in the BPO industry-a lot of activity was
witnessed on the M&A front. Both India-centric as well as MNC BPO players
were involved in the acquisitions game, which came in three different hues-first
was the VC-backed companies where the promoters opted for the exit route and in
most cases got a decent valuation. The acquisition of FirstRing by ICICI
OneSource and Transworks by Indian Rayon, an Aditya Birla Group company, are
some notable examples. And just after March 31, 2004 IBM stole the limelight
with its acquisition of Daksh. More heartwarming was a lot of Indian companies
that scouted for and picked up specialized BPO companies abroad-the
acquisition of CorPay Solutions by Datamatics, ClaimsBPO by WNS, c3 in
Philippines by Hinduja TMT, Aegis Communications by the Essar Group and Upstream
LLC by the Godrej group. A third phenomenon was the acquisition of niche
India-centric companies, not necessarily VC-funded. TCS buying out its stake in
the SwissAir JV AFS, Optimus buying iBackOffice and Perot Systems acquiring
Vision HealthSource were a few such examples. Even Citigroup bought back the
remaining 55.6% stake in e-Serve.

Fiscal 2003-04 not only witnessed acquisitions, there were plenty of JVs also
signed-companies mainly looked at this merger route for scaling up their
operations. Datamatics formed a JV company in partnership with the US-based
Cadmus Communications Corporation. The new company - KnowledgeWorks Global (KGL),
with an initial investment of $1 million, provides content management services
for publishing companies. There was a spate of JVs signed by the other Top 20
India-centric companies too. While mSource had a JV with Accenture, Infowavz
signed the dotted lines with Contact Power of UK and Sutherland with the ISANI
Group of the US. Most notable was Tracmail making a strategic consolidation
effort by merging with two companies Webhelp and Spherenomics to form a new
entity called TWS Holdings. MNCs like ClientLogic and ACS formed JVs with ITC
Infotech and L&T Infotech respectively. Indian players also opened new
delivery facilities overseas. mSource set shop in Tijuana, Mexico, WNS in
Ipswich (UK), HCL BPO in Malaysia, Progeon opened in Brno, Czech Republic.

The Backlash

This was perhaps the most contentious issue faced by the Indian BPO industry
during the year, as the anti-outsourcing brigade became mainstream in the US.
What started with the State of New Jersey taking back to US some Social Security
related processing work from eFunds, ultimately snowballed into a major issue
with everyone from Presidential nominee John Kerry to a host of Senators and
Congressmen mooting bills to stop outsourcing to India. And with the US just
coming around from a prolonged economic slowdown, the cry over job losses did
touch an emotive chord. More than 50 Bills (incluiding a few Federal ones) were
tabled across different states like Alabama, California, Mississippi, New York,
Washington and Wisconsin.

Even if all these states banned outsourcing of government jobs, some skeptics
argued that there would not be much of an impact on the Indian BPO industry,
since the quantum of government work is minimal. However, it seems there are
efforts made to even offer sops to private companies who do not outsource, while
government is trying to financially squeeze companies who continue to do so.
Since this went against the priciples of free markets, it naturally evinced
strong protests from eminent personalities like Bill Clinton, Bill Gates, Alan
Greenspan and Marc Andressen among others, besides votaries of the Indian BPO
industry.

There were problems even on the British shores-Indian BPOs' other haven
besides the US. With the number of job losses swelling because of outsourcing by
large enterprises like Prudential, Aviva, British Railways and BT, the UK's
strong labor unions flexed their muscles against the outsourcing brigade.
Another arsenal was added to the armory of this brigade as there were questions
raised about the QoS (quality of service) from Indian players.

While some like Lehmann Brothers and Capital One had complaints about this,
some like Dell claimed that their help desk customers were angered by the Indian
accents of the agents.

New Geometry

While traditional processes like receivables management (collections),
telemarketing, HR and tech support continued to rule the roost, the Indian BPO
industry also witnessed a strong emergence of a number of niche verticals like
healthcare services, airlines, publishing services and even research analytics.
While receivables management and HR are horizontals across many industries,
healthcare provider and payer services, tech support and airlines gained ground
during the year. Many non-voice players got into serious publishing services,
while some moved to high-value analytics like market research and equity
research. Telemarketing remained popular, but now there was a question mark over
its future owing to 'do-not-call regulations'.

People Power

The Indian BPO industry has witnessed a significant increase in the number
of seats during 2003-04. It increased from 140,000 on March 31, 2003 to 210,000
on March 31, 2004. The total number of employees increased from 171,000 to
245,000. Most of the increase was seen in India-centric players and captives.
The share of captives, currently between 65%-70%, is expected to grow.

Due to costs associated with attrition levels, including investments in
employee training many of the leading BPO players have adopted certain measures.
These include non-hiring of applicants who spent less than a year at the
previous workplace or those who have changed three jobs in two years. Besides,
HR agencies actively involved in poaching candidates are blacklisted, while many
insist on an official release from the previous employer at the time of
appointment. Despite these measures, poaching went on with impunity and there
were numerous cases where people jumped jobs every quarter. The year saw an
increase in average salaries both for call center as well as positions for
high-value back-office work.

Strategic Locations

Companies increasingly started looking at Class B and C cities in catchment
areas to source manpower, as typically attrition rates were lower there. A lot
of new cities emerged as serious destinations. While Mumbai, Bangalore, NCR an
Chennai remained the hot destinations, Pune and Hyderabad also came up as
serious contenders. Kolkata, Ahmedabad and Chandigarh also entered the fray
during the year. The cities attained their own flavors too-while NCR remained
the king for voice-related work, Mumbai did a lot of financial services, while
Bangalore reigned supreme on tech support. Chennai became a serious back-office
processing hub with high-value equity research work.

Taxing Issues

One silver lining for the MNC BPO players was the decision of the Finance
Ministry to exempt them from paying taxes. The Central Board of Direct Taxes
appointed a task force on non-resident taxation to clear the uncertainty over
Section 9 (1) of the Income Tax Act, introduced in the Budget for 2003-04, which
held that while receiving calls per se was not taxable, selling products through
telemarketing was. The board then clarified that call centers are only providing
services that are incidental functions, while the core activity of manufacturing
and supplying goods and services are done abroad. So, profits from BPO
operations of multinationals will be insignificant and difficult to determine.
The only rider is that the transaction between the two parties should be at arms'
length. However, MNCs engaged in providing "core services" would come
into the tax net. The tax levied will be to the extent to which the profits of
these non-resident companies are attributable to their Indian operations. This
includes call centers, which provide software support services over the
telephone, or engage in annual maintenance contracts for offshore customers.
Travel-related services also fall under this category. BPOs for insurance,
credit cards, pension funds services are also out of the tax net.

Twilight Transport

Here's an interesting trend. The Indian BPO industry also spawned off a
number of ancilliary industries during the year. These would include
transportation, night catering as well as accent training. While most serious
players still brought experts from overseas to provide accent neutralization
trainings, some started outsourcing this to specialists in the country. The
biggest to gain were transporters, what with the need to pick up and drop
employees in multi-shifts becoming a norm with every player. A 24x7 environment
also meant nightlong cafeterias, which spelt good time for caterers. It's
still early days to estimate the size of these industries.

Beyond the numbers and trends, the outlook remains positive. We expect
industry to remain on consolidation mode, with heightened M&As, customers
wins and movement of high-end work to India. The air is optimistic and the BPO
party is clearly set to continue.

Rajneesh De in Mumbai