Indian BPO: Report Card 2010

The official reason that most IT companies gave the analysts and investors
when they forayed into BPO business is that it would give them a new area to
growthat is beyond IT and beyond the CIOand that would derisk the portfolio. A
few believed in this hypothesis, a few more were convinced, and a few others
simply did bite the bullet as the analysts demanded (the classic herd mentality
of Indians, as they call it) it. But that hypothesis had never really been
tested. While BPO did grow faster than IT on a very small base in the initial
years, it was not that IT industry was in distress.

But last yearthe financial year 2009-10was surely different. TCS IT
exports grew 1%. Infosys exports grew 5% and Wipros grew 3%. In the same
period, TCS BPO grew 73% (well, leaving out a big acquisition, the growth was
still 27% organically); Wipro BPO grew 15%; and Infosys BPO, which did not have
a good year in BPO, still saw 9% growth. In other words, we have every reason to
believe that the hypothesis was tested and the results were conclusively
affirmative: that BPO is a growth driver.

Unfortunately, the popular perception somehow is that the slowdown affected
BPO more than it did IT services. Many media stories have even reportedquoting
some analysts or associationsthat in FY10, the industry recorded a de-growth of
more than 20%. While we will keep our exact industry sizing estimates for the
next issuewhere we take into account the entire industry including the
captivesthe revenue movement of top twenty companies gives us an indication
where things have moved. In FY09, they accounted for 49% of the total industry,
including captives and we have no reason to believe that that share would have
changed dramatically in FY10. So, if they have grown by 15%, it is difficult to
believe that the industry would have shrunk by 20%.

In short, Dataquest strongly reiterates that the de-growth of the BPO
industry in FY10, as reported by sections of the media, is a myth.

However, the reasons for this kind of perception can be explained by a few
factors.

First, it was a reality that new contract signing actually dropped
significantly in the first two quarters of FY10. Since the BPO revenue
realization cycle is a little longer, a lot of them did not result in too much
revenue realization last year. While that surely did affect the revenue, the
industry realized revenues of those contracts that it had closed in FY09.

Also, many of the industries saw massive restructuring. While some of them
realize the virtue of outsourcing, the decision making cycles got longer. That
not just affected revenue but badly affected the morale which also helped in
building the perception that something is wrong with the BPO industry.

And finally, the trend of customers preferring other locationsthe
Philippines for sure but other nearshore locations as wellover India for
vanilla voice services became more definite and many such jobs moved out of
India. So, a real de-growth happened in call center services in the Indian
geography, but it did not really impact the revenues of the BPO firms so much,
because most of them like Hinduja Global, 24/7 Customer and IBM Daksh now have
significantly large operations there. 24/7 Customer has more people in that
country than it has in India. Also, that part of the business today accounts for
only about 25-30% of the industry revenue (only exports).

So, there was less big news, less glamor and less headline grabbing deals. On
the ground, however, an all-round growth happened.

The Top20

The composition of the Top20 table did not change much, except for two new
companies who debutedboth would have been there last year too had we
got/managed to estimate their revenue last year. So, it was more of a technical
adjustment. Two companies from last years list that got pushed out were Syntel
KPOthe BPO division of Synteland Vcustomer.

Last year, we said the relative positioning of BPO companies with respect to
each other was still going through radical changesand the order had not been
established yet. While consolidation is still a possibility, with PE players
having a stake in a few companies, this year, we have not seen any company
jumping up or falling down in the ranking by more than two positions. It seems
the order is getting established, finally.

Here is why we think it is a real possibility. There are nine IT firm-owned
ventures, up from eight last year. From the rest eleven pure plays, only three
have significant stake from private equity firms and which can be acquisition
targetsWNS, Firstsource and Exl Service. One24/7 Customeris very closely held
and the promoters are not in a hurry to dilute their stake or lose control. So,
the big consolidation that we all keep talking about can happeneven
theoretiacllywith only these three companies merging with some others. While
there are other pure plays as well, most of them like Aegis, Hinduja Global and
Aditya Birla Minacshave strong parents, which see this as a strategic area to
grow and hence can be considered stable.

Another difference between last years performance and this years is that
last year, nine out of top ten companies had grown 20% whereas only four among
the next ten had done so. The distribution of growth this year is far more
secular. If five out of top ten companies have grown by double digits, six out
of the next ten have done so.

However, there is another point that we noted last yearthat this industry is
not as heterogeneous as the IT industry. And that has become even more prominent
this year. Unlike in IT, this industry does not have too many common
denominators. While it started with almost all start-ups offering some sort of
customer service, the BPO industry has since then gone into multiple areasfrom
traditional areas like customer service and F&A to newer services which
companies had never outsourced earlier, some of which required far more
knowledge and competence to deliver. The phrase KPO actually originated here.
So, while some services are getting more and more standardized, companies are
getting into newer and newer areas, making the definition of the BPO industry
more and more difficult. With one of the big common denominatorsvanilla
customer servicemoving out of India, the heterogeneity and hence dissimilarity
is only increasing.

The Tech Play

In the initial days of the industry, BPO was known in India as IT-enabled
services. When IT services firms entered the business, they proclaimed that BPO
was all about technology and they have a natural advantage because of their
technology heritage. The industry has, by and large, come to accept, the role
technology can play in BPO. And early signs show that in many cases, IT services
players have leveraged their technology expertise. However, it is not restricted
today to IT services firms alone and even any pure plays today offer technology
value-add to the clients. However, they are often clubbed under the same basket.

What we have seenand it will be far clearer once you flip through the
profiles of the Top20 companiesthat most BPO companies today integrate
technology to their strategy. Dataquest divides this entire tech based value-add
to four areas: integrated BPO and technology deals, use of platforms, use of IP
to offer extra value to the client processes, and use of technology to make
internal processes more efficient and enhance productivity. Since the last is
not a client facing value-add and is not restricted to the BPO industry, we will
ignore it in the present discussion.

Integrated IT-BPO deals, being talked about for the last five to six years,
are finally happening. Last year was the year, when it reached a critical mass.
Seven out of eighteen new deals that TCS BPO signed last year were integrated
IT-BPO deals. Similarly, Wipros share of integrated IT-BPO deals stood at 40%
of the total value of new deals it signed last year. For Cognizant, which does
not reveal this number, the percentage share is even more. So did IBM Daksh,
leveraging IBMs IT skills. This is one area where IT companies are surely
scoring over BPO companies. But that does not mean that the deals are getting
decided on the basis of this. In most cases, it is still the relationship that
they are leveraging.

The second and more talked about aspect of tech play is the platform BPO.
This simply means that many of the processes are standardized and automated and
the client s offered the solutions and services on a single pricing. While
conventional wisdom suggests that the IT companies would have an edge even here,
that is not necessarily the case. While TCS, Infosys and Wipro have built some
platforms, only TCS has a mature platform for BPO, which it has acquired. On the
other hand, Genpact, WNS, Firstsource, and Xchangingall pure playshave very
strong platforms. Even Aditya Birla Minacs has a platform for marketing
services. Even others like Mphasis and HCL are getting into platforms.

The third playwhich voice players are leveragingis building of technology
and tools to give extra values to clients. Unlike platforms, the client does not
have to move the processes to their technology, but the tools such as analytics
tools can be applied to analyze data, do predictive analysis, based on past
record and the tools and enhance sales or collections or customer satisfaction,
as the case may be. Convergys, 24/7 Customer and Hinduja Global have solutions
today built around that. Even non-voice players like Exl, WNS, and IBM Daksh
today offer analytics skills. While all of them have acquired analytics services
firms, most of these firms have over the years, productized, to some extent,
their skills.

While in the integrated IT-BPO play, there is a natural advantage for IT
services players, those IT firms that have not restructured their BPO services
to get into those areas where scope for technology value addition and
possibility of integrated IT-BPO lay is more, have not been able to leverage
this opportunity. HCL and Mphasis, which were the first two enter into BPO,
today have large voice-based offerings. They have not been able to leverage the
opportunity of integrated IT-BPO deals. While TCS, Infosys and Cognizant entered
the area later and they never had the legacy of those older processes, Wipro,
which entered the business by acquiring a big call center, Spectramind, has
transformed itself to offer those services that can leverage IT. HCL is now
going through that phase. So is Mphasis. In fact, even Aditya Birla Minacs,
which merged a small sister company, PSI Data Systems, and has got IT capability
today, is trying to realign its services to get into areas where it can add
value through technology.

In the next two years, this will be standardized across the industry and the
clients would naturally expect it.

Indias Loss of Voice

The other reason for which FY10 would be remembered by the BPO industry is
this. This is the year which finally saw Indias dominance in all areas of BPO
getting challenged successfully by another location, the Philippines, albeit in
a single area: vanilla customer services.

The last two years saw customers of all voice services, barring tech support
and specialized collections, preferring the Philippines over India. However, it
is in FY10 that the Indian companies openly acknowledged what companies like
Accenture and Convergys had done years back. Today, 24/7 Customer has more
people in the Philippines than it has in India. Hinduja Global Solutions has
more people in voice (barring those serving India market) in the Philippines
than in India. Firstsource, Wipro, IBM Daksh, Aditya Birla Minacs, Genpactall
have significant number of people around Manila.

While the Philippines has officially displaced India from the #1 slot in an
industry, which not long back, was known as the call center industryand is even
known by that name to numerous ancillary workers such as cab driversthere are
other nearshore destinations too that are emerging. In fact, many Indian players
have facilities in locations like Guatemala and Costa Rica from where they serve
the US market and in Northern Ireland, where they serve the UK market. In fact,
Aditya Birla Minacs lost a client last year, which wanted to move voice work
from India to Latin America and South Africa.

Lack of Vision?

While FY10 proved beyond doubt the resilience and maturity of the Indian BPO
industry, it also raised a few questions about the vibrancy and the dynamism
that was so synonymous with the industry. Today, while the services may be
heterogeneous, the strategy seems to be common. There is no diversity of
thought. Part of the reason given by industry analysts is the fact that the
first generation of BPO leadershipwho came from various industries such as
banking, insurance, construction, technology, retail, not to talk of
consultinghas been replaced by leaders who have been either in IT or BPO
industry from almost the beginning and while there is no reason to doubt their
capability as managers, many of them lack exposure to customer industries and on
a collective platform like Nasscom, have no diversity of thought. That by itself
is not a bad thing in the short run.

In the long run, you need vision, clarity of thought as much as you need
capability to execute.

Shyamanuja Das

shyamanujad@cybermedia.co.in