Mature, Growing, Captive

	Flight to scale: 14 of the Top 15 BPO outfits are now either large captive units or subsidiaries of India-based tech giants
	Captives-the second coming: Last year, major MNCs such as Prudential, Lloyds, Aviva and Tesco set up their own captive operations
	Global delivery: This became top of mind for BPO companies competing with the world, but it's early days yet
High value services: Equity and market research, and engineering design, etc, began to come into India

	BPO: Who's Who
	Equity Interest in Indian BPO
	Major Outsourcers: Segment-wise

Of the three and a half billion dollar export revenue that Indian offshore business services industry earned in 2003-04, almost two-third were accounted for by the captive operations of large global corporations like GE, Dell and American Express. And their percentage contribution is on the increase for the last three years. If we go by the true meaning of the phrase, that part is not BPO at all. For the “O” in BPO is still not offshoring, it is outsourcing. 

By itself, it may not cause excitement-or tears. But that is the right point to start if one has to see the nature of growth in Indian BPO industry-coming back once again to the more popular, even if not strictly correct phrase-in perspective.

And understand some of the trends that are emerging today. 

Take the first five companies in our list here. Three of them are captives. Take the top ten. Five of them are captive. The figure's dropped to 50%. Take the top 15, and so on. As you move down, you find that the percentage of captive operations among total companies decreases sharply. For example, the next 15 list has just two captive operations. 

Now, from statistics, if you shift your attention to history, it becomes clearer. Many of these captive operations like GE, Amex, and Citi were started when there was not much awareness about offshoring of business services. In fact, WNS, which is today an outsourcing company, also started as captive operations of British Airways. So if you see just two names-Wipro Spectramind and Daksh-in the Top 10 companies that have reached there by being outsourcing service providers right from day one-WNS started as a captive of Bristish Airways and eFunds started its captive operations, before turning the India opportunity to a business by itself-there is hardly anything to be surprised. 

Compare this to the IT industry. Even today, though there is hardly any big IT/technology company worth its name that does not have an IDC, the top slots are held by the likes of TCS, Infosys, and Wipro. These are the people who started the IT offshoring wave, much before the IBMs and the Microsofts came calling. Time may be a great leveler but it has not levelled as much as we often assume. 

Captive Rising 

This explains why the GEs and Amexs top the ranking. But it does not explain why the captives' share is on the rise, even today. 

That explanation is not as simple. GE, Amex, Citi and British Airways were pioneers. Those who followed them were the Indian companies like Spectramind, Daksh, and most of the other names that you find in the Top 30 companies list. However, since 2002-03, there has been a steady flow of many more captive operations. They are not yet big enough to find a place in the top ranking but have built significant sizes of operations. Their revenue is also on the rise and that gets reflected in the overall industry size. On the other hand, there are hundreds of Indian companies whose operations are very small. According to V&D bpOrbit estimates, there are not less than 300 companies which have a manpower base of 50 or more. Some of them are specialized companies and will grow. Some of them, which are into generic services, will simply vanish. But today, these are companies whose revenues are not significant enough to contribute much to the industry figure. 

The change in the position of the companies in the list will also explain the industry trends. The initial Indian leaders were professional-promoted, VC-funded companies. They have either been acquired or their growth has been affected. Three years ago, Spectramind, Daksh and EXL were the top three players in this area, among Indian companies. Today, two of them have been acquired. The third one has moved out of the top. Compare this with Zenta, a company backed by the No 1 collections company in the US, NCO Group. It has moved up the ladder significantly. ICICI OneSource is also an inorganic growth story. 

Industry Evolution

As discussed, it is a few pioneering companies that started the whole offshoring wave. That phase from 1994 to 1999 could be called the first phase in the growth of process offshoring. This was a time, when IT companies like Infosys were succeeding in making the CIOs convinced about the benefits of IT offshoring and a few companies like GE, Amex, Citibank, and British Airways were trying that out for process offshoring. This was by all accounts the Phase I of the growth. 

This prompted NASSCOM to commission the now historic NASSCOM-McKinsey study. A few pioneering companies promoted by Indian professionals had either started or were finalizing their business plans to start the third party BPO business. The year was 1999. In that year and the next, most of today's big names came into existence. Spectramind, Daksh, CustomerAsset and FirstRing (both now part of ICICI OneSource), EXL, vCustomer, GTL, MsourcE, HCL, Hinduja TMT, Epicenter...most of the companies came into being at that period, till 2002. That can be called Phase II. This was marked by activities of Indian companies. 

The third phase, 2003 onwards, was when most other captives started coming. They were
supplemented by a lot of Indian companies entering this area. However, this time the companies that were offshoring were much more aware. They had the experience of many others to go by. And they were trying out different models. Companies were trying captive models, hybrid models and even joint ventures. Many companies who did not want to reinvent the wheel started giving BOT contracts to Indian outsourcing providers. This was also a phase when even the companies who were already having captive operations started outsourcing part of the work to the offshore service providers. 

We believe the next phase will be marked by rationalization of structures. We will see much more hybrid operations and may well see a few cases of inverse BOT, if one can call it so. This means a few companies may well go the British Airways and SwissAir way of getting out of their own subsidiaries and change the relationship with the Indian company from an ownership model to a client-vendor relationship model. This phase will also see entry of companies-both captive and outsourced-in many white spaces that exist-like engineering services, market research. 

Indian BPO industry has reached a maturity level in five years which other companies take decades to build. Keeping pace with that, the level of expectation has also grown up. Today, the contracts are tough, the matrix is complex, SLAs are stringent. Interestingly, many outsourcers expect that their Indian BPO vendor would, in the first year, deliver a quality, that is better than the best they have achieved anywhere else, either themselves or through a third party provider. In short, today outsourcers believe in the capability of India to deliver. 

Yet, when it comes to outsourcing the entire work to a single vendor, not many outsourcers today are comfortable with the idea. In fact, some of the most prolific outsourcers to India-like Amex, HP, Citibank, Aetna, Aviva, AT&T, Dell, Sprint, BT, Cisco-have outsourced to multiple India-based centers. A large number of them also have their own captive delivery facilities. While in some cases, the choice to go for multiple vendors may have been dictated by the fact that different skill sets are available with different vendors.

This can be explained by a simple fact: though Indian companies have proved themselves in terms of their ability to understand and execute complex processes, many of them are not perceived to handle exceptions well, thanks to their limited presence. Interestingly, quite a few of the outsourcers have had no problem in choosing only India as a location for offshoring-thereby acknowledging that geo-politically India is not risky but when it comes to vendors, they have chosen to go with more than one. 

Challenges

Today, the India name is the brand. The capability of Indian companies is getting acknowledged. The first level of targets have been achieved. Now, the industry is in the growth mode.

Based on the opinions of the CEOs themselves-largely drawn from the 2nd India BPO Summit
2004 organized by V&D bpOrbit-there are a few challenges before the industry, at this phase of growth.

They are summarized here, classified under long-term strategic challenges and short-term tactical challenges. 

Strategic challenges

Global Delivery Model: The top-most on the mind of the CEOs of larger companies are building a robust global delivery model. There is an almost total consensus on the fact global delivery capability is a must for companies who want to grow from here. Companies today acknowledge that while India will continue to be the center of gravity and the major delivery location, footprints in multiple geographies, based on multiple models-offshore, onshore and near-shore-is a must to compete in the global market. However, there seems to be no consensus on what mix would be the winning combination. Expect many larger companies to have
onshore/nearshore capabilities in near future.

Supply of manpower: While the industry manages to cope with the demand in the short run, most CEOs believe that unless acted upon by all stakeholders, lack of enough trained manpower could be the most threatening factor to the health of Indian BPO industry. Ironic though it may seem in a country of billion plus people, the fact is that there is need for large scale expenditure on training, infrastructure to make this intelligent and talented students passing out from colleges in large numbers BPO-ready. That is the only operational issue that CEOs are worried about
today.

Providing some value add: Though opinions might differ on what moving up the value chain means in the context of BPO, all large companies believe that they cannot be everything to everyone. While a vertical specialization is touted as the right step towards building that value add, a few others believe that process specialization is what will lead to that sustainable competitive edge. One agreeing point seems to be the strategic use of technology to platformize some expertise at the low-end while customizing high end. The cost structure, believe experts, demand that. This is highly feasible, thanks to the availability of technical talent in the country. 

Continuing to be cost-competitive: Make no confusion about this one. Companies came here for cost saving and if they ever go out, it will be for the same reason. In a business, where the unit of quality is also dollars saved, the ability to reduce cost on a continual basis is what will make a company cost competitive. This can only be possible by increasing process efficiency and increasing productivity, realize companies. To be able to reduce cost year after year will what will determine the success of the outsourcing vendors. In short, each outsourcing company will have to have a consulting company within itself.

New Opportunities: To be able to identify new opportunities and exploit them fast enough is what will keep companies ahead in the race. A few opportunities that were being passed off as high value but not for the biggies are no more untouchables. Today, companies like WNS are getting into niche areas like market research. 

Total contract value: Measuring each contract in terms of total contract value is slowly but surely emerging as a trend. It will be a challenge for the companies to take the contract sizes up, for longer duration if they have to survive in this business.

Tactical challenges

Some international presence: A company cannot just wait to be a fully global company offering everything, in all languages in all geographies. The first step is to build at least some presence outside India. That is what most companies are doing when they are building delivery capabilities in countries like the Philippines, Eastern Europe or Mexico. 

Information security: Data protection/information security practices are under implementation in most companies. 

Backlash: Till the US presidential elections are over, this will be a worrying factor, though not many CEOs would admit it in public.

Availability of operational middle managers: Thanks to the fast growth, companies are struggling to cope with the growth. The first challenge is finding enough mature managers at the floor level.

Funding: Funding for growth is a major challenge for middle market companies. 

Endnote

How different will next year's list look like? Is there a possibility of large scale consolidation? While that is a hotly debated issue, our studies believe that despite a few acquisitions, the industry structure and the number of players would not change much. 

Also, the M in the phrase M&A has been a passive word. Expect a few medium sized companies to merge together, consolidate, may be with additional funding from a big private equity company. 

Shyamanuja Das in New Delhi