Business Process Outsourcing: Touching New Horizons

By Ravishankar Panda

Sanjiv Agarwal Strikes gold as IBM buys Daksh

Bangalore April 07, 2004: Daksh owner Sanjiv Agarwal and the employees entitled to esop
will get richer as IBM inked a deal to acquire Daksh e-services, India's third-largest business
outsourcing firm. (The Economic Times)

Background

Though Business Processing Outsourcing is a part of IT sector, it is rapidly becoming an

independent industry nowadays and contributing substantially in the growing and booming Indian
economy. Looking back into the history, BPO was started modestly with Tata Sons and Datamatics
selling their services to foreign companies. It was early 1990's when it started picking up but still
was far away from gaining a distinct name. Eventually it got recognized after the Nasscom-
Mckinsey report in 1999. The industry is growing at the rate of 60-70 per cent. The main reason
behind this growth is availability of highly qualified English speaking persons at a very low cost and
India's unique image in the field of software industry with ample infrastructural and government
support.

Why India?

India is a popular choice for customers seeking outsourced services because it is able to offer a 24
7 service and reduction in turnaround times by leveraging time zone differences. In certain
Remote Services categories, Indian players have achieved high productivity levels with the
emergence of BPO vendors with deep process skills and the ability to offer integrated outsourcing
solutions. At the core of India's great attraction as the outsourcing destination is its unbeatable
value proposition - PQR (Productivity, Quality and Rate) factor.

The increase in capacity was equally divided between captive centres (subsidiaries of
multinationals such as HSBC, Standard Chartered, AOL, Dell, Hewlett Packard) and Indian third
party providers such as Daksh, Wipro Spectramind, EXL, MsourcE, among others.
Offshoring to India has three advantages - significant cost savings, major productivity gains and
dramatic improvements in quality. While traditionally the key driver for ITES-BPO activities has
been cost reduction, companies are increasing viewing these services as strategic and essential
elements for organic growth.

Some facts
Today, the global BPO industry stands somewhere between US$ 200 to 650 billion in which Indian
share is very less irrespective of growth registered. India still needs to travel a long way to get hold
of major chunk. One thing is for sure that the BPO industry achieved a respectable position within
a span of 5 years in comparison to IT industry, which took almost 20 years to make a niche for
itself. India generated a revenue of US$ 2,400 million in 2002-03 in comparison of mere US$ 565
million in 1999-2000 and is expected to bring revenue more than 10 billion US$ by year 2006.
Though the anti BPO bill in USA might affect Indian BPO industry to an extent but the bright future
of BPO industry will remain untouched.
Global outsourcing spending is projected to top US$ 1.2 trillion by the end of 2003.
Globally, outsourcing spending is increasing by 11 per cent per year.
Two-thirds of the outsourcing spend is in large Fortune 500 companies.
Two-thirds of outsourcing spending is in the US.
Shrinking margins will force more companies to break with tradition and consider BPO to reduce
operating cost.
A lot of demand is expected to be generated by HR processes especially payroll management
In India, ITES-BPO segment registered a growth of 59 per cent to reach Rs. 113 billion (US $ 2.3
billion)
According to current industry estimates, India commands more than 90 per cent of all offshore
outsourcing in IT services
ITES contributed 25 per cent to the total IT Software and Service exports from India during FY03
Captive ITES-BPO players have almost doubled their share in Indian software exports, growing by
a phenomenal 90 per cent in last financial year
ITES-BPO segment is projected to register a growth of 54% to clock revenues of US$ 3.6 billion
during FY2003-04
The ITES industry is expected to grow to Rs. 810 billion in 2008.

Problems ahead
Since the work coming from the USA is substantial, India has become over dependent on US
market. India is also facing the anti-outsourcing wave currently going in US backed by various
political segments as common people over there feel that it would create more unemployment.
Some of the political leaders are looking for change in International tax law in order to put a check
in outsourcing. In USA call centre segment employs about 7 per cent of work force.
Some companies feel that service provided by another part of the world might bring dissatisfaction
from the customer and brings the repute of the company in stake. This is mainly because of the
Asian accent, which sometimes American find difficult to understand. The cultural difference also
creates problem occasionally as service provider's ignorance leads to misinformation.
On an average an US call centre worker earns $8 to $10 per hour, which has become stagnant
over last few years. While in India people working in call centre are earning salary in five figures,
which is less than what an American employee gets. But, the gap in the wages is reducing and this
might become a problem for Indian BPO industry because of cost factor. Countries like Romania,
Philippines, etc. are giving tough competition because of their low cost, better accent and good
understanding of western culture.
Since last two budgets this segment was not given much of consideration also is worrying factor
for the players involved.

The future..
IBM's move to acquire Daksh is a clear indicator of Indian BPO segment is consolidating and
future is quite promising. What Indian players are required to do is to explore new markets like
Canada, Europe, Japan, Australia, etc., for more work. This will not only reduce the dependency
on US market but also will help the industry to overcome the possible backlash that might come
from US. The industry is also required to improve the service quality to the satisfaction of end
users. Some of the Indian companies like TCS, Infosys, Wipro, etc., have taken towards this
direction. What lies in the future entirely depends on how these companies perform to get
substantial order across the world.