You are on page 1of 11

c c 

c 
 
?

The ~          c refers to the business process
outsourcing services in the outsourcing industry in India, catering mainly to Western operations
of multinational corporations (MNCs).
As of 2008, around 0.7 million people work in outsourcing sector (less than 0.1% of Indians).
Annual revenues are around $11 billion around 1% of GDP. Around 2.5 million people graduate
in India every year. Wages are rising by 10-15 percent as a result of skill shortage.

cc 
 
The industry has been growing rapidly. It grew at a rate of 38% over 2008. For the FY09
financial year the projections is of US$7.2 billion worth of services provided by this industry.
The base in terms of headcount being roughly 400,000 people directly employed in this Industry.
The global BPO Industry is estimated to be worth 120-150 billion dollars, of this the offshore
BPO is estimated to be some US$11.4 billion. India thus has some 5-6% share of the total
Industry, but a commanding 63% share of the offshore component. The U.S $7.2 billion also
represents some 20% of the IT and BPO Industry which is in total expected to have revenues
worth US$36 billion for 2008. The headcount at 400,000 is some 40% of the approximate one
million workers estimated to be directly employees in the IT and BPO Sector.
The related Industry dependent on this are Catering, BPO training and recruitment, transport
vendors, (home pick up and drops for night shifts being the norm in the industry). Security
agencies, Facilities management companies.











? Ê     
   Ê  ?
       ? 

c c 
 c c 

c c


c  
cc 
?
?
?
The Indian IT and ITES industry is booming as outsourcing and offshoring are catching up fast
in the global arena. NASSCOM, the apex organisation of Indian IT & ITES industry, along with
McKinsey prepared a detailed report on the future potential of the industry and what India needs
to do to get a larger share of the global offshoring cake.

In the last decade, the IT and BPO industries have seen substantial offshoring. India has been the
leading offshore destination during this period, and now accounts for 65 per cent of the global
industry in offshore IT and 46 per cent of the global Business Process Offshoring (BPO)
industry. The global offshoring market continues to grow rapidly, as the proven benefits of
offshoring (also termed global sourcing) induce more and more companies to adopt these
practices and providers develop the capabilities to serve even more sophisticated customers.

A detailed analysis indicates that the addressable market for global offshoring exceeds US$ 300
billion. We believe that India can sustain its global leadership position, grow its offshore IT and
BPO industries at an annual rate greater than 25 per cent, and generate export revenues of about
US$ 60 billion by 2010. Additionally, export growth can be further accelerated through deep and
enduring innovation by industry participants. Such extensive innovation could generate an
additional US$ 15-20 billion in export revenue over the next five to ten years.

? 






c 

c  c c
?

c c
The fear of a recession looms over the United States. And as the clich goes, whenever the US
sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking
a cue from a probable recession in the US and a global economic slowdown.
Weakening of the American economy is bad news, not just for India, but for the rest of the world
too.

c


c 

A recession is a decline in a country's gross domestic product (GDP) growth for two or more
consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.



c

An economy which grows over a period of time tends to slow down the growth as a part of the
normal economic cycle. An economy typically expands for 6-10 years and tends to go into a
recession for about six months to 2 years.

A recession normally takes place when consumers loose confidence in the growth of the
economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a decrease in
production, lay-offs and a sharp rise in unemployment.
Investors spend less as they fear stocks values will fall and thus stock markets fall on negative
sentiment.




c

The economy and the stock market are closely related. The stock markets reflect the buoyancy of
the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis,
but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the
US economy. The Sensex crashed by nearly 13 per cent in just two trading sessions in January.
The markets bounced back after the US Fed cut interest rates. However, stock prices are now at a
low ebb in India with little cheer coming to investors.
 c
c
c 

The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US.
Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes.
Major banks have landed in trouble after people could not pay back loans.

The housing market soared on the back of easy availability of loans. The realty sector boomed
but could not sustain the momentum for long, and it collapsed under the gargantuan weight of
crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky
ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the
economy.

?
?



c

The US economy has suffered 10 recessions since the end of World War II. The Great
Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of
high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in
the 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production
declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in
1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and
sharp correction to overproduction of the previous decade. This was followed by Black Monday
in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by
22.6 per cent affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest
expansion on record. From March to November 2001, employment dropped by almost 1.7
million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of
1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.
The dot-com burst hit the US economy and many developing countries as well. The economy
also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock
prices crashed.

c  c 

c  c c

Indian companies have major outsourcing deals from the US. India's exports to the US have also
grown substantially over the years. The India economy is likely to lose between 1 to 2
percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals
in the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But experts
note that the long-term prospects for India are stable. A weak dollar could bring more foreign
money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring
down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US economy. Even though
domestic demand and diversification of trade in the Asian region will partly counter any drop in
the US demand, one simply can't escape a downturn in the world's largest economy. The US
economy accounts for 30 per cent of the world's GDP.

Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In the globalised world,
complete decoupling is impossible. But India may remain relatively less affected by adverse
global events." In fact, many small and medium companies have already started developing trade
ties with China and European countries to ward off big losses.

Manish Sonthalia, head, equity, Motilal Oswal Securities, says if the US economy contracts
much more than anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent by
the IMF-will contract, and India would be no exception.

The only silver lining is that the recession will happen slowly, probably in six months or so. As
of now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather segments will
suffer losses because of their trade link. Certain sections of commodities could face sharp impact
due to the volatile nature of these sectors. C.J. George, managing director, Geojit Financial
Services, says profits of lots of re-export firms may be affected. Countries like China import
commodities from India, do some value-addition and then export them to the US.

The IT sector will be the worst hit as 75 per cent of its revenues come from the US. Low demand
for services may force most Indian Fortune 500 companies to slash their IT budgets. Zinnov
Consulting, a research and offshore advisory, says that besides companies from ITeS and BPO,
automotive components will be affected.
During a full recession, US companies in health care, financial services and all consumer
demand driven firms are likely to cut down on their spending. Among other sectors,
manufacturing and financial institutions are moderately vulnerable. If the service sector takes a
serious hit, India may have to revise its GDP to about 8 to 8.5 per cent or even less.

Lokendra Tomar, senior vice-president, Integreon, a BPO firm, says the US recession is likely to
have a dual impact on the outsourcing industry. Appreciating rupee along with poor performance
of US companies (law firms, investment banks and media houses) will affect the bottom line of
the oursourcing industry. Small BPOs, which are operating at a net margin of 7-8 per cent, will
find it difficult to survive.

According to Dharmakirti Joshi, director and principal economist of CRISIL, along and severe
recession will seriously affect the portfolio and fixed investment flows. Corporates will also
suffer from volatility in foreign exchange rates. The export sector will have to devise new
strategies to enhance productivity.

?

















 



c  c c


Worst affected because of US recession will be the service industry of India. Under service
industries come BPO, KPO, IT, ITeS etc. Service industry contributes about 52% to India's GDP
growth. Now if that is going to get hurt then it will also hurt India's overall growth but very
slightly. India is not going to face a major impact due to US recession. People may say that there
is going to be a huge job loss due to recession. and will cite the example of TCS firing about 500
employees but these were employees who didnt perform and for cost cutting one have to reduce
Non performing asset and that exactly what has been done. There is no threat to the skilled
people. According to NASSCOM India will have a shortage of about 5 million skilled people in
IT/ITeS. So there are lots of opportunities.

Apart from this India's travel, tourism and power industry is going to grow at a better rate. This
is again a good sign. India has a huge population so a huge consumer base so we dont have to
always depend on US for our growth. India's GDP is expected to grow at the rate of 8.5-8.9 %
which is again way above the growth rate of US and only second highest in the world after
China.

This recession gives us opportunity to be innovative and to think out of box so that the US
directly dont affect our robust growth. Due to increasing Rupee exporters are having a hard time
but it has been noted that our exporters are not that efficient and in past they got the benefit of
depreciating rupee. So now its time to be innovative and more effective and increase the over all
efficiency and go for systematic cost cutting to balance the rupee effect. Infact there are lots of
scope for improvement. In West Africa goods at departmental stores are sold at the rate 5 times
than Indian price and Indian goods are not exported to several countries in West Africa. Its an
excellent opportunity for our exporters.

?
?





   c 
 
The US financial crisis and the subsequent global slowdown has hit international BPO
companies hard. Many small and medium ones have ceased to exist and others are
evolving strategies to sail through the slowdown. Business process outsourcing
(BPO) in India was having a good time until recently.

In 2007-8, according to NASSCOM, BPO revenues were close to US$ 11 billion,registering a


growth of 30 percent over the previous year. The party seems to have runout of steam after the
financial crisis hit the shores of the US, the principal market for the Indian BPO companies.
Companies working with the US banking and financial sector (BFSI), the major constituent of the
Indian BPO business, have been the worst hit. The magnitude of the financial crisis has been so
enormous that it engulfed almost all other sectors of the US. Consequently, BPO companies
working with these other sectors have also started seeing adverse effects. While the big players
like Wipro, Infosys and Genpact retain their optimism for the longer term, they are quietly
working on strategies to cope with the current slowdown. In contrast, small and medium players
have faced the brunt of it. Many of them have already ceased operations and many others are
trying to survive by resorting to various means. However, they are still finding the going difficult.
This piece is an attempt to look into what BPO player s are doing to sail through the current
slowdown.



  

³Companies do not have enough business. They do not have enough money on the balance sheet.
They are firing people,´says Rajeev, a BPO professional, who has been lucky enough to get a job
after being laid off by a small BPO company, Cyber Futuristics. He was one among 30 people to
be laid off at the same time. ³When we cannot survive, how can you people survive?´ This is
what the management told them while laying them off. Rajeev¶s case is not a one-off. Many small
and medium BPO companies have done the same. They are not only seeing their sales going
down, but they are facing pr essure on their margins as well. They have been forced to cut on their
operating costs as their US-based clients are reluctant to pay higher prices like ear lier. They
cannot complain, being aware that many people in the US are out of jobs and really short of
money. For instance, Revons IT Solutions, a 15-employee Chennai-based BPO company working
on the publishing works and back-end office operations outsourced from the US, has seen its
volumes going down considerably. A director working with Revons confirms that revenues of the
company have gone down significantly. He admits that around 10 employees have been laid off
so far to cut costs. The depreciation of the rupee against the dollar has come as some relief in
these tough times. Sales of companies have gone down, but revenues in rupee terms have not, as
Aijaz Khan, who runs a small BPO company in Lucknow, points out. He says, ³ Earlier we used
to get anything between Rs 36 and 40 for one dollar. Right now we are getting around Rs 50.
Therefore, we have not seen the revenues going down considerably though sales and margins are
down.´ Bigger players have also faced the heat, but are better equipped to deal with the situation
arising out of the slowdown. A for ecast by NASSCOM reveals the possibility of a 3 to 4 percent
decline in growth in this sector in 2009-10. Domestic BPOs like Cameo Corporate Services, a
Chennai-based company, are in a better position ± probably a reflection of the fact that the Indian
economy is not as badly hit by slowdown as the countries in the West and Japan are. But they are
also not expected to grow at rates any better than previous years, which also demonstrate that
Indian companies are treading cautiously, if ambitiously.



 

When financial crisis hit the US, BPO players thought it to be another opportunity to increase
their business. This turned out to be a gross under estimation of the problem as the crisis blew
entire investment banks off the US landscape. Ajai Bhatnagar of BPO Consultants, an advisory
firm for global outsourcing, says, ³Investment banking is the key to BFSI segment, which
is the bread and butter of both IT and BPO sectors in India. This is in a complete mess in the US.´
So what can international BPOs do, and what are they doing to ride the slowdown? Once reality
struck BPO companies, as Bhatnagar says, they hurried to find means to cut down on costs.
For the BPO sector this was a new situation. Till the slowdown appeared, it was used to a growth
rate of around 30 percent year-on-year basis for the last many years. To begin with, the
reaction was knee-jerk and the first method most BPOs have adopted is to lay off employees. The
big ones have not resorted to retrenchment, but they have almost frozen new intakes as
compared to before the slowdown. Many BPOs, which include some of the big names, have
increased their working hours, and frozen pay hikes and other perks. Infosys BPO, one of the
accelerated the process of redeployment of staff in an effort to largest, has, according to
newspaper reports, terminated the services of over 600 contract workers in February. It has also
prune variable costs. BPOs have suddenly become aware of even the most trivial measures to cut
costs. They are asking employees to switch off monitors not in use, to keep optimum
lighting at the workplace, reduce expenditure on stationery and food items, and cut down on
travel costs. BPOs working on inter national projects have star ted r educing
their margins, which used to be as high as 20 percent. They cannot let their clients leave at this
stage, even when they are not ready to pay the higher prices they were paying earlier. With
these BPOs now willing to work on reduced margins, they have suddenly started seeing value in
the domestic market, where the margin is generally between 8 to 10 percent. International BPOs
like TCL, Infosys and HCL have already started increasing their exposure in the domestic market.
Traditionally, BPOs have been focusing on the US market alone. With the US in crisis, they have
woken up to the reality that there is a world outside it as well. Revons IT, for example, is
concentrating on marketing in Europe and Australia to get new clients, though its efforts have not
paid much dividends yet. Unfortunately, the timing of these efforts seems quite inappropriate.
..

Bhatnagar says that they are not going to pay dividends as the whole world has slowed down,
including Europe, Japan and Australia. Persistent efforts on this front may only bear results once
the slowdown is over. Viswanath R. Rao, Executive Vice- President of Operations, Hinduja
Global Solutions, says the company is focusing on consolidation; something even Bhatnagar says
will be a trend for some time in the BPO sector. Smaller players, especially those catering
specifically to the BFSI in the US, are showing signs of willingness to be acquired as they know
that they may perish forever if they stay put. Bigger players like Aegis, Wipro and HCL have
already either acquired or are planning to acquire some of the companies under pressure. BPOs
are also trying to deepen relationships with existing clients, rather than looking for new ones,
which are anyway nowhere on the horizon. Even smaller players like Aijaz Khan¶s Lucknow-
based BPO have shown a willingness to cooperate with clients over longer payment cycles.
Enterprises outsourcing jobs to India are also keen to deepen these relationships.
Companies are spreading their footprint in areas like consultative selling. This is, however, easier
for bigger companies, than for small and medium-sized BPOs. Bhatnagar of BPO Consultants
says that closures in the small and medium-sized BPOs in recent months have been because of
their inherent problems rather than the slowdown as such. ³People had started these businesses
only in lure of the dollar, with no other commercial will or reason. This downturn will certainly
separate the wheat from chaff and a lot of consolidation will take place.´
Domestic BPOs are expected to remain unscathed. However, they are also not likely to add to
their growth rate. Indian companies might not have been as badly hit as their Amer ican
counterparts, but they are also looking to cut costs. After all, hardly any sector is showing robust
growth. In such a scenario BPOs based in smaller towns, semi-urban and rural areas are expected
to make gains. The slowdown, for instance, has brought cheers to rural BPO DesiCrew, as Saloni
Malhotra, CEO of the company, says. This outfit, which gets works outsourced from the Indian
mobile, Internet and insurance companies, has seen slightly more positive impact during the
slowdown.













The Indian BPO sector has hit a rough patch, and growth rate as expected in 2008-9 will be much
below as what was seen in 2007-8. Even big players like Genpact expect its revenue growth to
reduce from 26 percent in 2007-8 to between 10 and 15 percent in 2008-9. EXL Service expects
its growth to slacken from 19.5 percent last year to 5 to 8 percent this year.
However, a few factors are still loaded in favor of the BPOs. The rupee¶s marked depreciation
against dollar has offset loss in sales volumes to some extent, something even Aijaz Khan pointed
out. Attrition rate has also started showing signs of slowing down consider ably. Inorganic
expansion is what many big players are looking for at this stage. With many BPOs in bad shape,
Bhatnagar says inorganic expansion has become cheaper, a good news for the industry. No
wonder we have been hearing of BPOs with cash in hand on a buying spree despite the slowdown.
Costs of raising capital through banks have fallen. With inflation falling to almost zero, rates are
going to be cut further. This will help the BPOs in the post- slowdown phase, when they will look
to give a real push to their business to cover for lost time. What has hit the BPO industry most
severely is the fact that nearly one-third of its revenues originate from the BFSI vertical ± an area
worst affected during the slowdown. This segment is still not showing signs of real improvements
though governments all over the world are trying to revive it through stimulus packages. The
economic situation in the US and other countries are, however, bound to improve sooner or later
as effects of so many stimulus packages will ultimately be visible.
Smaller and medium-sized BPOs also realize this and are probably counting on it. They are trying
to hang on for as long as possible. Perhaps the best bet for them is to merge with bigger players.
And for the bigger players these can prove value- additions at fairly cheaper prices. Bhatnagar
says that BPO companies should start working with the international clients to benchmark
processes and become more efficient, something on the lines of Infosys, which is expected to
maintain an impressive 25 per cent year-on-year growth despite the slowdown.
NASSCOM is quite optimistic about the BPO sector in the long run. Accor ding to its recent
report ± Strategic Review 2009 ± the sector will rebound from 2010 onwards. The report
highlights that the BPO industry will ultimately benefit from the short-term cutbacks in spending
by US companies on technology. Bhatnagar also prophesies that BPOs that survive these tough
years and prune themselves to be nimble entities will thrive and grow with a big bang. Perhaps
this is what is inspiring many small and medium BPO player s to hang on by a thread.