BPO Sector - Showcasing Resilience

By M H Ahssan

Despite a tough environment, small BPOs fared well in FY09. You could be forgiven for thinking that the global economic downturn would have crippled most small and mid-size business process outsourcing (BPO) companies, but you would be wide off the mark. In reality, small and mid-size BPOs, while fighting a grim battle to survive, have fought admirably well. And they have done it not by doing anything spectacularly different, but by following the strategies of their bigger cousins, who have also been equally hit by the slowdown. As per estimates of IT body Nasscom, India’s overall IT-BPO industry grew 11.77 per cent in 2008-09 compared to 33.9 per cent in 2007-08. BPO, at 18.22 per cent, showed the highest growth, albeit that was also a big drop from the previous year’s 31.55 per cent.

As such, it has been a hard grind for small and mid-size BPOs, who faced non-payment from bankrupt clients, pressure to renegotiate existing contracts at lower rates, increasing wage costs and diminishing profits. As countermeasures, most of them have offered more services at the same rate to existing clients; some have diversified into new geographies or new service areas; others have turned inward to service the Indian market. In the process, they have notched up revenue growth rates between 15 per cent and 40 per cent (see ‘Staying Afloat’). And to address the bottom line, almost all have gone on a cost-cutting spree.

Battling The Odds...
One reason why BPOs faced trouble is that their biggest markets are the US and the UK, countries that have been hardest hit by the economic downturn. “Most of them have more international clientele, so they have certainly faced a problem,” says Pramod Bhasin, CEO of Genpact, one of India’s largest BPO companies, which saw its own revenue growth halve to 13 per cent, and PAT fall by 48 per cent last fiscal.

Adds Raju Bhatnagar, vice-president for BPO and government relations at Nasscom: “BPOs that are into credit card outbound calls, home loans and the automobile industry have been affected.” For example, EKM Infotech, a tiny 20-seater BPO based in Delhi, has had clients going bankrupt or simply unable to pay up. “We cannot even take legal action because the attorney will be very expensive,” says Avneet Sidhu, CEO and director of EKM Infotech.

BPOs that serve more verticals, or focus on niche areas, have fared better, according to Bhatnagar. Manpreet Singh, senior vice-president of Vertex India, an 850-seater BPO operating out of Gurgaon, claims the company has remained unscathed because it has clients across telecom, retail, BFSI, and utilities such as water and power, but he declines to disclose specific numbers. But even such companies faced longer payment cycles. “The payment cycles used to be 120 days but now they have extended to 150-180 days,” says Chetan Kothari, managing director of the 900-seater, Mumbai-based Tricom India, which is mostly into legal and healthcare services.

Most BPOs, though, have prevented their revenues from slipping. Here is how. First, most mid-sized BPOs have managed to ward off client moves to renegotiate existing contracts by offering more services for the same price. (But when contracts have come up for renewal, prices have fallen up to 20 per cent, according to Satish Ambe, head of Managed Process Services at Mumbai-based Kale Consultants.) Second, the dollar’s appreciation against the rupee has also prevented revenues from falling.

Profitability, though, has taken a hit, primarily because operating costs such as salaries have increased. “The focus has been to increase productivity per head,” says Tricom’s Kothari. Other operational expenses have been trimmed, too. Hero Management Services, says director Anupam Bhasin, reduced expenses 25 per cent by rationalising employee transportation routes, vacating a rented office, and adopting VoIP-based solutions for phone calls.

...And Surviving To Tell The Tale
Many BPOs have either entered new markets such as Europe (other than UK) and Australia, or entered new verticals, or entered India. “We see a lot of opportunities coming from Germany,” says EKM’s Sidhu. Adds Hero’s Bhasin: “We see growth of 10 per cent from Europe and around 8 per cent from Australia.” ExpertServ has started doing back office management work, including back-end activation of SIM cards and credit cards, says Kulindra Shrivastava, vice-president of business operations at ExpertServ.

“Another place BPOs are looking at is India,” says Viral Thakker, partner at KPMG India. That is not a bad ploy: Nasscom’s estimates for FY09 indicate that domestic BPO has grown the most — 23.16 per cent, driven mainly by growth in BFSI, telecom and airline industries.

As Genpact’s Bhasin says, “Those small and mid-sized BPOs that focused on the domestic market have been less hit during this downturn.” One such BPO is Intouch Solutions, which grew its revenues at an enviable 25.7 per cent last year. “We expect 40 per cent growth this year,” says a bullish Vishal Choudhury, executive director of the company. Sensing the potential, most mid-size BPO companies are making a beeline for the Indian market.

But making a mark will not be easy. Entry of more companies has put pressure on prices. “Earlier, we had fewer people in the domestic market so the pricing was better,” says Intouch’s Choudhury. “But now, a lot more negotiations are happening on the price front.” Then, mindsets of Indian clients are very different. “Indian clients negotiate costs to a very large extent,” says EKM’s Sidhu. “One IT major wanted to pay us Rs 100 per employee, whereas US clients pay us a minimum of $20 per employee.”

Finally, there is hope that outsourcing will remain a priority for US companies, despite President Barack Obama’s proposal to take away tax benefits from companies that outsource jobs. “The tax benefits they would get from the US will be much less than the operational expense they will have to incur,” says KPMG’s Thakker.

Indian BPO companies say this argument is borne out by the fact that despite the difficult environment, business has actually grown during the downturn. “To optimise costs, outsourcing is one big area enterprises are looking at,” says Vertex’s Singh. “Everybody has business challenges during this downturn, and we are looking at addressing those challenges.” Hopefully, when the upturn arrives, India’s mid-size BPOs will reap the fruits of perseverance.