BPO - Making It Big At Home

By M H Ahssan

While global clients may still hold glamour, domestic BPO orders are proving more resilient.

Young and full of beans, the domestic business process outsourcing (BPO) market is disproving the existence of an economic slowdown. While the domestic IT services market grew at a dismal 20 per cent in FY09 compared to its 42.51 per cent rise in the previous year, the domestic BPO market grew at a much higher 40.6 per cent compared to last year’s 28.6 per cent.

A number of relatively recent deals and their value, which now runs into hundreds of millions of dollars, have strengthened the sector. Intelenet’s domestic BPO Sparsh employs 17,000 people, and has grown 35 per cent from its previous year’s head count of 12,600. Also, Sparsh closed one of the biggest domestic BPO deals for Aircel’s customer support this year, though the valuation is unknown. It will be based out of its Puducherry centre, which had an initial head count of 1,600.

Genpact, which hitherto only had international clients, set up a domestic division with a team of 1,000 employees nine months ago. Its main focus is the BFSI (banking, financial services and insurance) and telecom sectors. It is rumoured that Genpact has closed a deal with one of the largest private banks in the country to provide end-to-end solutions.

Tech Mahindra plans to scale up to 4,000 seats from the present 2,000 in the next two months. “We have a separate team handling domestic operations,” says Sriram Veeravalli Sevellimedu, head of BPO operations at Tech Mahindra. Nearly half of Hinduja Global Solutions’ (HGS) 14,205 employees cater only to the domestic market, and 17 per cent of its revenues come from it. “Initially, the margins were very low, but they are stabilising (at higher levels) slowly,” says Partha Sarkar, CEO of HGS. Seats at its domestic operations have grown from 6,500 to 7,000-plus last year.

Though the majority of the deals pertain to customer support, large deals for end-to-end processes (see ‘Homing In On Growth’) are also being sealed. The five biggest customers of domestic BPOs are Idea Cellular, Airtel, Indian Railways, ICICI Bank and Aircel. The domestic BPO sector has grown to a $1.94-billion (Rs 8,900 crore) industry from a $1.57 billion (Rs 6,330 crore then) in FY08.

While the telecom and BFSI segments have been generating maximum revenues for the sector, the HR, finance and accounting segments are also seeing credible growth. Operations out of tier II and III cities are becoming more commonplace. The decline in volumes in the international market has also aided the dramatic surge in the domestic BPO sector. As larger BPOs enter the domestic market, both the demands from clients and end-delivery modules are undergoing rapid changes.

“Several years ago, only a part of a project was outsourced by domestic enterprises,” says Anuj Kumar, vice-president, India domestic CoE at IBM Daksh. Today, Kumar finds Daksh looking at customer outcomes for large enterprises such as Bharti and Idea Cellular, too.

IT industry body Nasscom says that trends and verticals will become more diverse. “From customer care to back-office management, from banking to telecom, and from voice to non-voice, today, the domestic BPO is into everything and that too in a structured way,” says Raju Bhatnagar, vice-president of Nasscom.

The Next Level
In the early 1990s, BPOs catering to the domestic market were chiefly single-entrepreneur set-ups in an unorganised market. “Subsequently, they ran out of capital, and were forced to shut down or merge with larger enterprises,” says Sarkar. In 2004, IBM landed a landmark $275- million deal with Bharti Airtel, heralding the advent of large BPOs into the sector. While the market has come a long way since then, the past couple of years have been most significant. Today, the biggest players in the domestic BPO business are Sparsh Intelenet, Wipro, IBM Daksh, MphasiS and Bharat BPO.

While most of the work is still on the voice segment, there is a slow shift towards outsourcing back-end operations. Indian enterprises do not want to go to different BPO operators for handling different processes of their business. “The domestic market has proven to be better business for integrated processes,” says Kumar.

Susir Kumar, CEO of Sparsh Intelenet, also sees a significant shift from outbound calls to more inbound and end-to-end solutions. “Most of the work we do is inbound and back-office management, from entries to account set-ups,” he says. Market estimates value Sparsh’s deal with Aircel at Rs 70-80 crore, if the deal is for four-five years. “As we expand our business in south India, we needed a partner with core strengths in the domestic telecom industry,” explains Gurdeep Singh, COO of Aircel.

Earlier, pricing depended on several factors: the number of people working, time taken per call, total number of calls, and so on. Today, SLAs (service-level agreements) are changing to business outcome models and transaction-based pricing. “Buying patterns and heavier procurement processes are being formulated in the manner of international businesses,” says Tech Mahindra’s Sriram.

SMS has also become a revenue earner for BPOs. “Apart from 700,000 calls a day, we also handle 50,000 SMSs every day for the railways,” says Akashdeep Singh, COO of Bharat BPO, which takes care of Indian Railways’ BPO needs exclusively.

Transaction-based pricing has just taken off, and is expected to bring in more transparency. While Wipro continues to charge its customers on a time-per-call basis, irrespective of whether the call was resolved or not, it is looking at changing this. “We are looking at outcome-based pricing, and we are innovating to measure the business outcome per call,” says Ashutosh Vaidya, senior vice-president and head at Wipro BPO.

Telecom, BFSI And More
The ever-increasing customer base of telecom service providers, and the growing insurance and banking industry have supported the domestic BPO industry quite well till now. In 2008, telecom constituted $661 million of the $1.57-billion domestic BPO pie and, in 2009, it accounted for $865 million of the $1.94-billion domestic industry. While the telecom segment of the domestic BPO industry is growing at 56 per cent, the overall domestic BPO market is growing at 40.6 per cent. BFSI constitutes about 50 per cent of this market. The remaining verticals, though with a smaller share, continue to grow at a rapid pace.

Owing to the global slowdown, the BFSI sector in the West has seen a massive crunch in volumes. The travel sector, which does a lot of outsourcing, is not in good shape either.

Bharat BPO is the only company that caters to a single domestic client, the Indian Railways. Interestingly, it does not charge the railways. Instead, it shares revenue with telcos which route the customers’ calls to the BPO. “The railways used to spend as much as Rs 100 crore annually on callers and telephone bills till two years ago, which is a net saving for them now,” says Singh.

Still To Come
Impressive though its growth appears, the domestic BPO base is very small and is still at only 13.13 per cent of the total BPO industry in India. The size of domestic BPO orders is only about 40-50 per cent that of international orders, and the profit margins are lower. The difference in the profit margin between the domestic and international BPO sectors varies from 15 to 25 per cent, and is mainly due to the differences in labour costs. International services need a more skilled work force. “Domestic BPO margins are on an average 15 per cent lower than that of offshore, but are fairly comparable,” says Radhika Balasubramanian, COO of Sparsh.

India remains a price-sensitive market, and customers here have different demands from those of international clients. “Even if we can provide them a value proposition of 10 per cent, we can get a client,” says Susir Kumar.

Nasscom’s Bhatnagar feels both the export and domestic BPO markets will continue to grow as there is ample headroom. But in the days to come, a lot of consolidation is expected. “A lot of the larger BPOs do not have low-price models, so they might have to merge with the smaller BPOs to provide affordability to customers,” says HGS’s Sarkar.

As anticipated a few years ago, IT-BPO services have begun emanating from tier II and III cities. Several large BPOs are trying to operate out of cities such as Jaipur, Ahmedabad and Durgapur, which provide a large multi-lingual pool of labour that is needed (but not readily available in tier I cities) by telcos that offer multi-lingual services. But,“the trainability index of an employee is very high in these cities for high-end processes”, says Sriram.

Nevertheless, with a little extra effort to train personnel, it becomes far more cost-efficient to operate from a smaller city. “We have to pay low salaries and low rentals compared to large cities,” says Sarkar of HGS, which has a large facility in Durgapur. Similarly, Sparsh Intelenet has set up its BPOs in Mohali and Aurangabad, and IBM Daksh has a facility in Visakhapatnam.

Still, BPOs often cannot move operations because of strict SLAs on quality, which they are unable to meet from smaller cities that have deficient work culture, connectivity and infrastructure. Sparsh’s Kumar admits that moving to smaller cities is not always cheaper from the RoI (return on investment) point of view.

“To catch up with the growth of the export BPO segment, the domestic segment will have to grow phenomenally,” agrees Vaidya of Wipro. The slowdown has changed the needs of customers. New integrated processes, strict SLAs, pricing and consolidation will drive the industry. The domestic BPO industry will also have to move beyond the telecom and BFSI verticals by innovating faster. It is a time of considerable challenges, but also one of great opportunities.