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Saturday 12 November 2011

Changing Gears of Indian BPOs

Where are we struggling Right now?
India's unrestrained growth in business process outsourcing (BPO) services appears to have taken an unexpected stumble. A decade after dominating the market and racking up $12.4 billion in revenues, directly employing three million people and cornering nearly half the share of the offshore global market three years ago, a large chunk of the Indian BPO industry focused on voice tasks appears to be having second thoughts.
Prompted by rising wage costs, attrition and an inc r e a s i n g ly painful shortage of English proficient talent, several BPO firms are heading to the relative safety of the Philippines. Up to a dozen operators are rapidly setting up and expanding call centres in this South-east Asian nation of a 100 million people, and many more are expected to follow as clients are increasingly insisting on delivery of services from Manila.
The Philippines churns out 350,000 graduates annually, most of them proficient in English, thanks to English medium education in its schools. Also, Filipinos speak with a more familiar accent and are culturally closer to key markets in North America (especially the United States). BPO firms in the Philippines enjoy extended tax holidays and spend far less than in India particularly on office rents and transport for workers. As a result, in barely five years the BPO industry in the Philippines has grown to nearly $7 billion in size and employs some 450,000 people, a majority of them in the voice sector.
But in the background industry executives have struggled with tougher operating challenges. Of the three million graduates churned out by Indian colleges every year, only a small fraction is employable. As a result, BPO companies spend at least four weeks training each of their agents or associates to take or make calls "live" on the floor. Once the agents gain some experience, retaining them can be a tough task, with attrition rates topping 50 per cent in some voice BPO firms.Some analysts dismiss any overt threat to the Indian BPO sector from the Philippines. "India continues to enjoy the largest share of the BPO market (over 50 per cent globally) and has graduated beyond voice to higher-value services," says Arup Roy of tech researcher Gartner. Even so, about 43 per cent of India's BPO revenues today come from voicebased services and, of that, almost all from English-speaking customer services contracts. Over time, the industry has matured, evolving from just voice calls to supporting other forms of services (web, e-mail and instant message) to entering the non-voice, data-based services market. More recently, many companies have moved to the next level, with their customers trusting them to analyse sales and customer data.
Worried by these rapidly worsening numbers, companies that outsource work and the service providers themselves have rapidly looked for alternatives, especially to the proverbial low-hanging fruit, the voice BPO market. Indian BPO veterans such as Raman Roy, who founded the BPO firm Quatrro after selling off Spectramind, among India's earliest crop of call centres, to Wipro, argue that the industry here is handing its business on a platter to Manila and allowing it to scale. "The largest company in the Philippines is perhaps as big as one facility of an Indian BPO. By letting large-scale voice work migrate to Manila, we're allowing the Philippines to add heft to their industry," he says.
Aggressive incentives to BPO companies and some inherent advantages of location also help. "The IT/BPO hub in Manila is situated bang in the middle of some of the largest shopping malls," says Keshav Murugesh, CEO of WNS, which started with a 200-seat facility in the Philippines in 2008. "The government has invested in transportation infrastructure for shopping malls, thus it is easy for employees to travel to and from work." The Philippines also has better tax sops and cheaper infrastructure costs (telecom bandwidth is at least 25 per cent cheaper, for instance), which make it more lucrative to set up a unit there.
Two years ago, after Intelenet Global Services started losing clients because it didn't have a centre in the Philippines, it started with a small, 100-person team there. It has grown to a 1,000-person unit, and the company plans to scale up to 5,000 people in four years. "Filipinos don't need to attend intensive accent neutralisation classes lasting four weeks or be herded through culture courses either," says Sandeep Aggarwal, Intelenet's Executive Vice President for Sales, Solution and Transition.
The cultural similarities between the United States and the Philippines make for another snug fit. It is easier to explain to an American that a hurricane has shuttered a facility than, say, Shiv Sena riots bringing Mumbai to a halt, says Aggarwal. Clients from sectors such as consumer electronics and others are demanding that voice support be delivered from the Philippines and not India.
WNS and Intelenet aren't the only ones expanding rapidly in the Philippines. Rohit Kapoor, Chief Executive of EXL Service, made multiple visits to Manila to hunt for an acquisition to enter the market. He wasn't successful. Instead, Kapoor opted to set up a new centre around 18 months ago, which has today grown to 800 people, handling calls from eight companies.
"Customer empathy is much better in Manila... we have people empathising more personally with customers who have accidents, than just relying on preset manuals to verify claims," he says. Outsourcing experts and advisors in the Philippines say that the trend is irreversible. The country may already be a leader in voice BPO, going by where new contracts are being delivered from, according to Gregory Kittelson, Managing Director, Kittelson & Carpo Consulting, an immigration and outsourcing services provider in Manila.
"If you're doing voice work out of India and haven't lost your contract you're going to do so pretty soon," he says, without a hint of humour. Kittelson & Carpo has advised at least 150 companies this year, mainly in BPO, about setting up shop in the Philippines. This attraction was too hard to resist for Shanmugam Nagarajan, Co-founder and Chief People Officer of 24/7 Customer, a Bangalorebased BPO service provider.
His company, founded in 2000, has some 3,000 people in India, while it has already hired over 4,000 in five years in the Philippines. "India has been muscled out of the voice market," Nagarajan says. "Rising attrition and consequent wage rise make it very difficult to scale in India." So, 24/7 Customer says it will continue to expand in the Philippines and is looking for a place outside Manila, even as its expansion in India slows. India's voice BPO growth is being held back at an annual 15-20 per cent when it can expand at 50 per cent, rues Roy of Quattro.
While large BPOs such as WNS and IBM Daksh may be able to adopt a hybrid delivery model across India, the Philippines and other outsourcing locations, the decline of call centre contracts from here may be a pointer to much tougher times ahead for this once unstoppable sector.
Is their chance of Growth by small tweakings?
A post-lunch slowing of biorhythms is sweeping through call-centre country Gurgaon and the performance on a floor full of agents working on a large Indian mobile phone company's account is faltering. The slowdown is spotted some 1,400 km away at Aegis's grandiosely-named Global Command Centre, or GCC, in Mumbai. The analyst, who notices the falling metrics, reaches for the phone, flagging it to the Gurgaon call centre's head with a solution: cut down on breaks later that afternoon to bring back service levels to an even keel.


Sure, there would have been some tight bladders on the post-lunch shift, but the remote sensing ability of Aegis's so-called GCC is the next generation of outsourcing, says Aparup Sengupta, the company's Managing Director and Global CEO. "It will improve consumer experiences and in the process help companies perform better," he says.
Systems like the GCC (it cost $10 million to put up), a focus on consultancy, and its investment in training will propel growth for the emerging star in the steel-tooil Essar group of companies, says Sengupta. For a company that has made 18 acquisitions in seven years, Aegis is focused on squeezing growth through consolidating its spread. "We crossed $700 million of revenue this year. By March 2012, we want to cross the magic $1 billion mark, and this growth will be organic," says Sengupta. India's total business process outsourcing, or BPO, services revenue was around $17 billion in 2010/11.

Next Growth will be only once you move up to value chain!
Halfway across the world, another BPO unit from an old economy Indian conglomerate is also pushing the envelope. Toronto, Canada-based Deepak Patel, CEO, Aditya Birla Minacs, is busy expanding beyond plain vanilla outsourcing to high-tech consulting. "It's a domain, domain, domain game now! The earlier model of Indian outsourcing was based on labour arbitrage, but that alone is not enough now," says Patel. Companies are outsourcing even what used to be considered "core" work some years ago. For example, credit card issuers earlier would not outsource fraud detection and forensics work; today, they are.


To address opportunities like this, Minacs - as the BPO unit of the $35-billion Aditya Birla conglomerate is commonly called - has a new go-to-market approach in place, which has the company proactively presenting proposals to clients rather than merely responding to request for proposals, or RFPs, floated by outsourcers. "This happens more with existing customers, is more expensive than traditional methods, but works better in sales conversion than the traditional method of responding to RFPs," says Patel. "If you get up the value chain, the margins are higher, the business is stickier, and relationships with your partners are more respectful."


Earlier this year, for one of its unnamed North American customers, Minacs's executives visited 140 sites across the United States to understand closely the operations. "After six months of extensive touring, we put forward five proposals, each of which was tailor-made to meet their requirements. This changed the competitive landscape as nobody had the kind of insight that we did," he says. These steps are reflected in the company's revenues: $375 million in 2010/11, up from some $312 million the year before.
"There is a growing need for BPOs to use the data to drive certain business results aligned with their business processes," says Mayur Sahni, Senior Market Analyst, IDC Asia-Pacific.


mosimageIn India's rapidly growing BPO industry, Aegis and Minacs are outliers; very different from new-age start-ups seeded by professionals, such as WNS, or outsourcing units spun off from multinationals (market leader Genpact, for instance). Aegis and Minacs, by contrast, come from old world business groups which have made their millions in businesses such as cement, steel, petroleum and aluminium, among others. The closest business to tech outsourcing services they have run is telecom.
While both the BPO firms claim that a small percentage - four per cent for Minacs and less than seven per cent for Aegis - of their business comes from their respective parent groups, there is no denying the benefits of being part of large conglomerates.


"For most BPO companies positioning is a mere brand statement. Aegis and Minacs have spent money in executing their brand positioning. They have been able to do so due to the backing of the large groups that they belong to," says a BPO industry insider.


mosimageIt is perhaps such depth of support that allows Aegis and Minacs to absorb costs even if it lowers profitability. In June this year, rating agency Standard & Poor's expressed concerns over Aegis's 13 per cent operating margins - measured by earnings before interest, tax, depreciation and amortization, or EBITDA - being lower than its peers. The reason for this is its higher share of onsite delivery which piles up costs. Sengupta calls it cultural proximity to its customers. "An employee sitting in Bangalore may not be able to serve a platinum card customer from the US who lost his card skiing in Vermont," he says.


Minacs hired 30 senior domain specialists in 2009/10 - an expense that had not been budgeted for, but one which, Patel says, was critical to take the business forward. "If you are going to execute pieces of your client's business, you got to have people who are more talented than the ones your clients have." At Rs 35 crore in the April-June quarter this year, Minacs's EBITDA was flat from last year, but Patel puts it down to investments in ramping up to serve clients in the coming quarters.


Next, the Aditya Birla group plans to merge two information technology, or IT, subsidiaries into Minacs, a move lauded by an analyst. "There are two ways in which BPO vendors move up the value chain. One is by moving up within the BPO industry, where Indian vendors have been fairly successful. The other is by moving from BPO services to IT services. Indian BPO companies have been finding it difficult to achieve growth in IT services organically," says Ajay Srinivasan, Head, CRISIL Research. Over the years, Minacs and Aegis have built strong businesses. How valuable they turn out to be in the years ahead for the conglomerates they are a part of will be decided by how quickly they step out of their parents' benign shadows.

Source: compiled from various articles on Business Today 

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