It was one of the most crucial issues on which the US Presidential election was contested, even leading to, some believe, John Kerry's ultimate defeat. Across the Atlantic Tony Blair's re-election was also dominated by it. It even inspired our ubiquitous Bollywood to produce a movie called American Daylights. A radio channel in the US carried a skit on how to abuse an Indian call center agent (thankfully, there was indignation and indictment in the US also). There could be little doubt that the Rs 25,080 crore Indian BPO industry remained in global headlines throughout 2004-05. This was a 41% jump over the Rs 17,830 crore it registered the previous year-exports did slow down a wee bit, growing at 36% to reach Rs 22,440 crore; however, this was more than compensated for by the whopping 85% growth registered by the domestic BPO sector pegged at Rs 2,640 crore.

The continued momentum of market consolidation, the renewed interest of VCs leading to substantial funding, growing synergies between IT services and BPO arms of companies involved in both business lines, emergence of a new breed of high-end knowledge based processes other than the regular service lines, and more and more new industries starting to outsource to India, plus the growth of a domestic market, were some of the real positives in 2004-05.

Notwithstanding the healthy growth, the general consensus seemed to be that the Indian BPO industry took two steps forward and then one back during the year. The anti-outsourcing campaign that continued in the US and UK even after the respective elections, would have remained only a minor irritant if a spate of events had not highlighted the lack of adequate data protection laws in India. Coupled with this, a cluster of geographies across the world emerged as viable BPO hubs and threatened to gnaw away at India's undisputed supremacy in this sector till date. However, the biggest worry has been internal-with attrition levels reaching alarming proportions, the industry started feeling the manpower pinch for the first time; even, going to newer cities or recruiting from hinterland was not able to solve the issue immediately. Add to it the psychologically debilitating effects the industry had on a majority of people due to time, work and cultural pressures, and you would find Indian BPO sitting right above a Molotov cocktail with the fuse about to be released.

Consolidation & Funding
Consolidation in the form of M&A activities was the buzzword throughout the year-this obviously led to substantial VC funding during every quarter of FY 2004-05. (See Tables What the VCs Ordained & The BPO Consolidation Chart to see the complete list)

The largest BPO investment during Q1 was the $50 mn raised by Chennai-based OfficeTiger from US-based private equity firm Francisco Partners. Feroze Waheed founded Astra Business Services, a Gurgaon, and San Francisco, based firm focused on collections services for the US market, raised a $4 mn investment led by WestBridge Capital Partners. iSeva, a Bangalore and Irving, Texas based BPO services firm, raised an undisclosed amount of funds from existing investor e4e Inc and called off its merger deal with US-based ECE Holdings. But the highlight of Q1 was the acquisition of Daksh e-Services by IT Services giant IBM. The deal, valued at about $160 mn, represented one of the most successful exits for VC investors in the Indian BPO industry.

Equally important was TCS exiting from Intelenet by divesting its 50% stake to HDFC for Rs 161 crore just prior to its IPO. Q2 witnessed a decline in VC investment from Q1. In M&A action during Q2, ICICI OneSource took a 51% stake in Chicago-based Pipal Research, a provider of business research and analytics and a 100% stake in Amherst, New York-based consumer collections agency Accounts Solution Group; Mumbai based Infowavz was acquired by HIG Capital, a Miami, Florida based private equity firm.

Q3 was the time for the biggies; GECIS sold off 60% of its shareholding-shared equally by two private equity firms, General Atlantic Partners and Oak Hill Capital Partners. The transformation of GECIS from a captive organization to a third-party BPO service provider presaged increased reluctance of global organizations to own their shared services operations, especially where the first-mover advantages of having in-house resources have already been achieved.

Q3 saw few other VC investments too-V Prabhakar Ram founded Outfield Knowledge Works, the holding company of Newgen Imaging Systems, a Chennai based provider of end-to-end services for the ePublishing industry, raised $9.4 mn from The Carlyle Group. Kishore Mirchandani co-founded Outsource Partners International (formerly itAccounts), a Bangalore and Los Angeles-based firm focused on finance and accounting functions, raised a $4 mn second round add on from new investor Cargill Ventures. The quarter also saw HDFC divesting 50% of its stake in Intelenet to Barclays for a consideration of Rs 164 crore, and TWS Holdings selling off Webhelp to Brigade.

In the last quarter of the year, H-Cube, formed in January by private equity investment firm GTRC Golder Rauner in association with ex-ACS EVP Henry Hortenstine, acquired a majority stake in Zenta, though previous owner Intrepid Capital Partners retained substantial stakes.

BPO Competitors for India
However, if consolidation presented the brighter picture of Indian BPO, the emergence of other BPO hubs around the world posed a serious threat. Although Ireland, China, and the Philippines are currently not as favorably positioned as India in terms of availability of low-cost skills, they are making significant efforts in improving the quality and quantity of their manpower. Add to these bad media coverage on a couple of BPO funds like siphoning off of funds from Citibank accounts by MphasiS' Pune employees or the Sun sting operation at Infinity e-services, the brand name of India is bound to take a hit.

However, despite the ongoing backlash against outsourcing, Indian call centers are set to add another 100,000 seats this year, much higher than the 70,000 seats that the country added in 2004-05. This was one of the major findings by a recent research report prepared by human resources firm Kelly Services after a survey done in four countries-India, China, Korea and the Philippines. This growth represents around 64%, which is the highest across the region, the report said. On the cost front too, Indian centers are ranked the most competitive among the four countries with salaries paid to agents in India being even lesser than in the Philippines. In terms of manpower issues, the report stated that India experiences a high level of agent turnover and competitive poaching and that the pool of agents is large enough to accommodate this movement. Only 11% of call centers are facing recruitment issues, while larger centers find it more difficult to recruit.

The Manpower Problem
The optimism of the Kelly report on the quantum of manpower might be slightly misplaced. Current manpower resources available to the Indian BPO industry will not be sufficient to meet the country's aggressive growth targets even in the medium term (2009). The manpower shortage, coupled with high attrition, already impacted the performance of the Indian BPO industry in FY 2004-05, making it less globally competitive, because

• service billing rates fell from $10-12 per hour to $4-11 (except maybe for the Top 15)
• employee attrition levels shot up from 30-35% per year to 60-70%
• per-head salary costs increased from $ 200 a month to $ 330
• profit margins plunged from 30-40% to 17-25%.

Manpower will be required across all levels in BPO companies, but estimates based on current staffing patterns suggest that there could be a significant requirement of experienced people at the manager/team leader level. The need for action is urgent, because the availability of people with relevant skills has to be generated at least 2-4 years ahead of actual demand. There may also be need for a rethink on the specific skills provided by the education system, with the more complex tasks requiring post-graduate qualifications. Specific 'delivery-related' skills having to do with language, analytical ability, computer proficiency, customer service orientation and behavior would also be needed. In order to meet the skill requirements of the ITeS industry, the Nasscom- KPMG report recommends remedial action to plug gaps in each aspect of the education lifecycle.

• People are not attracted to ITeS because they are not aware of employment options,

• ITeS is perceived as largely requiring IT skills; jobs in the ITeS industry lack esteem, and employment is not seen as a long-term career option.

• Key skills required by the industry are not developed through the current educational system, and a standardized modular curriculum for ITeS is lacking.

• There is no national-level mechanism for certifying skilled manpower, nor is there an understanding of specific parameters to test and certify.

• There is a lack of direct placement links between institutions and ITeS industry, especially in the smaller cities.

Rajneesh De For more details log on to www.dqindia.com