According to DQ estimates the Rs 17,830-crore Indian BPO pie in 2003-04 primarily comprised four constituents-the MNC captives who contributed around 56%, the India-centric third party BPO service providers with around 29%, the MNC BPOs with around 8%, while the remaining 7% came from the domestic call centers that were primarily captives.

The Big Guns
Within the India-centric third party BPOs, the Top 20 contributed nearly 70%, while the remaining 300-odd players accounted for the rest. The scenario is not much different from software exports, where the Top 20 contributed more than 60% of the overall pie. Perhaps, this explains the spate of consolidation within the industry in terms of a number of M&A activities that happened during the year. And, that is a trend that is likely to continue in 2004-05. Barring some niche players, most of the smaller ones are likely to be absorbed by the Top 20 who are readying to scale up.

Companies like eFunds, EXL Service, vCustomer and 24/7 Customer had more than 55% of employees involved in inbound voice work, about 12% were engaged in outbound voice, 25% were in back-office processes and about 8% in e-mail support. Wipro Spectramind, at Rs 437 crore, headed the revenue list in this category, followed by WNS Global Services which clocked Rs 414 crore. On the IT services side, the list included HCL Technologies BPO Services, Progeon (Infosys), mSource (mPhasis), etc. Other prominent names were Nipuna (Satyam), SmartServe (NIIT), Optimus (Polaris) as well as the BPO operations of Patni, Mastek and Zensar.

Pure-play BPO companies, which narrowly missed the Top 20, included Tracmail (partially restructured into TWS Holdings), Allsec Technologies, Vetri Software, Global Vantedge and iCall India. While Daksh, at Rs 284 crore, was a prominent member of the Top 20, it has since been acquired by IBM and would join the MNC club next year.

Captive Success
Captives were the first to come to India during the late 90s led by the now legendary GE Capital (mainly voice) and American Express (primarily back-office). In 2003-04, this category contributed nearly 49% in revenues, though their number was less than 15% of the active BPOs in India. GE Capital International Services (GECIS) headed the Top 10 list of captives followed by Dell and American Express. Not surprisingly, the BFSI sector dominated the list of Top 10 captives-other than GECIS and Amex, it included e-Serve, Scope (Standard Chartered captive), HSBC and JP Morgan Chase. Technical support/helpdesk was represented by Dell, Global eBusiness (HP) and AOL, while P&O Nedlloyd, one of the largest container carriers in the world, was an interesting inclusion. Outside the Top 10, there were BFSI captives like ABN-Amro (ACES), AXA, Prudential and Morgan Stanley, whose revenues would be in the same region as the No. 10, P&O Nedlloyd, in the list.

Foreign Origin, No Bar
A smaller chunk of 8% of the overall pie was contributed by the MNC third-parties who had mostly come to India during the last three years following the US economic slowdown. The year 2003-04 was the one that really saw most of these companies substantially scaling up their operations in the country and included customer interaction companies like Convergys, Sitel, Vertex, and Sykes as well as broad based BPO companies like Accenture, EDS and Deloitte Consulting in the Top 10 list. Some other prominent players who did not make into the Top 10 included Deloitte Consulting, CSC, TeleTech and LiveBridge.

India Shining
The year also saw the domestic BPO industry taking a big leap to reach Rs 1,240 crore. This was mainly driven by a host of captive call centers that either came up or scaled up their existing operations. The main thrust came from the banks, the telecom service providers, the hospitality industry as well as travel and tourism. The Tatas started the E2E Serwiz Solutions, the first big organized domestic call center in the country. Reliance Infocomm added more than 2,000 people in its call center providing support in multiple languages. Even banks like ICICI and HDFC substantially beefed up their call center operations.

Contrary to popular belief, the domestic sector was not only about call centers-India also started seeing serious BPO work getting done. While players like Datamatics increased their proportion of work like share registry, more and more share market and mutual fund-related work started getting outsourced. In addition, players like Accenture started offering domestic BPO services as part of their overall infrastructure management portfolio. Indo-Rama Syntheitics outsourced their Finance & Accounting services to Accenture, while enterprises like Dabur, Bharti and Tata Steel also started outsourcing some of their core processes to BPO providers.

M&A Games
Consolidation was the buzzword in the BPO industry-a lot of activity was witnessed on the M&A front. Both India-centric as well as MNC BPO players were involved in the acquisitions game, which came in three different hues-first was the VC-backed companies where the promoters opted for the exit route and in most cases got a decent valuation. The acquisition of FirstRing by ICICI OneSource and Transworks by Indian Rayon, an Aditya Birla Group company, are some notable examples. And just after March 31, 2004 IBM stole the limelight with its acquisition of Daksh. More heartwarming was a lot of Indian companies that scouted for and picked up specialized BPO companies abroad-the acquisition of CorPay Solutions by Datamatics, ClaimsBPO by WNS, c3 in Philippines by Hinduja TMT, Aegis Communications by the Essar Group and Upstream LLC by the Godrej group. A third phenomenon was the acquisition of niche India-centric companies, not necessarily VC-funded. TCS buying out its stake in the SwissAir JV AFS, Optimus buying iBackOffice and Perot Systems acquiring Vision HealthSource were a few such examples. Even Citigroup bought back the remaining 55.6% stake in e-Serve.

Fiscal 2003-04 not only witnessed acquisitions, there were plenty of JVs also signed-companies mainly looked at this merger route for scaling up their operations. Datamatics formed a JV company in partnership with the US-based Cadmus Communications Corporation. The new company - KnowledgeWorks Global (KGL), with an initial investment of $1 million, provides content management services for publishing companies. There was a spate of JVs signed by the other Top 20 India-centric companies too. While mSource had a JV with Accenture, Infowavz signed the dotted lines with Contact Power of UK and Sutherland with the ISANI Group of the US. Most notable was Tracmail making a strategic consolidation effort by merging with two companies Webhelp and Spherenomics to form a new entity called TWS Holdings. MNCs like ClientLogic and ACS formed JVs with ITC Infotech and L&T Infotech respectively. Indian players also opened new delivery facilities overseas. mSource set shop in Tijuana, Mexico, WNS in Ipswich (UK), HCL BPO in Malaysia, Progeon opened in Brno, Czech Republic.

The Backlash
This was perhaps the most contentious issue faced by the Indian BPO industry during the year, as the anti-outsourcing brigade became mainstream in the US. What started with the State of New Jersey taking back to US some Social Security related processing work from eFunds, ultimately snowballed into a major issue with everyone from Presidential nominee John Kerry to a host of Senators and Congressmen mooting bills to stop outsourcing to India. And with the US just coming around from a prolonged economic slowdown, the cry over job losses did touch an emotive chord. More than 50 Bills (incluiding a few Federal ones) were tabled across different states like Alabama, California, Mississippi, New York, Washington and Wisconsin.

Even if all these states banned outsourcing of government jobs, some skeptics argued that there would not be much of an impact on the Indian BPO industry, since the quantum of government work is minimal. However, it seems there are efforts made to even offer sops to private companies who do not outsource, while government is trying to financially squeeze companies who continue to do so. Since this went against the priciples of free markets, it naturally evinced strong protests from eminent personalities like Bill Clinton, Bill Gates, Alan Greenspan and Marc Andressen among others, besides votaries of the Indian BPO industry.

There were problems even on the British shores-Indian BPOs' other haven besides the US. With the number of job losses swelling because of outsourcing by large enterprises like Prudential, Aviva, British Railways and BT, the UK's strong labor unions flexed their muscles against the outsourcing brigade. Another arsenal was added to the armory of this brigade as there were questions raised about the QoS (quality of service) from Indian players.

While some like Lehmann Brothers and Capital One had complaints about this, some like Dell claimed that their help desk customers were angered by the Indian accents of the agents.

New Geometry
While traditional processes like receivables management (collections), telemarketing, HR and tech support continued to rule the roost, the Indian BPO industry also witnessed a strong emergence of a number of niche verticals like healthcare services, airlines, publishing services and even research analytics. While receivables management and HR are horizontals across many industries, healthcare provider and payer services, tech support and airlines gained ground during the year. Many non-voice players got into serious publishing services, while some moved to high-value analytics like market research and equity research. Telemarketing remained popular, but now there was a question mark over its future owing to 'do-not-call regulations'.

People Power
The Indian BPO industry has witnessed a significant increase in the number of seats during 2003-04. It increased from 140,000 on March 31, 2003 to 210,000 on March 31, 2004. The total number of employees increased from 171,000 to 245,000. Most of the increase was seen in India-centric players and captives. The share of captives, currently between 65%-70%, is expected to grow.

Due to costs associated with attrition levels, including investments in employee training many of the leading BPO players have adopted certain measures. These include non-hiring of applicants who spent less than a year at the previous workplace or those who have changed three jobs in two years. Besides, HR agencies actively involved in poaching candidates are blacklisted, while many insist on an official release from the previous employer at the time of appointment. Despite these measures, poaching went on with impunity and there were numerous cases where people jumped jobs every quarter. The year saw an increase in average salaries both for call center as well as positions for high-value back-office work.

Strategic Locations
Companies increasingly started looking at Class B and C cities in catchment areas to source manpower, as typically attrition rates were lower there. A lot of new cities emerged as serious destinations. While Mumbai, Bangalore, NCR an Chennai remained the hot destinations, Pune and Hyderabad also came up as serious contenders. Kolkata, Ahmedabad and Chandigarh also entered the fray during the year. The cities attained their own flavors too-while NCR remained the king for voice-related work, Mumbai did a lot of financial services, while Bangalore reigned supreme on tech support. Chennai became a serious back-office processing hub with high-value equity research work.

Taxing Issues
One silver lining for the MNC BPO players was the decision of the Finance Ministry to exempt them from paying taxes. The Central Board of Direct Taxes appointed a task force on non-resident taxation to clear the uncertainty over Section 9 (1) of the Income Tax Act, introduced in the Budget for 2003-04, which held that while receiving calls per se was not taxable, selling products through telemarketing was. The board then clarified that call centers are only providing services that are incidental functions, while the core activity of manufacturing and supplying goods and services are done abroad. So, profits from BPO operations of multinationals will be insignificant and difficult to determine. The only rider is that the transaction between the two parties should be at arms' length. However, MNCs engaged in providing "core services" would come into the tax net. The tax levied will be to the extent to which the profits of these non-resident companies are attributable to their Indian operations. This includes call centers, which provide software support services over the telephone, or engage in annual maintenance contracts for offshore customers. Travel-related services also fall under this category. BPOs for insurance, credit cards, pension funds services are also out of the tax net.

Twilight Transport
Here's an interesting trend. The Indian BPO industry also spawned off a number of ancilliary industries during the year. These would include transportation, night catering as well as accent training. While most serious players still brought experts from overseas to provide accent neutralization trainings, some started outsourcing this to specialists in the country. The biggest to gain were transporters, what with the need to pick up and drop employees in multi-shifts becoming a norm with every player. A 24x7 environment also meant nightlong cafeterias, which spelt good time for caterers. It's still early days to estimate the size of these industries.

Beyond the numbers and trends, the outlook remains positive. We expect industry to remain on consolidation mode, with heightened M&As, customers wins and movement of high-end work to India. The air is optimistic and the BPO party is clearly set to continue.

Rajneesh De in Mumbai