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The biggest negative to happen for the domestic call center industry is the offshoring phenomenon, said the CEO of one of the leading domestic call center companies, way back in 2004, while describing her challenges. Four years later, her company, one of the pioneering domestic call centers in India, is part of a much bigger company (in our list of Top 10).
And no one is complaining.

The Day of the Domestic!
Around 1999-2000, India started emerging as a favorite destination for locating call centers for interacting with customers based in developed markets that speak English, such as the US, the UK, and Australia. It has been a phenomenal growth story since then, with a predominant majority of consumer companies in the Fortune 500 list outsourcing their call center work to India. India has built a multi-billion dollar industry around it.

But, of late, many companies doing that work are realizing that it is no longer such an attractive proposition, both from the growth and margin perspective, thanks to the rising rupee and manageability of complex operations in the night. In short, it was becoming difficult to sustain the momentum, if you are a company primarily doing offshore customer interaction services

And then, there was this godsend: the booming Indian domestic consumer market. Areas such as telecom, aviation, and retail are seeing unprecedented growth. Indian telecom is a global case study. Sectors like financial services and retail are fast reaching there. All this means a big latent need for domestic service.

It is no surprise that many international call centers have started to tap what they call the domestic opportunity.

But do not get us wrong. The story of this fast emerging marketsome have already started calling it the Next Big Thingis not just about a fallback strategy of the international call centers. We would grossly undervalue the opportunity if we say that. There are two reasons why we started from there. One, it is a market that is well understood. Two, while the demand is there, it needs both good supply and demand to make a market move. And international call centers bring in world-class supplya great plus point for all the stakeholders in the market.

Let us turn to the big story.
According to a research by McKinsey Global Institute (MGI), Indias disposable household income will contribute to a quadrupling of its private consumption between 2006 and 2025. MGI estimates that Indian consumers will spend Rs 69,503 bn in 2025.

That kind of consumer activity will require an underlying need for customer interaction service, in areas such as telecom, banking, insurance, travel, electronics, IT you name it. It is difficult to put a number to that demand, but it will be huge, to put it as modestly as one can.

The Market Today
Unlike the offshore BPO industry, the domestic call center industry developed in a fairly unorganized way. In many cases, the direct selling associates (DSAs) put some people together in a place, who made calls using just an office set-up, sometimes with a very basic ACD. Some of themlike Andromeda, a Top 10 company in our listdeveloped into large ones. Also, a few entrepreneurs started small call centers to serve whoever came their way. Some of the early pioneers were Magus, Customer First, and Orion Dialog, the last two now part of Aegis.

A few of them did graduate to what we call organized players. But many of them still remain the way they weresmall and unorganized, with basic or no investment on call center technologies. New ones are still mushrooming. Unlike the offshore call centers, where both international marketing and technology served as entry barriers, there are hardly any barriers for someone wanting to start a new domestic call center. Even today, that is a significant part of the overall industry.

According to DQ estimates, the organized players (classified as those with 200 or more people) together account for a market of Rs 1,097 crore; the unorganized sector still accounts for Rs 504 croremore than half of that. Together they size up to Rs 1,602 crore. That is the size of the Indian outsourced domestic call center industry. That may look very small when seen in the context of the consumer boom that is happening in India and when compared with the offshore industry, but that is the total market size as of 2006-07. This is likely to grow about 65%that is a fairly rough estimate based on the growth estimates of large playersto reach Rs 2,604 crore. This will be led by a few players who project three digit growth figures, based on their actual nine-month performance and, hence, is close to the actual. At least three of the players in our listAegis, Firstsource, and Omniaexpect to grow in three digits. We expect the same for some new players, which are not in the list yet but have already got significant traction, such as vCustomer.

A far bigger story though is that of the captives. Almost all large banks today have fairly centralized call centers that employ in thousands. ICICI Bank and Reliance lead the list among the private companies while SBI and BSNL lead among the public sector ones, though, interestingly, both BSNL and SBI have started outsourcing. The other companies that have fairly large contact center operations in-house are HDFC, Citibank, Standard Chartered, American Express, and HSBC. Among the airlines, two of the three full services airlines (Jet Airways and Kingfisher) have separate legal entities, while Indian has taken the outsourcing path by increasingly outsourcing to Omnia BPO. Even the pre-merger Air India has taken the outsourcing path by handing over its customer service to Intelenet. Here too, it is the public sector companies that have taken the lead.

On first look, it seems Indian public sector companies are far more forward-looking than private companies. In reality, however, with the exception of IRCTCwhich has outsourced to a specially created company called Bharat BPO, a 50:50 JV of Omnia BPO and Spanco (which sold Sparsh, one of the largest domestic contact centers to Intelenet before reentering the business)all others have done outsourcing the same way that American corporations did ten years back, with an immediate gain in mind. On the other hand, many private companies that run large call centers have built them with technology and practice of world-class call centers. In futurewhen they decide to outsourcethey could either spin off these entities creating the domestic equivalents of Genpact and WNS; or they could actually sell them to existing players for a premium. Either way, they look at value creation, and not cost reduction alone. One such company, SerwizSol, already in our Top 10 list, started by serving Tata companies but today earns close to 30% of its revenues from non-Tata clients, and plans to grow that part significantly. Even Anil Ambani-led Reliance Communications, which has close to 10,000 people in its call center subsidiaryand it is the only large telecom player that has resisted taking the outsourcing pathcould well be a player in itself. That, of course, is never an option for a public sector enterprise.

However, unlike Tatas and Reliance or even UB (owner of Kingfisher), companies like Jet Airways and ICICI Bank are fairly focused and it is difficult to believe if they will try to grow this as a business. They could well be potential candidates for acquisitions for outsourcing companies looking at fast ramp-up. But here is a caveat for those vendors looking for acquiring them or getting work from them: even after close to a decade, few offshore banking captives have gone third party. So companies like ICICI and HDFC may, at best, outsource part of their processesthey still doand may even go for full outsourcing in their insurance and other operations, but it is difficult to believe they will give control of core banking.

While there is no way to calculate how much worth of business that will be, manpowerwhich has a direct correlation with revenue in this industryis a good indication. According to DQ estimates, the captive centers together employ close to 130,000 people in their call centers, while the outsourced industry (including the unorganized players) employs close to 150,000 as on December 31, 2007. In 2006-07, our estimates show that the captive industry sized up to Rs 3,600 crore. The reasons for such large discrepancy in numbers are two. One, the salary levels are very, very different and, hence, costs are different. Second, the captive industry has not added as much in numbers as the outsourced industry in the last nine months; so the manpower break-up was a little more in favor of them as of March 2007.

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