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Three years back, a high-profile board meeting was in place at Intelenet Global. There was much discussion and deliberation on the future scenario of the industry and the course the company must adopt to mitigate the uncertainties arising out of global ups and downs. Back then Intelenet Global was majorly into providing voice-based customer services to international clients. The margins were good but the risks were high, an economic slowdown in US or a domestic currency rise could have a negative impact on the companys top line or bottom-line. Hence, the meeting was convened to chart out a preemptive course of action.

Among the many suggestions that were thrown up that day, a big foray into the domestic industry was the most interesting one. The reason is not hard to guess. Till then the domestic BPO industry was considered too complex and murky for any serious and organized player to make any headway. There were a few companies like Magus, Infovision, Andromeda, Customer First, who were functioning in the industry that could be labeled as organized sector. But, the small mom-pop BPO shops or what we call as the unorganized sector cornered the larger chunk of the domestic BPO market. Big companies, and especially international BPO companies, were loath to enter the market because of the lower margins and haphazard market dynamics. Bill in Dollars and pay in Rupees was the simple mantra for success.

In light of this scenario, when Intelenet Global announced the acquisition of domestic BPO company Sparsh; quite a few were taken by surprise. Suddenly, the term domestic BPO was quite highly debated. Quite many analysts hailed the foray by Intelenet Global, while a few predicted a gloomy scenario. But then the unthinkable happened; the US economic juggernaut came to a halt and the domestic currency soared to touch the 40 Rupee per Dollar mark.

Suddenly, domestic became the buzzword. Companies that were completely focused on international market suddenly were all at sea. Meanwhile, others like Intelenet that had made the shift earlier could take it easy. Even we were surprised by how well the domestic shift paid off, admits a senior official of Intelenet.

The upheaval in the global economy has only strengthened the case for the domestic industry, including that of BPO. Earlier this year Dataquest had come out with a special issue on the industry, wherein we had outlined the emergence of the industry, the challenges faced and profiled the top-ten players. Keeping in mind the fast-changing dynamics of the industry, we are bringing out a fresh issue on the industry that highlights the progress made by the industry, a sort of health dossier and the number of companies that we profile has increased to sixteen instead of the top ten.

Trying Times?
Even though, there has been much talk about the high-growth potential of the domestic industry, the mood on the ground is pretty somber. Talking to a majority of the industry players, one can feel that the brimming exuberance that was evident till some months back has been replaced by cautious optimism. Till the GDP was growing at a healthy 9% with the stock indices touching the heavens, domestic BPO companies were riding the crest. But the overall dip in the economic scenario has marginally dipped the sentiments.

Though there is no a direct relation of the overall dip in the global economy with of the domestic BPO sector, there are some real concerns. The biggest thing that is troubling the growing industry is that the much-required capital for expansion has become dearer, as the interest rates have gone up significantly over the last few months. Since raising money through equity markets is not a viable option now, many companies have put on hold their expansion plans. The companies are also impacted by the rising power and real estate costs, especially those functioning out of the tier-1 & and -2 cities like Magus and others.

The other big bane is also the fact that the domestic BPO industry is still largely voice-based and into customer retention and customer management. Large banks like ICICI and SBI run much of these captive call centers, while the telecom side is represented by Reliance and BSNL. Even so, the revenues of the industry as a whole have grown by a healthy margin of 65% over last year, touching Rs 8,600 crore. Of this the captive call centers of the banks and the telecom players still account for the lions share of the pie, though slightly down over last year. The organized industry has also grown marginally and currently accounts for around 24% of the market size, the rest being taken up by the unorganized sector.

Nonetheless, opportunities await BPO firms in providing specialized services to newly emerging industries like retail, fashion or automobile segments. Services that have significant scope for growth are market research, accounting & inventory, and SCM. There is growth potential from two ends in the domestic market, basically from MNCs looking to expand their presence in India and requiring the same systems and processes they have elsewhere; and on the other end there are the Indian companies with global aspirations who use the market as a testing ground and want to provide a global experience in the Indian market. Keeping in mind these scenarios, the good times are not yet over for the domestic industry per se.

Organized Vs Unorganized
Though the unorganized sector accounts for 11% of the overall marketshare, it is still a huge number. Most of these are small call centers that are operating out of small towns and cities providing marketing services for DSAs associated with banks and telcos. Most of the unpolished calls that one gets these days selling credit cards and personal loans, usually originate from these small call centers.

Most of these call centers function on totally cost arbitrage basis, providing services at much below the market rates. While the standard billing rates in an organized company is based on per seat basis, the smaller companies are ready to work on a variety of models, that is more inclined towards variables or incentives. The average realization per person is still around Rs 15,000-20,000 per month, dipping slightly due to the increase in cost overheads.

But as Intelenet did in 2005, a lot more organized players are making strong moves in the domestic space. A big indication of this shift is the recent announcement regarding the merger of the domestic BPO business of Spice Televentures and Spanco Telesystems. According to reports in the media, the joint venture, touted as Indias largest onshore domestic BPO, is targeting revenues of Rs 500 crore by the year ending March 2010. As of now the company employs around 10,000 people and is expected to grow to around 15,000 by the financial year ending March 2009. The JV will see the merger of three leading domestic BPOs in the onshore space, comprising Omnia BPO Services (a Spice Televentures subsidiary) and Bharat BPO (an existing JV of Omnia and Spanco Telesystems) and Spanco BPO Services.

Interestingly, Spanco was also involved in the first big domestic M&A; Sparsh (the BPO outfit acquired by Intelenet in 2005) was a subsidiary of Spanco. Other leading BPO outfits like Firstsource, HTMT, and Genpact are also increasing their India business by eyeing greater revenue and opening more centers in the country. ICICI-promoted Firstsource had announced that it intends to ramp up the domestic revenue share from 4% to 10%.

Touching Hinterland
Compelled by the changing dynamics, domestic BPO players are looking at heading toward tier-2 and -3 cities. Companies like Firstsource have taken innovative measures and set up operations for the domestic market in non-metros like Trichy, Kochi, Vijaywada, Hubli, Indore, etc. The company is also reaching out to cities like Jalandhar and Siliguri. MphasiS BPO as well has been looking at tier-2 cities for growing its domestic BPO. In fact, according to reports MphasiS is also looking at entering the rural parts of the country to tap the largely unaddressed workforce in the next three to four years. Another new entrant into the domestic business, Genpact, is also looking inwards.

Intelenet also plans to increase its India presence by opening more facilities in northern India, especially in Punjab where it already has a center in Mohali. Aegis BPO has recently opened a center in Lucknow and has set aside Rs 480 crore for business expansion in India.

The biggest challenge faced by the companies when they move to rural areas, other than the infrastructure one, is that of finding employable workforce. While there is no shortage of people in the smaller locations, there are severe gaps in terms of skill levels, and companies need to spend significantly on training. Yet the results are beginning to show, with BPO companies moving to places like Jhansi, Satna, and Ranchi.

In the End
It goes without saying that specific triggers for heightened outsourcing differ across verticals. While deregulation, massive growth and entry of new players drive outsourcing among telecom operators, severe competition and widespread adoption of IT are enabling growth in the banking sector. Meanwhile, the spread of e-governance can also have a positive impact on the industry, as the government is also a big user of IT. A good case in point is that of the way Indian Railways, specifically IRCTC, used BPO services to reach out to the people. Various government agencies are also looking at either setting up or outsourcing essential services like passport services (like TCS) or managing Police helplines (with Spanco). Thus, the government sector could be a big driver for the market.

On the flipside, till now services outsourced by the Indian companies are largely limited to low value, high volume, back office jobs and customer support activities. Managing rapid growth while maintaining competitive costs and quality will be critical to the growth of BPO service providers. Building and developing specialized services and solutions that provide greater value will be a key challenge for vendors to sustain profitable growth in the long term.

Gradually with the rise in business complexity, high volumes and internal issues there will be a shift toward value-addition. As the business volumes grow organizations will be forced to focus on their core activities, hence de-coupling all non-core, non-critical processes for outsourcing. This will surely benefit the BPO companies.

In the coming year, there could well be an upsurge in M&A activities as large international BPOs move strongly into the domain and intensify competition in the BPO market. With a large number of small and mid-sized vendors focused on the domestic market, inorganic growth will be an attractive option for the international players looking to build scale rapidly.

Coming back to the point we started from, domestic BPO operations contributes close to 30% of overall revenues at Intelenet. Today, the company is on a firmer footing, when compared to all the international BPO outfits that are caught in the economic maelstrom. India might not be immune to the global economic pressures, but one thing is sure, that the billion plus population while it presents a big problem also spells a big opportunity. With a burgeoning market hungry for goods and services, there is little doubt about the growth potential of the domestic BPO industry. As CK Prahlad rightly stated, the profit lies at the bottom of the pyramid.

Shashwat DC
shashwatc@cybermedia.co.in

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