Survival of the fittest is a phrase that British polymath philosopher Herbert Spencer first used in 1864 after reading Charles Darwin’s work On the Origin of Species. Simply put, it meant ‘only the fittest organisms will prevail’; and the very definition of ‘fittest’ has also changed with time. Those who understood it did sustain and those who didn’t went into oblivion; be it in the living world or in the corporate terrain (time and again). In fact, if the latest signals are anything to go by, then the BPO industry could be one inevitable addition to the extinct list, as its cost advantage fritters away; which means it certainly doesn’t remain the fittest on that count.
A latest Nasscom report would indicate this very speculation as baseless. As per the report, the $50-billion IT-BPO industry is headed for a 13-15% growth in FY2010-11. But the recent survey by Pierre Audoin Consultants (PAC) seems to be a clarion call of sorts, since it is only the latest of a series of reports that indicate how India is moving away from being the epicentre of cheap outsourcing centres and nations like China, Vietnam, Philippines, et al, are becoming the most preferred spots to serve as offshoring centres. Only, the threat looks more real than it ever did in the past.
While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago as compared to their US counterparts, the difference today is marginal. The major contributor to this rising cost has been the wage inflation, which was hovering over 8% in 2009 and is expected to touch a steeper 10.9% by the end of 2010. “With time, India’s price advantage will continue to diminish; hence it needs to find a niche and continue to reinvent the business models, services and enabling technologies,” cautions Vishal Deep Dhillon, Regional Director – Asia, CSC.
Countries like China, Vietnam and Philippines are emerging as a big threat to India’s dominance in global offshoring industry. Thanks to the low cost advantage and heavy investments to promote English as a spoken language, China has witnessed a whopping 212% and 170.2% y-o-y increase in signed off shoring contracts (worth $12.69 billion) and executed contracts (worth $7.34 billion) respectively in 2009 when compared with 2008. Not only this, the dragon nation has also added an astonishing 3,287 enterprises and 5,85,000 employees to its outsourcing industry count in 2009. The Filipino BPO industry (with a growth rate of 19% in 2009) is also in a neck-to- neck competition with India. In fact, Philippines has emerged as one of the top destinations (with 15% market share) for outsourcing over the past few years; with revenues growing from $100 million in 2001 to $6.1 billion in 2008.
The threat from Vietnam cannot be undermined too. While salaries of BPO workers in Vietnam are the lowest among almost all major offshore destinations (they are 40% lower than India and China, and more than 80% lower than Singapore), tax rates, too, are at par with other emerging markets. For instance, outsourcing software development work to a Vietnamese firm can cost a company up to 50% less than what it would have cost it had it outsourced the work to India. Even outsourcing companies in the Middle-East are now giving tough competition to Indian BPOs by moving up the value chain. If industry experts are to be believed, their efforts have resulted in an annual growth of over 20%. Historically, a large talent pool has been one of India’s major strengths, but if one goes by a latest ASOCIO-KPMG report, employability of Indian graduates at present is considered to be really low, with Economist Intelligence Unit (EIU) rating India as 2 on a scale of 5 on quality of labour force. This has made multinationals hesitant in outsourcing their work to India.
The next stumbling block is the high attrition rate in the Indian BPO industry which is invariably high (35%) when compared to its Asian counterparts. The increasing cases of data breaching too are affecting outsourcing to third parties in India. Then there is the slated withdrawal of STPI scheme in FY 2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20% for a BPO at present. This is expected to go up to 33% if the scheme is withdrawn. In all, the future of the BPO industry doesn’t look as sunny as road mapped by Nasscom with optimism deep sunk within. So is the major job provider (2.23 million) finally heading towards the death bed or is there a way out?
One possible way out could be to take BPOs to tier 2 and tier 3 cities where rising costs could be managed as compared to high cost offerings in the metros or tier 1 cities. The challenge there will be the training gap, but the investment does have long term potential. The next way could be to innovate within long term sustainable verticals like KPO (Knowledge Process Outsourcing), LPO (Legal Process Outsourcing), et al, for which even outsourcers are ready to pay a high price as they derive utility from them. “BPO will continue to evolve, both in form and substance, from simple processes in the beginning to complex KPOs later, involving support to business decision processes and consulting for optimal performance. Business itself will begin to look like a project management process (think construction projects) compared to the familiar current business. My Asian mind tells me that BPO will re-incarnate in another form, more suitable and responsive to the shape of the global economy,” Eugene Reyes, VP – Business Development North America, BPO International, Inc. tells B&E. Even Joel Perlman, Co-founder & President, Copal Partners feels that the next big opportunity for India could be DPO (Document Process Outsourcing) “KPOs & DPOs are high growth areas and India is well positioned to become a leader here,” he tells B&E. K. M. Nanaiah, MD, Pitney Bowes too holds the same view and feels that DPOs certainly have the potential to be the next big thing in India.
No doubt, because of its sustained cost competitiveness, experienced and large labour force, India has been considered to be a favourable BPO location in the past. But not any more! With radical changes in global economic environment & growing sophistication of customer needs, it’s now inevitable to evolve further. It’s therefore imperative for all stakeholders to identify challenges and put an action plan in place to meet them and identify areas that can catalyse future growth. If they are able to do so, good enough! If not, BPO, an acronym that most Indians rejoiced in, will soon become a reason to mourn over!
Saturday, June 26, 2010
Increased M&A activity in BPO
While 2008 was a great year for mergers and acquisitions (M&As) within the Indian BPO industry (the industry witnessed 13 M&As including Citigroup Global Services’ acquisition by TCS for $505 million, Quattro’ takeover of RSM McGladrey and Babel Media for $50 million & $125 million respectively, WNS buying Aviva Global Service for $230 million, et al), uncertain economic conditions across the globe perhaps forced several companies to hold on to their cash last year (M&A activity within the industry reduced by 55% in 2009). But the year still saw players like EXL Service Holdings acquiring Schneider National (for $40 million), Cognizant buying UBS BPO Unit (for $75 million), EXL Service Holdings purchasing Am-Ex Travel Services Captive India for $30 million and Infosys BPO taking over McCamish Systems for $38 million.
FY2010 has just started and players like Genpact and Aegis have already announced one acquisition each. While Aegis, the back office company promoted by the Essar Group, has agreed to acquire US-based education and financial service provider Sallie Mae’s customer service centre, India’s largest back-office firm Genpact is taking over US-based analytics and data management services provider Symphony Marketing Solutions. CBay Systems India and Avantha Group too have announced the acquisition of Spheris India and US-based Pyramid Healthcare Solutions respectively. So what is it that has prompted Indian BPO players to go in for the M&A option, one that comes with a huge amount of operational and value destruction risk?
The expectably positive sounding Nasscom-McKinsey report has projected the BPO space to be a $360 billion market opportunity across the globe by 2020. This is one reason why the industry continues to remain a favourite with VC & PE players who accounted for almost over 20% of all deals in 2009. Not to forget, their total investment portfolio for this industry has grown 16 times in the past eight years, at a CAGR of 42%. Even in a year weakened by recession, there has been no let-up in their interest in the BPO sector in India, with a 9% increase in total investment portfolio over 2008. And with the overall global economy recovering in 2010, that concentration is only poised to augment further.
Another thing which has prompted the shift is the fact that the Indian BPO sector has evolved significantly over the last decade, and has matured beyond the pioneer phase to enter the ‘emerging rapid growth’ phase. Players in the BPO industry can now be seen foraying into areas such as business analytics, knowledge-based services apart from transforming clients businesses through a mix of re-engineering skills, technology enabled platforms, new operating models and increased depth of services.
But then there are contrarians who feel that these M&As have nothing to add on to the growth story of Indian BPOs. As per them, it’s actually a fight for survival. Though, at present there are over 110 BPO captives operating out of India, the number is expected to reduce to just half in the next five years. “M&As in the BPO industry, particularly in the voice vertical, are an outcome of the US sub-prime mortgage crisis. It’s the crisis that has made the survival of small players really hard. These players are now allowing bigger players to acquire them as they can no more take the pressure on their balance sheets,” says Anuj Gupta, Angel Trade.
Further, there are many who feel that with time India has lost its price competitiveness that tempted multinationals to offshore their business to India. While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago as compared to their US counterparts, the difference today is becoming marginal year by year. The major contributor to this rising cost has been the wage inflation, which was hovering over 8% in 2009 and is expected to touch 10.9% by the end of 2010. “With time, India’s price advantage has diminished; it now needs to find a niche and to reinvent the business models, services and enabling technologies,” says Vishal Deep Dhillon, Regional Director-Asia, CSC, to B&E.
That countries like China, Vietnam and Philippines too are emerging as a big threat to India’s dominance in global offshoring industry, is actually old news. But now, as Gartner analyst Diptarup Chakraborty tells B&E, “Destinations like Philippines, Israel are almost coming neck-to-neck with India as they are offering cheaper rates to the outsourcers.” Then there is the slated withdrawal of STPI scheme in FY2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20% for a BPO at present. This is expected to go up to 33% if the scheme is withdrawn.
Considering the fact that there have been many domestic entrepreneurial ventures, not particularly backed by large scale IT organisations, that ventured into setting up BPO outfits in an attempt to become bigger simply on the basis of the boom that was, in case the government withdraws tax-holiday sops or increases the tax rates, that surely would put these newbie BPOs on the selloff block, if not immediately bankruptcy. Worse would be the case with Indian BPOs that, hoping for a sudden revival in the US economy (which accounts for clost to 60% of all global BPO projects), have attempted to invest in buying out American BPO units to leverage their physical US presence to get more BPO projects. Deeply submerged on loans and funding from financial institutions, such BPOs will have no option but to themselves be sold off to large scale buyers.
The lessons from all this is that it is inevitable that M&As in the Indian BPO sector would continue to rise; but what would also happen is that the likes of CSC, Infosys, Convergys, Accenture, Genpact, would only go on to become much larger entities than they are now.
FY2010 has just started and players like Genpact and Aegis have already announced one acquisition each. While Aegis, the back office company promoted by the Essar Group, has agreed to acquire US-based education and financial service provider Sallie Mae’s customer service centre, India’s largest back-office firm Genpact is taking over US-based analytics and data management services provider Symphony Marketing Solutions. CBay Systems India and Avantha Group too have announced the acquisition of Spheris India and US-based Pyramid Healthcare Solutions respectively. So what is it that has prompted Indian BPO players to go in for the M&A option, one that comes with a huge amount of operational and value destruction risk?
The expectably positive sounding Nasscom-McKinsey report has projected the BPO space to be a $360 billion market opportunity across the globe by 2020. This is one reason why the industry continues to remain a favourite with VC & PE players who accounted for almost over 20% of all deals in 2009. Not to forget, their total investment portfolio for this industry has grown 16 times in the past eight years, at a CAGR of 42%. Even in a year weakened by recession, there has been no let-up in their interest in the BPO sector in India, with a 9% increase in total investment portfolio over 2008. And with the overall global economy recovering in 2010, that concentration is only poised to augment further.
Another thing which has prompted the shift is the fact that the Indian BPO sector has evolved significantly over the last decade, and has matured beyond the pioneer phase to enter the ‘emerging rapid growth’ phase. Players in the BPO industry can now be seen foraying into areas such as business analytics, knowledge-based services apart from transforming clients businesses through a mix of re-engineering skills, technology enabled platforms, new operating models and increased depth of services.
But then there are contrarians who feel that these M&As have nothing to add on to the growth story of Indian BPOs. As per them, it’s actually a fight for survival. Though, at present there are over 110 BPO captives operating out of India, the number is expected to reduce to just half in the next five years. “M&As in the BPO industry, particularly in the voice vertical, are an outcome of the US sub-prime mortgage crisis. It’s the crisis that has made the survival of small players really hard. These players are now allowing bigger players to acquire them as they can no more take the pressure on their balance sheets,” says Anuj Gupta, Angel Trade.
Further, there are many who feel that with time India has lost its price competitiveness that tempted multinationals to offshore their business to India. While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago as compared to their US counterparts, the difference today is becoming marginal year by year. The major contributor to this rising cost has been the wage inflation, which was hovering over 8% in 2009 and is expected to touch 10.9% by the end of 2010. “With time, India’s price advantage has diminished; it now needs to find a niche and to reinvent the business models, services and enabling technologies,” says Vishal Deep Dhillon, Regional Director-Asia, CSC, to B&E.
That countries like China, Vietnam and Philippines too are emerging as a big threat to India’s dominance in global offshoring industry, is actually old news. But now, as Gartner analyst Diptarup Chakraborty tells B&E, “Destinations like Philippines, Israel are almost coming neck-to-neck with India as they are offering cheaper rates to the outsourcers.” Then there is the slated withdrawal of STPI scheme in FY2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20% for a BPO at present. This is expected to go up to 33% if the scheme is withdrawn.
Considering the fact that there have been many domestic entrepreneurial ventures, not particularly backed by large scale IT organisations, that ventured into setting up BPO outfits in an attempt to become bigger simply on the basis of the boom that was, in case the government withdraws tax-holiday sops or increases the tax rates, that surely would put these newbie BPOs on the selloff block, if not immediately bankruptcy. Worse would be the case with Indian BPOs that, hoping for a sudden revival in the US economy (which accounts for clost to 60% of all global BPO projects), have attempted to invest in buying out American BPO units to leverage their physical US presence to get more BPO projects. Deeply submerged on loans and funding from financial institutions, such BPOs will have no option but to themselves be sold off to large scale buyers.
The lessons from all this is that it is inevitable that M&As in the Indian BPO sector would continue to rise; but what would also happen is that the likes of CSC, Infosys, Convergys, Accenture, Genpact, would only go on to become much larger entities than they are now.
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