India- world leader in business process outsourcing (BPO)

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted August 29, 2006

India is the world leader in outsourcing, accounting for about half of the global business. In spite of the increased pressure on cost and competition from new emerging geographies in the global outsourcing map, the BPO sector in India is on a sound track and is projected to grow by around 40 percent during the ongoing fiscal.

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Scores of multinational companies farm out services to companies in countries such as India, where wages are low and skilled workers are plentiful. Powered by its continuing dominance in providing low-cost IT skills, the great Indian BPO story continues unplugged despite the emergence of new competitors like China, Philippines and Indonesia.

Offshoring of jobs to India - which started off with call centers and back-office jobs like accounting - has today spread to include high-end product design work and even packaging and graphic designs.

"The Indian BPO sector is expected to maintain the current export momentum and grow by 35-40 per cent in this fiscal (FY 07) to achieve $8-8.5 billion as against $6.3 billion in the previous fiscal (2005-06)," says Kiran Karnik, president of the industry association Nasscom.

According to a latest study on global outsourcing market, India will maintain its low-cost IT skills leverage in the offshore outsourcing market for at least another 30 years.

Global outsourcing advisory and research firm Everest said in its "2006 Global Sourcing Market Update" that the concerns related to sharp wage inflation and skill shortages leading to an adverse impact on India's offshore cost advantage were grossly exaggerated.

The US-based research agency said India's offshore outsourcing market is likely to maintain its low-cost labour advantage over the UK for at least next 30 years. The country will also retain its low-cost wage supremacy over the US for at least another 18 years, the report added. Along with its Asian peers like Philippines, India continues to aggressively move ahead with policies aimed at minimizing the adverse impact of wage inflation, it added.

Buoyancy to stay here

The total revenue for the entire IT sector, including software and services exports, BPO exports and the domestic market by the end of the current fiscal (FY 2007) is estimated to be about $36-38 billion, with IT software and services contributing $21-22 billion, the BPO sector $8-8.5 billion and the domestic market $7.73 billion. For the last fiscal (FY 2006), the IT sector has posted combined revenue of $29.6 billion, with a growth rate of 29 percent. IT software and services contributed $17.3 billion and the domestic market $6 billion.

According to a Nasscom analysis of the BPO sector, outsourcing to India provides significant benefits over arbitrage in labour costs through business process enhancements and improvements.

"In spite of the rising element of cost, Indian offshore operations provide cost savings of 40-50 percent annually. Similarly, despite 10-15 percent wage inflation annually, companies are able to leverage declines in telecom and other overhead costs to sustain the cost arbitrage," Karnik said.

The turnover in the BPO sector, growing at over 45 per cent in the country, is likely to touch 25 billion US Dollar by 2008, Karnataka Science and Technology Minister Ramachandra Gowda said.

The domestic business process outsourcing sector is likely to grow over five fold to touch 17 billion dollars in the next four years from the present three billion dollars, according to a study by Assocham. Revenue generation from the BPO industry is expected to soar to 15 billion dollar by 2007 and will exceed 17 billion dollar by 2008, the chamber said in a release on Tuesday. Interestingly, the outcome of US presidential elections was not likely to impact the outsourcing wave and the industry would continue to grow, the chamber said.

The sector has been growing at a rate of 60-70 per cent annually, beating even the information technology sector. Revenues from the domestic BPO industry has increased to about 2.4 billion dollar in 2002-03 from 565 million dollar in 1999-2000, Assocham said. The impressive track record of the Indian industry, strong fundamentals and the growing emphasis of the government towards telecom and infrastructure support were the main factors that would drive the BPO industry further, it said.

The government should also support the industry in reducing operational costs and dealing with anti-offshore legislation issues, it added.

The current scenario

Indian service provider's have bagged the biggest outsourcing deals during this year and such deals have reached record levels so far, according to an authoritative analysis of the global outsourcing industry.

The figures released by sourcing advisory firm TPI says that despite the continued controversy surrounding off-shoring in Britain and elsewhere, a record level of outsourcing deals currently under negotiation involve off-shoring to places such as India.

Duncan Aitchison, managing director, International, with TPI, said:
"Contrary to speculation about rising levels of dissatisfaction with offshore outsourcing, our data predicts further growth in the value of work being moved offshore. Aitchison said: "The mature Indian vendors have achieved significant growth. Infosys, Satyam, Wipro, TCS and HCL are beginning to win larger and more varied deals. Our data suggests that there is no reason to doubt that this trend will continue, especially as buyers gain experience of working with them, and their confidence grows as a result."

However, the Big Six of outsourcing - Accenture, ACS, CSC, EDS, HP and IBM - still dominate the offshore outsourcing market having won almost three quarters (73 percent) of contracts in 2006 to date compared with 18 percent for the Indian providers.

The robust deal flow is showing signs of acceleration with 325 global deals coming up for renewal in 2006 and 2007, representing over a fifth of the active contracts. According to sourcing advisory firm TPI, $100 billion worth of outsourcing contracts are due for renewal in the next two years, of which 72 per cent is held by the big six - the likes of Accenture, ACS, CSC, EDS, HP and IBM.

Recognizing the need for broader geographic footprint for enhanced client comfort, Indian offshore BPO players, including TCS and Genpact, are going aggressive on initiatives including geographic expansion, acquisitions, outsourcing contracts, and partnerships to evolve into consolidated offshore-onshore players.

"Offshore providers BPO services have benefited from their ability to start small and build relationships from the bottom up. In the context of finance and accounting, offshore BPO players can start with image capture and reconciliation, moving up the value chain toward more strategic offerings. However, offshore BPO players are recognizing that without a broader geographic footprint, they face a `ceiling', above which their customers will not feel comfortable engaging with them," a latest report by global research firm Forrester has said.

Indian BPO companies are increasingly setting up shop in low-cost countries. If you can't beat them, join them, seems to be their motto.

Countries in East Europe, South America, Canada are fast emerging as competition to India as a destination for the global BPO industry.

Indian BPO companies have also started setting up their own operations in these countries to compete with global majors like Accenture, EDS, IBM, CSC and others.

The facts and figures speak

• Indian ITES-BPO exports are estimated to have grown from USD 3.1 billion in FY 2003-04 to USD 4.6 billion in FY 2004-05, recording a growth of nearly 48 per cent, and are estimated to reach USD 6.3 billion by the end of the current fiscal year (FY 2005-06).
• Net employment in the ITES-BPO segment is estimated to have grown by approximately 100,000 in FY 2004-05, taking the total direct employment to 316,000.
• Based on hiring trends observed over the year, this segment is likely to end the current financial year (FY 2005-06) with total employment projected to reach 409,000.
• Employee turnover/ attrition levels appear to be stabilizing with the talent acquisition, development and retention initiatives being undertaken by the players, beginning to deliver results.

Future Directions

• Pharmaceutical Research and Development (R&D) is slated to become the next big thing in the offshore services market in India with a growing number of multinational pharmacy companies seeking to establish their R&D operations in the country. US-based BCG said in its latest report 'Harnessing the power of India' that partnerships between Indian and global pharmacy companies are on the rise and almost all top global firms are heading towards India with plans to set up their R&D divisions. India ranks among the top nations for R&D spending by multi-national companies (MNCs) across all industries, and biopharma companies in the sub-continent nation have been increasingly active in securing their share of this interest and investment, the report added.
• The Indian call centre industry revenue will cross $9 billion in six years owing to entry of new industries and various countries, according to Frost & Sullivan research report. In the report on Asia Pacific Contact Centre Outsourcing Market, the agency estimates the number of call centre agents to touch 530,000 by 2012 from 160,000 now. "In future, the demand from telecom and technology verticals will increase as they will outsource knowledge building and analytical data mining in value terms. The price per agent per hour for these services is comparatively more," it said.
• Offshoring of engineering services is estimated to be a $40 billion opportunity for the Indian software services sector by 2020.According to a report prepared by Nasscom and Booz Allen Hamilton, globalization of engineering services will be the next growth frontier for India and this is expected to create 250,000 jobs in India. According to the report, the total offshore engineering spend is expected to grow to $150-$225 billion by 2020, and India, with its talent pool and existing experience in engineering services, is well-suited to realize 25 per cent of the opportunity.
• As per a Nasscom report, India enjoys a relatively strong position in the automotive and high-tech/telecom engineering services market with $25 billion opportunity by 2020.
• India leads the pack for the most sought after destination for Knowledge Process Outsourcing and the KPO industry is estimated to generate 250,000 jobs in five years, a study by a leading staffing solutions company Kelly Services India has said. It was, therefore, not surprising that most estimates project that India would corner two third size of the Global KPO business--an impressive $12 billion in next five years employing over a quarter million people, the whitepaper said.
• As manufacturers look at reducing costs and product development cycles, India is fast emerging as the new-age design board for MNCs. The result: MNCs like Whirlpool, GE, LG, Philips and Bosch are setting up research and design centers in India. And some others like Reckitt are offshoring design work to Indian design houses. "Outsourcing design jobs to India started in a small way, but is going to be big. This is the latest trend in the world of manufacturing. A product is today conceived in the US, designed in India, manufactured in China and sold in markets across the globe," says Anuj Prasad, chief designer at Delhi-based Desmania Design.
• The banking, financial services and insurance (BFSI) vertical will continue to witness some of the largest offshore spending, and India stands to get at least 30 per cent of the $400-billion pie being thrown up for grabs by the US industry by year 2010.

Stay invested

So far, India has been among the major destinations for global offshore outsourcing businesses. As the US and European companies continue to offshore their back-room operations and services-related businesses to low-cost overseas locations, Indian BPO industry is aiming for further market share gains in this segment.

The industry experts feel that the cost-savings benefits of the offshore outsourcing will continue to drive the sourcing decisions in the foreseeable future. India's demonstrated superiority, sustained cost advantage and fundamentally powered value proposition. Outsourcing to India has provided companies with significant benefits over the arbitrage in labour costs - through business process enhancements and improvements. In spite of the rising elements of cost, Indian offshore operations provide cost savings of 40-50 per cent; in spite of wage inflation averaging 10-15 per cent annually, companies are able to leverage declines in telecom and other overhead costs, productivity gains and economies of scale to sustain the cost arbitrage.

According to Nasscom, the total addressable market for global offshoring is approximately $300 billion, of which $110 billion will be offshored by 2010. India has the potential to capture over 50% of this. Nasscom is, however, clear that to accelerate growth companies will need to adopt innovation across multiple dimensions, such as business model innovation and knowledge innovation. There is also the threat of competition from China and East European countries, which have now ventured into IT exports. But there are market opportunities as well as scope for collaboration.

In fact, the Indian market is approaching a near perfect market situation in the outsourcing business, says Sourav Mukherji, Assistant Professor, Organisation Behaviour, Indian Institute of Management, Bangalore (IIM-B). He says that for a long time, Indian companies have been intuitively striking outsourcing deals. But it's also true that they have been giving better value to customers which means that they have moved up the value chain.

India has retained its rank as the fourth most-attractive country for investment and the preferred location for call centre and back office activities, according to a survey by Ernst and Young. The Ernst and Young European Attractiveness Survey 2006, released in La Baule, France, said the US and China remained the top two preferred countries for international decision makers. "India's rating in 2006 is on par with the previous year," the survey said, adding that the country still lags behind China in attracting foreign direct investment. While China achieved the lead position for manufacturing operations, India has emerged the top country for call centers and back office functions.

BPOs are booming and everyone wants a share of the pie, so why not individual investors?

India's Top BPO firms

1. Genpact
2. WNS
3. Wipo BPO
4. HCL BPO Services
5. ICICI OneSource
6. IBM Daksh
7. Progeon
8. Aegis BPO Services
9. EXL Service Holdings
10. 24/7 Customer
11. MphasiS BPO
12. Intelenet Global Services
13. GTL
14. TCS BPO
15. Transworks

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai  may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai  is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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