Expanding BPO Landscape - I

NASSCOM-Everest India BPO Study: Roadmap 2012 – Capitalizing on the Expanding BPO Landscape
NASSCOM and Everest India have recently launched their Study on the Indian BPO sector, which evaluates the country’s current standing in this sector and its Roadmap until 2012.

According to the Report, India is at the forefront of the rapidly evolving Business Process Offshoring (BPO) market, having established itself as a “destination of choice.” The sector, that has grown manifold in size
and matured in terms of service delivery capability and footprint over the past decade, is now at an
inflexion point. Today, it faces a unique opportunity to enhance its role as a full-service, value-adding partner. There is significant headroom in the addressable BPO opportunity for buyers and providers, and there are sizeable untapped areas across a wide spectrum of segments. Also, the Indian BPO sector is favourably positioned to benefit from its established delivery capabilities, which influence buyers’ decision
to expand their global sourcing exposure..


Key highlights

According to the Study, the Indian BPO sector has been growing at more than 35 percent over the past three years. BPO is the fastest growing segment of the overall offshore market, and currently estimated
at US$ 26-29 billion. While labour arbitrage has been a key driver for this growth, other factors such as access to talent, service quality, productivity, and time-to-market have gained importance.

The Indian BPO industry could grow nearly five-fold to reach US$50 billion in size by 2012


2.  Rigorous cost cutting by vendors inevitable in 2008

The larger companies may hedge forex exposures in the near term, but cannot disregard the threat of
lower competitiveness in the long run. Large global vendors and focused, niche providers may be able to raise billing rates, but this will not compensate for the entire exchange loss, and will need a parallel productivity increase to prevent margins from weakening further.

Cost rationalization will be inevitable in 2008 for Indian vendors - whether small or large! The most
obvious impact will be on wage hikes and executive perks. Recruitment too is expected to slow down marginally until mid-2008, as vendors push up utilization rates aggressively. But we expect recruitment to pick up again in the latter half of the year as the slack gets wrung out. The impact on attrition rates will
also be interesting to see, as large premiums on poaching may no longer be affordable.

Apart from the obvious cost heads, companies will also look to optimize various administrative or
marketing costs. Traditionally, the weak Rupee has meant that margins were never threatened for
Indian IT and BPO service providers. This has led to considerable slack, in areas like transport costs, procurement, travel, telecom, etc. In the past, management attention was focused only on growth, but
now, the quality of growth will matter more.


3.  Smaller cities will shine brighter

The cost and talent pressures will drive vendors to smaller cities at a faster rate. Especially so or new centers of large companies already present in India. With improving attention to education across India
and State governments’ recognizing the potential of the outsourcing sector, companies are finding themselves almost spoilt for fresh location choices. Proximity/connectivity to larger cities and good
education infrastructure seem to be guiding the discovery of Tier III destinations like Udaipur, Bhopal,
Vishakhapatnam, Nagpur, Chandigarh, Ahmedabad, Nashik, etc. The emerging hot spots are also
offering:

4.  Vendors to aggressively diversify client base

The focus on the US market is already going down - ValueNotes analysis shows that US-based buyers
made up for 56% of the total BPO & KPO contracts in 2007. Nasscom analysis shows that for IT
outsourcing, the share of US-led business was about 67% in 2006-07. We believe that this will reduce further in 2008 for several reasons. First, a probable US recession is making vendors aggressively de-risk their sources of business. Secondly, growing maturity of buyers in Europe, Middle East and Asia is opening up new,
untapped markets. Thirdly, vendors are maturing rapidly and have acquired the financial, managerial and operational capabilities to build and run centers at multiple locations around the world. All of this is driving the "global sourcing" movement in the industry, and 2008 will see this playing out further.


5.  Domestic business will be hot and happening

The Indian domestic market for IT and BPO has typically not interested the large companies, which are traditionally export focused. All of a sudden however, they’re waking up to the potential opportunity in this hitherto neglected, but rapidly growing market within India. A few large IT deals in the past two years, especially in BFSI and telecom helped spark the interest. Ironically, many of the largest domestic deals, especially in telecom, have gone to multinational vendors. But as the Indian economy grows rapidly, new opportunities are emerging in retail, manufacturing, media & publishing, for Indian vendors to tap.

We believe that 2008 will see a lot of noise around outsourcing in the domestic market. High growth rates, Rupee denominated contracts and better utilization (day shifts) will grab the attention of small and large Indian exporters. We expect that large IT/BPO companies will look for acquisitions in the domestic space to acquire specific capabilities and client relationships.


6.  Greater focus on the mid-market opportunity

The mid-market segment in the US and Europe has been traditionally underserved for a variety of reasons, including lack of knowledge of offshoring, unattractive deal sizes for the premium vendors, etc. However, rising outsourcing maturity of early buyers amongst mid-market companies is driving their propensity to deploy the more expensive services of larger vendors. At the same time, intensifying global competition is encouraging the larger vendors to look beyond Fortune lists.

Some Indian vendors have laid down strategies to enhance their mid-market coverage via select acquisitions. We believe, that in 2008 many more vendors will create differentiated offerings for the mid-market segment, and target this business aggressively through defined strategies and calculated investments.


7.  Software + BPO will integrate even more closely

The integration of software and business process outsourcing has been underway for a while now, as customers are moving from piecemeal contracts to transferring ownership of entire processes to their
vendor "partners". This presents a large opportunity for IT vendors, some of whom have already
integrated their BPO and IT arms and also started knowledge services/ analytics practices. We expect vendors to further articulate and implement software+BPO integration strategies in 2008.

A key ingredient of the "integrated" offering will be the creation of platforms, especially for back-office
and transaction processing services. Platform BPO will allow vendors to de-linearize growth through
large-scale productivity payoffs and pay-per-use revenue models. Acquisitions of companies with
proprietary platforms will also pick up, although acquiring cannot help vendors do away with
investments in capabilities for customization and backward integration.


8.  The knowledge services industry will scale the maturity curve further

We have seen credible evidence of the knowledge services industry’s climb up the maturity curve this
year. VC interest in the sector is rising and investor concerns about a less than rewarding exit have
been put to rest by the valuations of KPO firms like Marketics and marketRx. Entry of large (IT & BPO) outsourcing vendors into the KPO business, the slow but steady emergence of end-to-end service
providers, rapid ramp-up of some of the smaller, niche players and other such factors point to more
evidence that growthin the knowledge services space is set to gain further traction in 2008.

We believe that in 2008, KPO will rise to the "next" level of maturity - and move from the staff

augmentation model to a value-added role, in which the service provider partners, and even consults the service user, and services provided have the potential to directly impact the buyer’s business objectives.