Report on BPO Sector: Current status and

future challenges

A Detailed Report

Submitted to Prof.Y.N.Kaushal

Submitted by Mr. Pradeep Sahoo (fmg19A

191042)

1
 Cover Letter

To,

Mr.Ramesh Agarwal,

Senior Manager,

ABC company,

New Delhi-110001, India.

The following report encloses a detailed report on the Current challenges and trends present
in the India’s BPO industry..

The report is enclosed with all the details and the related information collected from various
sources..

Kindly go through the report and validate the project as per your standards and let us know in
case of any discrepancies.

Thanking You,

Yours Sincerely,

Pradeep Sahoo,

Senior Research Analyst

2
XYZ Company,

New Delhi-110001, India.

EXECUTIVE SUMMARY

In the last decade the IT and the 1.BPO industry had seen a phenomenal rise in the off shoring
business with India being the destination point for most those big companies making their
stranglehold in the Industry. India now accounts for 65% of Global IT Industry outsourcing
business and 46% of the Global Business Processing Outsourcing business Industry. The
global off shoring market continues to grow at rapid pace, as the benefits (at large with cost
of off shoring) of off shoring (which is also termed as global sourcing or global delivery) is
inducing more and more companies to adopt these practices.

It had been concluded through this report that the addressable market for the global off
shoring had increased to about US$ 11.5 billion, we believe that India can sustain its global
leadership position, grow its offshore BPO industries at an annual rate greater than 25 per
cent. Additionally, export growth can be further accelerated through deep and enduring
innovation by industry participants. Such extensive innovation could generate an additional
US$15-20 billion in export revenue over the next five to ten years. Achieving these outcomes
will require breakthrough collaboration between industry players, central and state
governments, and NASSCOM.

The market for the global BPO industry is of the size of around US$ 11.5 billion and could
expand by more than 10 times from its current size to at least US$120-150 billion. BPO
growth will be driven largely by traditional industries (e.g., retail banking) and cross-industry
functions such as Human Resources and Finance & Accounting.

While the market for the global offshore BPO industry is quite large, industry evolution
would largely dependent on three major forces: (1) supply (the capacity and quality of the

3
offshore locations); (2) demand ramp-up (realistic adoption of off shoring by companies); and
(3) industry conduct (the actions taken by industry players).

India is at the forefront of the rapidly evolving Business Process Off shoring (BPO1) market
and is well established as a ‘destination of choice’. Having grown manifold in size and
matured in terms of service delivery capability and footprint over the past decade, the Indian
BPO industry is now at an inflexion point – and 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 buyers2 and providers, and there are sizeable untapped opportunities across a
wide spectrum of segments. Also, Indian BPO industry is favourably positioned to benefit
from its established delivery capabilities, which bear a key influence on buyers’ decision to
expand their global sourcing exposure. Over the next five years, the right choices by
stakeholders of the Indian BPO industry could effect a fivefold growth. The aspired target is
Aggressive, but it is achievable, and will bring huge payoffs to India’s economy, employment
and role in the global marketplace. This study is a comprehensive fact-based view of
capabilities, opportunities, and growth imperatives for the Indian BPO industry that will
allow for focussed decision-making by all stakeholders — providers (third-party vendors and
captives), buyers, NASSCOM and the Government. The detailed study is provided in the
following report.

4
 Table of Contents

SECTIONS PAGE NUMBER

1. INTRODUCTION 06

23
2. TRENDS IN BPO MARKET

25
3. FUTURE PROSPECTS

27
4. METHOLODOGY ADOPTED

5. DATA ANALYSIS 30

6. CONCLUSIONS 38

5
7. REFERENCES 46

8. GLOSSARY 40

6
INTRODUCTION: GROWTH OF BPO SECTOR

BPO is the process of hiring another company to handle business activities for you. Major
corporations in the US and Europe are outsourcing their back office operations to India to
save costs.

E.g. employee payroll is maintained in India for their employees worldwide. Although these
jobs usually are not directly IT-related, their data-based orientation often means that they
require IT departmental support to be successfully outsourced.

BPO is distinct from information technology (IT) outsourcing, which focuses on hiring a
third-party company or service provider to do IT-related activities, such as application
management and application development, data center operations, or testing and quality
assurance.

In the early days, BPO usually consisted of outsourcing processes such as payroll. Then it
grew to include employee benefits management. Now it encompasses a number of functions
that are considered "non-core" to the primary business strategy.

Now it is common for organizations to outsource financial and administration (F&A)

processes, human resources (HR) functions, call center and customer service activities and
accounting and payroll.

These outsourcing deals frequently involve multi-year contracts that can run into hundreds of
millions of dollars. Often, the people performing the work internally for the client firm are
transferred and become employees for the service provider. Dominant outsourcing service
providers in the BPO fields (some of which also dominate the IT outsourcing business)

7
include US companies IBM, Accenture, and Hewitt Associates, as well as European and
Asian companies Capgemini, Genpact, TCS, Wipro and Infosys.

Many of these BPO efforts involve offshoring -- hiring a company based in another country
-- to do the work. India is a popular location for BPO activities.

Frequently, BPO is also referred to as ITES -- information technology-enabled services.

Since most business processes include some form of automation, IT "enables" these services
to be performed.

ITES:- ITES stands for IT-enabled services. IT-enabled outsourcing can be defined as,

• Those outsourcing services that use information technology in the processing and
delivery of the service.
• Services are typically delivered through a telecommunications or data network, or
other electronic media

An offshoot of BPO is KPO -- knowledge process outsourcing. Considered by some to be a

subset of BPO, KPO includes those activities that require greater skill, knowledge, education
and expertise to handle. For example, whereas an insurance company might outsource data
entry of its claims forms as part of a BPO initiative, it may also choose to use a KPO service
provider to evaluate new insurance applications based on a set of criteria or business rules;
this work would require the efforts of a more knowledgeable set of workers than the data
entry would. The current definition of KPO encompasses R&D, product development and
legal e-discovery, as well as a number of other business functions.

Also coming into use is the term BTO -- business transformation outsourcing. This refers to
the idea of having service providers contribute to the effort of transforming a business into a
leaner, more dynamic, agile and flexible operation.

8
Reasons for Outsourcing…

1.

Reason Savings

Cost reduction 43%

Focus 35%

Access to special enterprise 32%

Resource related reasons{relieve resource constraints, reduce IT

51%
staff and augment IT staff}

2. Why Outsource?

The benefits of outsourcing of course are variable, dependent upon the nature and situation of
the organization. However, the following is a list of benefits of outsourcing:

• Gain functional and technical edge on the competition - without capital investment.
• Ability to concentrate on core functions
• Lower Cost - Control of budget
• Lower ongoing investment required in internal infrastructure
• Higher quality service due to focus of the supplier
• Increase flexibility to meet changing business conditions
• Increase commitment and energy in non core areas
• Improve credibility and image by associating with superior providers
• Generate cash by transferring assets to the provider
• Faster development and start up
• Enhanced performance

9
Constituents of BPO:-

There is a disagreement as to what exactly constitutes BPO. With the rapid expansion of the
BPO industry and the extent of its reach, it is becoming increasingly difficult to define what a
BPO exactly means. It encompasses a wide variety of activities such as human resource,
accounting, financial research, marketing, sales, legal work, logistics and so on. Software
services are also regarded as a part of the BPO market by many firms.

SOME HISTORY:-

Evolution of Global Outsourcing

• When and how did outsourcing start?

Evolution of Global Outsourcing

Period Event

Adam Smith's Wealth of Nations propagates competitive advantage through

1776
outsourcing. Term "outsourcing" itself was not in use.

18th and 19th With whaling fleets and floating factory ships, the concept of "offshore
centuries manufacturing gets a fillip

Companies like Ford Motors own everything, even forests to make rubber
Early 20th
for car tyres! General Motors runs a 2000 people HR and travel desk to
century
cater to its employee needs

ADP starts with handling payroll outside companies. Today the $8 billion,
1940s 41000 employee payroll expert handles payrolls for one in six US workers
and recently opened office in India.

1960s Hundreds of call centres spring up in the US and UK. Convergys, the
largest call centre company started as a captive unit of Cincinnati Bell.

10
 Hived off in the late 1990s. UScompanies from oil majors, telecom
operators, pharma firms to FMCG firms outsource customer care,
telemarketing, payroll and other functions.

C. K. Prahalad's core competency theory expounded ina Harvard Business

School paper caught the imagination of big corporations around the world.
1970s-1980s The basic lessons of the theory - identify your core competencies, focus on
them and get out of everything else. American Express, Swissair, British
Airways and General Electric(GE) start captive units in India.

US and European companies start shifting work to Ireland, Israel and

Canada. Ireland particularly benefits as costs are lower and it offers multi
1980- 1990
language capability. At their peak the over 100 call centres in Ireland
employ over 300,000 staff

C. K. Prahalad's core competency theory expounded ina Harvard Business

School paper caught the imagination of big corporations around the world.
1990-1999 The basic lessons of the theory - identify your core competencies, focus on
them and get out of everything else. American Express, Swissair, British
Airways and General Electric(GE) start captive units in India.

The New Telecom Policy of 1999 ended the state monopoly on

international calling facilities. This heralded the growth of
inbound/outbound call centres and data processing centres one of the first
1999 outsourced services to third party players was medical transcription.
Though outsourcing of business processes like data processing, billing, and
customer support began towards the end of the 1990s when MNCs
established wholly owned subsidiaries.

Third Party players spring up in India. By 2005 end, over 300 open shop in
India and beyond. Some of them even set up operations outside. About 45
2000
global destinations BPOs bandwagon and are now competing to get a slice
of the annual $300 billionoutsourcing pie.

Source: Bussiness World

11
BPO India chronology

The Birth(1995-2000)

1995
Pramod Bhasin and Nigel Andrews of GE make a case for captive back office operations in
India. GE M & A asks Anderson Consulting to explore the market for third party vendors.

1996
British Airways sets up a 30 people captive back office in Mumbai to undertake data entry
work. American Express assigns Raman Roy the task of setting up a call centre in Gurgaon.
The same year, Anderson submits its verdict to GE: captive is the way to go.

1997
GE flags off captive BPO operations in Gurgaon through subsidiary GE Capital International
Services (Gecis). Raman Roy is signed on as CEO. Gecis starts operations with basic data
entry work.

1999
Driven by the Internet boom, Sanjeeev Agarwal, backed by $3 million venture funding from
CDC Capital Partners, sets up Daksh eServices in Gurgaon and begins offering email support
service.

2000
Raman Roy quits Gecis to set up Spectramind in Gurgaon. CustomerAsset and 24/7
Customer setup shop in Bangalore. All three rope in venture capital investment and follow
Daksh’s lead in fashioning teir business models around email support services. The third
party industry is born.

The Gold Rush(2000-02)

2001
The dotcom crash is followed by boom in demand for voice bsed services. Customer support
and telemarketing services fuel boom in call centres. Captives like Dell, HSBC, Standard

12
Chartered, AOL, and HP lead the boom. Multinational third partystart upsl land big ticket
customers- Daksh-Sprint, Spectramind-American Express.

2002
Private equity investors, Indian IT sevices majors and large corporate houses rush into third
party BPO. Warburg Pincus acquires a 70percent stake in British Airways’ captive. WNS
Global Services is born. General Atlantic pumps $21 million into Daksh. Oak Hill Capital
backs a management buyout of the Conseco group’s stake in EXL Services. Indian IT majors
enter the space Wipro buys Spectramind for $100 million, Infosys sets up Progeon and
Satyam announces Nipuna. ICICI subsidiary I-One Source buys CustomerAsset. India’s BPO
revenues surge to $2.7 billion as on March 2003 and voice corners 60 percent of the market.

Consolidation(2002-04)

2003
Third party firms begin to scale up revenues and diversify service lines through aggressive
M&A led strategies. WNS buys UK based Town and Country and US based ClaimsBPO to
enter insurance segment. I-One Source buys British Telecom’s call centre in Ireland.
Transworks is acquired by Aditya Birla Group.

2004
WNS becomes the first Indian third party BPO firm to hit $100 million revenues. IBM buys
Daksh for $130 million. Signals the entry of the Global Big Five in India’s BPO market. GE
sells 60 per cent in Gecis to private equity firms General Atlantic and Oak Hill Capital for
$500 million. Gecis becomes the largestthird party Indian BPO firm.

Coming of Age

2005 onwards
M& A – driven consolidation leads to emergence of four third party camps. Indian scale

13
players with multiple service lines across the value chain- Genpact, I-One Source, EXL,
WNS, MNC third party players – Convergys, ADP, Hewitt. Integrated IT and BPO services
offering – Infosys, Wipro, IBM, Accenture, Niche players – Evalueserve, Office Tiger,
Marketrx, Indecomm.

Captives continue to set up operations but are now looking at different models – BOT, hybrid
(third party and captive). The next phase of BPO will see players in all categories moving
towards high end, knowledge based services like analytics and market research.

Source: Businessworld

Call centre and BPOs

A Business Process Outsourcing (BPO) organisation is responsible for performing a process

or a part of a process of another business organisation; outsourcing is done to save on costs or
gain in productivity.

A call centre performs that part of a client's business which involves handling telephone calls.
A call centre, for example, might handle customer complaints coming in over a telephone.

Thus, a call centre can be considered a BPO organisation. The converse is, however, not true
because there exist BPO organisations, such as medical transcription agencies, which handle
their business through websites, and do not process any telephone calls on behalf of their
clients.

Voice-based and non-voice based BPO jobs

1) voice based means communicating with customers thru calls only and non voice thru chat
and email
2)communication skill is less imp in non voice based jobs
3)it depends on various companies , basically one introduction rnd , tech test,aptitude
,reasoning test,speakin abt a topic ,hr tech, voice based openings wil hav additionally a voice
test

14
4)long term career in bpo in nt gud as it involves night shifts which
affect ur health .if u go 4 a carrer in bpo try for voice based openings as remuneration is gud
compared to non voice based

ITES – BPO sector

Global Scenario

Worldwide spending on Business Process Outsourcing (ITES-BPO) services totaled

approximately US$ 712 billion in 2001. IDC projects that by 2006, the potential ITES-BPO

market may increase to US$ 1.2 trillion, with an overall compounded annual growth rate

(CAGR) of 11 percent. While traditionally the key driver for ITES-BPO activities has been

cost reduction, companies are increasing viewing these services as strategic and essential

elements for organic growth.

Worldwide ITES – BPO spending by segments – 2001 – 06

(Figures in US$ million)

2001 2006 2001-2006 CAGR

(%)

Human Resources 7,373 25,555 28.2

Logistics 140,700 308,651 17

Purchasing 5,288 12,185 18.2

Engineering/R&D 69,798 123,882

12.2

Marketing 76,666 108,340 7.2

Sales 107,412 165,736 9.1

FOM 120,635 172,329 7.4

Administration 36,644 53,396 7.8

Legal 111,273 163,962 8.1

15
Finance/Accountin

36,356 64,872 12.3

TOTAL 712,145 1,198,908 11

Source: IDC

The Indian ITES-BPO Scenario

According to NASSCOM, the Indian ITES-BPO industry registered a growth of 59%

and clocked export revenues of Rs. 11,300 crores (US$ 2.3 billion) up from Rs. 7,100
crores(US$ 1.5 billion) in 2001-02.The industry is projected to register a growth of
54% to clock revenues of US$ 3.6 billion in 2003-04. India is a popular choice for
customers seeking outsourced services because it is able to offer a24X7 service and
reduction in

turnaround times by leveraging time zone differences. In certain Remote Services categories,
Indian players have achieved high productivity levels with the emergence of

BPO vendors with deep process skills and the ability to offer integrated outsourcing

solutions. At the core of India’s great attraction as the outsourcing destination is its

unbeatable value proposition – PQR (Productivity, Quality and Rate) factor.

India has emerged as the most preferred destination for ITES & BPO with revenues growing
well above industry average at a rate of 59% this year contributing about 25% to the total
software and service exports.

Captive ITES-BPO players have almost doubled their share, growing by a phenomenal 90%.
Captive units grew from US$ 710 million to US$ 1350 million

Third Party Vendors have increased their presence from US$ 769 million in 2001-02 to US$
985 million

Absolute growth in the ITES-BPO segment increased from US$ 549 million in 2001-02 to
US$ 856 million

Growth by Service lines – a snapshot

16
Within the ITES-BPO segment, Customer Care continues to be the dominant segment with
both revenues and employment growing by more than double in 2002-03 over 2001-02. Other
areas that witnessed significant growth were Administration and Finance registering revenue
growth of 67% and 70% respectively over 2001-02. Segments such as Payment services and
HR too have registered a considerable growth in revenues at 90% and 50% respectively in
2002-03 over 2001-02. In terms of manpower, Customer care employs the largest number of
people followed by Content Development, Administration and Finance. The number of
employees in the Administration and Finance segment has grown by 78% and 60% in 2002-
03 over 2001-02.

The key trends witnessed in the Indian ITES-BPO market in 2002 were:

Significant increase in capacity: The quantum of new investment in the industry

increased by around US$ 300 million to reach US$ 800 million by the end of 2002.

The increase in capacity was equally divided between captive centers (subsidiaries of

multinationals ñ such as HSBC, Standard Chartered, AOL, Dell, Hewlett Packard) and

Indian third party providers such as Daksh, Wipro Spectramind, EXL, MsourcE, among

others.

Continued focus on Customer Care and Administration: According to

preliminary estimates made by NASSCOM, customer care and administration were the

fastest growing segments in the ITES-BPO space, with a projected growth of over 75

percent in 2002- 03. The high growth rate can be attributed to the presence of

experienced third party vendors (who scaled up operations) and entry of captive

players. In addition, the availability of a fairly large talent pool also attracted

investors and customers alike to this segment.

Continued dominance of US and UK markets: NASSCOM’s preliminary estimates

suggest that the English speaking geographies dominated export revenues of the

Indian ITES industry accounting for over 90 percent of the industry total.

Enormous interest by potential customers: Not only did existing customers scale

17
up business (in terms of number of processes offshored or seats utilized or expansion

by captives); the sheer cost and productivity gains realized by them generated

tremendous interest among almost every significant Fortune 100 company to explore

offshore ITES-BPO from India.

Rapid maturity of third party vendors: Most leading third party vendors further

consolidated their leadership position by investing in infrastructure, quality standards,

employee training and re-skilling, expanding service line/process offerings, investing

in marketing front-ends and personnel with domain and process skills

Increased presence of IT services companies: A large number of IT service

companies expanded their offerings to include ITES-BPO by creating their own

capacities (Infosys, Patni, Satyam, HCL, Cognizant, Syntel) or by acquiring ITES-BPO

players (Wipro deal with Spectramind).

Emergence of several under-the-radar opportunities: The industry expanded its

radar of opportunities to new service lines such as package software implementation,

System Integration, R&D engineering and new management as new horizon for

robust growth

Geographical diversification of capacity: A number of players set up additional

centers in new cities drawn by attractive incentives offered by many state

governments, and in an attempt to diversify risk of running a single location center

and to take advantage of lower labour costs in other cities

The average no. of employees in the ITES-BPO sector is 190 but the range is huge

and varies from as low as 4 people to as many as 16,000 people

The encouraging trend in this area is the presence of MNC Captive units that account

for 45% of the industry and are a vital determinant of the long term competitiveness

of India in this sector

Changes in ownership structure:

18
o Two MNCs have divested part of their stake in their captive units, British

Airways in WNS and Conseco in EXL. They have capitalized on the market

value of their firm by bringing in a strategic investor(s). The unit then

competes with third party vendors, claiming domain expertise as a

differentiator while targeting new customers

o Venture capital funds such as Oakhill, General Atlantic Partners, Westbridge

Capital, Warburg Pincus, among others are reported to have invested close to

US$ 300 million in ITES-BPO companies in 2002

o M&A transactions are on the rise and some IT service companies choosing to

buy rather than build in order to rapidly scale up

Changing customer behavior: A number of large customers prefer to outsource

business to multiple vendors and also set up a captive unit on their own. In some

cases, they are asking the vendor to build a center on a build-operate-transfer model,

in which case the vendor would grow the center to a certain size and then hand it

over to the customer at the end of the pre-determined period

Critical Success Factors in the ITES-BPO Business are:

The key sub-segments in the Indian ITES-BPO industry are:

Indian ITES-BPO Industry – Fact Sheet (SR) Page 4

Customer care: including database marketing, customer analytics, telesales/

telemarketing, inbound call center, web sales and marketing, sales and marketing

administration

Finance: including billing services, accounting transactions, tax consulting and

compliance, risk management, financial reporting, financial analysis

Human Resources: including benefits administration, education and training,

recruiting and staffing, payroll services, hiring administration, records management

19
 Payment services: credit/debit card services, cheque processing, transaction

processing

Administration: including tax processing, claims processing, asset management,

document management, transcription and translation

Content development: including engineering, design, animation, network

consultancy and management, biotech research.

Indian ITES-BPO Industry: Background

Offshoring to India has three advantages - significant cost savings, major

productivity gains and dramatic improvements in quality

The primary driver of cost savings is labour cost arbitrage. The differential in wages

between the parent location in the US or UK and India is more than 70- 80 percent

for offshorable processes. However, interaction costs increase by 10-20 percent

because India is a remote location, resulting in net savings of 40- 60 percent for the

offshored processes

Significant potential exists for cost savings through offshoring across industry

verticals. Hence, customer interest in offshoring will not be limited to just a few

verticals, but be much more widespread. Insurance and retail banking generate the

bulk of savings because of the high proportion of processes that they can offshore. As

a result, companies in these two verticals are taking the lead in sourcing ITES from

India and rapidly growing in scale. For instance,

o GE has the largest ITES operation in India with more than 12,000 employees

and is growing at the rate of more than 700 people per month

o HSBC, which started offshore operations about two years ago, currently

employs over 1,000 people and plans to double that number in less than a

year

20
o Conseco (now EXL eServices) acquired a 350 agent company and has grown

the facility to more than 1700 people in a year

Offshoring opportunities vary from standardized corporate center activities such as

accounting, payroll, etc. to more niche and vertical specific opportunities such as

clinical trials support for pharmaceutical companies, claims processing for the

insurance sector, account opening support for the banking sector, etc

The ITES industry in India attracts people who are more skilled and qualified than

those who work for BUs or shared services centres in the parent location. Further, the

ITES set-ups serve a multitude of divisions/BUs within the company (in case of inhouse

providers) and across companies (in case of third party providers) facilitating

transfer of best practices across all. Consequently, the offshore centers in India have

been able to make dramatic improvements in process quality and productivity as

compared to those in the parent location.

Business Process outsoucing

21
22
23
 BPO Business Models

Over the years, different models have been used for conducting business in BPO. The regular
outsourcing models of on-shoring, near-shoring and offshoring are seen in BPO as well. TPI,
a sourcing advisory, has observed that in addition to on-shoring, near-shoring and offshoring,
BPO operations are also conducted through the following three business models :

• Transactional BPO: Transactional BPO handles one aspect of a process only. The customer
has to carry out a significant part of the process in-house and hence the customer owns the
risk of the process. Also, outsourcing many aspects of the process in a transactional mode
leads to complex fragmentation which can pose as a threat to productive delivery.

• Niche BPO: A niche BPO carries out 3-4 aspects of a process. A niche BPO, which also
makes certain investments in the customer's process, aims at improving the efficiency of the
process. The vendor in a niche BPO works in close coordination with the buyer, sometimes
seeking the services of the customer's employees. Both the vendor and the buyer share the
risk of the process.

• Comprehensive BPO: A comprehensive BPO handles both transactional and administrative

tasks in a process and takes 70 percent responsibility of the output. The vendor purchases the
buyer's assets and also hires most of its employees. Comprehensive BPO has bulk deals
lasting for 7-10 years.

24
 TRENDS IN BPO SECTOR

As per Nasscom, BPO sector can be divided into 3 phases of growth-:

Phase 1 (1996-2000): Pioneers- It was basically into captive model. The companies use to
have their own call centre.
Phase 2 (2000-2003): Rise of the third party vendors. Processes were outsourced to different
vendors who used to work on behalf of the companies (clients).
Phase 3 (2003-ongoing): Cautious followers are able to survive. Vendors who are able to
survive cost reduction and provide good CSAT (customer satisfaction) are able to resist this
cut throat competition.

OBJECTIVE OF THE STUDY

1) To find trends or development of BPO industry

2) To see the influence of foreign exchange in BPO sector

3) To find out the impact of recession on BPO sector

4) Determine the effect of interest rates

5) Revenue generation in BPO sector

25
 Indian BPO Segments
Business Process Outsourcing in India is organized in many segments. Back-office
processing and customer interaction services are among the fastest and largest growing
segments that contribute significantly to the Indian BPO market. Other notable segments are
revenue accounting, content development, animation, engineering and design, GIS and
medical transcription.

Back-Office Operations / Revenue Accounting / Data Entry And Conversion / HR

Services - This segment is by far the largest, accounting for 42% pf the market share in FY
2002. Industries such as banks and aviation require large-scale data processing and data based
decision-making capabilities. Indian companies provide data entry (paper to digital) and rule-
set processing (applying present rules and criteria for processing) and are fast graduating to
problem solving and decision-making.

Content Development / Animation / Engineering And Design / GIS - The content

development segment ranks second occupying 26% of the pie. The Roncarelli report on
computer animation estimates that labour costs in India for computer animators is roughly
one-tenth that in the US. While a computer animator in India earns about US$7,000 - 9,000
per year, an equivalent animator in the US earns US$45,000 - 90,000.

Customer Interaction Services - The customer care segment ranks third occupying 28% of
the pie. A customer care centre is a service centre with adequate telecom facilities, trained
consultants, access to requisite databases, Internet and other online information support
infrastructure to provide information and support to customers. Such centres are used for a
number of customer-related functions like marketing, selling, information dispensing, advice,
etc.

Medical Transcription Services - Medical transcription accounts for 2% of the total Indian
outsourcing services. Medical transcription was one of the first offshore BPO services to be
launched from India. This service involves the transcribing of medical records from audio
format or dictated by doctors or other healthcare into either a hard copy or electronic format.

26
Other Services - The other services include online education or web based training, market
research analysis using statistical packages, remote network maintenance and monitoring.

BPO Competitors of India

By virtue of certain advantages India has been able to maintain its supremacy over its rivals
in the BPO industry but there are a number of other countries, which can give India run for its
money in Business Process Outsourcing. Some of the prominent competitors of BPO India
are China, Philippines, Mexico, Canada, and Malaysia. The Philippines advantage, besides
skilled and English educated work force and good telecom infrastructure, is familiarity with
American work culture and Spanish language.

China enjoys a great advantage in terms of large pool of people but the Chinese have a great
limitation, as they do not have enough English speaking graduates like India. Mexico too is
emerging as a tough competitor for India but is good for low-end jobs only. Other countries
like Ireland have a smaller talent pool. Canada and South Africa are other prominent
competitors of India but are costlier than India, while Russia has poor infrastructure and poor
linguistic capabilities.

Hence India still has the leading edge in the BPO industry, but it should keep on improvising
to maintain its stability. Therefore India should be on its guard to maintain its position intact.
If India has to maintain its supremacy in BPO and its software workforce, then BPO India has
to learn Spanish, which is spoken in more than 24 countries. With India already stamping its
superiority in the BPO sector with its knowledge of the English language, it now needs just
one other language that will make the world its market, which is Spanish.

Future Prospects
The future for the IT/BP industry holds bright. It is estimated that 56% of the BPO market
could be India's by the year 2006 with the demand for BPO services increasing at an annual
growth rate of 50 per cent during 2004-06. The pace at which the Indian BPO market is

27
increasing is tremendous. The market of BPO in India is likely to be around $9-12 billion by
the year 2006 and will employ around 0.4 million people. The BPO market is ready to fire up
and India Inc is all geared for this big opportunity.

This is really great news for India Inc since we have to tackle the BPO backlash as well.
Though there are chances of this party being spoiled by the US led backlash but then also
India is sure to have a large share of the BPO market. This will go a long way in making
India the BPO super power of the world. If the backlash stays on for sometime, then may be
India could only have a 42% share of the market instead of 56%. Though it is a reality that
companies outsourcing their business operations to Indian BPOs have been saving a lot of
money and also saving jobs of their own countrymen.

Growth of Indian BPO Industry

According to studies conducted by NASSCOM and leading business Intelligence Company,
McKinsey & Co. the Indian IT/BPO segment is expected to employ over 1.1 million Indians
by the year 2008. Market research shows that in terms of job creation, the ITES-BPO
industry is growing at over 50 percent. In the financial year 2003-2004, ITES-BPO
companies were the largest recruiters in the IT/ITES sector, adding a total of about 70,000
jobs.

An estimated 70,000 new Jobs expected in 2005 in the field pf ITES. Plus there will be
additional hiring to replace industry attrition that is around 25%. On the other hand BPO and
outsourcing services would generate around 1, 25,000 new Jobs in 2005. McKinsey & Co.
predicts global market for IT-enabled services to be over $140 billion by 2008. In that the
opportunity for India will be around $ 17 Billion.

India Domestic BPO Market

AN IDC INDIA MULTI CLIENT STUDY
The Indian economy has made rapid strides in the last decade around employment creation,
increase in tertiary education thereby offering growth beyond the metros and impacting the
life of the urban population and given a new dimension to the way businesses are done today
in the country. The Indian economy is passing through times which have made the industry
majors take a pause and look for solutions which can help them take them to the next level of

28
growth. Enterprises across sectors are taking corrective measures to emerge much stronger in
the next decade, which is expected to see a new face of global economy, radically redefined
and restructured, more mature and evolved customer demands, robust products and services
with strong delivery models. The current slowdown in the economy and the fact that major
global economies are in different stages of recession, is bringing in new paradigm shift across
industries. Indian domestic BPO companies must factor in this trend to get their
strategies right and the way they operate. The emerging challenges in the global market are
making it prudent for the BPO service providers to re-align their businesses and look for
opportunities within the domestic geography. To understand Indian enterprise maturity on
different processes and identifying opportunities in Domestic Business Process Outsourcing
space, IDC India supported by CII BPIAI, conducted a study from supply and demand
perspective. The study offers service provider’s valuable insight into the dynamics, size, and
level of maturity from enterprise business process standpoint. As per the IDC study, though
banking and telecom continue to be the traditional growth vertical, financial services,
insurance, retail, travel, manufacturing and government are expected to contribute to the
domestic outsourcing business. Finance & accounting, human resource are emerging as
functions holding potential for growth in the near future apart

Charts Relating India BPO , BPO Business &

BPO Growth

METHODOLOGY ADOPTED FOR THE STUDY

1) Tabulating and estimating the revenue generated by Indian BPOs

2) Tabulating and estimating the revenue generated foreign companies who have outsourced
their business in India

3) Comparative analysis of these two market players with plotting, pie charts and finding out
the share of each market player in BPO industry

29
4) Finding out the kind of market which BPO sector is currently in and who are the key
players and competitors

5) Tabulating the last five years data and analyse the revenue generated by all the leading
market players in the industry

6) Drawing pie chart for the leading market player in terms of revenue for 2007-08 in order to
determine the impact of recession

PROBLEM ANALYSIS / IDENTIFICATION

High levels of absorption

The rapid growth of Indian ITES-BPO in the last eighteen months has contributed to a
continued mismatch between the demand and supply of experienced resources in the
industry. Consequently employment generation and attrition levels remain high.
Indian ITES-BPO added approximately 73,500 jobs in FY 2003-04 – with the number
expected to double in the current fiscal. Even so, demand for experienced professionals
outpaced their supply and attrition levels in the industry remain between 25-40 percent.

Vendor maturity - managing people risk

In spite of the relatively high people risk - attributed to the high turnover and attrition - Indian
companies displayed increasing maturity as companies deployed innovative employee
retention strategies. These included - employee recognition schemes, career planning
services, educational guidance and assistance and a greater emphasis on improving the
quality of work-life.

30
As the companies rapidly ramp up scale, they are increasingly facing a shortage of mid-level
executives to manage the growth. As a result there is tremendous pressure to pull-up the
above average performers and prepare them for the next level of leadership. The opportunity
to rise rapidly in this industry, on the basis of exhibited performance, is a great motivator for
the industry workforce.

INFLUENCE OF FOREIGN EXCHANGE ON BPO SECTOR

The sharp appreciation of the rupee in relation to the dollar and, to a lesser extent, the euro,
the pound and the yen has naturally affected the booming software exports and the BPO
industry. The rupee could become even stronger. The BPO industries are reportedly operating
on thin margins.

An analysis of the recently released first quarter (April-June 2007) results of the top four
information technology (IT) companies — Infosys, TCS, Wipro, and Satyam — is
noteworthy for two reasons. First, it shows how these companies fared at a time the dollar
lost more than 7 per cent in rupee terms. Secondly, it provides insights into how they might
cope with a dearer rupee over the medium term. It needs to be stressed that the financial
performance of these companies continues to be impressive, although it may not have
matched the lofty standards the share market has routinely come to expect of them. These
four companies account for more than 40 per cent of receipts from software exports that
totaled over $29 billion in 2006-07. For the domestic stock markets the relevance of these
companies can hardly be overstated. A company such as Infosys counts not only in an
evaluation of other IT stocks but also in deciding the behavior of the stock market as a whole.
Unlike merchandise exporters who secured a partial relief by way of a Rs.1400 crore package

31
of concessions, the IT and the ITES sectors will have to grapple with the consequences of a
stronger rupee in a number of more nuanced, and often unique, ways.

IMPACT OF RECESSION ON BPO SECTOR

Consequences of US recession on India job market

Worst affected because of US recession will be the service industry of India. Under service
industries come BPO, KPO, IT, ITeS etc. Service industry contributes about 52% to India's
GDP growth. Now if that is going to get hurt then it will also hurt India's overall growth but
very slightly. India is not going to face a major impact due to US recession. People may say
that there is going to be a huge job loss due to recession. and will cite the example of TCS
firing about 500 employees but these were employees who didnt perform and for cost cutting
one have to reduce Non performing asset and that exactly what has been done. There is no
threat to the skilled people. According to NASSCOM India will have a shortage of about 5
million skilled people in IT/ITeS. So there are lots of opportunities.75 per cent of its revenues
come from the US. Low demand for services may force most Indian Fortune 500 companies
to slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says that
besides companies from ITeS and BPO, automotive components will be affected. During a
full recession, US companies in health care, financial services and all consumers demand
driven firms are likely to cut down on their spending. Among other sectors, manufacturing
and financial institutions are moderately vulnerable. If the service sector takes a serious hit,
India may have to revise its GDP to about 8 to 8.5 per cent or even less.

According to Lokendra Tomar, senior vice-president, Integreon, a BPO firm, says recession
is likely to have a dual impact on the outsourcing industry. Appreciating rupee along with
poor performance of US companies will affect the bottom line of the outsourcing industry.
Small BPOs, which are operating at a net margin of 7-8 per cent, will find it difficult to
survive. According to Dharmakirti Joshi, director and principal economist of CRISIL, along
and severe recession will seriously affect the portfolio and fixed investment flows.

EFFECT OF INTEREST RATES ON BPO INDUSTRIES

32
Because of the slowdown of Indian economy and BPO industries the interest rates have also
gone down. Bank has reduced their interest rates due to lack of business.

REVENUE GENERATION IN BPO SECTOR

Revenue is generated on the basis of volume / seats a BPO has or is required for any process.
For eg. if a process is outsourced to a vendor, client provides the data on the volume and a
charge per unit is defined in the agreement. Then the vendor is paid on the basis of volume
(no. of calls*price per call). The average revenue earned by BPO industry in 2007 in India
was $ 13,811 million.

A Few Issues:-

The BPO industry is marked with some operational issues and they are enumerated as
follows:

-Lack of Labor Guidelines: There is very little over-time pay and it, thus, leads to
systematic overworking or understaffing of resources in both small and big BPOs. The
understaffing is also responsible for the erratic quality or projects due to rush jobs. Labor
regulation has been avoided because historically Indian regulations have been misused to
offer hassles to industry rather than relief or solutions. Recently, a committee headed by
Arjun Sengupta had submitted a draft of the Unorganized Sector Workers’ Bill to cover the
workers in this sector.

Lack of Health Guidelines: There can be medical counseling (without too much expenses)
to cope with effects of prolonged night-shifts, or sitting in chairs, especially chronic back-
aches, and personality counseling. This shall help especially when there are project
requirements for extended over times.

33
Employee Retrainabilty: There can be career counseling to help young employees plan a
career in a still turbulent sector (Not everyone will be a team leader). There is no provision
for re-training for workers being laid off and there is little chance of unemployment benefits
in India. Retrenchment in this sector happens at a larger scale usually when companies lose a
few big clients as in the recent mortgage sub prime crisis or even earlier when a big computer
maker of American-origin shifted. The insecurity of being laid off leads to further attrition. In
this scenario, companies that offer skill enhancement and re-training are likely to have a
sustainable edge in human resource management

Attrition - An urban legend: Despite the noise about attrition by industry players, most of the
attrition is actually and subtly encouraged to keep operating margins down. This is because
attrition enables middle managers to cut down costs temporarily by making other team
members stretch, and replacing them by un-experienced younger members. It is also very
easily explained as due to market conditions or poaching by other companies. The solution
for having an industry wide database lacks sensitivity to individual personal rights and seems
to point the finger almost entirely on employees for attrition.

Growth of BPO in Indian Economy

In spite of tough competition, India has emerged as a global leader in the Business Process
Outsourcing (BPO) industry. India has the advantage of having large English speaking and
computer literate workforce, which are considered as important perquisites for the success of
BPO sector. It explores the factors that have contributed to the success of BPO industry in
India. Sound infrastructure is crucial for the success of any industry including BPO. The
author throws light on the improvements achieved in the telecom, aviation, power, offices,
hotels and road facilities that have facilitated the growth of the BPO industry. He examines
the role played by the human resource in making India a BPO hub. The article also discusses
the initiatives taken by the government including policy concessions, tax exemptions and
removal of procedural hurdles to enable the growth of the BPO sector. In the last section the
article throws light on the future of BPO industry in India, especially its contribution towards
GDP, exports and employment generation. The author observes that BPO industry has
witnessed transformation from back office service operations to handling core functions and

34
is playing a significant role towards growth of the economy. The author emphasizes the need
for continued efforts to maintain the lead in this industry.

BPO & KPO: Emerging Trends and Challenges

During the post-reform period, India has emerged as an ideal destination for many
multinational companies. Various demographic, economic, political, social and financial
factors contributed towards India being considered as a favorable destination. The success of
the BPOs in India led to a lot of criticism in western countries regarding loss of jobs and shift
of economical benefits to India. In spite of these concerns, India has successfully moved
towards the next value chain of Knowledge Process Outsourcing (KPO). It throws light on
the emerging trends and opportunities in the KPO industry for India in the fields of
engineering research and design, medical services, legal process outsourcing,
pharmaceuticals, equity research, education and training. The article discusses the porter’s
five forces in the context of the KPO industry namely, industry competitors, potential
entrants, likely substitutes, buying power of employees and outsourcing entities. The authors
believe that the KPO industry will be driven forward by domain knowledge structured and
packaged to the needs of the client. India has to prepare itself to face the challenges posed by
this sunrise industry.

35
India’s IT & BPO sector: What contribution to broader economic
development

Until now, India has barely participated in the manufacturing export boom that has long
fuelled East Asia’s growth. It has, however, established itself as a leading exporter
of software and information technology (IT) -enabled services to OECD markets. Software
has been a leading growth sector over the past decade and expectations are that it can
continue in this role for some time to come. Yet, the industry and its major participants face
new challenges and potential constraints on realizing that potential. There is also the question
of how far the benefits of the software/IT sector’s growth are reaching the Indian masses as
opposed to small, educated elite.

Modeling and Analysis of Indian Outsourcing Industry: A

System Dynamics Approach

India is emerging as one of the biggest markets for offshore services. Business process
outsourcing (BPO) is the delegation of one or more information technology (IT) intensive
business processes to an external provider that, in turn, owns, administrates and manages the
selected processes based upon defined and measurable performance metrics. Offshore
outsourcing is an umbrella term covering a range of IT and business services delivered to
companies in developed countries by personnel based in developing countries. Though Indian
outsourcing industry is growing, the attrition rate is also rising in this sector. So is the
backlash against outsourcing. In order to survive and grow in this scenario, Indian firms must
ensure that their services are not only cost-effective but also qualitatively superior. The
present study probes into these issues. The study aims to explore the structure of Indian
outsourcing industry through the methodology of system dynamics. A system dynamics
model has been developed, validated and simulated over time to understand the trends that
characterize this industrial segment. The implications of the results of the study are discussed.

36
MARKET LEADERS IN BPO SECTOR AS PER NASSCOM

NASSCOM Announces BPO Companies Rankings for the year 2006-2007 and 2008-2009 on
the basis of the revenues generated:
1. Firstsource Solutions
2 Genpact
3. WNS
4. Wipro BPO
5. HCL BPO Services
6. ICICI OneSource
7. IBM Daksh
8. Progeon
9. Aegis BPO Services
10. EXL Service Holdings
11. 24/7 Customer
12. Mphasis BPO
13. Intelenet Global Services
14. GTL
15. TCS BPO

37
Indian IT-BPO Industry - DATA

Revenue \ Year 2003-04 2004-05 2005-06 2006-07 2007-08

Domestic BPO 0.3 0.6 0.9 1.1 1.6

Overall BPO Revenue 3.4 5.2 7.2 9.5 12.5

Figures in $ billion Source: Nasscom

The key trends witnessed in the Indian ITES-BPO market are:

Significant increase in capacity: The quantum of new investment in the industry increased
by around US$ 300 million to reach US$ 800 million by the end of 2002. The increase in
capacity was equally divided between captive centers (subsidiaries of multinationals ñ such
as HSBC, Standard Chartered, AOL, Dell, Hewlett Packard) and Indian third party providers
such as Daksh, Wipro Spectramind, EXL, MsourcE, among others.

1.Continued focus on Customer Care and Administration: According to preliminary

estimates made by NASSCOM, customer care and administration were the fastest growing
segments in the ITES-BPO space, with a projected growth of over 75 percent in 2002- 03.

38
The high growth rate can be attributed to the presence of experienced third party vendors
(who scaled up operations) and entry of captive players. In addition, the availability of a
fairly large talent pool also attracted investors and customers alike to this segment.

2.Continued dominance of US and UK markets: NASSCOM’s preliminary estimates

suggest that the English speaking geographies dominated export revenues of the Indian ITES
industry accounting for over 90 percent of the industry total.

3. Enormous interest by potential customers: Not only did existing customers scale up
business (in terms of number of processes offshore or seats utilized or expansion by
captives); the sheer cost and productivity gains realized by them generated tremendous
interest among almost every significant Fortune 100 company to explore offshore ITES-BPO
from India.

4.Rapid maturity of third party vendors: Most leading third party vendors further
consolidated their leadership position by investing in infrastructure, quality standards,
employee training and re-skilling, expanding service line/process offerings, investing in
marketing front-ends and personnel with domain and process skills.

5.Increased presence of IT services companies: A large number of IT service companies

expanded their offerings to include ITES-BPO by creating their own capacities (Infosys,
Patni, Satyam, HCL, Cognizant, and Syntel) or by acquiring ITES-BPO players (Wipro deal
with Spectramind).
6.Emergence of several under-the-radar opportunities: The industry expanded its radar of
Opportunities to new service lines such as package software implementation, System
Integration, R&D engineering and new management as new horizon for robust growth.

7.Geographical diversification of capacity: A number of players set up additional centers in

new cities drawn by attractive incentives offered by many state governments, and in an
attempt to diversify risk of running a single location center and to take advantage of lower
labor costs in other cities. The average no. of employees in the ITES-BPO sector is 190 but
the range is huge and varies from as low as 4 people to as many as 16,000 people. The
encouraging trend in this area is the presence of MNC Captive units that account for 45% of

39
the industry and are a vital determinant of the long term competitiveness of India in this
sector.

8. Changes in ownership structure: Two MNCs have divested part of their stake in their
captive units, British Airways in WNS and Conseco in EXL. They have capitalized on the
market value of their firm by bringing in a strategic investor(s). The unit then competes with
third party vendors, claiming domain expertise as a differentiator while targeting new
customers. Venture capital funds such as Oakhill, General Atlantic Partners, West bridge
Capital, Warburg Pincus, among others are reported to have invested close to US$ 300
million in ITES-BPO companies in 2002. M&A transactions are on the rise and some IT
service companies choosing to buy rather than build in order to rapidly scale up.

9.Changing customer behavior: A number of large customers prefer to outsource business

to multiple vendors and also set up a captive unit on their own. In some cases, they are asking
the vendor to build a center on a build-operate-transfer model, in which case the vendor
would grow the center to a certain size and then hand it over to the customer at the end of the
pre-determined period.

THREATS IN BPO SECTOR

The Threats In BPO Sector Are As Follows:

India which has been an unrivalled force in the BPO domain will face stiff global
competition. Russia, China, Australia, South Africa, New Zealand, Mauritius, Fiji, Malaysia,
Philippines and Ghana are the countries that top the list as potential threats to the Indian BPO
market. Where the Philippines focuses on voice services, Malaysia has zeroed in on
transaction processing and South Africa on other BPO operations. Certain countries are even
relying heavily on their proximity towards the US. Despite the boom and support that BPO
sector has fetched, there are certain grass-root level setbacks too. These setbacks are strongly
propagated to be threats resulting into backlash to the BPO activity in India. The setbacks are
as follows:

40
• Lack of maturity in service line, increasing competition among e-logistics providers and
management resistance are the main deterrents to the outsourcing in the logistics sector.

• Discretionary cuts in budgets, low growth due to industry maturity and decentralized nature
of facilities management are the main deterrents to the outsourcing in the facility &
operations management sector.

• Privacy concerns and technical nature of subject matter are the main deterrents to the
outsourcing of legal services.

• If all above is not enough, the companies which are outsourcing non-core processes from
third party service providers are literally placing their fate in the hands of another company,
which appears to be a normal setback of BPO at the outset.

• Some companies which jumped BPO market in India are now looking to sell their assets
being unable to scale operations up to the required level. As per the NASSCOM report,

41
recently there were about 200 Indian companies offering BPO and related services looking
for buyers.

• Companies rush into BPO market without understanding the kind of operational and
marketing issues they would have to cope with, and the kind of gestation periods to be
expected before profits can start flowing in consistently. As a result, many facilities that were
set up are lying vacant, and the failed enterprises have to either close down or get acquired, as
they have neither funds nor clients.

• The rapid growth of India’s ITES-BPO industry has not been taken too well in developed
countries from where jobs are coming to India. Recently, in the US, bills have been tabled in
five states namely; New Jersey, Maryland, Connecticut, Washington and Missouri that sought
to ban the transfer of state data processing contracts to developing nations. In the UK, three
of the country’s biggest trade unions have come together to fight the loss of jobs to India.

One of the factors spurring BPO expansion in India is the healthy competition between cities.
The top five cities are Chennai, Bangalore, Delhi, Mumbai and Kolkata, with Bangalore
targeting the IT market, Chennai and Kolkata focusing on accounts and Delhi and Mumbai
taking up follow-up of payments and high-end job analysis, respectively. Quite
understandably, Bangalore leads the pack, with its professional approach to attracting and
retaining clients. These threats can be avoided to make the India number one in the Call
Center Industry. Today’s India is a land of huge opportunities for global investors. The
reforms process that the nation embraced a decade ago is now paying off. India’s economy is
sizzling and is one of the fastest growing in the world. It has
also seen a surge in foreign investment lately.

42
Future market opportunity
The achievements to date of Indian BPO industry are impressive. However, there is
significant headroom to tap the addressable market opportunity from exports and from
serving the domestic market. A bottom-up analysis shows a total export BPO market
opportunity of US$ 220-280 billion by 2012. The domestic Business Process Outsourcing
market provides an additional US$ 15-20 billion opportunity for the industry by 2012.
The addressable market opportunity for Indian BPO industry shows that traditional areas of
focus will continue to be large, but several other areas also have significant untapped
potential for buyers and providers alike.

• Market opportunity by verticals: There is a large market opportunity not only for
established industry verticals like Banking, Insurance and Manufacturing, but also for buyers
and providers in many other emerging verticals. The Banking & Capital Markets, Insurance9
and Manufacturing verticals together constitute almost 70 percent (US$ 160-190 billion) of
the total US$ 220-280 billion export market opportunity over the next five years. However,
emerging verticals such as Technology, Telecom and Travel & Transportation verticals also
provide opportunities in excess US$ 10 billion by 2012. Other verticals such as Media &
Publishing, Pharmaceuticals & Life Sciences, and Energy & Utilities too represent significant
untapped opportunity.

• Market opportunity by type of services: Another way to look at the total export market
opportunity is by type of services demanded — vertical-specific BPO services10 and
horizontal BPO services. Over the next five years, vertical-specific BPO services provide
larger market opportunity (60 percent; US$ 145-175 billion) compared to horizontal BPO
services. Horizontal BPO services, which currently account for a greater share of services
offshored to India, also provide a significant addressable market opportunity — a total of
US$ 75-105 billion spread across traditionally mature areas like CIS and F&A as well as
emerging segments like HR, Knowledge Services, and Procurement Services.

43
• Market opportunity by nature of work: Buyers and providers need to expand their
relationships into middle-office and front-office services, which together represent an
opportunity in excess of US$ 100 billion by 2012. However, back-office processes are
expected to remain the largest opportunity areas over the next five years (providing more than
50 percent of the overall market opportunity). Back-office opportunities extend beyond
traditional SG&A (e.g., F&A, HR) functions; services such as transaction processing
activities in Banking and Capital Markets, investment operations in Capital Markets, supply
chain and logistics support for the Manufacturing, Retail, and Travel industries are some
examples of high-potential back-office services.

• Market opportunity by source geography: There is significant BPO opportunity for buyers
and providers across geographic markets. While North America is expected to contribute
roughly 70 percent of the total market opportunity for the Indian BPO industry, both
providers and buyers should increasingly look at exploiting opportunities in the UK,
Continental Europe and Asia Pacific. English-language based business processes from these
geographies represent a huge market opportunity of US$ 45-75 billion by 2012. Furthermore,
domestic Business Process Outsourcing market (in verticals such as, Banking, Retail,
Insurance, Media, Telecom, and Government) provides an additional US$ 15-20 billion
opportunity for the industry.

It is possible for Indian BPO providers to maximise the available market opportunity by
developing a stronger near shore presence, strengthening language and cultural capabilities,
and developing distinctive value propositions.

Considerations for future growth

Efforts being undertaken by the Indian BPO industry will enable it to grow rapidly in the
future. Continuing on current growth momentum could help the Indian BPO industry reach
about US$ 30 billion in export revenues by 2012. However, comparing past growth trends
with the significant future market opportunity, the Indian BPO industry can set itself a stretch
target of US$ 50 billion (that is, approximately five times its present size) in export revenues
by 2012. A fivefold growth in the Indian BPO market will add nearly 2.5 percent directly to
India’s GDP from exports earnings and provide direct employment to about 2 million people.
This will also spur growth in smaller Tier - 2/3 cities to enable the six fold growth in the

44
number of delivery centres that will be required to support the stretch target for the industry.
Also, it is important to note that secondary impact of the Indian BPO industry’s growth
on employment in related service industries and consumer spending is likely to be multiple
times as compared to the direct impact.
In order to capture a significant part of the available opportunity, various stakeholders will
need to manage multiple internal and external considerations:

1) Supply-side constraints such as talent and infrastructure,

2) Emerging competition from other offshore destinations,

3) Threat to sustainability of Indian BPO industry’s cost advantage and economic value
proposition, and

4) Evolving buyer expectations that require up-shifting of providers’ value propositions.

Further, fulfilling these expectations will require providers to make specific choices and
trade-offs in terms of capabilities and investments.
The future growth of the Indian BPO industry will put significant constraints on the supply
side. From a people perspective, capturing a fivefold growth will put pressure on talent
availability at all levels. While the number of people required to support impending growth
are available, unless the current focus on ‘ready-to-eat’ talent is altered, the future growth
may lead to a shortage of 0.8-1.2 million entry-level graduates by 2012. This shortage may
become further accentuated on account of competition for resources from domestic industries
such as Retail, Insurance, Telecom, and Banking, as well as from additional requirements to
support growth in domestic BPO business. Middle-management personnel with domain
experience, largely sourced from the domestic industry, will also be in short supply.
Sector-specific skill shortages (specialized skill categories for vertical-specific processes such
as actuaries for Insurance BPO) are also likely to emerge. Additionally, a significant part of
the fresh, entry-level pool is difficult to access, due to geographic distribution of employable
talent. Tier - 2/3 cities in India will have to meet approximately 50 percent of the additional
talent requirements. This will necessitate creation of physical and social infrastructure in
these cities, which needs to be facilitated by various stakeholders.

45
While India is best equipped to capitalise on the available opportunities, these opportunities
are not lost to other offshore destinations. A number of offshore / near shore BPO
destinations are emerging as viable options for BPO delivery centres (e.g., Philippines,
Eastern Europe, Latin America, and China), and could pose a threat to India’s continued
dominance of the space. These locations also offer lower cost than source geographies,
provide sizeable pools of talent, and offer valuable leverage points to buyers. Further, these
competing destinations are continuing to reshape their fiscal and regulatory incentive
structures to attract buyers as well as providers of BPO services.
The economic model behind India’s BPO industry is constantly changing. Historically,
providers have been able to tap into relative wage differentials across geographies to build a
strong value proposition for off shoring. While cost-arbitrage continues to be a significant
driver of global sourcing for most buyers, the associated benefits will diminish over time with
changes in underlying factors. Adverse currency movements and wage inflation in India are
putting pressure on operating margins of providers. Compared to the US dollar, the Indian
currency appreciated significantly since 2002 — a trend that is likely to continue in the near
term and even in the medium to long-term. Inflationary pressures on operating cost are
unlikely to ease, due to resource scarcity and overall economic growth. Scenarios
on potential momentum indicate that cost-arbitrage can diminish in the medium-term. As a
result, reliance on a cost-savings-driven value proposition alone will not be in the best long-
term interest of the Indian BPO industry.

Given this environment, two broad priorities emerge for the industry: a) optimize the current
Environment in order to continue the cost-arbitrage-led proposition, and b) innovate to
continue building new, higher-value propositions for buyers. Evolving buyer expectations
also drive the necessity to deliver additional value beyond labour arbitrage. With increasing
maturity, buyers are looking for impact beyond costs and efficiency. Mature buyers
are adopting optimization and transformation-focussed objectives. Evolving buyer
expectations are also reflected in buyers’ third-party vendor selection criteria — in addition
to cost- and quality-related criteria, process expertise, industry expertise, and strategic impact
today figure as key vendor selection criteria for mature buyers. Similarly, captives are also
facing growing expectations from their parent companies, with more than 70 percent of
parent companies expecting captive operations to deliver value beyond cost savings.

46
Fulfilling these expectations will require that providers make specific choices and trade-offs
in terms of capabilities and investments. Providers will need to develop value-add approaches
in terms of the type of work (move from providing simple rules-based work to complex
judgment-based work), type of capability (develop standards and centers of excellence) and
accountability for outcome (move from ownership of task to ownership of process and
business outcome). There is early evidence of providers stepping-up to deliver such
initiatives and value-add results to buyers. Successful outcomes will be reflected in terms of
broad adoption of future-state provider models and changes in the way buyers pursue global
sourcing opportunities. Increasingly, buyers will need to approach global sourcing issues with
a transformational mindset while deciding on

a) sourcing models, engagement and

b) governance approaches with providers, and
c) c) developing output-based pricing.

47
 REFERANCES

Links used for the study

http://news.indiamart.com/news-analysis/rupee-impact-and-the-16346.html

http://education.indiatimes.com/educationTimes/getArticleDetail.do?
sectionid=26&pageno=1&articleid=2009011920090116150247694324ffb5b&image=NA

http://www.fibre2fashion.com/industry-article/9/877/impact-of-recession-in-american-
economy-on- india3.as

http://www.books.iupindia.org/IB11020000009.html

http://www.oecd.org/dataoecd/59/12/2503442.pdF

http://www. nasscom.org/

http://callcenterservices.today.com/2008/04/11/threats-to-the-indian-bpo-sector/

http://www.hindu.com/biz/2005/10/17/stories/2005101700061700.htm

http://www.bpoindia.org/

^ Tas, J. & Sunder, S. 2004, Financial Services Business Process Outscourcing,

Communications of the ACM, Vol 47, No. 5

^ Cover Story

^ NASSCOM Announces Top-15 ITES-BPO Exporters Rankings for FY 06-07

^ Willcocks, L., Hindle, J., Feeny, D. & Lacity, M. 2004, IT and Business Process
Outsourcing: The Knowledge Potential, Information Systems Management, Vol.
21, pp 7–15

48
^ Gilley, K.M., Rasheed, A. 2000. Making More by Doing Less: An Analysis of
Outsourcing and its Effects on Firm Performance. Journal of Management, 26 (4):
763-790.

^ Kakabadse, A., Kakabadse. N. 2002. Trends in Outsourcing: Contrasting USA

and Europe. European Management Journal Vol. 20, No. 2: 189–198

^ Weerakkody, Vishanth, Currie, L. Wendy and Ekanayake, Yamaya. 2003. Re-

engineering business processes through application service providers -
challenges, issues and complexities. Business Process Management Journal Vol.
9 No. 6: 776-794

^ Leavy, B. 2004. Outsourcing strategies: opportunities and risk. Strategy and

Leadership, 32 (6) : 20-25.

49
GLOSSARY
BPO SEGMENTS----------------------------10

BUSINESS MODEL--------------------------8

DRIVERS, INHIBITORS AND CHALLENGERS-----25

FUTURE MARKET---------------------------27

GEOGRAPHICAL DIVERSIFICATION------------34

GROWTH OF BPO---------------------------19

KEY TRENDS ITES-BPO---------------------23

KPO-------------------------------------20

MARKET LEADERS--------------------------21

OPPURTUNITIES IN BPO--------------------34

50
REVENUE GENERATION----------------------24

STRENGHTS-------------------------------32

SWOT ANALYSIS---------------------------32

SYSTEM DYNAMICS-------------------------21

THREATS---------------------------------35

TRENDS----------------------------------9

WEAKNESS--------------------------------32

51