India’s major IT services vendors are aiming to claim a larger slice of the growing market for business process outsourcing services, but face strong competition for clients as well as labor from specialist third-party and captive operations.
India’s five largest IT services vendors with BPO operations (TCS, Infosys, Wipro, Satyam and HCL) made combined BPO revenue of $332m in the year ending March 2005, with $200m of that coming from Wipro’s BPO unit, the best-developed of the bunch. The five BPO businesses employ a combined workforce of 27,650 staff.
Industry association Nasscom claims that the value of India’s exports of BPO services such as call center management, payment services and accounts processing totaled $5.1bn last year, which meant that the top five IT services suppliers accounted for only 6.5% of the market.
The entry of big names such as Wipro and Infosys into the India BPO sector has added another dimension to the BPO market, which now includes large outsourcers’ BPO operations, big stand-alone BPO providers such as vCustomer and 24/7 Customer, captive shops set up by global companies, and a number of smaller BPO companies with only a few hundred employees.
The market share breakdown is roughly even among these different types of providers, according to TK Kurien, the head of Wipro BPO Solutions. About one third of the market goes to the big BPO companies, including stand-alone providers and IT firms’ BPO arms, while the captives and the smaller mom and pop operators each have another third of the market.
But many of these global financial services firms’ captive shops cannot achieve efficiency or the necessary scale, and several have begun to sell their captive BPO operations.
Although many of the large captives will stick it out for the long haul, mostly to calm any fears about outsourcing and data security, Mr Kurien said the smart captives would look for an exit option. He added that many of the smaller BPO shops will simple vanish in the coming 12 months. As the rupee stays strong and margin pressures mount, including annual salary increases of 15% in the BPO sector, these shops will be left without a viable exit strategy.
The rest of market appears poised for some serious consolidation; the current field of between 30 and 40 recognized large and medium-sized Indian BPO companies would probably shrink to about 10 major players in the next five years, according to Ramesh Neelakantan, head of North American business development for BPO firm NIIT Smartserve.
Wipro’s mr Kurien expects only the big IT vendors’ BPO arms, as well as some of the captives and one or two large BPO-only vendors, to weather the storm. And it is not just Indian services companies getting in on the game, as evidenced by IBM’s acquisition of Indian BPO heavyweight Daksh eServices last year.
The BPO units and subsidiaries of the large Indian IT companies differ in terms of size, and to a lesser extent, service offerings and vertical focus, but most of them share a similar story: strong sales numbers, yet still dwarfed by revenue from their parent IT operations; a sizable overlap of BPO and IT clients; attrition rates, that while lower than the BPO market average, are still a cause for concern; and ambitious growth plans in terms of headcount and new service centers.
India’s largest software services company, Tata Consultancy Services is looking to capture $1bn in annual revenue from its business process outsourcing activities by 2010, an area in which it employs 2,000 people accumulated through acquisitions in the airline and insurance sectors. The company said this $1bn revenue figure would make it one of the top 10 global BPO vendors. TCS currently provides BPO services to 20 clients, from its 2,500-seat BPO center in Mumbai.
Wipro BPO Solutions, until recently known as Wipro Spectramind has annual sales of $200m and a workforce of roughly 13,000, heavily concentrated in India. It divides most of its work among the financial services sector (30%), manufacturing (30%), healthcare (15%), and airlines and travel (10%). Some 18% of its revenue comes from processing solutions that include higher-value work than traditional call center or back-office BPO work. About 60% of Wipro’s business comes from transaction processing and related back-office services, and another 20% is call center support.
Although smaller than its rival Wipro’s BPO shop, Infosys’ BPO subsidiary Progeon has shown remarkable growth since its start three years ago. Revenue has grown from $4m in 2002 to $17m in 2003, $43m in 2004 and $18 for Q1 2005, with a focus on banking, capital markets, insurance, research, telecom, and cross-sector financial accounts, according to Progeon CEO Akshaya Bhargava. Of the company’s 19 clients, 13 are existing Infosys IT clients.
There’s little doubt among these companies that the demand for BPO will continue to surge in the next several years, and to meet demand, India’s current BPO workforce of 300,000 is projected to grow up to 40% a year to 1.4 million in four years. That means the industry will probably need as many managers and supervisors in 2009 as it has overall workers now, Progeon’s Mr Bhargava said.
Attracting and retaining top talent will be a key to success in the sector, in addition to having the scale to meet demand and support new contracts for traditional BPO work and increasingly higher-end services. Cross-selling opportunities remain strong and should continue to provide the bulk of revenue for these vendors, especially as IT and BPO work become more integrated.