BPO in India – Prospects and Problems

Abstract

BPO is one of the popular business practices in today's competitive environment. The
Indian BPO industry is constantly growing. However, along with the phenomenal
increase in BPO to India there has been a backlash against outsourcing. These enraged
cries come from parties that have been affected by the migration of jobs to offshore
locations like India. Though this anti-outsourcing movement is gaining momentum, it is
important to understand the long term benefits of outsourcing to India. This papers gives
an overview of BPO industry in India, the various problems it is facing and the future
trends.

Introduction

BPO [Business Process Outsourcing] has been the latest mantra in India today.
As the current sources of revenue face slower growth, software companies are trying new
ways to increase their revenues. BPO is top on their list today. IT services companies are
making a quick entry into the BPO space on the strength of their existing set of clients.

The philosophy behind BPO is specific, do what you do best and leave everything
else to business process outsourcers. Companies are moving their non-core business
processes to outsource providers. BPO saves precious management time and resources
and allows focus while building upon core competencies. The list of functions being
outsourced is getting longer by the day. Call centres apart, functions outsourced span
purchasing and disbursement, order entry, billing and collection, human resources
administration, cash and investment management, tax compliance, internal audit, pay
roll...the list gets longer everyday.

If a bank shifts work of a 1000 people from US to India it can save about $18
million a year due to lower costs in India. According to Mckinsey, giant US pharma firms
can reduce the cost of developing a new drug, currently estimated at between $600
million and $900 million by as much as $200 million if development work is outsourced
to India.

What is BPO?
Business process outsourcing is a general term used to describing the
outsourcing of critical, but non-core, business processes or functions of an organization to
external vendors for long periods of time on a set of predefined performance metrics.
BPO services have gained prominence during the past couple of years as more and more
organizations have recognized the practical and enhanced value of externally delegating
processes as opposed to them in-house. BPO usually refers to processes in organizations
delivering services to customers as opposed to organizations that manufacture and deliver
products.

BPO involves the complete transfer of a business process or function to an

external service provider who executes the transferred business process or function –
typically with extensive usage of IT in the delivery process. The BPO vendor completely
takes over the execution of the process – in that sense it is the transfer of the ‘ownership’
of the process.

BPO is most easily applied across IT intensive functions such as payroll

processing, human resources, financial accounting, logistics, administration, customer
interface applications (call centers, ATMs) etc. However, BPO differs from traditional IT
outsourcing and the two terms cannot be used interchangeably. IT outsourcing involves
specific task management and/or task specific applications, which may be part of a larger
business process, but most often do not involve an end-to-end process per se. E.g.
maintenance of servers or maintaining specific security applications are typical IT
outsourcing tasks. There is no specific business process involved. On the other hand BPO
would typically allow an organization to completely outsource a full process with all its
sub elements and focus on the core elements of an organization’s strategy. It is a
complete transfer of process ownership from the company to the BPO vendor.

Evolution of BPO

Outsourcing is not new - it has been a popular management tool for decade. One
can safely say outsourcing has evolved:

• 1960's - time-sharing
• 1970's - parts of IT operations
• 1980's - entire IT operations
• 1990's - alliances/tie-ups
• 2000's - IT-enabled services

Benefits

Benefits derived from BPO can be summarized as follows:

 1. Productivity Improvements
2. Access to expertise
3. Operational cost control
4. Cost savings
5. Improved accountability
6. Improved HR
7. Opportunity to focus on core business

Global Market Size of BPO

Rapid transformation is taking place in the global BPO market. It is accompanied
by increased spending in BPO services. Most of the leading business companies of the
world are adopting BPO as a strategic business solution. The BPO industry is very
diverse, with several sub-segments, each displaying its own unique characteristics.

According to Gartner, a market research firm, the size of the global BPO market
by 2007 would be $173bn, of which $24.23bn would be outsourced to offshore
contractors. Of this, India has the potential to generate $13.8bn in revenue. "The
projection includes revenues of pure play Indian BPO service providers, captives
operations of MNCs operating in India, third party service providers and BPO
subsidiaries of IT services firms.

North America will remain the dominant market for ITES-BPO services,
accounting for nearly 60 percent of the total ITES-BPO market in 2006. The main
verticals in the North American ITES-BPO market are telecommunications, financial
services, health care and energy. Commonly outsourced processes include internal
auditing, payroll, human resources, benefits management, contact centers/customer care,
payments/ claims processing, real estate management, and supply chain management.

The Western Europe ITES-BPO market is expected to account for 22 percent of

the market by 2006. The financial services sector is the largest consumer of BPO-ITES
services in Europe, followed by utilities and telecommunications. Human resources,
finance and accounting are expected to be the fastest growing service lines.

The Asia Pacific ITES-BPO market is expected to account for 18 percent of the
total ITESBPO market in 2006. Companies in the Asia-Pacific region have traditionally
outsourced only manufacturing activities. Given the relative infancy of the ITES-BPO
market, this region is expected to experience rapid growth over the next few years.
Growth will primarily be driven by cost-reduction and the need to focus on core
competencies. HR, finance and accounting are expected to be the key growth areas in the
Asia-Pacific region in the years ahead.

India, the preferred BPO destination

The former CEO of GE, the legendary Jack Welch, gave “70:70:70 Theory” as
appropriate business strategy. The theory states that 70% of the business processes were
outsourced, 70% of the outsourced processes went offshore and 70% of the offshore
facilities were located in India.
 India has clearly emerged as the most preferred global destination for offshore
outsourcing activities of all kinds. From call centers to healthcare to publishing to writing
accounts and tax filings, to claims processing and to engineering design, Indian
companies have done it all.

India has one of the largest pools of low-cost English speaking scientific and
technical talent. India also has a distinct advantage of being in a different time zone
that gives it flexibility in working hours. All these factors make the Indian BPOs
more efficient and cost effective. In order to meet the growing international demand
for lucrative, customer-interaction centers, many organizations worldwide are looking
to BPO India. Dell, Sun Microsystems, LG, Ford, GE, Oracle all have announced
plans to scale up their operations in India. Others like American Express, IBM and
British Airways are leveraging the cost advantage India has to offer while setting up
call centers. Several foreign airline and banks have too set up business process
operations in India.

The rule of thumb is that each Indian employee represents an annual savings to
American employers of $20,000 to $30,000. The cost of transmitting work offshore is
expected to plummet by as much as 60 percent in 2005 thanks to new undersea cables.
While such savings are a big draw, quality of work is a close second -- and gaining in
importance. The skills of India's computer scientists, for example, are unsurpassed. The
Capability Maturity Model, or CMM, developed by the Software Engineering Institute at
Carnegie Mellon University, has been used to evaluate the software development
processes of hundreds of companies. Software teams receive a rating of 1 to 5, with 5
being the highest. A decade ago, only Motorola's unit in Bangalore achieved a 5 rating.
Today, 387 Indian companies are so accredited. Therefore, multinational enterprises are
getting more complex work done on the subcontinent -- not just in IT but in fields
ranging from financial services to biotechnology.

Indian Market size estimates of BPO

 • Nasscom-McKinsey: In 1999 they estimated by 2008 it will be $17 billion but it
has been revised to $21-24 billion by 2008. Indian can capture 25% of global
BPO offshore market and 12% of the market for other services such as animation,
content development and design services.

• Gartner: $1 billion (2002), $1.2 billion (2003). $13.8 billion by 2007. Gartner
does not incorporate animation, medical or other (legal) transcription services,
GIS, market research, data search, research and development, network
consultancy and other non-business processes in its estimates on the ITES market
size and potential.

Revenue \ Year 2002 2003 2004 2005 2006 2007 CAGR

Offshore BPO
1,322 1,825 3,017 6,439 12,563 24,230 78.91
Revenue

Indian BPO
912 1,205 1,961 3,928 7,412 13,811 69.35
Revenue

Total BPO Market 110,167 121,687 131,171 143,090 157,033 173,070 9.45

CAGR in % 2002-07 Figures in $ million Source: Gartner Dataquest (May 2003)

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.

Problems and Challenges

BPO Backlash
Along with the phenomenal increase in BPO to India there has been a
backlash against outsourcing. The opposition and backlash is coming mainly from
developed countries that are directly affected by outsourcing to India. An anti-
outsourcing movement has drawn wide support as layoffs continue to mount at such
U.S. companies as IBM, which is cutting 13,000 jobs in Europe and the United States
and adding 14,000 in India, according to the Washington Alliance of Technology
Workers.
Though this anti-outsourcing movement is gaining momentum but the pace at
which the trend of outsourcing is continuing to India, this is going to double in a
couple of years. It is because of numerous advantages that India enjoys in comparison
to other countries.

Fame comes at a price. And being the fastest-growing and most cost-
competitive outsourcing destination could sometimes elicit such negative responses.
The reality that India is fast emerging as the back office of the world and our BPO
industry is estimated to grow at a rate of 65 per cent per year is not taken too well by
most of the developed countries of the world, from where these jobs are coming to
India. Even as investments in the ITES-BPO industry are increasing by the day,
banners and slogans demanding a ban on outsourcing of jobs to India are increasingly
noticeable.

Some states in the US have tried to legislate banning the transfer of state data
processing contracts to developing nations. Despite the bill being passed by the US
senate barring the shifting of BPO work to India, the BPO supporters lobby in the US
is working at changing the mindset and perceptions. In the UK, three of the country's
biggest trade unions have come together to fight the loss of jobs to India, especially
British Telecom's move to open a huge call center in Bangalore. These unions fear
that the competitors of BT will emulate this act. German protesters have been running
an unrelenting political campaign against the German green-card scheme for a while
now.

But one thing is sure. The trend of BPO is likely to continue under all
circumstances, because firms have become habitual of moving the BPO work to
India, it is now like an addiction, which they can't do without. The only thing that
needs to be done now is resolving of cultural differences, which, crop up during the
cross-border shifting of BPO work.

Security issues
NASSCOM has estimated that India may have lost out IT and ITES business
opportunities worth about $7 billion to $8billion because of security concerns among
potential foreign clients. While global clients are convinced about the delivery
capabilities of Indian IT and BPO companies, data security issues are a major concern in
any discussion on offshoring services to India.

Attrition
 BPO outfits are a relatively new breed of employers that have sprung up over the
past few years. On the surface, these companies seem to offer plumb jobs. The criteria for
securing a job here include little more than a good command over the English language
and a basic knowledge of computers. The pay goes into five figures in little or no time
after joining.

However, these professions call for long as well as odd hours of work and
incredibly high work targets to be achieved. Such working hours result in irregular sleep,
unhealthy food habits, nausea, chronic fatigue, body ache, back pain, headaches,
computer syndrome, dry eyes, etc. when these work hours get coupled with the stress
brought on by stiff work targets, the result is a host of psychological problems like
nervousness, insomnia, anxiety, hypertension, restlessness, irritability and even
depression. Also the Indian call-center workers are increasingly facing particular abuse
from Americans, whose tantrums are sometimes racist and often inspired by anger over
outsourcing.

Not surprisingly, the attrition rate in BPOs in India is high. The staff attrition rates
within BPO centres in India average 22 per cent per annum, with attrition rates in voice-
based services hitting 30 percent.

To combat these high attrition rates and ensure consistent service delivery quality
to their clients, BPO companies are actively striving to raise the understanding and value
of their company brand within the community, and introducing incentive-based pay
structures and "quality of life" initiatives for workers. Pay cheques alone are not enough
to retain employees. Management also needs to consider other aspects like secure career,
benefits, perks and communication. The attrition battle could be won by focusing on
retention, making work a fun place, having education and ongoing learning for the
workforce and treating applicants and employees in the same way as one treats
customers. Some companies are also providing in-house counseling for the employees to
cope with the industry pressures.

Shortage of suitable staff

 Staff shortages could be a major bottleneck for the industry, according to the
report. The skills and quality of the workforce needs to be improved because only 25% of
technical graduates are suitable for employment in the offshore IT industry in India,
while only 10% to 15% of general college graduates are suitable for employment by the
BPO industry, according to Jayant Sinha, a partner at McKinsey.

Poor infrastructure

The urban infrastructure in India needs to be improved as offshoring companies

deal with various bottlenecks. Further growth of the industry will have to come from
entirely new business districts outside the first- and second-tier cities. The
Nasscom/McKinsey report proposes setting 10 or 12 integrated townships in India with
associated infrastructure such as roads and international airports

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 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. India's IT and business process outsourcing (BPO) services industry
could be bringing in $60 billion by the year 2010, growing at over 25% a year,
according to the Nasscom/McKinsey report

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.

Offshore BPO, it is said, today accounts for only two per cent of total business
process service delivery contract value worldwide and is only expected to rise to six per
cent of the total by 2008.

The firm predicts that the offshoring of "judgmental" processes -- more complex
processes requiring agents to make informed decisions to fulfill requests -- and
"analytical and expert services" -- highly complex processes requiring specialist
knowledge and expert judgment -- will only increase to 10 percent of offshore BPO
activity by 2006.

Regardless of the many challenges associated with offshoring the delivery of

business processes, the potential of 40 percent to 60 percent cost reductions is highly
compelling to prospective buyers, especially in the commercial sector.

Outsourcing to India may slow down in the coming years owing to competition
from other developing countries. Neeraj Bhardwaj, CEO of RocSearch, a London-based
knowledge process outsourcing firm, believes that even though BPO business may
migrate to other countries, India will emerge stronger in the KPO (Knowledge Process
Outsourcing) segment.
KPO provides value to the client through domain expertise rather than process
expertise. The KPO opportunity has been pegged at a huge $17bn by 2010. the options it
opens up for professionals in fields as diverse as law, engineering design, biotechnology,
financial services, remote education and more are just as exciting. India’s share in KPO
market could grow from the current 56% to 71% in six years time.

Trends

Shift from captive centers to independent software providers

There’s a fairly clear trend towards offshoring a large part of captive BPO or
development work to independent vendors. An AT Kearney publication, Captive No
More, Executive Agenda, Second Quarter 2004 had highlighted that “…by 2008, captives
will likely account for just 20% of the off-shoring market in terms of employment and
30% in terms of revenue.” This report predicted the shift from captive centers to
independent software providers stating that the latter will pick up the majority of the
work going off-shore a few years from now.

Outsourcing Version 3.0

We are seeing now the third generation of outsourcing or outsourcing version 3.0.
With this current wave of outsourcing, the mega-deals era is all but over. And that goes
for not just new deals, but deals coming up for renewal and being renegotiated mid way.
Outsourcing activity is now broken into parts and the shifting of back office operations
may mean multiple locations with different entities. The growing engagement between
Indian BPO companies and clients in the West has provided a maturity level that is
calling for a more focused approach. The early experience of not getting the right service
level has forced corporates to look at ’componentization’. Componentization would mean
breaking their outsourcing requirements into different parts and moving those services to
locations where one can get the required level of service. The trend started as companies
are breaking their processes into parts and looking what is movable and what is not.

Multisourcing will gain acceptance.

Today's savvy buyers will eschew one-stop shopping and instead choose suppliers
who can add value. It's difficult for one supplier to add value and save money in all
processes. For this reason, specialists will thrive.

Service level agreements (SLA) and metrics will change to reflect the value a
supplier can bring to an organization in addition to cost savings.

Historically, SLAs reflected the transactional aspects of a process. They centered

on cost, efficiencies, and through-put. But today, buyers are beginning to require
suppliers to transform the processes to add value to the business. For example, a supplier
can process a paper transaction in 48 hours, but the buyers believe an electronic
transaction could be processed in 24 hours and at a lower cost, and they want their
outsource partners to "take them there,".

Procurement comes of age.

Interest in procurement will swell because procurement yields immediate savings

which creates a strong business case early on. And it truly fits in well with the bundling
of other BPO processes.

Buyers will buy BPO differently next year.

Buyers have gotten savvier and now are buying BPO services with greater understanding.
Historically the buyer's procurement department was responsible for choosing the
supplier. They were just interested in cost.

But now buyers are using outside advisors and are also consulting with the business
group that will be impacted before making a selection. The theme is now quality.
Productivity and effectiveness are now the marching orders.

Differentiation in supplier offerings.

At this stage in HR and F&A, every supplier can do basic BPO transactions.
Differentiation is what it matters now. The differentiation will center around having an
impact on business results.

Offerings have to be global.

Today North American solutions are not enough. Today suppliers need to add
components from Asia, Europe, and Latin America to meet the needs of today's
demanding outsourcing buyers. Companies want standardization across borders. Global
integration and standard technology are the only ways to win deals from large
companies."

Offshoring will accelerate.

Jim Konieczny, HR Outsourcing Global Operations Leader for Hewitt says the
gains of 2005 will accelerate next year. Some buyers are buying into offshoring as a
business strategy because they now understand labor arbitrage is necessary to get to the
right economics.

Consolidation among BPO suppliers accelerates.

Last year Hewitt jump-started the acquisition trend by buying Exult. The trend
continued this year. Mellon sold its HR business to ACS. EDS formed a joint venture
with Towers Perrin to form an HR unit called ExcellerateHRO. And CSC purchased Aon
Consulting Inc. "It's about acquiring capabilities," says Jim Konieczny, HR Outsourcing
Global Operations Leader for Hewitt. Suppliers are searching for people with skill sets
they need to build out their business. In addition, acquisitions come with "some built-in
market share.

Buyers will look to other locations besides India.

Buyers now feel comfortable with India, which created the business case for
offshoring. Originally buyers felt India was the only place to go. However, India is
probably not right for every aspect of a BPO process. For example, Eastern Europe is
important for native language skills. Future promises a "truly global delivery," which
demonstrates "a maturing of the offshore value proposition."

Offshoring has opened up emerging markets for suppliers.

Offshoring is producing new markets for suppliers who are also manufacturers
like HP and IBM. Last year India, Brazil, Russia, and China have provided customers as
well as employees for HP. This trend will solidify this year.

Suppliers with industry vertical expertise will find themselves in demand.

 Suppliers with unique industry experience will be the next wave. They will have
unique offerings that address the particular needs of that industry in addition to the
requisite process expertise.

For example, last year the applications world focused on banking and the capital
markets and was successful. Now there is more focus on industry-specific skills on the
BPO side. Suppliers are branching out into other verticals. Credit services processing,
data management, and healthcare will get attention next year. In addition, this
specialization will spawn new entrants into specific verticals.

Outsourcers will no longer be able to compete on price alone.

Offshoring has leveled the playing field. A supplier will have to be able to prove
it has the ability to deliver business transformation to win a BPO contract.

Third party advisers will become more important to BPO transactions.

Konieczny sees the third party advisors like Everest Group, TPI, and EquaTerra
becoming even more important to the future BPO transactions. Since the transactions are
now so complicated buyers look to a seasoned advisor with broad experience to guide
them through the outsourcing thicket.

Reverse outsourcing
SlashSupport, an India-based tech support company, which has opened a small
outsourcing hub in California, is spearheading a new trend of reverse outsourcing.
Recently, it opened a small outsourcing hub in San Jose, California to meet the needs of
American companies on their own soil, but it has big plans in what some might call the
beginnings of a trend towards reverse outsourcing.

Trade Unionism

As India's money-spinning BPO sector emerges as one of the largest employment-

providing sectors in the country, India's primarily young workforce is fast turning into
cyber-coolies who some critics charge are treated like indigent laborers.
 Consequently, trade unionism is finally entering the country's BPO sector, which
until recently was considered a knowledge-based industry bastion free from most labor
issues. Over the last few months both local and international trade unions have not only
become active but are also stepping up their efforts to bring about a movement in the
county's IT and BPO sectors.

UNI is a global union network of 900 skills and services sector unions, which
under the umbrella of The Centre for Business Process Outsourcing Professionals has
also launched a new organization called, UNITES Professionals.

But UNI is just one of the trade-union organizations making inroads in the
country's back-office sector. A few weeks back The Centre of Indian Trade Unions -- a
Left-affiliated labor union and one of the largest in the country -- announced that it has
already set up a small union for BPO workers in Calcutta and has deployed its cadres in
Bangalore, Chandigarh, Chennai and Hyderabad to organize a union of IT workers in
those cities.

And, in collaboration with CITU, the All India Trade Union Congress, yet another
Left-backed trade union, has also announced that it is starting a movement on its own to
"separately deal with the labor issues of the Indian IT industry."

The BPO industry, however, doesn't agree that Indian BPO workers are a
neglected lot. In comparative terms, the BPO workforce is well off. While an average
Indian (per capita income) makes about $600 a year, and many even with education make
less working perhaps longer and harder, a BPO worker with just a high-school level
education makes over $2,500 a year. This is about twice the earnings level of an entry-
level high school teacher, accountant, or even an entry-level marketing professional with
a graduate degree. With experience and education, the salaries go much higher.
Besides, there are other attractions as well, such as door-to-door transport, security-guard
escorts, refreshments on the house, a yearly company-paid picnic or an excursion
pleasure trip, in-house health-club facilities and the like.

Nevertheless, there are a few on the other side of the table who support the idea of
BPO unions. "If a union movement brings in best practices in the sector and works
towards reducing attrition as they do in the U.K. and the U.S., it is good for the sector,"
said T Kurien, CEO of Wipro BPO. A similar view is held by Raman Roy, one of the
founders of the Indian BPO sector, who said, "Unions are good if they control the menace
of attrition that is emerging as a stumbling block to BPO sector's growth."

References

• Business Process Outsourcing, Sarika Kulkarni, Jaico Publishing House, Mumbai,

2005.

• www.nasscom.org/bpo

• www.rediff.com/business/pti/report

• http://pda.physorg.com

• www.computerworld.com

• www.outsource-center.com

• www.bpoindia.org

• www.chennaionline.com

• www.economictimes.com

• www.outsource2india.com