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Indian BPO Industry Over-promised, Under-delivered?
The outsourcing industry has arguably been the most notable claim to fame, and ill-fame (Western backlashes) of a globalised India Inc. But Caught in the throes of severe talent crunch, the industry may find it tough to retain its leadership position in the coming years.
Issue Date - 01/03/2012
With more than 7 years of experience in the India BPO industry, Krish (name changed) can be considered an industry veteran, considering that Indian BPO story gathered momentum in the last decade only. He works with American Express, one of the outsourcing pioneers and enjoys all kinds of perks. He rose through the ranks quickly; an industry norm, and swears by his employer. He loves his pay cheque, his bosses are his friends, and he feels well ensconced with medical facilities and educational benefits, and a clear growth path. He definitely is a great advertisement for the Indian BPO Dream machine.

As an after-thought, he reveals that slowdown has led to many employers taking up severe cost-cutting measures. The food is not free anymore and the office cabs are getting crowded. But his pet-peeve is the kind of new talent being hired. “Nowadays they take anybody and everybody, unlike the stringent standards that we passed through.”

What had started as a lab-test case by Raman Roy for American Express in mid-1980s to demonstrate the viability of India to his American employer as an able and cost-effective outsourcing destination, has acquired gargantuan scale. “We are bigger than Bollywood today, though we may not be as entertaining,” quips Raman Roy, often termed as the father of the Indian BPO revolution, to B&E. Taking the first movers advantage, India emerged as the pole star for the outsourcing world. Even today, it continues to be the world’s leading sourcing location for IT-BPO services, with a share of 58% in 2011, and India-based resources are estimated to account for around 60-70% of offshore delivery capacities across leading multinational IT-BPO players. If we take BPOs standalone, we still lead the world with a 37% market share. In the last decade, the industry has grown by more than 15 times in size, and given direct and indirect employment to an estimated 4.5 million people, as per a NASSCOM-CRISIL report. IT & ITES (IT enabled services, or BPO) today constitute $101 billion in revenue, says industry body NASSCOM, and India today accounts for well over 5% of global technology products and services spending of roughly $1.6 trillion.

The industry brought many things for India. It became the face of a globalised India, it stamped the belief that world class work could be done from an emerging market like India at a fraction of American costs, and often brought us brickbats from Western politicians and jibes from many Western talk-show hosts. If they could have their way, the US administration would love to clamp down on Indian outsourcing and Chinese manufacturing to the extent possible. But after a decade of relentless and frantic growth, the Indian BPO industry is standing at the crossroads and there is a creeping realisation that things are not as rosy as they were in the past. And what Krish points out to in terms of hiring practices is just one vivid indicator of the same. Moreover, the industry has seriously underperformed its own expectations in the past few years. According to NASSCOM-Everest India BPO study released in 2008, the projection for the industry was to reach $30 billion in export revenue by 2012 (at $11 billion at that time). And NASSCOM itself reports projected export revenues of $16 billion for the BPO industry as per its report released earlier this month for FY 2011-12. Growth of BPO exports has also seriously tapered down from over 35% from 2005-2008 to 13% yoy for the current financial year. Although slowdown has been a major factor, it is certainly not the only devil in the detail. The industry is seeing a serious erosion of its leadership position as a cost competitive destination.

There are two critical realities of life in any industry where you have a first mover advantage. First (and we will come to the second a little later), there is the eventual entry of competition that leads to a declining first mover advantage. It is widely known that a new set of destinations – notably countries like China, Philippines, Indonesia, Bulgaria, Egypt and Vietnam – have emerged; inspired by the Indian BPO growth story and looking to leverage it for their educated population. And they are fast beating India in different parameters, even as India remains the number 1 destination. A survey by Sourcing Online reveals that India scores 8.3 on cost competitiveness, where it is beaten by Indonesia (8.6), Bulgaria (8.8), and Philippines & Egypt (9). In terms of resources and skills, it is still leading comprehensively with a score of 6, outflanked only by Canada (6.3) and US (6.9). The critical stumbling block, however, is in the Business & Economic Environment index, where India has a score of 4, and you’ll be quite dismayed when you go about counting the number of countries ahead of India on this parameter – 31 to be precise, out of a total base of 38! Imagine the country’s situation when other destinations start measuring up more and more on the first two parameters. And imagine what happens when China, which is closing in on India with 7 on cost competitiveness and 5.6 on Resources & skills and also beats India hands down in Business & Economic Environment at a score of 5.6, starts getting its act together. Clearly, our infrastructure and our enabling environment for business leaves much to be desired, and is a consistent drag on our performance indicators. China, meanwhile, is attempting a host of initiatives to catch up with India. It has identified 20 cities as outsourcing hubs and is offering strong incentives to its domestic outsourcing service providers. For instance, employers there get 2 years free compensation from the government for hiring local talent. And it is readying a pool of around 20 million people to join its outsourcing industry. The Chinese BPO industry was around $6 billion in 2010. Just to give an insight in to the Mandarin enthusiasm, in the first five months of 2009, 1057 new BPO companies were established in China. Most of the Chinese BPO firms are still small, with very few tipping the scale at over 10,000 employees. They don’t have the strong support of the IT/software industry like the Indian BPOs have, and hence will lack process specialisation experience of large Indian BPO players. But knowing the way the Chinese go about their business, nothing can be said for the future with acceptable certainty. And the global clout they have will only add to their USP. Already, several Fortune 500 enterprises such as Accenture, GM and Panasonic have set up shop in China, and IBM has four delivery centres in China in Chengdu, Dalian, Shanghai and Shenzhen. Philippines already appears to have arrived on the low end. As per reports, Philippines overtook India in terms of call centre jobs in 2010, employing 3.50,000 people compared to India’s 3,30,000. Even in terms of revenue, the country generated around $6.3 billion in the segment compared to $5.6-5.9 billion for India as per various reports.

Now coming to the second reality, the pioneer in an industry has to move with the times, grasp the opportunities & tackle the challenges of the particular day and age. Infrastructure for business and government policy paralysis is a common lament for all sectors in India, so we will not stress more on that aspect for now. The question is that while the Indian BPO sector grew relatively untethered in the initial phase and created global benchmarks, is it showing the potential to retain those benchmarks in the coming years and embrace shifting industry paradigms? Did it prepare itself enough to be able to tackle the wave of late, yet formidable entrants in the sector as was expected of it?


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