FLAVOR OF THE MONTH l BPO: Whats hot

FLAVOR OF THE MONTH l BPO: What's hot

The industry is going through some interesting and action-packed time and it only signals the adrenaline that will continue to race up further

Pratima Harigunani

Tuesday, June 10, 2008

If we look around the Indian BPO territory, amidst a deluge of challenges there also are challenges, a tide of action and power. From its current size to the near potential, from the nature of business deals to the craving for acquisitions, from traditional vanilla fare to new and virgin verticals, the heat refuses to fizz out.

Here’s a glimpse of the temperatures that continue to soar.

Size does matter

Recent estimates show that while the global BPO industry will be worth $230 billion by 2012, India can gain $50 billion of that global pie. The present global BPO market is estimated at $26-29 billion, which has grown at 35 per cent over last few years.

Of this, banking, capital insurance, manufacturing, technology, telecom and travel will be big markets. Currently 0.7 million graduates are employed by the industry, which at present garners $11 billion in revenues, according to a joint study conducted by National Association of Software and Service Companies (Nasscom) and the Everest Group.

The study adds that the current momentum is poised to touch $30 billion by 2012. But it also adds that, with accelerated growth to capture the addressable spend in the international and domestic markets, the industry could become $50 billion by 2012.

What’s interesting is that about 30 per cent of the opportunity is in the under-penetrated industries such as telecom, retail, media and energy while traditionally large areas such as banking, insurance, financial services and manufacturing will continue to offer large opportunities as well.

In terms of geographies, despite North America being the largest BPO market for India, there are untapped larger outsourcing opportunities coming up in the UK, Continental Europe and Asia-Pacific. BPOs, when they turn inside, will have some ripe market in terms of domestic opportunities too that is growing at a good rate.

The domestic market grew to Rs. 5,400 crore in FY 07 up from Rs. 4,050 crore in FY 06, the result of a significant increase in demand. Domestic BPO spends are growing steadily, led by customer interaction and back office processes for the BFSI, telecom, and airline industries noted Nasscom.

Tables turning big

According to a Tholons study, April 2008 saw 32 mergers and acquisitions at a value of $1760 million at an average deal size of $45 million. The trend is towards acquiring small niche players as majors like HP, Satyam, EDS, ACS, IBM and Symantec show their hot appetite at the deal tables.

BPO as a target service line made up 16 per cent of this action as last tracked by Tholons for April 2008.

This was marked by acquisitions like Quatrro’s deal with RSM McGladrey Financial Process Outsourcing, 3i Infotech’s deal with Regulus for $80 million and WNS’s deal with Call 24/7 worth $16 million.

The year gone by also marked acquisitions by Indian BPOs like Apollo Health Street’s acquisition of US-based Armanti Financial Services for Rs. 3.1 crore; EXL Service acquiring Inductis and Hinduja TMT; acquisition of Affina for $30 million. But the topping on the cake was the acquisition by Transworks of Canada-based Minacs for $125 million, likely to rank as one of the largest ever cross border BPO acquisitions from India.

Infosys Technologies Ltd is a good case in point of captives coming under the Indian fold as outsourcing and in sourcing take a new direction together. The company acquired three divisions of the business process outsourcing division of Royal Philips NV of the Netherlands for an undisclosed amount in an all cash-deal.

Integreon Managed Solutions, on the other hand, made a recent acquisition of Datum Legal, a New York-based litigation support and electronic data discovery firm for an undisclosed amount.

The latest in the list is Cognizant’s acquisition of Los Angeles-based Strategic Vision Consulting (SVC), a management and technology-consulting firm.

In terms of deal size too, there has been signs of change. If the barometer of overall global services industry by sourcing advisory firm TPI is anything to go by, then the total contract value awarded in the last six months was about $50 billion, the highest in past few years.

But as multi-sourcing dominates, suppliers will have to get used to the probability of more customers in lower value deals.

Trend check

The industry is undergoing evolutions and revolutions alike as it grows and shows some notable trends for now and ahead. According to predictions for ITO/BPO for the period 2008-2012, from LogicaCMG, interesting trends like Netsourcing, KPO and Freelancing will move northwards.

Netsourcing will see suppliers differentiating themselves by offering customer-based services while commoditizing their virtual delivery platforms. Major global and Indian suppliers will increasingly emulate one another.

Indian suppliers will mature and diversify, while others will increase their number of low-cost captive centers or offshore alliances to stay price competitive as the current direction suggests.

The predictions hint that alliance supply networks such as prime contracting and best of breed will assume significance in large-scale outsourcing deals. At the same time outsourcing failures and disappointments remain a force to reckon with.

Here scope creep, time creep, cost and time over-runs are some issues that BPOs are dealing with. Taking on more than one can chew, contracts with poor payoffs, inflexible contracting, capability-constraints with suppliers, are some issues that haunt the industry.

At the same time, the R-word remains the most watched out word for the industry so far dominated by US markets and financial-related verticals.

According to a survey by Global Services magazine, the slowdown would at best have a moderate impact on the global IT services and BPO industry. It says that while the slowdown would impact profitability and revenues in the short term, the industry is aiming at realigning existing service areas and increasing focus on non-US geographies.

And nearly two-thirds of the buyers intend to go ahead with planned projects. Nearly 36 per cent do not see cut in IT spending across the board while 36.4 per cent admit prioritizing outsourcing in the short term.

The study points out that large vendors with multi-shore delivery capabilities like TCS, Wipro, Infosys, Satyam and HCL Technologies are better equipped to exploit new opportunities during slowdown whereas mid-sized firms are more likely to face the pressures of exchange rate risk, lower billing rates, domestic inflation and slower deal closures.

BPO firms like Genpact, WNS Global Services, EXL Services and Cambridge are among those more likely to offer better value to clients during this period.

Clearly, the industry couldn’t have been at a more interesting point in time as it stands at the crossroads of achievement and challenges.

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