Will BPO margins be stable at 20%?

CIOL Bureau
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Profit margins for business process outsourcing (BPO) firms are expected to come down and stabilize at around 20 to 25 per cent over the years, according to a joint study by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and the International Data Corporation (IDC).


The factors affecting pricing and adding to the volatility include proliferation of smaller players in the burgeoning BPO industry, which has put bigger and established players in a spot. This has led to the commoditisation of BPO services, specially in the low-end of the value chain.

Exchange rate fluctuations also play a part. Based on rough industry estimates, for one per cent appreciation in the rupee value against the US dollar, there is an impact of over one per cent on company bottomlines. Global economic slowdown has also resulted in global corporates delaying their outsourcing decisions.

The study also revealed that sales BPO services from India are projected to grow from $709 million in 2003 to about $2,572 million in 2006 at a 52 per cent CAGR. Whereas marketing BPO services will grow from $609 million in 2003 to $2,188 million in 2006 at a 62 per cent CAGR. In the current global economic climate, overall advertising budgets are under pressure.


But, the e-marketing services slice will continue to show relatively high growth as firms are recognizing the importance of a multi-channel marketing approach and database and analytical tools. Another growth area is the outsourcing of PR activities to specialized PR agencies, in particular high-tech sectors.

It was observed that logistics was one of the most expensive corporate functions within many companies. Various indicators point out that overall spending on logistics makes up 10 to 11 per cent of GDP in western economies. IDC estimates 48 per cent of this amount to be spent on internal logistics staff and resources, and 52 per cent on external logistics service providers.

IDC expects logistics BPO services from India to expand from $168 million in 2003 to $701 million in 2006 at a five-year CAGR of 48 per cent.


Manufacturing, retail and wholesale sectors would account for most of this spending. Major drivers for logistics BPO include cost savings, access to new skills and technology and the growing army of logistics service specialists with leading-edge skills which companies can partner with.

The survey estimates that the worldwide procurement BPO market was $6.10 billion in 2002. A serious inhibitor to procurement BPO is the complexity of technology and process integration in the supply chain. This integration is key to make procurement outsourcing and e-procurement work effectively. Instrumental to the supply chain integration is the growing use of private e-marketplaces by major industries like the car industry.

Covisint, for example is the e-procurement platform set up by Daimer Chrysler, Ford, General Motors, Nissan, Renault, Commerce One & Oracle and was used by Daimler Chrysler recently to procure over $3.50 billion of direct goods. IDC projects this emerging market for services in India to grow from $176 million in 2003 to $627 million in 2006 at a 45 per cent CAGR.


The survey estimates the Indian domestic BPO services market at $80 million in 2002. This is too small an opportunity compared to BPO exports services in terms of market potential but can be of a greater strategic importance for players in the industry, where there are players operating at 50 to 60 per cent operational levels.

Given the current industry utilization levels of 1.20-1.80 shifts, domestic business can help players shore up utilization levels to 2.40-2.80 and fetch additional revenues by another 15 to 20 per cent.

The spokesman said it was observed that delivering low-end customer care services has been the entry point for most players in the Indian BPO space. The strategy to deliver voice-based customer care services provide the early entrants in the BPO space a foot in the door to the BPO market, a story which was to be often repeated by new players. Thereon, with the relationship established, Indian service providers, have been successful in leveraging the association by garnering more business from same clients.

Services mostly rendered by Indian contract centres are marketing, telesales and technical support. With a 24x7x365 services model and options to use email, web chat and voice as service channels, Indian contract center service providers brought in more business as they could service their customers` customer more effectively at a much lower price.


On the other hand, the massive upfront capital required to set up a call center is a major deterrent for players looking to enter the space. The average capital spend on a per seat basis in call center in 2002 was close to $7,500. Given the real time nature of the services provided, contact centers need to invest heavily in telecom redundancy and power backups, resulting in a further escalation of costs

Almost 90 per cent of BPO services in India are currently being delivered through voice, but given the rapidity of advancements in technologies like VoIP, IDC believes the usage of more cost-effective web-based channels will increase and a number of processes currently requiring human elements would be automated.

Source: IRIS