Posted on 21 March 2012.
By Goutam Das and Sunny
India’s BPO industry losing voice, finds life elsewhere
Two years ago, Barclaycard decided to outsource the customer service of its credit card and consumer lending businesses. The deal was worth a mouthwatering 100 million pounds over five years. Naturally, Indian business process outsourcing (BPO) companies queued up. But Marge Connelly, Barclaycard’s Chief Operating Officer, said the function – all of it voice – had to be done out of the Philippines.
The Philippines was a colony of the United States from just after the Spanish-American war of 1898 to the Second World War – enough time for the US to imbue the South-East Asian country with its culture and language.
Barclaycard, part of the Barclays Group with headquarters in the United Kingdom, and Connelly, an American, were more comfortable with Filipinos, rather than Indians, speaking to their clients.
Eventually, Firstsource, an Indian BPO outfit, took over Barclaycard’s customer service centre in Teesside in Northeast England, and moved a majority of the work to the Philippines. Connelly, who left Barclaycard last December, is not the only one of her kind. Nor was the Barclaycard voice contract the first to go to the Philippines. But, given its size and profile, it provided a curious twist to the BPO story in India.
The story began with a whisper more than two decades ago when Raman Roy took on some work for American Express. It soon grew into a rumble and then into a thunder as the industry rode on Indians’ comfort with the English language to appropriate the bulk of the work being outsourced by companies in the US and Europe. Sanjay grew an alter ego as Sam, Nikhil turned into Nick and Sulekha pretended to be Sally. Hours in training turned a Tamil accent into the Boston twang and the Punjabi gruffness into the Texan drawl.
Images of young men and women, fresh out of college, sitting at a computer with headphones planted on their heads as if rooted there, became the symbol of the new India. Costing a fraction of what a similar professional in the West would have, they spoke and spoke into the microphone. And then the voices got muffled.
A RIVAL RISES
In the last six years, voice contracts coming to India are estimated to have fallen by half. This has pegged back the industry overall. In 2008, a report by industry lobby NASSCOM and research firm Everest said the Indian BPO industry would earn $30 billion from exports by 2012.
Given the “significant future market opportunity”, said the report, the industry could also set itself a “stretch target” of $50 billion. We are in the third month of the year and that market opportunity looks less than significant.
The BPO industry’s growth has lagged that of IT even from a smaller base
The industry may clock less than $16 billion this year – a meagre growth rate of 12 per cent, according to NASSCOM’s latest estimates. In fact, the compound annual growth rate since 2006 has been an underwhelming 13.41 per cent.
“I will take a bet,” says an industry veteran who does not want to be identified. “No BPO company in India can show double digit organic growth in 2012/13. They will show growth only by making small acquisitions or by passing off information technology work as BPO.”
As voice in Indian BPO gets muted, the buzz around the Philippines gets louder. Last year, it became the biggest provider of voice-supported services as its BPO industry jumped 21 per cent to $10.9 billion.
The Business Processing Association of the Philippines expects growth to touch 19 per cent in 2012, very similar to how India had been growing before 2006/07. If you look at pure voice operations, the Philippines, with $5.2 billion in revenues, has already become No. 1 in the world, pushing India, at $4.8 billion, into the second spot.
What’s more, a chunk of the voice contracts going to the Philippines has moved out of India. According to estimates, in the last two years, about 75,000 seats that could have been added to call centres in India went to the Philippines.
In this period, US Retailer Target, Australian telecom firm Telstra, Manila-based food and beverages company San Miguel, US-based Aetna Insurance and Canadian carrier Air Canada – none of whom gave details – are understood to have preferred the Philippines to India. “We make decisions about engaging vendors based on the global needs of our business,” said a spokesperson for Target.
SLEEPING WITH THE RIVAL
“In the next decade, India as a destination can lose $25-30 billion in foreign exchange earnings to the Philippines. Indian service providers will earn a large chunk of this but India will lose out,” says Sandeep Aggarwal, who is part of a strategic transformation group at Intelenet.
The company, for its part, has made sure it is one of those gaining even if India loses. About a year ago, hospitality giant Hilton decided to give out nearly half a billion dollars worth of call centre work spread over five years.
It wanted the centre to be in the Philippines and Intelenet won half of that contract by setting up a centre there with 2,000 employees. The other half went to Aegis, part of the Essar Group, which followed suit.
Neither company was willing to discuss the contract, but when IBM’s Global Locations Report of 2011 says the Philippines has become a top destination for Indian investors, you can be sure the bulk of that money is going out of BPO coffers.
BPO rivals to India
“Calls requiring empathy towards the customer are best handled from countries like the Philippines, as they understand the American culture better than Indians,” says Rohit Kapoor, who heads EXL, India’s ninth largest BPO company. EXL has not added many new voice processes in India since 2008, choosing to add most of them in the Philippines.
Jerry Durant, who sits in Manila as Chairman Emeritus of The International Institute for Outsource Management, says of the Indian approach: “We hear complaints on voice-based services, linguistics as well as the tenor. It is not uncommon to be told ‘no problem’ and this has become a sure sign that there is a big problem.”
Beyond empathy, there are other areas in which the Philippines has the edge. It gets trained manpower, thanks to a government programme, and its employees travel on their own.
In comparison, the fresh-out-of-college look in the Indian call centres may look cool, but does not make a great business case, especially when the employer has to spend on training its people, arranging transport for everyone working nights and providing escorts for the women.
And then there is the matter of skill in certain areas. Some time ago a large health care company wanted EXL to handle processes like medical summarisation and disease management. It wanted US-registered nurses. India did not have any. The Philippines, on the other hand, had 100,000 nurses who had returned from the US after the financial crisis and were unemployed. EXL hired 400 of them and put them in front of computers.
According to industry estimates, 30 per cent of the graduates in the Philippines are employable, compared to 10 per cent in India. And they last longer. The attrition in the Philippines is about half that in India.
As the Philippines has emerged as India’s biggest rival in voice, several others are vying for the same pie. So if empathy tilts the scales in the Philippines’ favour, culture swings it for Egypt, which, with costs comparable to India’s, has been getting more and more contracts from companies based in West Asia.
Dalian in China has become an important outsourcing centre because a large population of the former Japanese colony is conversant in Japanese.
It does not help that the manpower in India is becoming costlier, with a 10 to 15 per cent rise in BPO salaries and training expenses in the last five years, leaving the Philippines just about 10 per cent higher in manpower cost. Brazil, West Asia, Poland and Romania – with costs comparable to or slightly higher than India’s – have also started giving Indian BPOs a run for their contracts.
To keep pace, Indian BPO companies have spread out. “Some voice work we cannot take offshore because of regulatory reasons and customer demand. A larger geographic spread also helps in reducing transfer of operations from one centre to another, and helps us grow in other markets,” says a Genpact executive.
The company, the largest in India’s BPO industry, is present not only in Dalian but also in several other countries, including five locations in the US and one in Mexico.
“It is only if a client asks specifically that its calls be handled out of India that we do so,” says N.V. “Tiger” Tyagarajan, President and CEO of Genpact. It operates in 25 languages, of which only English can be handled in India with a high degree of proficiency.
“Few clients, if any, are served from one location. We are also increasing our onshore activity in the US, some of it due to regulatory and licensing issues,” says Tyagarajan.
There is one more issue. As Mitt Romney, Rick Santorum and Newt Gingrich battle for the right to challenge US President Barack Obama in elections later this year, there is pressure on US companies to keep jobs within the country.
The pressure is more telling on BPO than on IT, mainly because there is a shortage of coders in the US but BPO jobs, particularly on the voice side, do not need much skill. With an unemployment rate of more than eight per cent, the US has enough people who would want to work in a call centre. And they may show more empathy than even the Filipinos.
“The perception that we are taking away jobs is the biggest challenge. The CEOs of client organisations are trying to weigh the benefits of offshoring against the pain they would suffer,” says Swami Swaminathan, who heads Infosys BPO.
Back home in India, the Manmohan Singh government has not done BPO any favour by withdrawing tax incentives under the Software Technology Parks of India scheme and imposing the Minimum Alternate Tax on Special Economic Zones. The inadequate infrastructure takes its own toll.
“I think part of the problem was the early success that Indian companies enjoyed. You really didn’t need to do much in order to get business as demand exceeded supply. But now Indian companies have to compete head-to-head with others in every aspect,” says Durant.
Phaneesh Murthy, dressed in his usual attire of jeans and T-shirt, reaches into a small, crystal bowl of fruit. Nibbling on something he picked, he says: “Companies like WNS are dead.” And you wonder if it is a case of sour grapes.
Murthy, whose iGATE acquired Patni Computers in 2011, tried to acquire WNS Global Services four years ago, but dropped the bid because he found that it was not a “strategic fit”. Maybe he is just bitter. WNS, after all, is a leading provider of BPO services, with 22,500 employees in 25 locations across the world.
It is then that Murthy brings you out of your conspiracy reverie. “There was a downturn in the market in 2008. All our prices were down. The tech industry got hammered. Our share price was $4. WNS’s was $11. Today our share price is $22, WNS’s is still at $10.” At the time this article was written, WNS’S share price on the New York Stock Exchange was $13 while iGATE was trading on NASDAQ at $16.62.
On second thought, WNS is not all that hot right now. Its revenues declined 23.2 per cent in the quarter ended December last year and its operating margin was a wafer-thin two per cent for the year ended March last year. Experts say staying focused on pure BPO services and not getting into IT has hurt the company.
However, where there is WNS, there is also Genpact, which reported a 27 per cent rise in revenue last year and boasts a 16.5 per cent margin. Genpact has done it not just by spreading out geographically, but also by moving up the value chain.
Several others companies, notably EXL, have done the same. They hire doctors to handle medical claims, chartered accountants to look at large loan maintenance and portfolio tracking, and lawyers to handle legal processes. Genpact also offers technology services, which acquired a big boost with the acquisition last year of Arjun Malhotra’s financial analytics services provider company Headstrong.
Gopinathan Padmanabhan, head of global delivery at MphasiS, owned by Hewlett Packard, says: “I can manage the customer’s infrastructure, the applications, and also the business processes that run on top of the application.”
Milind Godbole, who runs the Asia Pacific operations for Aditya Birla Minacs, the BPO arm of the group run by Kumar Mangalam Birla, says the industry is moving from an assembly-line model to more intellectual capital oriented work.
“Call centres were always like a line assembly. Now, the BPO industry is looking more at creating platforms and introducing automation to add value,” he says.
Platforms use cloud computing and bundle business process with technology.
The BPO firm hosts an application at its own or a third party data centre and customers pay only for using the platform. The BPO revenues through this stream are not linked to the number of people the company employs. Like a product, a platform is built once and sold to many customers.
Infosys is an aggressive platform builder. One of its BPO platforms, Source to Pay, manages a customer’s indirect spending. After a purchase request from the client, Infosys BPO executes the range of processes from managing requests, generating purchase order, following the goods shipment, invoice processing and vendor payments.
The customer pays for the usage or outcome and incurs no capital expenditure. WNS, the target of Murthy’s ire, is dismissive of his prognosis. It sees itself on the growth path again after “a period of uncertainty”. It is investing in its technology-enabled practice.
“We have aggregated dozens of platforms, automation and new tool kits,” says Keshav Murugesh, its CEO. WNS has created a platform for the travel industry, which can check irregularities in the way travel agents function. It helps fare experts tell airlines how much more they should charge from an agent in case of irregularity.
The evidence of the transition is more than visible in the industry’s revenue split. In 2005/06, voice constituted 75 per cent of the industry’s revenues, which stood at $5 billion. As the revenue has grown more than three times, non-voice is more than half of it. The larger Indian firms do not have more than 20 per cent of their revenues coming from voice. It helps that the margins in non-voice are higher – 10 to 15 per cent higher than in voice.
Some companies have started distancing themselves from the term BPO. Bangalore-based 7 in which Microsoft invested recently, wants to be seen as a technology company. Essar-owned Aegis calls itself an “experience” company, managing different experiences for its customers.
The CEO of a rival firm sniggers that these companies may be facing an “identity crisis”. With time, we will know if the crisis had an opportunity lurking inside.
Source: In Today