Information Technology

July 27, 2006
Getting better than ever- The BPO story

Runa Mukherjee

NEW DELHI -- The Indian horizon has been expanding. The spectrum of options has been broadening and with that, the same critics, who had once written off the so-called 'BPOs', are now eating their words as, the ITES and BPO sector has come back in a way never before.

McKinsey-Nasscom report shows that India will continue to stay on top, maintaining its 46 percent share of the global BPO market and its 65 percent share in the IT offshoring and outsourcing market through 2010.

There is an increased emphasis on improving business process efficiencies and there is a growing trend towards the use of technology to automate and streamline business functions. Business process management is a combination of expertise in process management and implementation technologies to deliver a solution oriented towards business delivery.

Outsourcing is the process of transferring an internal business function including the significant physical and human assets, to an external provider in order to use outside resources to perform activities that were previously handled within the organisation.

It involves transferring an amount of the management control and decision-making to the external supplier. Buying products from another party is not outsourcing or out-tasking, but is termed as a vendor relationship. Similarly, buying services from a provider is not necessarily outsourcing or out-tasking.

Outsourcing involves a considerable degree of two-way information exchange and trust. Organisations that deliver such services feel that outsourcing requires the transferring of management responsibility for running a segment of the business.

Many companies look to employ expert organisations in the areas targeted for outsourcing. Business segments outsourced include information technology, human resources, facilities and real estate management and accounting among others. Many companies also outsource customer support and call center functions, manufacturing and engineering. Outsourcing business is characterised by expertise not inherent to the client organisation.

The overhead expenses of customer service are comparitively less where outsourcing has been used leading to many companies, from utilities to manufacturers, shutting their in-house customer relations departments and outsourcing their customer service to third party call centers. The logical extension of this decision was to outsource labor overseas to countries with lower labor costs, and this trend is termed as off shoring of customer service.

To be a captive or not to be:

The advantage of building a captive BPO unit is that securing your data is less complex because it never goes out of the organisation. Another advantage is that the margin can be achieved for onself and need not be given to the third party. Captive BPOs are earning a lot of fame too quickly, so much so, that many have moved on to be independent firms.

On the other hand, captive units require a considerable effort to establish. Initially, management is going to need to spend a considerable amount of time and attention in establishing the new unit. If responsibility is given to the talented workforce of the organisation, then the efficiency will suffer as they will realise that they have not got the cream job.

One of the biggest advantages of working with a third-party vendor is the opportunity to distribute repetitive work to efficient labour in developing countries who see these chores as their main objective and platform for advancement within their organisation.

Working with a third-party vendor makes it possible to focus on your core business while the vendor concentrates on their core business of improving the efficiency of the outsourced process. Working with multiple customers, the vendor gains the ability to develop best practices and put them across their organisation to reduce costs for their customers and to improve the standards of performance.

The use of outsourcing is expected to simply grow as the supply base continues to mature and companies become more comfortable working with external providers based in offshore locations.

Growth

The BPO growth is resulting from the global economic downturn and the success of Fortune 500 firms that are outsourcing in India. Indian companies are also riding in this wave of success.

While other destinations are also emerging, like Mexico, Philippines, Eastern, Europe, China and Canada, India owes its success to its english-speaking professionals and its high standards of customer operations.

"According to every major industry analyst, India is the most preferred BPO destination in the world. India's advantage over other locations can be encapsulated by the 3 C's -Capability, Cost and Communication. Capability relates to the wide range of competencies combined with our process and quality focus. Cost relates not only to wage levels but also to productivity and quality and Communication refers to the large English speaking population", said Sumit Bhattacharya, Executive Vice President HCLT - BPO services.

According to NASSCOM survey:

• Indian IT-ITES industry continues to chart remarkable double-digit growth for the nth successive year and is expected to exceed USD 36 billion in annual revenue in FY 2005-06, a growth of nearly 28 per cent
• Global IT spends is projected to grow at a steady rate of 5-6 percent per annum, BPO spends will grow at 10-11 percent;
• Un-penetrated potential of G2000 corporations (late adopters) will lead demand;
• Deepening vertical and geographic market penetration of offshore; transnational corporations will drive growth of the global delivery model (GDM);
• While interest in newer offshore destinations is likely to continue, maturing appreciation of fundamentals (skill and scale) to re-affirm the indispensable role of India in any major global sourcing strategy will take place;
• Cross border M&A will remain a popular route for building global delivery capability; Indian players will get more active;
• 28 percent of the suitable talent will be available across all offshore locations (outranks the next destination by a factor of 2.5);
• Keen emphasis will be on security, quality and leveraging experience to gain from operational excellence.

How to carry on riding the wave:

• Sustained total cost competitiveness, driven by utilisation and ability to deliver multiple dependent processes;
• Enhancing the talent pool advantage - will focus on skill development to better leverage the worlds largest working population.
• Strengthening urban infrastructure in existing and emerging cities and will emphasise on proactive regulatory reform to facilitate greater ease of doing business;
• Driving a philosophy of operational excellence amongst industry players to ensure that India based delivery sustains world leading benchmarks in performance;
• Catalysing domestic market development;
• Actively promoting an uncompromised agenda towards global free trade;
• Fostering an ecosystem to breed innovation.

Why India?

The Information Technology enabled services (ITes) and the Business Process Outsourcing industries (BPOs) is still in its nascent stages in India. Despite their recent entry into the Indian scenario, the industries have grown phenomenally and have become a very important part of the export-oriented IT software and services environment.

One of the key factors is the English speaking population and the fact that our population is young. The presence of an English-speaking population is a key factor in the choice of location of offshore services, as the commonality of language helps to ensure that quality and performance criteria can be fulfilled. Most of the Western European and USA population is an ageing population. Almost 60 percent of our population is in the age group of 16-30 years. Nearly 1,20,000 IT graduates join the workforce per year. For the lower-end services like telemarketing, customer care and data processing, ordinary graduates are employed and that has greatly improved the employment opportunities in India.

As global corporations look for destinations of high quality, scalable operations and low-cost around the world, India, China and Philippines become the front-runners.

China has a limited English-speaking population and Philippines generates only 400,000 graduates per year. India's education system that produces two million graduates every year-positions the industry well to ride this momentum. Supplementary is the fact that the India brand equity overseas has already been established through the IT services sector.

The emphasis will be on quality, but cost-effectiveness will also continue to play an important role in determining the competitiveness of the country vis-à-vis emerging challenges from newer countries.

"India ranks high in areas such as qualifications, capabilities, quality of work, management capabilities and work ethics, and thus is ahead of its competitors", said Aditya Gupta, president, InfoVisionGroup.

"The Philippines have been an outsourcing destination for US companies even before India came onto the global BPO radar. And even today, due to their affiliation with the US in terms of English accent, idiom and cultural familiarity, the Philippines remains a destination for low/mid level US focused voice and low complexity back office processes. So while there is some competition, it is sporadic and in no way stiff", said Sumit.

According to the US-based research agency, Everest firm, India's offshore outsourcing market is likely to maintain its low-cost labour advantage over the UK for at least the next thirty years. Then report added that the country would also retain its low-cost wage advantage over the US for at least another 18 years.

Along with the other Asian countries like Philippines, India continues to move ahead with policies aimed at minimising the adverse impact of wage inflation, it added.

According to the report, value additions to the relevant workforce, both on quality and quantity fronts, along with development of more low-cost offshore locations is needed. After finding its foothold in centres like Bangalore, Delhi-NCR, Pune and Hyderabad, the BPO industry is expanding into new and non-metro places like Jaipur, Lucknow and Chandigarh. The move to two-tier cities within the country and opening of delivery centres outside India is also helping the IT service providers to lever their costs.

Offshoring will retain a substantial labour arbitrage for the next 30 years between the UK and key low-cost destinations as such as India, confirmed experts.

Attrition Rates?

According to the Everest Institute's '2006 Global Sourcing Market Update', India's offshore outsourcing market is likely to maintain its low-cost labour advantage over countries such as the USA and UK for at least the next two decades.

The current growth in salaries and the prevailing attrition levels are symptomatic of the initial high growth phase of most high-growth industries. As with other such industries in the past both these factors will subside to a steady state along with consolidation and maturity.

Furthermore, it should be noted that what is important is the Cost of delivery. Whilst salaries do contribute a significant proportion, there are other associated costs such as technology and communications. A downward trend in these associated costs combined with increasing productivity and quality will tend to mitigate to a great extent the rise in salaries.

According to NASSCOM, the average rate of attrition in call centres and BPO companies is around 30-35 percent. A large part of attrition is due to individuals moving to higher-level jobs in other companies. The attrition rate varies dramatically across companies in the industry. It is also driven by the nature of job -voice, non-voice, shift, location etc.

"Though attrition rates have been a point of concern earlier, as the Industry matures, the attrition rate in the industry has remained considerably static over the past few years. This is also supported by the fact that BPOs are now undertaking on high end and non-voiced based work. The point to note about attrition is that most of it is 'within' the industry -i.e. people are moving from one BPO company to another. Attrition out of the industry is far less. The implication is that the industry is creating an experienced and expanding workforce", said Sumit.

Tapping IT to its full potential

IT enables and has the capability of transforming BPO services in terms of efficiency, effectiveness and business impact. Whilst, to date, IT has enabled and made BPO Services more efficient, there is significant untapped potential in terms of effectiveness and business impact.

Essentially, the going forward contribution of IT relates to two areas of service delivery- Predictability and Performance:

Predictability

• Delivery assurance
• Risk mitigation
• Scalability
• Replicability
• Business Outcome
• Impact assurance

Performance

• Transition management
• Learning curve compression
• SL consistency

The various factors driving the BPO market today has shifted from pure labour rate mechanism to cost competitiveness through technology-enabled re-engineered processes. Indian companies have terrific process due to IT diligence skills and process re-engineering skills that are supplemented by in-house technology groups.

High Salaries?

According to the Everest Institute's '2006 Global Sourcing Market Update', India's offshore outsourcing market is likely to maintain its low-cost labour advantage over countries such as the USA and UK for at least the next two decades.

The current growth in salaries and the prevailing attrition levels are symptomatic of the initial high growth phase of most high-growth industries. As with other such industries in the past both these factors will subside to a steady state along with consolidation and maturity.

Furthermore, it should be noted that what is important is the Cost of delivery. Whilst salaries do contribute a significant proportion, there are other associated costs such as technology and communications. A downward trend in these associated costs combined with increasing productivity and quality will tend to mitigate to a great extent the rise in salaries.

According to NASSCOM, the average rate of attrition in call centres and BPO companies is around 30-35 percent. A large part of attrition is due to individuals moving to higher-level jobs in other companies. The attrition rate varies dramatically across companies in the industry. It is also driven by the nature of job---voice, non-voice, shift, location etc.

"Though attrition rates have been a point of concern earlier, as the industry matures, the attrition rate in the industry has remained considerably static over the past few years. This is also supported by the fact that BPOs are now undertaking on high end and non-voiced based work. The point to note about attrition is that most of it is within the industry -i.e. people are moving from one BPO company to another. Attrition out of the industry is far less. The implication is that the industry is creating an experienced and expanding workforce", said Sumit.

Security

"At HCLT - BPO Services, we have a very robust multi-domain, multi-level, multi-layered Information Security Policy to address all concerns regarding protection of Intellectual Property and prevention of data theft. This includes the Information Security having 10 domains, 36 control objectives and 127 controls, the fulfillment of which are audited quarterly internally, and half-yearly externally, by a reputed third-party organisation. All our Delivery Centres are BS7799 certified which is the globally accepted highest certification for Information Security. This includes providing robust security organisation structure, physical security controls, providing technical security measures, personnel security, business continuity & disaster recovery and compliance to legal and regulatory requirements such as IT Act, Data Protection Act etc", said Sumit.

In addition, NASSCOM and its member companies are strong upholders of data privacy and have been continuously strengthening both the legal and enforcement framework for data protection.

HCLT - BPO Services has Web content filtering software, Intrusion detection systems, proxy server, Antivirus, firewall, Interscan messaging system to provide confidentiality, integrity and availability to the information.

"Being in the business of CRM and Data Management for over 15 years, we have developed and refined process at all levels and departments to ensure data security is not what makes our clients have sleepless nights. Theft / misuse of data is a criminal offence so there are laws to deal with such instances", said Aditya.

India: to continue to be a top BPO industry

India is still lacking in infrastructure when it comes to world-class performance. It is important for the industry to move up the value chain and offer high quality and unique services to its customers. It is only the ability of companies to offer such services that will see this industry gaining real glory, rather than hype.

Sumit Bhattacharya believes that by transforming what we deliver from cost savings to value realisation, it can be acquired: "India has all the major building blocks to achieve and deliver best-in-class customer benefits -i.e. Process orientation and Quality focus combined with IT expertise and remote delivery experience. Companies such as HCL are now significantly enhancing these building blocks by adding advanced capabilities in strategic domains as well as business or process re-engineering or transformation and aligning service metrics to global Best Practice", he said.

The final element will be to evolve engagement models based on Risk and Value share based pricing.

"HCLT - BPO Services has maintained a quarter-on-quarter growth rate of over 34 percent since it's inception in 2001, a growth rate which has consistently been higher than the industry rate of growth. We also pioneered the concept of near-shore delivery by initiating our operations in Northern Ireland in December, 2001. Today, we operate from 10 delivery centers spanning 3 countries employing over 10000 people. Our aim is to sustain our performance", he said.

Conclusion

Companies have realised that BPO is a key driver of value and allows companies to begin new businesses, take strategic decisions and open new sources of revenue.

Having made a mark in the global BPO business, Indian IT and ITeS sector is now thriving in Knowledge Process Outsourcing (KPO). According to Research & Consultancy Outsourcing Services, the world BPO market is estimated to be worth US $17 billion with the major contribution from India, worth $12-14 billion. The Indian BPO industry includes basic data and market research, equity research, management, engineering design, animation and simulation, medical content & services and education and publishing.

Another estimate by National Association of Software and Service Companies (Nasscom) is that the total market size of BPO industry is US $ 5 billion. India as a major KPO player in the world is based on its intellectual and Internet resource. The resulting economic success of the BPO industry has taken many firms to off shore their advanced knowledge work.

The Indian BPO sector has to change its business model by offering clients not just process improvement but becoming their transformational partners, felt speakers at Nasscom's annual ITES-BPO summit last month. Firms must go in for a vertical focus, with emphasis on processes and technology. This platform-based scramble-typically developing an ERP like solution for a specific industry that would serve multiple customers in it- will keep delivering substantial value. There is a need to understand the client's technology platform but also to deliver process expertise that offered quicker paybacks, believe some experts.

The mid-life challenge for Indian BPOs is to move away from the 'transactional stuff' and become clients' business partners itself delivering efficiency and productivity gains at the end of the day.

India is well on its way to be on the top of the BPO wave for a good amount of time. Captive or third party, the CEOs and the managing directors are ready to ring in the good times.