Outsourcing stares at a bleak future

The fate of Indias 14.7-billion BPO industry has become a bit uncertain.

With an army of suppliers cloning each others services within the country and eagle-eyed competitors in Southeast Asia waiting to snap up global outsourcing opportunities,the fate of Indias 14.7-billion BPO industry has become a bit uncertain. Declining volumes,pressure to maintain slim margins,reduction in cost arbitrage,wage inflation and an ongoing talent crisis have added up to paint a bleak picture. Consequently,a number of Indian BPOs may be getting ready to script their endgames.

Financially,the past two years have seen more lows than highs for Indian BPOs. HCLs BPO unit,for instance,has been running at a loss for two fiscal years in a row,and analysts expect the trend to continue for a few quarters. Wage inflation and price correction cut WNS operating margins in half,from 4 in FY10 to 2 in FY11. Again,FY11 margins for Firstsource remained flat at 14.2,and profit after tax at the countrys largest standalone listed BPO rose a meagre 2.2.

Overall,volumes have come down drastically for the BPO market and there is pressure on margins because of the steep rise in wages. After the global downturn,transaction processes have come down sharply. In such a scenario,only companies that have scale and deep pockets can sustain. Most of the small BPOs are out of business, says Sanjeev Hota of Sharekhan.

Over 6,000 small ITES companies and BPOs across the country were reported to have shut down during the recession,while several medium-sized companies which could not handle margin pressures went on the block last year.

This year is likely to see another wave of de-cluttering,with large companies like Firstsource and Nasdaq-listed EXLServices reportedly looking for buyers. In a recent deal,UK-based general service company Serco acquired Intelenet Global Services for R2,772 crore in Indias largest BPO deal. EXLServices recently acquired Outsource Partners International OPI,a former KPMG captive firm.

Going forward,the Indian BPO sector is going to become a game for large-scale global players,and regional players are sure to get marginalised. The voice BPO story in India is over,and companies will want to manage the majority of the outsourcing headroom left locally. Onshoring will be the way ahead, says Aparup Sengupta,managing director and chief executive at Essar-backed BPO firm Aegis.

Indias cost arbitrage,which was its USP,has now come down to 20-25,compared to the earlier 50-60. With several other outsourcing destinations vying for a pie of the market,the cost advantage will not sustain the sector much longer. It is becoming difficult for suppliers to differentiate from the kind of services they are offering. Today,there are lots of options both from the location and suppliers side,and the labour arbitrage is no longer a driver, says Punish Mishra,Associate Partner,Everest Group. However,the human resource crunch,feel industry stalwarts,is the sectors biggest headache,with Nasscom projecting a shortage of 2.62 lakh professionals by 2012. Attrition rate,according to Assocham,has been at 65 for the last two,making it the highest amongst all industries. Says Raman Roy,the man often credited with the genesis of the Indian BPO industry: There is definitely a big crisis in the industry. The greatest challenge in India is that there are no people to hire. While unemployment is high,unemployability of graduates is forcing me to hire 1,000 people abroad. Industry experts feel that in the future,it will be only platform-based or value-based BPO outsourcing,and not about process-driven services. According to a PwC and CII report on the IT/ITES industry,Tata Consultancy Services has several deals for its platform-based BPO services. TCS also acquired Diligenta,a BPO platform for processing insurance policies,while Infosys approach towards BPO platforms lies in making multiple smaller themes. In FY10,Infosys rolled out a software-as-a-service SaaS version of its banking product Finacle. It also developed platforms in HR,procurement and media and entertainment. One of the biggest BPO platform plays for Infosys was its acquisition of US-based McCamish Systems. Wipro too has platform-based offerings using SAP for manufacturing companies,notes the PwC report.