"BPO's $50-billion opportunity"
In just about a decade, the Indian BPO industry has grown from almost zero to $11 billion in annual revenues and a workforce of 700,000. Starting with lowend work of data entry and then voice-based customer contact, the industry now also does sophisticated finance and accounting, besides analytics and legal work. The demand for outsourced services from India has been so large that the Indian BPO industry has been growing at 35 per cent annually for the last three years. A recent Nasscom-Everest study shows that the “potentially addressable market” for Indian BPOs could be a staggering $220-280 billion by 2012.
BT: Pramod, let me start with you. How does the climate look? The subprime crisis is not yet behind us, oil is on the boil, inflation is up across economies. Are these factors going to be a threat to or an opportunity for the BPO industry?
BT: Ananda, you’ve made some acquisitions in the US and signed some fairly big outsourcing deals as well. Do you think the industry can maintain its 35 per cent growth rate?
Ananda Mukerji: There clearly are macroeconomic factors that today every industry is facing, every company and so our customers are facing it; to that extent there is going to be a turbulence in the short term. I think the fundamentals of the business are very strong. The proposition of cost and skills arbitrage provided by an offshore location like India continues to be strong. The growth can be sustained and there is more than enough demand for our services.
Raman Roy: I think when you say stocks are down, it is relative to where they were. Yes, the IPO market is already challenging. Is it going to continue for tomorrow morning? Yes, it is. But medium to long term, is there an opportunity for people to use IPO and exit? I think there definitely is. Some of the expectations may undergo a change, there is a little bit of fine-tuning to understand what the marketplace and what investors are looking for. It’s a global aspect of what is happening to the stock market. It’s not that Indian stocks or BPO stocks are impacted alone.
Akhil Gupta: Next six months are a good time for us. In the past three months, we have worked harder than we have in the last three years, in terms of the kinds of deals that have come to us and the demand for private equity. The problem currently is that people have still benchmarked their expectations on the high-end of the cycle and that will change if the stock market remains where it is. And, my prediction is that there are few global cues to show the market will swing back to those levels. I think we have gone from a point when people took out the term ‘risk’ from their dictionary to a time now when everything is too risky. This kind of turmoil is the perfect market for private equity.
Bhasin: One other aspect that we shouldn’t forget is demographic change. Demographic change will have a lot to do with the development of this industry. This is a change we can’t reverse. It may not be immediate, but medium to long term it’s a massive change.
Som Mittal: I think this change is visible in North America, Europe and Japan, where there are not enough people to manage. This change will get more accentuated and we have started seeing it in at least these pockets.
Bhasin: Frankly, it’s not a BPO industry problem, but an Indian industry problem. I don’t know if there is any sizeable company that has a lot of employees and can’t afford to be in the training business. All of us provide training in a variety of forms; we probably provide in our company 200-300 different courses, we have tie-ups with universities so that people can become Chartered Accountants or software programmers. I wish it wasn’t this way, I wish the government would fulfil its function of providing trained resources, but it is not right now. So, all of us have to build very large training departments. There is a benefit to that; the benefit is we learn how to manage processes even more efficiently. And, that is a unique skill Indian companies have built.
BT: Is going to Tier II really an option? Genpact has tried to go to Jaipur and smaller locations, others are working out of Pune. Is there sufficient talent coming out of Tier III cities?
Roy: To your earlier question, there is a pyramid across industries across countries. There is a pyramid from top to bottom of the number of people at every level, every competency, every particular domain knowledge. If you talk of moving to a higher domain, which was your earlier question, the next layer of the pyramid has the ability to feed it but the hunger is not that large. If you say that you will require PhDs in Econometrics in the same number as you require guys who take calls and answer balance queries, that’s not true.
But the number that is needed with the training that Pramod and Ananda spoke about, I think that’s doable because that talent is there. We have been able to learn how to compress the training time, we have been able to learn how to get an Indian up to speed to an international level, and we will move into smaller towns and cities for that segment. But will we go to these smaller towns and set up a fancy analytical capability that requires PhDs? We will not.
Michel E. de Zeeuw: I think that as we move to higher value services, the customer requests a bit more customer intimacy in terms of, say, proximity or it could be knowledge of local regulations. So, the expansion being looked at is not only in India, but onshore or nearshore.
Som: Low cost is the whole Indian environment of being a low-cost economy, and I think the issue today is that the currency fluctuation is impacting the whole world. Every projection will show you that the low-cost economy advantage of India has not changed. That will remain today, tomorrow and in the long term. The issue for us today is that we do many things that no one else in industry in India or in the world does. We have to produce our own power, transport our own people, train them… Two things that come to my mind—first one is training. Why should we be getting people from colleges who are not getting right education and soft skills, technical skills and then have to do that again? The other thing is that 85 per cent of the work we are doing is in the seven centres and if you look at the footprint of our colleges there are not even 5 per cent in these seven centres. So, we are bringing people from where they live and where they study to these seven centres. That obviously puts pressure on the infrastructure, cost structures and other factors.
There are two options for us: one is to change the education system and take the inefficiencies out, and the other is to go to Tier II and Tier III towns and invest even more in training. The need to go to Tier II/III cities is an economic compulsion, because you just can’t let this migration go on. We’re not looking for concessions and subsidies. We’re only asking governments to take note of the economic benefits this industry generates.
Mukerji: I think there is opportunity today because infrastructure, especially telecom connectivity, allows you to go to smaller cities and deliver high-class services. Three or four years ago, one couldn’t think of going to Pune; today we go to Hubli, Vijayawada and Cochin. We just need to be able to tweak our business model to be able to deliver. It’s a big opportunity, instead of bringing people from their cities to a Bangalore or Mumbai, we can actually go there.
Raman: Just to add to this and make a few controversial statements, we have sat with the governments and said, ‘where are the schools?’ You want to see middle management, I can recruit at the bottom of the pyramid but I still need middle management, I cannot operate without middle management and senior middle management in any location. Local talent at this level is not there. So, the guy I get in (from a bigger city) asks you ‘what about my child’s education, what about hospitals,’ and then comes eating places and entertainment? At Nasscom, in our report in February, we tried to bring out the integrated aspect of what it takes to be able to develop some of these towns for us to be able to go there.
BT: Akhil, given that the Indian BPO sector is so unique in the pain points it needs to manage, what makes it attractive for someone like you and do you see any BPO MNCs coming out of India in, say, five years from now?
Gupta: The answer is in your question itself. When we took an investment in Intelenet to the investment committee, they said ‘how can they manage with all these problems, attrition etc’. We said, ‘well that’s right, if they can manage this well we can make a big buck out of it’. And that’s the reason the bet is always on the management team, their dynamism and commitment.
Bhasin: Why is that (India producing a BPO MNC) a question? We were the founders of Dalian as a BPO destination, we’re the largest in Hungary, too. We went there before most people had heard of Dalian. Our managers are French in Europe, Japanese in Japan, American ops headed by a Mexican. We are more global than a lot of multinationals.
Mukerji: This industry has gone global much faster than any other industry. Today, we have ops in five countries, 4,000 people outside India. Probably four out of our top 10 executives are not Indians. This industry faced global competition from day one and had to become global companies as opposed to Indian companies.
De Zeeuw: I think being Indian is also core to how you manage your business. In this business, India is perceived very well by global customers.
BT: The US accounts for three-fourths of the business BPOs in India get. There is obviously a need to diversify. Given the slowdown, which markets are most ready for Indian BPOs to get into?
Mukerji: India and China.
Pramod: If we say we want to diversify from America and Europe, it is silly. How many economies are there that are as big?
BT: Japan …
Bhasin: Just because the US is in recession does not mean it will remain so forever; it will climb out of it and who knows this actually may be good for us in the long term. So I think that proportion is going to remain for a very long time.
Mittal: We do see movement in continental Europe in language and similarly Japan. There is a change in the mindset of Japanese customers in accepting English and similarly in service providers from India going farther in learning Japanese. We have already started seeing that in Germany.
De Zeeuw: I think Europe has been lagging behind in growth compared to the US, but some key changes have happened. First, euro is so high they actually need to get
BT: Who is doing better—pure play BPOs or the so-called IT-BPOs?
Mukerji: It depends on who you ask… (laughs). I don’t think it’s a matter of pure play BPO companies versus third party IT services companies and whose model is better. I think BPO business is a different business and requires different dynamics, different success factors, and I think it’s good that there are companies that have come into this industry are those that have done some fantastic work in IT. If you look the world around you and see how many BPO companies are there, they are all growing, they are all doing well, there is enough demand out there.
Mittal: I don’t think integration of services has yet happened. It may happen in the next round.
Gupta: I would love to invest in a BPO company that is going to the next level. Just thinking aloud, there is the improvement in processes that will drive BPO companies to acquire IT resources. I haven’t seen that as yet, but to me that sounds like a logical progression.
Bhasin: There is no similarity between Java programming and Sarbanes Oxley, that is why the CIO and CFO roles have not been combined and are not likely to be combined. So, I think that should answer your question. The fact is client relationships can be used to cross sell—if there are capabilities in both. I am saying this in front of Infosys BPO, earlier we did not see them on the map, now they have made acquisitions and we see them on the map not because of IT but because of their true capabilities in BPO. There will be areas where they (IT and BPO) overlap, wherein application of technology along with the application of process allows you to drive efficiency to a greater level than you can do on a standalone basis. But broadly it’s about two separate dynamics being brought together to sell well into your customer and increase your penetration.
BT: Michel, is that how you see it evolve?
De Zeeuw: If you look at it very factually, you will see most US companies have separate requirements— either BPO or IT. Of course, in the case of Infosys, since we started in IT and moved into BPO later, now it’s a real advantage to have it to tap into IT customers and move into our BPO business. It’s yet marginal but some deals come out as a package where the customer wants full back office, platform, software operating etc., but those are very few.
BT: How realistic is the five-fold growth that the Everest report has projected?
Bhasin: If I may clarify, we are talking about the $50-billion growth, it could be possible, the opportunity exists, but I don’t know if we can make it happen as yet.
Roy: I don’t know if we can make it happen on our own—all stakeholders have a role to play—government, customers, industry, providers, and educational institutes.
BT: Is India’s leadership position safe at least for the next five years?
Mukerji: Indian companies’ leadership, perhaps. India’s leadership is a function of what the stakeholders do.
Gupta: The only risk is that our stake is going up; the next phase is innovation and process improvement, but I do think we are well prepared to deal with it. The only spoiler will be the rupee appreciation. We can handle a gradual appreciation of the rupee. When it’s sharper it can be troublesome.
Mittal: There is a long way to go but there is a massive opportunity. We are going in the right direction.
De Zeeuw: I think both India and Indian players have expertise more than anyone anywhere else in the world, and the cost aspect is a key criterion and inflation is a longterm issue. Indian players are here to stay. We need to focus on transformation in the next phase of growth.
Mukerji: The skills and capabilities built by Indian companies are now exportable. There are other countries who will now compete. They are targeting this industry as a clear target, with incentive plans and sops. I don’t see that here.
Roy: I think we need to consider the potential if all stakeholders get their act together. What are we going to do to our transportation, electricity and education? We owe it to our next generation to get our act together and ensure India’s dominance in the market.
Mukerji: India will be the epicentre of the BPO market. We need to look at this strategically and see what kind of market share we can capture.
