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BPO: Maintaining the momentum - Views on News from Equitymaster
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  • Mar 12, 2007

    BPO: Maintaining the momentum

    The Indian business process outsourcing (BPO) industry continued their robust growth during 2007. The opportunity has generated confidence among the global players, which is evident from the increasing offshoring business Indian BPOs are attracting despite the security concerns and data theft incidents. NASSCOM expects the Indian IT-BPO industry to cross the US$ 60 bn exports mark by 2010, from US$ 31 bn in FY07 (CAGR of 19%). Out of this, we expect the growth in the BPO segment to be relatively faster than the IT services segment. Growth in the industry is being driven by a steady increase in scale and depth of existing service lines. There also has been addition of newer vertical specific services and emerging business services in the last year.

    Global IT spending is projected to grow at a rate of 5% YoY in 2007, after growing at 8% each year in 2005 and 2006. String growth is also expected in global BPO spends, which will further give an impetus to the Indian ITES-BPO industry. During FY07, the industry performance remained strong with leading firms reporting above expected growth rates in the first half of the financial year. Firms continued with their steady expansion into newer service lines and increased geographic penetration. Looking at a broader perspective, the last 12 to 18 months have seen an evolution in global perspectives about offshore outsourcing, a change in mindset of people to a wider, more rational acknowledgement of the economic imperatives and value drivers.

    US$ bn FY04 FY05 FY06 FY07E CAGR
    ITES-BPO 3.4 5.2 7.2 9.5 40.8%
    -Exports 3.1 4.6 6.3 8.3 38.9%
    -Domestic 0.3 0.6 0.9 1.2 58.7%
    ITES-BPO Share in total Software and Services Revenue 20% 23% 24% 24%
    Y-o-Y growth in ITES BPO. 0% 53% 38% 32%
    Direct employment in ITES-BPO 216,000 316,000 415,000 545,000 36.1%

    Source: Nasscom

    What domestic ITES-BPO market has to offer?
    ITES-BPO is a very unpenetrated segment of the domestic market, which is mostly driven by voice-based services with customer care and sales and marketing activity accounting for approximately 70% of the total. The banking, financial services and insurance (BFSI) and telecom verticals account for more than 70% of the demand for ITES-BPO services in the domestic market.

    While cost savings have been the primary driver of offshore outsourcing, there is no cost advantage in the domestic market. As a result, the primary motivation for the domestic market, in its early years of evolution is not cost savings but access to specialist skills and freeing client resources to focus on the core business. Scalability and process efficiency may generate some degree of cost savings in the domestic market but this may not compare with the levels achieved by outsourced foreign clients.

    While ITES-BPO penetration in India is still very low, a major proportion of end user organisations have an internal IT division to focus on these specific business needs. This is a crucial stage in the maturity of user organisations for them to consider and be able to outsource.

    Big players rule
    The future belongs to Tier 1 BPO companies. According to the latest results posted in 2006, large players are ramping up capacities and moving up the value chain. The third quarter results for 2006 of Indian BPOs showed healthy operating margins as well as growing revenues. Wipro BPO registered revenues of Rs 2,358 m for 3QFY07, with an operating margin of 23%. Infosys BPO registered a sequential growth of 20%, with an operating margin of over 22%.

    Time for Tier II cities to come up
    The present situation in India is that the large cities like Delhi-NCR, Bangalore and Mumbai are completely saturated and the companies are moving to small towns and Tier II cities, like Chandigarh, Vizag and Jaipur, which are driving future growth. This is a positive step, as the companies have to expand to newer location to grow and deliver high-end services to move up in the value chain.

    We believe that the Indian ITES-BPO industry is in for some strong years ahead, considering the growing momentum globally for outsourcing of not core processes to 'low-cost' destination like India. The challenge for Indian outsourcers, however, will be to maintain its low-cost status in the wake of rising employee costs. Scaling up of offerings and having a robust data security setup in place are also among the major challenges for the companies.



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