Ten years on, 800% growth and counting... - Views on News from Equitymaster

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Ten years on, 800% growth and counting...

Jun 14, 2010

This industry emerged out of nowhere and took the whole world by storm. It captured the imagination of India's youth - promising high salaries, global exposure, perks, and plush offices. It even inspired books and movies and gave us interesting pseudo names such as Joe, Bob, and Mary. Yes, you got it right. We are talking about the business process outsourcing (BPO) industry in India.

This industry has grown almost 9 times from US$ 1.6 bn to US$ 14.7 bn over the last decade. This works out to an average annual growth rate of 25% over this period. The BPO industry currently employs 1 m people, also providing indirect employment to 3.5 m.

Dealing with tough times
The subprime crisis and subsequent meltdown affected the BPO market as well. Companies cut budgets and discretionary spending on IT. Rising unemployment, of around 10% in the US and 8% in the UK, gave rise to protectionist sentiments. New bills were introduced in the US Congress to curb offshoring of jobs. Racism and verbal assault against call-centre employees was rampant. BPOs faced pricing pressure and fewer new deals or contract renewals. Vendors dependent on single or few clients faced risks on being able to continue the business.

BPO vendors quickly responded to this scenario by increasing the depth of their offerings. They focused on flexible operations and improved their efficiency. Innovative pricing models were designed in line with global demand. The industry also decided to focus on new verticals and clients which were recession proof. BPO subsidiaries as part of Wipro and Infosys reported decent performances. Overall revenues increased by 6% in FY10, as per NASSCOM, a reasonable growth in a bad year.

No more plain vanilla offerings
This industry has now moved out of its initial days and is now in a rapid growth phase. From plain vanilla voice based offerings, it now provides offerings of different maturity levels. Several new upcoming areas such as procurement services, healthcare outsourcing, and knowledge services have been introduced. Knowledge Process Outsourcing (KPOs) offers services such as research and analytics, legal process outsourcing, financial research and data management is expected to aid growth of the overall industry in the future.

These specialised services are difficult to duplicate in other countries such as Sri Lanka, Pakistan, Bangladesh and the Philippines We expect India to continue to be a leader, especially in the KPO space . This is due to its large professional base, superior skill sets and English language proficiency.

India's KPO market is forecast to grow by 25-30% annually till 2013, according to the global research firm Gartner. This market space is estimated to be worth US$ 50-70 m at present.

Growth fueled by surprising elements
Rural BPO presence: Tier-2 cities have now become the hub of IT industry and software development. From only being present in large metros, the BPO industry is today present in over 50 cities and towns. Karnataka has been a pioneering state in a new phenomenon of Rural BPOs. India's first rural BPO was set up in a tiny nondescript village, about 150 km from India's IT hub Bangalore. The BPO called Mpro Solutions really shows how IT can change the rural economy. Jobs, money and education is now provided locally thus greatly improving the village youth's prospects. This also prevents them from migrating to urban cities and increasing pressure on the already scarce city resources. About 60% of BPO employees in the cities currently come from small towns and villages, according to NASSCOM.

Domestic offerings: The domestic BPO market is a high-growth segment and is estimated to grow 19% through 2013, according to Gartner. It estimates that this market would grow into a US$ 1.2-bn market by 2011. This will reach US$ 1.8 bn by 2013. Many Indian providers and some multi-nationals have now shifted focus to the domestic market. This was mainly due to global economic uncertainty post the economic crisis.

US expansion: Indian BPOs are now planning to expand operations in the low cost US locations. This is following a fall in the prices of real estate and labour. A rise in anti-outsourcing sentiments also caused this shift. The aim for this surprising move is to court fresh orders and win projects in highly regulated sectors such as healthcare, government etc. Recently Patni acquired a BPO delivery centre in Texas, post a deal with a healthcare insurance provider. The Hinduja Group is also currently looking to acquire BPO units in the UK and the US as part of its plan to deploy idle cash.

According to NASSCOM, India's BPO business is expected to post a growth of 15-16% in FY11. This is due to growing demands from overseas clients and greater domestic demand. We are positive on the prospects of this industry, especially with the innovative endeavors they have taken for growth.

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