"BPO and IT industry can change the face of India" - Views on News from Equitymaster

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  • Jul 20, 2004 - "BPO and IT industry can change the face of India"

"BPO and IT industry can change the face of India"

Jul 20, 2004

Mr. Akshaya Bhargava is the Managing Director and Chief Executive Officer at Progeon, the BPO subsidiary of Infosys Technologies. He has over 22 years of global experience with Citibank N.A. and led the establishment of Citibank's captive outsourcing operations in India. He was till recently Global Product Manager for the Emerging Local Corporate Business of Citibank in Emerging Markets, and Chairman and Country Manager for Citibank A.S., Czech Republic. Mr. Bhargava is a graduate in Economics from Ferguson College, Pune and has an MBA from the Indian Institute of Management, Calcutta. In an interview with equitymaster, Mr. Bhargava discussed the current state of the Indian BPO industry and the challenges it faces in its growth going forward.

Eqtm: What synergies does Progeon bring in to Infosys' long-term objective of becoming an end-to-end service provider? What else needs to be done to fulfill this objective from Progeon's side?

Mr. Bhargava : Well, the synergies are obvious. What we have found is that in the last twelve months, demand has been for combined bids on IT and BPO. They are still not commonplace but we have been getting more and more instances of customers coming in and asking for a combined solution. We, between Infosys and Progeon, have recently won a deal to deliver certain reengineering benefits over a five-year period. These reengineering benefits will in part come from process improvement and in part from technology. So that is one example. The other example is that one of the top ten banks in America has chosen Infosys and Progeon as a common supplier of IT and BPO services. So, we are beginning to see that the synergy is something that is being demanded by customers.

Coming to the second part of the question as to what Progeon should do to fulfill this objective, if you look at Infosys, it is a billion dollar company. Then, Progeon did US$ 17 m in revenues last year. So, the relative sizes are very different. And in order to build a combined proposition, the difference in relative sizes must become narrower. So, I think that is what we need to do in order to improve and deliver this synergy to grow fast and catch up with our parent company.

Eqtm: With regard to the BPO industry, how do the supply and demand side dynamics work?

Mr. Bhargava : Let me talk about demand first. I do not think that there is a problem on the demand side. There is enough demand. It expresses itself in a variety of ways. Some of the very large companies would prefer to do a captive unit in India. And we have seen a lot of that. Out of the US$ 3.7 bn of revenues that the Indian BPO industry has reported, around US$ 1.3 bn is captive. Another US$ 1.3 is what I call secondary captive - captive units to third party BPO companies like Accenture, Convergys, IBM and Xansa. They are actually third party but the Indian unit is simply captive.

The remaining around US$ 1 bn is the genuine third party BPO business in India. Of this, the top 20 companies account for 68% or so. So, it is still a very small industry. And therefore on the supply side, everybody is sub-scale. The largest company reported revenues of US$ 63 m last year. So, in the international context, they mean nothing. So, my opinion on the supply side is that scale is really important. Also, specialization is very important. Right now, the tendency is that most companies do whatever work comes their way. I do not think that is the right approach. So, they need to state very clearly what they want to do and what they do not want to do.

In our case, we had said very early on that we would not be a call-centre. And our voice revenue ratio has remained consistently below 20%. It fluctuates between 15% and 19%. We have stuck to that and have turned away some deals and have not bid for large voice deals where we did not see any leverage or other connection. I do not see enough people doing that. People just want to get scale at any cost. It is important, but scale at any cost is dangerous.

Eqtm: And what about barriers to entry and bargaining power of suppliers and customers? What about competition?

Mr. Bhargava : This is really a business of significant investment, balance sheet strength, especially when you get into real BPO that is not really the call centre work. So, your balance sheet and financial strength is the barrier to entry. Now, when you have specialization, you have the bargaining power.

We face competition from MNCs. In fact, we face more competition from the MNCs than we face from Indian companies. And when we are bidding for BPO business, more often than not, we see international BPO companies trying to play a bigger role than many other Indian providers. So, clearly that is where most of the competition comes in.

Eqtm: What are India's prospects in regard to the growth in the global BPO industry especially when we are witnessing tough competition from countries like China, the Philippines and Ireland?

Mr. Bhargava : I would disagree that we are seeing competition right now. Ireland is no longer a low-cost location. It is a high quality and multi-lingual location, but costs have gone to a level where I do not think they are comparable to India. The Philippines is within 20%-30% of India but it has very limited offerings. It is a country of 30 million people. While in India the BPO industry is spread across many cities, in the Philippines, it is only in one city that is Manila. So, I do not think that the Philippines has scaling power like India.

There will be niche competition from that country because it provides very high quality call centre efforts. Also, their accents are much closer to America. They have invested in training. So you will find Series 6 and Series 7 certified agents in the Philippines that you will never find in India. So, they are in some ways better than the more qualified in India but they do not just have the numbers. China is not really a threat.

Eqtm: You have talked about our cost advantage over these countries. Now, have we moved ahead from the cost arbitrage advantage to providing clients with business solutions and not merely solution to their IT requirements?

Mr. Bhargava : You cannot get away from the cost advantage because that is the reason that attracts the customer into India. But, we are more and more seeing cases where people take the cost advantage for granted and they are looking for productivity benefits, quality benefits. So, I think that we are not quite there but we have made significant headway.

Eqtm: Could you share with us your vision for Progeon? What kind of a growth trajectory do you see the company taking going forward?

Mr. Bhargava : We have been growing very fast. While numbers are small, in the first year we did US$ 4.3 m in revenues and in the second year we did US$ 17.3 m. So, we have grown by more than 300%. This quarter we reported US$ 7.2 m in revenues, up from US$ 5.7 m in the previous quarter. So, quarter on quarter we are growing 20%-30%. I am quite satisfied with that growth rate. I think that is happening.

Now, if you ask me about my vision for Progeon, it is really not a call centre. Rather it is an end-to-end processing company. In the end-to-end business, the ramp up is very slow. It could easily take one customer around 12-15 months to fully ramp up. Now, given that it takes him 15 months to ramp up, if he ever wants to leave, it will take him 15 months to leave. So, the barriers to exit for the customer are very high. So, it is a very stable business. From year to year, when you come to work on January 1, you do not start the revenue clock at zero. You start with a base and you keep adding to it. So, I think Progeon is a very strong and a very stable business. For instance, all our contracts are long-term of around 3-5 years. We do not have short-term contracts. We do not do that kind of a business.

I think we have very clearly stated what is it that we want to be. I just see us getting bigger and better. I think the next phase for Progeon is to start bidding for larger value contracts where it requires some onsite presence and a combination of IT and BPO. That is what we are working towards.

Eqtm: In light of the backlash against outsourcing in the US and UK, what are your customers saying now? Is this a medium term concern or it might stretch to the long-term as well?

Mr. Bhargava : I think there are two levels of backlash. One is the political scenario, and I think that is a short-term issue. When elections in the US are over, I think this will begin to subside. Already you can see John Kerry making conciliatory statements on outsourcing. Anyway, it is coming down because US job growth is happening and in the last two months, the US has added a million jobs. So, some of those concerns are beginning to abate.

Now, the other side of outsourcing backlash is really the disruption it causes inside the customer organisation. That is a very large change management exercise and that is going to stay. It is not a concern but something that we have to deal with.

Eqtm: What are the personalities and books that have influenced you the most?

Mr. Bhargava : I have had a number of role models in my years in Citibank. My seniors and people I have worked with who taught me enormously. And I think that comes with any large company that you work with.

There is a recent book that I read, which I think is very thought provoking and very insightful. It is “Being Indian” by Pawan Verma. I will very strongly recommend it. It is really insightful on the whole Indian psyche and what is happening right now, and in many ways it has tremendous reference to the BPO industry because I think the BPO and IT industry in 10 years can change the face of India.

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