How Some BPO Providers Seek To Build and Protect Their TurfPublished: January 14, 2005 in Knowledge@Wharton
As the business process outsourcing (BPO) industry evolves, the bigger providers and niche operators are repositioning their organizations to stand apart from the traditional purveyors of plain-vanilla call center facilities. With distinctive branding, these companies hope to secure higher-value assignments as more and more services get commoditized, while also raising barriers to competition.
Impatient to wait for organic growth, some of these companies prefer mergers and acquisitions to take them to the next level. India occupies center stage for the industry, at least for now, mainly because of the availability of skilled talent in large numbers and at relatively low wages. In this article, Knowledge@Wharton examines the approach that three companies active in the BPO business have taken to build and protect their turf. The companies are: WNS Global Services based in Mumbai, India; Office Tiger, based in New York City, and Chennai, India; and Equinox of Irvine, Calif.
WNS Global Services: WNS claims to be the biggest of the Indian outsourcing companies with revenues of $103 million in 2003-04, which represents a growth of 84% over that of the previous year. That is expected to grow this year to between $150 million and $160 million, according to the company's CEO Neeraj Bhargava. Last year, WNS acquired ClaimsBPO, a health care services firm that was a division of Green Snow of Burlingame, Calif.
The eight-year-old WNS started out as a captive arm of British Airways to provide a range of airline travel and transportation services such as reservations, cargo support and customer service. It has since become a third party services provider after British Airways two years ago divested 60% of the ownership to investment firm Warburg Pincus, retaining a 20% stake; the remaining 10% is held by the company's management. It has since expanded its range of offerings to include insurance services such as policy and claims processing, and the telecommunications industry.
WNS has also bolstered its work force considerably over the past year. It now has 5,000 employees spread across Mumbai, Pune and Nashik in India; London and Ispwich in the U.K. and New York City. That came about with the increase in employees in Pune to 2,000 and in Nashik to 500 this year.
With ClaimsBPO in its fold, WNS has been able to enter the health care industry, offering services such as finance and accounting, claims processing and adjudicating services, customer relationship management and data analytics. The value of the integration and outsourcing market for the health care industry worldwide is estimated at about $31 billion by IDC of Framingham, Mass., the leading market intelligence firm tracking telecommunications and information technology trends. WNS today boasts some 20 big-name clients, including British Airways, KLM, Glaxo and Royal Sun Alliance.
Office Tiger: Office Tiger has of late shown a big appetite for acquisitions. Joseph Sigelman, Office Tiger's co-CEO, declined to identify the company now being acquired, except to indicate that it is active in the area of technology services. "We have not brought technology into our operations the way we should, and we are looking to address that through our acquisition," he says. The company is just fresh from another acquisition in October 2004, when it bought the Devonshire Group in London, a prominent provider of outsourced creative, document and staffing services with clients in the U.K. and elsewhere in Europe.
Office Tiger was founded six years ago by two former Wall Street investment bankers -- Sigelman and his Princeton University classmate Randy Altschuler, who is also co-CEO. The company started out by providing outsourced desktop publishing services, and rapidly moved up the value chain to provide a range of what Sigelman calls "judgment dependent" services. It now provides research and analytics for investment banks, pre-press work for financial publishing such as annual reports and mutual fund prospectuses, claims adjudication, litigation support and accounting services. Its long term contracted clients include eight of the top 12 investment banks, the Big Four accounting firms and several Fortune 500 companies.
Office Tiger's main center of operations is in the southern Indian city of Chennai (formerly Madras), where it employs some 2,000 of its nearly 3,000-strong work force. Sigelman declined to reveal the Office Tiger's annual revenues, but a published report last March put them at more than $35 million. Office Tiger has since grown significantly. What's more, the acquisition of the technology services firm will pitchfork its combined revenue number to brush shoulders with the industry's largest players.
Equinox: M&A also is the flavor of the season at Equinox. The 18-month-old company is a spin-off from Nexgenix, a systems integration company based in Irvine, Calif. with expertise in the financial services industry. In November, Equinox was acquired by i-flex, one of India's largest software product companies. The company's best known product is FLEXCUBE, which has emerged as the world's leading software product for the banking industry. Its customer base covers more than 200 financial institutions with a global footprint across 80 countries. Based in Mumbai, i-flex has offices in 22 locations worldwide, including New York, New Jersey, London, Amsterdam, Singapore and Tokyo. The company had revenues of $185 million in its last fiscal year ending March 2004; its current revenue run rate is $250 million for the current year.
Equinox has created a niche for itself by providing services to mostly U.S.-based lenders in the real estate mortgage finance industry, auto finance and credit cards, among others. Employing its proprietary products, Equinox helps its clients in customer retention and enhances the efficacy of marketing dollars spent on acquiring new customers. It also provides services across the mortgage finance value chain, including processing loan applications. The company has about 500 employees, most of whom are based in Gurgaon, near New Delhi in northern India. Don Ganguly, the company's CEO, says Equinox currently operates at a revenue run rate of between $5 million and $10 million.
Equinox was bought for an undisclosed amount by i-flex from The Chatterjee Group, a private equity fund with operations in 15 locations spread across the U.S., India, London, Singapore and Muscat. R. Ravisankar, CEO of i-flex's international operations based in New York City, says the Equinox acquisition fits well with his company's growth strategy. Primarily, it gives i-flex a much-needed base in the outsourcing industry; it had so far cautiously skirted the idea of jumping into the BPO fray.
Ravisankar finds comfort in the fact that both i-flex and Equinox are focused on the financial services industry, and immediately sees opportunities to cross-sell their offerings. "Many of our customers say, 'We're very happy with your software product and development, but what is your strategy in the BPO area?'" Apart from equipping his company to respond to such questions, Ravisankar finds other attractive attributes in Equinox. "We wanted to get into areas which (a) cannot be easily commoditized, and (b) require significant amounts of domain expertise," he says. "In Equinox, we found a remarkable synergy between that approach and their capabilities. They are sharply focused on the mortgage lending industry."
Metrics at Office Tiger
Companies like WNS, Office Tiger and Equinox are securing and growing their market presence with not just acquisitions of other companies that bring on board new sets of expertise. They are also developing new performance yardsticks. Ravi Aron, professor of operations and information management at Wharton, has been studying these companies to understand how globalization of the services is evolving.
Aron and his students at Wharton have looked into Office Tiger's performance relative to other companies in its peer group. Their studies so far reveal that Office Tiger has been able to build major barriers to competition, with the quality and customization of its services. "Office Tiger has been able to achieve the effectiveness of an army supply operation, with a level of customization that is required of an operating room surgeon," says Aron. The former, he explains, is about massive scale and timeliness, while the latter is about attention to detail and precision. "The reason why Office Tiger is not going to be easy to compete with is they are making the twain meet," he adds.
Aron says Office Tiger has developed a "program office" for the delivery of higher-end services to its clients. "A program office is a hybrid between corporations doing work in-house and going to the market to outsource those services," explains Aron. "Work in-house is done by managerial authority, but work outside is done by price and contract. These two have never really been bridged until recently with the development of technology." He says Office Tiger has been able to create such program offices that work very closely with the client, where the former's employees become almost like the client's staff.
Aron and his students have developed some metrics to rank Office Tiger versus its peer group. The annual increase in revenue per employee reveals the extent of productivity growth. Aron says many companies in the industry's lower rungs score revenue per employee growth of between 2.5% and 9% annually, while those higher up the ladder score in the 9%-18% range. "Office Tiger will easily be in excess of this," says Aron.
Another measure is the annual revenue per full-time equivalent employee (FTE) for the "execution staff" in a company. Here, Aron deliberately filters out the company's "support staff." That distinction is significant in the outsourcing industry as the relatively low wages in offshore locations tempt service providers to disproportionately bloat their support staff. Aron says that as high-end services demand increasing amounts of complexity and customization for customers, the average revenue per FTE should be at least $16,000 annually for an outsourcing company to be viable. He says Office Tiger's revenue per FTE "is well in excess of that" without revealing specifics.
Aron's next measure to identify companies evolving to increasingly higher levels of efficiency is the ratio of support staff to execution staff. He says that while many companies have ratios of 1.2:1 (support staff to execution staff), it gets to healthy territory in the ranges of 0.4 or 0.33. In other words, that would mean five or six staffers responsible for executing projects would need no more than one or two support staff. Aron says Office Tiger's performance on this score is a lot better than that of others. "It's doing better than companies four times its size."
Aron also looks at the labor input and technology input in servicing each client -- referred to also as the "capital substitutability of labor." Put differently, this measures a company's efficiency by the extent to which it is able to maximize its technology investments (read capital) and correspondingly reduce the role of labor in delivering its services. Here again, Office Tiger scores high. "I haven't seen a company that comes within 30% of Office Tiger's capital utilization in high-end accounts," says Aron.
The next yardstick sizes up the extent of "lock-in" or "switching" cost that a service provider has created with clients that limits the ability of rivals to make competing bids for the same business. Aron says it measures the extent of customization of the delivery to clients. He refines it further with an econometric measure called "revenue distance." With this, he attempts to size up the gap between the value created for a client and the amount that is "captured" by the revenue collected from that client. The shorter that revenue distance, the better is a company's performance. Of the 14 prominent companies Aron has scored on this measure, Office Tiger ranks among the top three.
Finally, Aron measures the extent to which a service provider has increased its "lock-in" with a client, thereby reducing price competition. He calls that the "firm-level expansion of scope and specialization." Here, a service provider attempts to provide more and more services to each of its clients, and also render them with increasing specialization. Sigelman says Office Tiger has been able to score high marks here. "When we look at our projected growth, we look at how much comes from existing customers," he says. "And it's a lot." However, he cautions against using growth in business from existing customers as a crutch to not continue to bring new business.
Office Tiger, to be sure, is not impregnable, and Aron has drawn up his list of watchwords for the company. He says that to be able to maintain service quality while continuing to increase scale, the company must find larger pools of middle and senior level managers. Sigelman is acutely aware of that and says it's a challenge in a business where people are the biggest assets and the structure of the work is inherently creative. "Judgment-dependent services are run by people who are always fickle," he says. "And you are trying to provide the McDonald's level of standardization among them. I think we've done a very good job of achieving that, but there is always more work to be done."
That brings Aron to the problem of labor attrition that has plagued many outsourced service providers, especially of the call center variety. He says the annual attrition rate at call centers is as high as 55% in Bombay (Mumbai) and Bangalore. Sigelman is in comfortable territory here. "We have been operating at an attrition rate of between 10% and 14% in the past few months, which is really equivalent to a structural zero," he says. "You are always going to have people who get married and go off to different cities."
Sigelman gets expansive on the attrition problem, pointing out that many companies in the IT-enabled services space have grown rapidly in recent years. "A lot of firms are unprepared to deal with this meteoric growth," he says. He says part of the solution is to have the foresight to invest in management teams that can grow faster than the production staff. "A lot of the businesses that are losing people are doing so simply because their managers are too thinly staffed. They are always fighting fires rather than doing proactive work."
Sigelman also agrees that as more and more outsourced services get commoditized and lower rung players enter the fray, his company would have to continually find room to expand at the higher-end to maintain or increase its premium billing rates. He feels that while common wisdom may suggest that premium service providers are chasing to the top of the pyramid, it may be the wrong way to size up opportunities. "I actually believe that in some senses the pyramid is inverted," he says. "As you become better qualified through taking on services that require not just muscle but also some portion of the brain, the opportunities themselves expand." Here, he says that with research and development into its offerings, Office Tiger is able to "define not just the way the present services are outsourced, but actually the very services themselves."
Amid all this, Sigelman has also launched internal initiatives to systematically track internal processes with Six Sigma processes. One such is Tiger Track, which is a work flow tracking system. "The idea is to audit who did what, when and for long and for how much," says Sigelman. A Six Sigma black belt who recently joined the company is also tracking costs such as the usage of printer paper.
WNS and Its Challenges
WNS is in a completely different market than those Office Tiger caters to, but it nevertheless has to grapple with warding off competition and maximizing its strengths. Arjun Sethi, a principal at management consulting firm A. T. Kearney who is based in New Delhi, says WNS has carved out an attractive niche for itself in servicing the airline and health care industries. He says the competition is relatively moderate, as is the availability of skills for such work.
Sethi, who heads his firm's technology and transformation practice in India, says the big opportunity for WNS now is to focus on growth within the health care industry. "WNS is now looking at knowledge services in bioinformatics, which encompasses clinical trials and database administration," he says. Sethi adds that this domain expertise can easily expand into market research, portfolio analysis, company research and the like. "Their management team is impressive, and they are making the right bets and the right moves," he says.
All the same, Sethi sees the challenges facing WNS in the coming years. The biggest of them, he says, is for the management team to continue its focus and growth. Another challenge for WNS is to be able retain its identity, especially when large multinational players such as IBM have entered the Indian market with an acquisitive eye.
Even as WNS may be relatively insulated by its market niche from the commoditization of outsourced services, Sethi sees pressure on margins developing on other fronts. The weakened dollar vis-a-vis the Indian rupee is a threat faced by all service providers with operations in India and U.S. clients.
The much smaller Equinox has built a reasonably high degree of protection against competition with its product platform-based services - the software and analytics it employs to help mortgage financiers retain and grow their customer base. "In the mortgage and refinancing market, there is very, very poor predictability in conversion of potential prospects to customers," says Aron, who has studied Equinox. He says that when Equinox's clients are able to increase the "predictive accuracy" of how many potential customers could become actual customers, there is a dramatic fall in marketing costs per customer. He says Equinox has been able to achieve increases of up to 45% in such predictive accuracy for its clients.
Steve Kropper, senior vice president of Equinox, explains how his company's product works against the backdrop of the mortgage finance industry's peculiarities. "The structure of the mortgage finance industry is that the companies mine very little business from their existing portfolio," he says, adding that U.S. real estate mortgage financiers lose an average of 12% of their customer base each year. This is because existing customers who move on to new homes go mortgage-shopping and sign up with other financiers.
"We've developed technology that can engage and interact with the entire portfolio of a client, with the result of identifying loans that are at risk and where finite marketing dollars should be focused," says Kropper. He explains that while it would be expensive for a lender to market to its entire portfolio, Equinox is able to refine that to a subset of the portfolio which could potentially be lost to competitors.
Equinox uses an online and offline relationship building product with analytics capabilities, where it engages a borrower for a period of time through emails and calls initially from its offshore locations and finally from the loan officers at its client companies. "It's a combination of email marketing, incubation and a set of baits such as monthly updates on home price data that is relevant to each customer," says Ganguly, Equinox's CEO. He says most of the wealth of an average American is in the form of his or her home. Therefore, information on the changing value of their homes is valuable to them, he reckons.
As customers access such data from Equinox's website, they reveal themselves in ways that become fodder for marketing. "We observe your behavior as you navigate through our field of real estate information," says Kropper. "You reveal your urgency (to refinance or buy a new home), you reveal the kind of financial product you want and also which segment you fall in -- a first-timer or a move-up buyer." Kropper says this process is much more efficient than responses to questionnaires. "You can ask people those questions, but in the real estate business, people's hopes and dreams get confused with their real plans. It is better to observe behavior," he says.
And so, with products called SmartAcquisition and StopRunoff among others, Equinox has been able to increase marketing efficiency for its clients. Says Kropper: "Our experience has been that by the time the program gets to the 18th month, we have been able to move retention levels pretty consistently from less than 3% to more than 9% - a near tripling."
Aron says that while Equinox seems to have a formidable offering, it may face situations where its clients want to license the product and put it to work in-house. Ganguly and Kropper say that is an unlikely eventuality, simply because their analytics get continually refined with each customer experience, and clients cannot afford to lose out on that. "What the lender gets from us is this aggregate experience and knowledge that we use to continually enhance our product," Ganguly notes. Adds Kropper: "No one lender would have sufficient quick stream and transaction information to evaluate whether a user of this service was a hot prospect or not."
In fact, it was precisely the complex nature of Equinox's products that drew i-flex as an investor. Says Ravisankar of i-flex, "They have the ability to bill not just on a cost-plus basis but provide real business value, and bill the customer on the actual business value realized."