BPO Providers Are Moving Up the Value ChainPublished: September 24, 2003 in Knowledge@Wharton
The concept of business process outsourcing (BPO) typically conjures up images of inexpensively hired college graduates dialing away at call centers in India, Singapore or the Philippines. It suggests software engineers rewriting arcane code in a technology park office in Bangalore, Beijing or some other in the developing world for a fraction of the salary that their U.S. counterparts might earn for similar work.
That picture is now changing, as providers of BPO services move beyond call-centers and routine data-crunching tasks toward higher-end services. Among this emerging group of BPO firms is Evalueserve, which is headquartered in Bermuda and has its main operational center in Gurgaon, some 10 miles outside New Delhi, India’s capital. It also has a U.S. subsidiary based in New York and a marketing office in Austria to cover the European market.
Alok Aggarwal, Evalueserve’s co-founder and chairman, who is based in Chappaqua, N.Y., says his company supplies a range of value-added services to clients that include a dozen Fortune 500 companies and seven global consulting firms, besides market research and venture capital firms. Much of its work involves dealing with CEOs, CFOs, CTOs, CIOs, and other so-called C-level executives.
Evalueserve provides services like patent writing, evaluation and assessment of their commercialization potential for law firms and entrepreneurs. Its market research services are aimed at top-rung financial services firms, to which it provides analysis of investment opportunities and business plans. Another major offering is multilingual services -- Evalueserve trains and qualifies employees to communicate in Chinese, Spanish, German, Japanese and Italian, among other languages. That skill set has opened market opportunities in Europe and elsewhere, especially with global corporations.
Experts say these new trends are significant, and they will continue to grow over time. “Activities considered for offshoring have moved up the value chain and begun to touch core functions, such as highly analytical processes,” says Stefan Spohr, a principal in the financial institutions group of A. T. Kearney, a global management consulting firm in Chicago. “More complex customer services are substituting simple data processing and call center activities.” Spohr adds that the higher-end functions being performed offshore these days include information research, financial portfolio analysis, customer data mining, statutory reporting and inbound insurance sales, among others.
A closer look at Evalueserve shows how the company established its presence in this growing market. Before setting up Evalueserve in December 2000, Aggarwal was director of emerging business opportunities for IBM Research worldwide. Before that, he was the founder/director of IBM’s India Research Laboratory in New Delhi. With 10 patents to his credit, he also taught at the Massachusetts Institute of Technology between 1987 and 1979 while on a sabbatical from IBM. Evalueserve has 175 professionals on its staff, a third of whom are graduates of the Indian Institutes of Technology and the Indian Institutes of Management, each with “potential GMAT scores of between 680 and 720,” says Aggarwal.
Aggarwal co-founded Evalueserve with Marc Vollenweider, its CEO. They decided to go into business together after meeting each other in early 2000 at the American Embassy School in New Delhi where their children studied. Vollenweider was at the time a principal at McKinsey & Co., overseeing the global consulting firm’s Knowledge Center in New Delhi. He holds an MBA from INSEAD and a master’s degree in telecommunications from the Swiss Federal Institute of Technology in Zurich. As CEO, he also oversees Evalueserve’s European operations out of Zurich, Switzerland and Paternion, Austria.
While Aggarwal declines to disclose Evalueserve’s revenues or name any of its 80 clients, he offers a few examples of the kind of projects his firm has begun to tackle. These include:
• Evaluating the commercial prospects of inventions in Russia and China. Evalueserve’s client, which specializes in extraction of intellectual property from Russia and China, was hired by the U.S. Commerce Department to analyze such inventions with the objective of keeping such technology out of the “wrong” hands.
• Research for a hedge fund’s database, tracking financial statements of 2,300 companies. This is soon expected to grow to 6,000 companies.
• Research and analysis of value-chain segments and industry developments for a market research firm specializing in information technology and telecommunications.
• Market forecast studies for an OTC drug worldwide for a research firm.
Cutting costs is not the only reason why outsourcing such tasks makes sense for its clients; it’s also about higher quality of work, says Aggarwal. “Among the more unusual emerging developments is that business process offshoring is not merely a way to reduce cost by migrating core functions,” adds Spohr of A.T. Kearney. “It is also a strategic initiative to take advantage of technological advances and the human capital available offshore to fundamentally restructure an organization’s operating model.”
Evalueserve’s model works on a mixed platform where anywhere between 50% and 80% of the work is handled out of an Indian facility, while the rest is done at the client’s location. For example, a patent filing assignment from a U.S. corporation may involve the Indian staff writing the patent in English or say, Japanese, and evaluating its commercial potential. But the client or its law firm would do the actual filing in the U.S.
ICICI Infotech Services in Edison, N.J., is another BPO services provider that is moving towards higher value offerings such as marketing software products and diversifying into markets outside the U.S. The firm has been promoted by the $2-billion ICICI Bank, a large financial institution in Mumbai, India, that is listed on the New York Stock Exchange.
In its first year after setting up shop in March 1999, ICICI Infotech spent $33 million acquiring two information technology services firms in New Jersey—Object Experts and Ivory Consulting—and Command Systems in Connecticut. These acquisitions were to help ICICI Infotech hit the ground running in the U.S. with a ready book of contracts. But it soon found U.S. companies increasingly outsourcing their requirements to offshore locations, instead of hiring foreign employees to work onsite at their offices. “The companies we acquired had onsite customers; today, they all want to go offshore,” says V. Srinivasan, ICICI Infotech’s managing director and CEO.
That reality forced Srinivasan to look for alternative modes of growth. The company has started marketing its products in banking, insurance and enterprise resource planning, among others. It has earmarked $10 million for its next U.S. market offensive, which would go towards R&D and back-end infrastructure support, and creating new versions of its products to comply with U.S. market requirements. It also has a joint venture — Semantik Solutions GmbH in Berlin, Germany — with the Fraunhofer Institute for Software and Systems Engineering, which is based in Berlin and Dortmund, Germany. Fraunhofer is a leading institute in applied research and development with 200 experts in software engineering and evolutionary information.
A relatively late entrant to the U.S. market, ICICI Infotech started out with plain vanilla IT services, including operating call centers. As the market for traditional IT services started weakening around mid-2000, ICICI Infotech repositioned itself as a "solutions" firm offering both products and services. Today,.it offers bundled packages of products and services in corporate and retail banking and insurance, among other areas. The new offerings include data center and disaster recovery management and value chain management services.
ICICI Infotech’s expansion into new overseas markets has paid off. Its $50 million revenue for its latest financial year ending March 2003 had the U.S. operations generating some $15 million, while the Middle East and Far East markets brought in another $9 million. It now boasts more than 700 customers in 30 countries, including Dow Jones, GlaxoSmithKline, Panasonic and American Insurance Group.
As BPO service providers move up the value chain, they occasionally have to deal with prospective clients who overstate the cost arbitrage factor and don’t realize that offshoring has moved beyond that. “Some people think Indian engineers earn 1/20th or 1/30th of their U.S. counterparts,” says Aggarwal, “and that is just not the case.” He says a top notch engineering graduate with an MBA would start out in India at between $14,000 and $22,000 a year (Rs. 600,000 to Rs. 1,000,000), while a U.S. student graduating from a top management school would earn about $90,000 to $100,000 a year. The wage cost in India, Aggarwal points out, is just about a fifth or sixth of U.S. levels.
On most other fronts, though, costs are comparable between the two countries, says Aggarwal. The cost of real estate in Silicon Valley is almost the same as what his firm pays in Gurgaon. In Mumbai real estate is even more expensive. What’s more, he doesn’t see any appreciable difference in telecommunications costs in India and the U.S. Costs of electricity, hardware, etc., are also high in India. “Salaries represent only 50% of the total costs,” says Aggarwal. “When you add the other expenses, Indian operations would cost about a third of what they would in the U.S.”
All this may -- or may not -- help calm concerns in the U.S. over good service sector jobs that seem to be migrating overseas at a time when American jobs are disappearing in a slow economy. “Given the sensitivity of migrating business processes to offshore locations in the recently unfavorable economic environment, there is potential for a backlash in the short run,” says Spohr. “However, moving jobs across national boundaries is not a new development but a natural part of the long-term trend for globalization.” Spohr believes that the debate about outsourcing will act as a temporary drag. “Naturally, most companies prefer not to be in the crossfire of the media discussion of this topic, but they will ultimately make a convincing case that these shifts in their global operating model are required to stay competitive and preserve as well as grow jobs in other areas,” he says.
Business process offshoring has gone from a specialist capability employed by a few leading business organizations to a mainstream model for many companies, according to Spohr. “The question is not so much whether or not to do it, but when and how,” he says. And in this market, he finds India having established “a widely recognized leadership position…capturing 70%-80% of the market share.”
Indian BPO service providers, however, cannot afford to be complacent. Spohr says the Philippines, Mexico and Hungary “are beginning to become better known as offshore locations.” Aggarwal sees competition also emerging from Russia, although the one big negative there is finding workers who are fluent in English. But the dark horse could be South Africa. “They do speak English in South Africa and have a Commonwealth law system, which helps,” says Aggarwal. “They could be a very strong contender.”
Competing with China?
While many market watchers point to China as the likely big threat to the Indian BPO industry, Aggarwal doesn’t believe that is likely. He says China has a large domestic manufacturing industry that would need information technology services; in other words, they wouldn’t have too many to spare for offshoring. In fact, Aggarwal sees a market opportunity for India to invest in educating the Chinese in information technology. That could then open doors to the Japanese market, since the two languages use a common script.
Other frontiers, too, beckon. Aggarwal sees a few new markets opening up. Patent writing and evaluation services are markets set to boom, he says. Some 300,000 patent applications are written in the western world annually, making for a market size of between $5 billion and $7 billion, he reckons. Outsourcing patent writing services could significantly lower the cost of each patent application —now anywhere between $12,000 and $15,000 apiece — which would help expand the market. “There are so many small startups that don’t want to file their patents,” says Aggarwal. “If costs came down to $4,000 or $5,000, they might consider doing so.”
Offshoring of equity research is another major growth area, according to Aggarwal. Translation services are also becoming a big Indian plus. Aggarwal notes that India produces some 3,000 graduates in German each year, which is more than that in Switzerland.
But what excites him most is the way that some companies use the Internet to outsource research globally. For example, take InnoCentive, an e-business firm in Andover, Mass., launched by Eli Lilly and Company in 2001. InnoCentive is a web-based community that brings R&D challenges to the world’s leading scientists -- some 25,000 of them. Companies anonymously post problems -- such as finding a new way to find nitrogen protection for an amino acid -- and the scientists compete to find solutions. Scientists who figure out solutions to these problems get cash awards ranging from $5,000 to $100,000, though they relinquish intellectual property rights to their discovery. “I look at InnoCentive as the ultimate conference, since I come from a research background,” says Aggarwal.
That model may be some distance away for BPO service providers, but they can take comfort in the fact that their existing model is hardy enough to last at least another five to seven years, says Spohr. BPO labor costs have been rising 10% to 15% a year in recent years, but A. T. Kearney has identified several factors that will continue to hold up the Indian advantage.
The expansion of the labor force by more than 2 million new English-speaking college graduates each year will provide plenty of room for growth. Also, he says the labor arbitrage between India and the U.S. is so significant that it will take a long time for it to catch up. What’s more, any rise in wage costs is getting offset by declining telecommunication rates (some 30% over the last couple of years), thanks to improvements in infrastructure and technology, he points out. So at least for now, BPO providers seem to have the best of all worlds.