After the Rebound: How Can Indian BPO Differentiate Itself?Published: September 09, 2010 in India Knowledge@Wharton
Mani Subramaniam, the Indianapolis-based head of business advisory services at Indian IT firm Wipro Technologies, recently had a brush with technology penetration in Bangalore. A police officer had pulled over his driver for running a traffic light. Subramaniam expected his driver to settle the infraction with a discreet currency note. Instead, the officer took out a Blackberry device, checked the driver's violation records and chided him for the third traffic transgression in three months. A ticket was in order, the officer decided.
Subramaniam shared this experience at a panel discussion titled, "Aegis Presents Outsourcing & Technology: Global Integration," at the Wharton India Economic Forum in Philadelphia earlier this year. India's IT revolution is increasingly penetrating newer areas of its economy across government services, health care and education, he and his fellow panelists noted.
India's business process outsourcing (BPO) companies have rebounded from the global economic downturn with a growing domestic market, increased Wall Street pressure on U.S. companies to cut costs by offshoring non-core activities, and new opportunities in health care and other industries, the panelists said. But they also face new rivals in other emerging economies like Egypt and Sri Lanka, a thinning wage-arbitrage advantage and pressures within the U.S. against offshoring. Their next challenge is to find new business and pricing models and offer higher value-added services.
A Rubber-band Rebound
"Where are we headed?" asked P.K. Agarwal, chief technology officer of the State of California, and the panel's moderator, referring to the Indian outsourcing industry's current trajectory. The industry has recovered from the global economic recession in a "rubber-band effect," responded Monty Singh, senior vice president of GE spinoff Genpact, India's largest BPO firm (US$1.12 billion in 2009 revenues).
"India and China are rocking, the global markets are stabilizing and pipelines [at Indian BPO companies] are 40% to 50% bigger than last year, but not back to 2008 levels yet," Singh said. While the IT industry in the U.S. has matured, BPO services are in a nascent stage with relatively low penetration and that gives "a lot of runway" to Indian BPO companies, he explained.
The slowdown is putting pressure on global majors to outsource more, said B.L. Bajaj, managing director of Dynamic Orbits, an M&A advisory services firm. "The Street [Wall Street analysts] is putting tremendous pressure on CFOs to deliver," added Subramaniam. CFOs have started questioning "the premise that was held so dear for so long that some of the IT assets are family jewels" and are asking if they should "get rid of them," he said. Subramaniam also pointed out that the Indian outsourcing industry currently has only an 8% share of the global market and said "The headroom is tremendous." Another panelist estimated the global outsourcing industry at between $350 billion and $500 billion annually.
Rethinking Business Models
P. Sridhar Reddy, chairman and managing director of CtrlS Datacenters, a provider of data storage services in Hyderabad was not as enthusiastic. "The slowdown will end very soon and American enterprises will continue to outsource from India, but I see some question marks," he said. The outsourcing industry faces a societal backlash and pressure from the U.S. government in the form of incentives for companies that do not offshore their work, he explained. Wage inflation averaging 15% annually in the past decade has narrowed India's cost advantage from a sixth of U.S. levels to about a third, he added.
The solution for Indian BPO companies is to offer not just cost savings, but focus on quality and customer service as well, said Sudhir Agarwal, president of the Middle East, Africa and Asia Pacific regions at Indian BPO firm Aegis. Further, Indian firms will need to have a global footprint. "We have to move up the value chain, offer end-to-end services and from multiple global locations," he said.
The slowdown has forced the industry's larger players to "rethink their business models," said Deepinder Bedi, executive director of Tulip Telecom, a data telecom services provider based in New Delhi. They have begun to factor in newer technologies such as cloud computing and "software-as-a-service" [where software is offered on the Internet in a pay-as-you-go model], he added.
Several pieces in the outsourcing food chain have become commoditized in recent years, posing fresh challenges for Indian BPO companies, noted Agarwal, the panel's moderator. "Commoditization is actually good," Subramaniam averred. "The major Indian players build a factory model, shave off all inefficiencies and very quickly get to the stage where it becomes highly efficient and highly deliverable. Then, they go on to innovate in other areas," he explained.
Singh noted that although Indian BPO firms began by selling labor arbitrage and efficiencies, branding their offering as "doing more for less," that needs to change. "We have to be paranoid for differentiation, or else we will get marginalized and beaten," he said. He went on to elaborate: "We need to solve the problems of our customers, and face the risk in pricing our products commercially by saying that we will impact their financial outcome. Earlier we would say we could do this with 100 people at this cost. Today we say, 'We will save you $5 million -- give us 10%.' How we do that is not your lookout; we know how to do that."
The India Advantage
The panelists noted that while the Indian BPO industry faces competition from other countries, it gets better scores on the combination of wage levels, education, fluency in English and sheer numbers. The Philippines, they pointed out, is good in English language and has a strong American accent and therefore captures much of the voice-based services, but it is poor in IT skills. China, Russia and Eastern Europe have good IT skills but are not very strong in English. Subramanian said that China is investing in strengthening the English-language skills of its workforce and will catch up with India in 10-15 years, "but its aging population will reduce its ability to supply the market." He pointed out that India has 200 million people who are now 15 years or younger poised to enter its workforce in five years. By then, the working-age population will drop significantly in the U.S., Europe, Japan and China. India, he added, will have an advantage in that it also produces about half a million engineers every year, "although not all of them are employable." Bajaj felt competition from Vietnam is "too small" and that many western companies are not comfortable sourcing high value-added services from China. "So India will still have an advantage," he said.
Panelists also noted that while South America and South Africa have pockets with BPO skills and time-zone advantages, Indian companies are also setting up their own operations there. Bajaj added that several midsized technology services companies in the U.S. and Europe are available for acquisitions at relatively low prices in the current downturn. He felt Indian BPO companies should take advantage of this "and convert this crisis into an opportunity."
Agarwal of Aegis however cautioned that Indian BPO firms have to also focus on retaining their existing strengths. He pointed out that the Indian BPO industry has lost low-end and voice-based businesses to competitors like the Philippines and said: "We have to ensure we don't price ourselves out of markets." He traced the evolution of outsourced voice-based services to stress his point. The industry started in Ireland, which priced itself out to Australia, before India took that market with still lower costs. "Now, it is moving to other countries," he noted. "Why can't we retain that business in India? For once, we should not lose that cost arbitrage."
Lower telecom costs could help, said Reddy. He felt a steady decline in telecommunication infrastructure costs have also allowed new business models to emerge. "We have seen increased interest from the [Persian] Gulf and African countries to outsource their telecom infrastructure from India," he said. "We have also seen some large U.S. and European companies consolidating their existing data centers in Asia Pacific into one large data center in India and save costs."
On Home Turf
Agarwal of Aegis raised an interesting question. Indian BPO companies help the rest of the world reduce costs and increase efficiencies, but are they replicating that within the Indian economy? "India still has a lot of people living on less than two dollars a day. Is all this going to help them?" he asked.
Subramaniam said data shows that every ITES (IT-enabled services) job helps create 3.8 ancillary jobs. "It will not wipe out poverty but it will lessen the disparity." Singh noted that India's largest bank, the State Bank of India, currently reaches only 100,000 of the country's 600,000 villages. IT, he said, could help in bringing about financial inclusion. Singh saw "huge markets" in banking and financial services, and health care, while his fellow panelists listed education, tax collection, postal services and the judiciary. A lot of work is already underway in using IT to drive efficiencies and savings across various sectors, the panelists explained.
Singh, for example, talked of technology helping India's ambitious National Rural Employment Guarantee Scheme, a government program to address unemployment in rural India. The government-run postal department is also modernizing, Singh said, adding that Genpact is involved in that effort. India's telecom revolution has spawned an industry with 550 million cell phones and growing, said Bedi. Rickshaw drivers and vegetable hawkers use cell phones, and new applications have been developed around them, such as helping farmers get the latest prices of their produce, he added.
Bedi also talked of a project his firm Tulip implemented in Malappuram in Kerala to create the world's first wireless district. The data connectivity network has an "always-on" Internet model, and has "e-enabled" education centers, rural online banking, health care centers , Internet telephony and e-governance, he explained. "Elderly people have daily video conferences from our centers with family members working in the Middle East," he added.
In another example, Bedi talked of how IT capabilities enable the Aravind Eye Care System, a chain of eye care hospitals in Tamil Nadu, to conduct eye surgeries at one-hundredth of what it costs in the U.K. Aravind also earns a 40% profit margin before interest, depreciation and taxes, he added. Aravind describes itself as the world's largest provider of eye care services. It sees 1.7 million patients and conducts more than 250,000 surgeries annually.
Reddy of CtrlS said his firm is working with India's taxation department on an automation project to help unearth unaccounted income, or black money. CtrlS is also helping to automate the Indian judiciary and the law enforcement system. All Indian courts will be IT-enabled in two or three years, according to him. The Indian government is also spending about US$2.2 billion on equipping schools with IT laboratories; 20,000 schools have already been covered, Reddy added.Bedi meanwhile pointed out that at the end of the day, the BPO industry can only facilitate change. "Technology is one enabler, but the real reason why these efforts are successful is the innovative spirit of the Indian entrepreneur," he said. "We never say no to an opportunity; we use jugaad (local improvisation), or anything else that is possible. That is what is driving the social revolution in India."