In the software and services space, the role of the Indian BPO industry is going to get relatively important over time. This is because the software services industry is about three times larger than the BPO industry and is growing at a significantly slower pace (around 30 per cent, compared to 40 per cent for BPO) already.

So it is the BPO industry which will have to carry the can, in terms of the growth rate, in the run-up to 2008, by which time India has targeted for itself exports of $50 billion, compared to $17 billion in 2004-05.

Against this tall order, the good news is three-fold for the BPO industry. First, these are still early days. Despite the consolidation that has taken place through several high-profile M&A deals last year, the top 20 players' market share has remained the same.

Everybody, the big, who are global class in quality, and the small, some of whom are not, is growing at a very rapid rate (BPO exports grew 44.4 per cent in 2004-05). So there is good scope for further rapid growth.

Second, the BPO industry overall is doing quite well, according to a survey and global benchmarking by Nasscom. Currently, the end user rating for Indian BPO is as high as that for North American vendors, the global leaders. The same is the case in terms of the number of fatal errors made.

Third, the leading Indian BPO vendors are rapidly maturing and going up the value chain. The Nasscom study has defined three phases which BPO companies go through while maturing: phase one -- with potential, relying on cost advantage; phase two -- relying on performance in service delivery; and phase three -- promising operational excellence in terms of established benchmarks.

Nasscom says the Indian BPO industry is moving from phase one to two, that is from potential to performance.

Vikram Talwar, CEO of EXL Services, one of the leading Indian BPO firms which is heading to be the first Indian-managed BPO firm to list at Nasdaq, says there is "no future in voice (the bottom rung of the maturity ladder), and we shouldn't be in it". But he sees great future and value in hybrid services offering both voice and non-voice services. The growth rate in this will remain high for the next 2-5 years.

"The transition from voice to hybrid is needed and it's happening. But the future is really in consulting and analytics. That's where true value is generated." In all except pure voice, growth can continue at 30-40 per cent. In hybrid services growth is established; in pure non-voice (handling of entire processes), demand is starting to grow and clients are looking for size and comfort levels.

If the weakness of Indian BPO was that its biggest players were mostly in the commoditised voice business, then key change is taking place in one company.

Says T K Kurien, who has just taken over as chief executive of Wipro [Get Quote] Spectramind, "In three years we will become a different kind of business. Headcount will not be a factor any more, though topline growth will remain in the 30-40 per cent range."

This will be achieved by drastically changing the work mix, which is still 80 per cent voice. The share of end-to-end processes work will be raised four times to 40 per cent in three years.

So a transition is taking place but there are two key challenges ahead. The first is the skills scenario -- the industry's attrition rate is now legendary, ranging from 25 to 40 per cent (Nasscom figure), to 70 per cent in the case of at least one leading voice player.

To beat the attrition and accompanying rising costs, when people leave in droves, companies sharply hike compensation packages, thus laying up trouble for the future. GECIS Global CEO Pramod Bhasin's solution is to expand in two- and three-tier cities.

"There is a lot to learn in how and where to recruit." He finds cities like Jaipur to be 'fantastic', with 'low attrition, low costs and good lifestyle'.

The successful hybrid players like WNS, EXL, and GECIS Global, which do not rely extensively on voice, find that as they grow they are learning to live with attrition. Rahul Singh, CEO of e-Serve, also feels that the industry is maturing and already there are several focused players.

That is the recipe for everybody -- get more focused, "select the domain and then scale up", and not as some have done till now. But the real challenge is not in the gross numbers, made up by entry-level recruits who flit from job to job, but retaining management talent -- getting the middle management to go to the two- and three-tier cities.

The second challenge is the data security issue, which anguishes the whole industry. The best industry players say they are more rigorous on security than many even at the home base of the clients.

"It is probably the single-biggest issue for Indian BPO," says Talwar. Bhasin adds, "Data protection will be India's issue and we have to manage perceptions. It all depends on how you follow up when something happens."

Everybody agrees that the government and Nasscom should put together a set of best practices and all the necessary laws must be in place. But there is a bit of gray area here. Most of the industry feels that India needs a comprehensive data security law and Nasscom was working on this with the previous government.