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All's not well with Indian BPOs!
Prasad Sangameshwaran & Amit Ranjan Rai | March 15, 2005
Aashish Bhinde and Sunder Sharma don't like being called doomsday prophets. But Sharma, the chief operating officer of Customer One, a 150-seater business process outsourcing firm headquartered in Mumbai, admits he is scared by the route the BPO industry is going.
"Unless this industry attains maturity fast, it will die," he says. Bhinde, the site director of Tracmail -- one of the earliest BPOs that set base in India -- adds to this theory: "Our strengths have become our weaknesses and our weaknesses have become strengths."
His examples: in the past, providing real time offshoring and getting good telecom connectivity was seen as a challenge. At the same time, a strong middle management team and employees were considered strengths. At present, the reverse is true.
The BPO industry is still in a nascent stage in the country -- having been around for less than five years. But problems are already rearing their heads.
In 2000, many global companies started moving back-office services to India. Their one-point-agenda: slash costs by at least 40 per cent by offshoring.
Since then, business for Indian companies has been booming. In 2003-04, Indian exports in BPO-ITES (business process outsourcing and information technology enabled services) was $3.6 billion (Rs 15,800-odd crore), up from $2.5 billion in 2002-03 (Source: Nasscom). Indian call centres account for roughly 25 per cent of that.
But all's not well. Four years after becoming a back-office to the West, Indian BPOs are discovering that cost control is similar to shooting in a landscape of moving targets -- bring one down and three more emerge.
While employee salaries have gone up by an average of 20 per cent every year, the average revenue per hour (for a single terminal) has declined by about 15 per cent over the past three years, from $14 to $12.
However, some industry experts disagree that revenues are going down. Says Ananda Mukerji, managing director and CEO, ICICI OneSource, a 4,500-seat BPO spread over eight locations, "There has been no price decline. A few players got away charging fancy rates in the early days. Only those players have been affected."
Then, being paid in dollars is no longer good news. That's because the Indian Rupee is gaining strength.
Says Raman Roy, chairman and managing director, Wipro Spectramind Services Ltd, one of the biggest BPOs in India, "The inflationary aspects on compensation, real estate and others used to be mitigated by the depreciating rupee. With the rupee appreciating or staying stable, it definitely creates a pressure on the bottom line."
The impact of the price slash and the depreciating dollar? If three years ago, a BPO earned close to Rs 700 an hour, it now gets just over Rs 500 for the same effort.
At the same time, hiring new talent has become more expensive. In 1999, the average pay packet for an entry level agent was Rs 7,000 to Rs 8,000. That's gone up now to between Rs 13,000 and Rs 15,000. Costs go up further because companies have to maintain what Bhinde calls a "rostering buffer", for scheduling manpower. BPOs need a 10 to 15 per cent surplus staff on their rolls because although the office is open all seven days, employees work five-day weeks.
The bench strength also compensates for attrition. Then, BPOs have an added cost -- picking up and dropping employees at their residence, given that most of the work happens during the night. This works out to roughly Rs 2,500 to Rs 4,000 an agent every month. Some organisations even provide meals and snacks to their employees, taking the costs up even higher. "BPO employees are a fairly pampered lot," says Mukerji.
Still, employee attrition is not getting any better. Industry sources claim that attrition levels in BPOs are sky-high: depending on attrition levels, a BPO could be looking at an entirely new set of employees every three to 10 months.
In specific BPO zones, like the Mindspace complex in suburban Mumbai, employee attrition is a joke. "If you reach the wrong floor, you'll be recruited," quips Bhinde. BPOs like ICICI OneSource claim that an attrition level of 5 to 6 per cent every month (65 per cent a year) is perhaps closer to the truth.
For every employee who quits, a company spends another Rs 40,000 to Rs 55,000 in recruiting and training a replacement. Even after training, it takes the new employee at least three months to reach an optimum productivity level. "There's a shortage of people," points out Roy.
The yawning gap between demand and supply could be increasing. As of March, 2004, the number of people working in the BPO sector in India was around 245,500. By 2008, the segment is expected to employ over 1.1 million people, according to a joint study by Nasscom and management consultancy McKinsey.
Some of the big cities are already running into trouble. There's no dearth of applicants, but finding the right candidate is always a problem. At present, for every 100 applicants in Mumbai, just one or two make the cut. Four years ago, the success rate was 20 per cent.
The hand of God
Is the Indian BPO-ITES industry in an unholy mess? First, the denial. "We are not facing any pressures on margins. It is only true for those who do business at the low-end of the spectrum (out-bound telemarketing)," says ICICI OneSource's Mukerji.
Adds Spectramind's Roy, "We have walked away from deals that were not commercially viable. We are not in this business as a social service. We are here to make a profit."
True, but there's no getting around the fact that technology is playing god. Bhinde says that costs on international private leased circuits and long distance charges have come down by 50 per cent in the past three years. That's important since technology accounts for 15 to 20 per cent of operational costs.
Says Francesco Paola, vice president, marketing and sales, Trinity BPM, a Gurgaon-based BPO, "A pure, manpower-based provider is going to face pressures on hiring, training and retaining people. But you can optimise the services and your processes with technology and using tools like Six Sigma to continually improve processes and lessen the cost pressures."
Companies are even looking at technology to take the place of their most pampered and most troublesome resource -- people. Delhi-based BPO and IT services provider Tecnovate eSolutions claims that it looks at IT working in tandem with the human interface. This, according to CEO Prashant Sahni, cuts down by approximately half the number of employees required in a process.
Agrees Paola, "Besides automation, we focus on continuous process improvement. Also crucial is to continually move up the value chain: continually offer value-added services the competition doesn't offer."
Other process improvements such as Six Sigma could further drive down the number of employees required in a process. "We would rather hire fewer people and pay them more," says Sahni.
For his part, Roy of Wipro Spectramind puts his money on quality. "We do not negotiate cost targets, we negotiate quality targets," he says.
"When your incentives are linked to quality, the realisation per hour goes up. By delivering consistent good quality, the customer is happy to pay a premium. If costs go up, so do margins and everything works just right," he adds.
Sharma of Customer One feels that BPOs must become domain experts rather than focusing on specific functions like voice and non-voice. Most BPOs claim that they are already working towards that.
For instance, if ICICI OneSource is specialising in financial services, then Tecnovate, which was set up by European online travel business provider ebookers, is naturally focused on travel. And Mumbai-based Tracmail is counting on collections to be its core competence.
BPOs are also confident that costs can be constantly controlled to keep bottomline pressures at bay. "Even old economy companies cut costs consistently. We can surely cut costs steadily for several years," says Mukerji. One way of keeping costs on a tight leash is by small innovations.
ICICI OneSource, for instance, is taking advantage of its growing scale. As the company has grown from one centre to eight in less than three years, all vital support services such as HR, finance and IT are being centralised in Mumbai and Bangalore. Then there's HeroITES, a part of the Hero Group.
Business head Rohit Chanana says that rather than invest in expensive telecom equipment, the company is looking at hiring it. "It sounds expensive in the short-term, but when technology gets a little outdated the equipment can be returned," he points out.
Tecnovate, on the other hand, taps human resources from abroad, to work at Indian salaries. Roughly 10 per cent of Tecnovate's 1,000 employees are from Scandinavia and East Europe. Sahni explains the motivation for these employees: "They gain professional experience. And they explore the country by staying here for a long period."
Tracmail's Bhinde claims that transportation is a "science that is not yet mastered". As transportation forms 6 per cent of operating costs, by rationalising routes and better planning, companies could effectively squeeze costs. So are the doomsday prophecies misplaced? Even the prophets are praying to be proven wrong.
Specialise or perish
While the BPO industry is under pressure because of rising employee costs and high attrition level, those dealing in low-end BPO services such as telemarketing, support services, call centres and so on are facing the threat of their sevices becoming commoditised.
With clients shopping around for the lowest price, margins for these low-end services providers are under severe pressure. Is there a way out? Specialise or perish, say industry experts.
That's exactly what Wipro Spectramind did. It's moved away from the low-end customer servicing business to focus on specific business verticals such as travel, insurance and healthcare.
Explains chairman and managing director Raman Roy, "The composition of business is a critical element for future investors. They certainly wouldn't bet on low-end customer services, which will surely commoditise. We are focused on areas where the revenue per unit is high."
Another Delhi-based BPO, Tecnovate, is following the same gameplan. Tecnovate is already focused on the travel and hospitality industry; and CEO Prashant Sahni says the priority will be to build on this expertise.
"Most of the large companies that outsource are domain [industry] specific, and it is uninteresting for a domain specialist to outsource to a generalist." Even relatively small players like Trinity focus on being pure-play specialists -- mortgage banking industry is where the company wants to remain focused.
What's the benefit? Revenues improve, for one. Low-end service providers typically charge clients based on the number of seats per hour used for the client's job. That's the input method. Specialists' billing, on the other hand, is output-based: they charge on the basis of the solutions they provide."A solution has domain knowledge, technology and processes built into it. That stops commoditisation because not every call centre can offer that. So the entry barriers become high," points out Arvind Srivastava, MD, Trinity BPM.