'The Indian BPO sector will keep on booming'

Even as war fears grip the Indian IT industry, there are other dark clouds hovering in the horizon.

The success of outsourcing has led to the displacement of many jobs from local markets in the United States, the result of which has been that many American States are contemplating a legislation that would block outsourcing to cheaper locations outside.

While the Indian IT-enabled service industry grapples to understand the ramifications of it, on another front, the high competition in the market has led to the questioning of long-term sustainability of the players.

Noshir Kaka, Principal, Mckinsey & Co, discusses the five challenges in front of the business process outsourcing sector.

Excerpts from an interview with Priya Ganapati.

In the event of a US war with Iraq how will the Indian outsourcing industry be affected? Will the length of the war be a major factor that determines the impact on the Indian industry?

The length of war will be a factor but it is certainly not the only factor. What matters is the impression that is there in the minds.

You can anytime prove the economic case for India. You can prove that others are doing outsourcing well in India, you can prove that service quality, delivery does not get affected out of India, in fact it improves.

But who you cannot convince is the middleman or the operations head in the US to make that decision because it is a personal career decision.

Christophe (Christophe Hioco, Global Head of Shared Technology and Operations, JP Morgan) said the same thing in presentation when he pointed out that one of the factors that kept him awake at night was will I get fired for outsourcing.

The length of the war is a factor but more than that their perception on how dangerous it is go out of the US at that time.

What is your reaction to recent reports that many US states are legislating to block government outsourcing to cheaper countries like India?

The US Federal Budget or for that matter any country's always had an unwritten law that it would largely like its dollars spent within the country.

For example, the reason why you don't see defence or aerospace showing up as a vertical for Indian companies is that. It is not like defence or aerospace has any less electronic content than telecom and banking.

So those laws in particular will not have much impact. Now whether that will expand into a greater law covering general companies, it is impossible to tell.

But I would like to make the point that demographics show that the working population in the US is actually on the decline pretty dramatically. So there is no way these jobs can be done on site anyway.

The age-group of 38-44; if you look at that age group, there is a decline of 11 per cent or 8 million jobs just from that age group.

The government contracts not coming to India does not bother me too much. Those form less than 5 per cent of the contracts handled by the Indian IT industry today.

Why do you think that BPO will not become another dot-com like bubble?

The grounding on which the BPO idea is based is very strong and unavoidable cost, quality and time benefits.

There is a lot of hype in the industry but if you take away that, the fact is that today you have case studies of people like GE standing up and saying we saved $500 million in India last year.

Now if you are a competitor of GE there is no way you can ignore that. Second is we have now crossed the critical mass in the sense that there is no longer a feeling that India is a country somewhere out there.

Third, is the maturing vendor base. When you have vendors like Accenture, EDS, Cap Gem E & Y, KPMG, PWC entering India and offering their offshore service it is a huge credibility boost to India because they have shown that you can deliver these services out of India.

For a number of reasons, the economics, the cost pressures, the declining labour pool, the case studies of competitors and the maturing vendor base, I think will ensure that this industry continues to grow.

You talked about how having large call centers does not mean increased profitability. You mentioned that having beyond 500 seats does not offer the same profitability to vendors as 500-seats does. Could you elaborate?

I mention that in the context that the question has been asked whether this industry would be largely like the IT services industry which is dominated by the top five players.

My response to that is if you look internationally it is a very fragmented industry. If you look at the top five call centers and HR processing outfits then they have a market share of 16-36 per cent.

So, the facts go to show that internationally it is not a consolidated industry. Now why is that? If you look at the call center business our sense is that you don't have the advantage of economies of scale beyond 500 seats. That's the comfortable size.

If you go beyond that you will get some advantage but then the cost advantage doesn't go down dramatically after the 500-mark.

So, if you are a relatively smaller vendor it is unlikely that a big guy will be able to muscle you out of the space simply because they have better access.

The challenge will be there will be certain segment of customers that will want to bundle large deals -- like the Lehmann brothers or Coke -- and that segment will be clearly one that will be driven to scale.

If you leave aside bundled service providers, there are a lot of other business models for focussed players by verticals, by geography, by horizontal -- there are plenty of paths you can take and become very sustainable player.

In that horizontal or vertical choice that you make you still have to number one, two or there or at least somewhere near the top. But it is not necessary to say that you will completely lose out because of larger players coming in.

What would be your advise to BPO companies to avoid the imminent problems that will come with the entry of too many players?

First, is pick your spot very carefully. If you are a small player you have to pick a spot that is 'unbundleable' and not 'commoditisable.' Those are the two words that I use. Let me explain what I mean by 'unbundleable.'

If your value proposition or the segment that you are targeting is going to come under the realm of larger players then you are in trouble.

The second is about monetization. If your gain is largely on labour cost arbitrage then you are constantly going to be under threat. Because there will always be somebody who is hungrier, smaller, has some spare capacity somewhere that he is willing to discount.

If your value proposition is based on skill sets like task reengineering, process reengineering or on the fundamental ability to drive capital efficiency those are levers that you can make sure within your area you are protected and sustainable.