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Cut-throat competition puts pressure on BPO margins

Parvathy Ullatil in Mumbai | May 14, 2004 10:47 IST

Intense competition in the business process outsourcing space is leading to increased pressure on margins of companies offering these services.

Companies that offer low-end voice and data services have been coping with the reduced margins for the last six months chiefly due to under-cutting of costs in the industry.

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Gross margins have recorded a sharp fall of 60 per cent to 40 per cent, while the billings for the traditional voice-based services, which constitutes nearly 70 per cent of the total volume of work outsourced to India, have slipped from $ 16 per hour/per seat to $12 per hour/per seat.

"The second tier players in the industry are facing some pressure on the margins. The smaller operators are vying to have their share of the pie and offer lower prices compromising on quality. This results in reduced margins," said Eric Selvadurai, president, global services, WNS Global Services.

Since there is no need for specialised skills in the low-end services, the 'switchability' in this end of the spectrum is relatively high.

Industry analysts agree that customer retention is directly proportional to the level of services offered, so higher the value of the service offered, the highest the chances of retaining customers.

"Since this is the lowest skill segment with very low investments in infrastructure and human resource, it has been witnessing an overcrowding of players.

Moreover it is a commoditised service, so people have no qualms about switching from one BPO company to another if the price is lower," said the CEO of a top domestic BPO company.

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