The domestic business process outsourcing market, with a growth rate of 50 per cent over five years, grew faster than the exports market to reach nearly $1.6 billion revenues in the financial year 2008.
Though it is smaller than the $11 billion BPO exports market, it is expected to reach $6 billion by 2012, according to a new Ernst and Young study.
The BPO sector's exports depend heavily on North America and the UK, which account for 87 per cent of the total exports revenue. With these two economies having been hit badly, the growth rate for exports is expected to fall further. But, if it's the 'business as usual mode,' India's BPO exports will touch $28-30 billion over four-five years, states the report.
The domestic BPO market, hence, presents a huge untapped growth opportunity. Its addressable market opportunity is in the range of $16-19 billion by 2012, with significant business growth coming in from sectors like BFSI (banking, financial services and insurance), telecom, media, retail and government.
"Outsourcing is not new to India. Indian companies have been doing this for a long time now. But what we were surprised to find was the depth and scope of portfolio outsourcing firms are ready to consider," said Milan Seth, partner, technology practice, E&Y.
Eighty per cent of the industry comprises captive shared service centres. The rest of the industry is highly fragmented. Estimates suggest that 650-700 firms constitute the unorganised sector. Over the next few years, the market will be consolidated and 8-10 large vendors will dominate it, says Seth.
Indian IT biggies, such as Tata Consultancy Services, Infosys and Wipro, are increasing their focus in this segment. India's second-largest IT firm, Infosys, recently announced its foray in the domestic market. Wipro is expected to do so soon.
Global players like IBM Daksh, Firstsource, MphasiS BPO and Intelenet Global Services are also planning to significantly expand their presence in this market.
Firstsource's revenue contribution from the domestic market has grown from 3.8 per cent in FY07 to 10.8 per cent in FY08. Similarly, the NYSE-listed Genpact has signed up four customers among the Indian financial services segment. Likewise, the Nasdaq-listed EXL Services is understood to be scouting for local buy-outs.
Although domestic suppliers offer an entire portfolio of services, as offered to international markets, the domestic market has limited services currently. According to a leading domestic provider, 90 per cent of this business is voice-based and 10 per cent non-voice based.
Hence, customer care and sales and marketing are the two largest service-line segments, having accounted for over 70 per cent of the overall market in 2008. However, services like HR and finance and accounting are expected to have a positive growth in the next two-three years.
However, margins and cost structures will remain a challenge for service providers. Entry-level salaries for domestic BPO are between $135-182 per month (around Rs 6,340-8,550) and wage costs have been increasing at 10-12 per cent annually.
'As compared with export-oriented BPOs, the annual revenue per full-time employee is 2.5 times in favour of export BPOs. However, the domestic BPO is expected to ride on huge size and net margins are anticipated to increase to about 12.5 per cent by 2012 from about 9 per cent in 2008,' states the report.
Seth adds the Indian buyer is very different from his global counterpart. "When it comes to pricing, it will be the buyer who will decide. Players will have to devise different models and cost structure in the emerging markets," he added.