A few years ago, the official phrase that Nasscom used in fact it invented it—for describing the call centre services, back office, and other such remote services was IT-enabled services, or ITeS. Today, the official Nasscom term is a little different. It is ITeS–BPO. The voice of Indian software services companies has come to acknowledge the fact that BPO is a distinct business and an envelope phrase like ITeS is not the best way to express it.

But do not have any confusion regarding IT companies’ potential for succeeding in the BPO business. That debate is over and decidedly so. IT services companies are in this business for the long run and will probably change the rules of the business the way they have done in the IT business earlier. The impressive initial clientele—StandardLife to Citibank to Cisco—only proves that they are being taken seriously by the international firms who would like to outsource to India.

In fact, the point of debate today has shifted. Like every other new opportunity, the remote services opportunity started with a hot debate on who would succeed—an IT company or a big old-economy corporate or a VC- funded company set up by professionals. Like every other mature business, the stakeholders of BPO services have come to realize that the background of the promoters is, if at all, the only factor in deciding the long-term success of a company.

Today, the debate is who has got what existing strengths? And more importantly, the next logical half—what strength needs to be built in so as to succeed?

IT Companies in BPO: Strengths & Challenges
The advantages that IT services companies enjoy over others are many.

n Existing client base: For Indian companies in BPO, the major challenge will be marketing the idea to the US companies in the face of a thriving captive offshore model. IT services companies, which have built their credibility with the client will easily bypass that cycle of building the trust and will bag the projects easily as has already happened with some IT company-promoted BPO units. In fact, in Q3 2002–03, all the four new clients that Spectramind signed in are existing Wipro customers.

n Familiarity with the overseas market: IT services companies are the only companies that have large marketing teams in the US and other important overseas markets. And not only is their understanding of the overseas market better, they can also quickly start marketing their services.

n Familiarity with the business model: Only IT services companies have the experience of providing a business service to the overseas clients. The skills that will be useful in the BPO space as well are relationship management, migrating work to an offshore location, and the familiarity with running large employee businesses.

n Knowledge of processes and practices: Because of providing business solutions, the IT services companies have an understanding of the processes and practices of businesses in the overseas markets. That can be extremely useful in offering BPO services.

n Vertical domain knowledge: Many IT companies have built vertical domain knowledge over the years. That will also come in handy when offering BPO services.

However, there are critical differences between the two business of IT services and BPO. Some of them are as follows:

n IT services is project to project, whereas BPO is continuous. And that makes BPO more involving with the clients. While it has its own advantages, like stability of business, it also throws up some challenges. One is more subtle relationship management. In BPO, the companies have to deal with functional managers everyday, not with IT professionals. The other challenge is business continuity. The business continuity planning has to be near-perfect in BPO, because some of the BPO work is every day, every hour.

n Different margin game. The margins are lower in process outsourcing than in IT services. A company must know where to balance the topline and bottomline. Else, the valuation could be severely affected. However, with IT services margins under pressure, the gab between the IT services margin and the BPO margin is closing. For example, Wipro’s IT services margin in the third quarter of 2002–03 was about 29 percent, a decline of 5 percent on year-to-year basis. The Wipro Spectramind margin at 25 percent was not far below the IT services margin.

n Growth is possible smoothly only in the English speaking world—that is the US, the UK, and Australia/New Zealand. IT services are not so much market language dependent.

n The two businesses need to be treated differently. While the experience of IT services is extremely useful in BPO, the two business are different and will continue to remain different. That means it cannot be treated as just another project team. That is the reason why almost all the IT services companies have floated separate subsidiaries/JVs for doing BPO. What they are using is the experience, and the management capability.

However, the bigger challenges are HR-related. They are:

n Access to manpower: Unlike IT services, where the fresh recruits are near-ready, thanks to the IITs, RECs, and other engineering colleges, here there is a lot of effort that goes in before you can convert the raw manpower into effective workforce. That puts a major training burden on companies.

n Also, unlike engineering graduates, who have gone through almost similar kind of education, here you have to hire graduates who come from different educational streams. You will recruit them because of their soft skills, not because of knowledge or what they have learnt in the college. That means you cannot rely on the institution’s name. It is a tougher job.

n Beyond a certain point, no matter what you do, you cannot give a smooth growth to employees. So the attrition will be more. And unlike IT, where you will lose employees to other companies, here you will lose them to other professions/industries. That means, even if you are the best in the industry as an employer, you will still lose people in large numbers. In other words, arresting turnover is beyond your control.

It’s not difficult to comprehend why IT services companies are entering the BPO space. Some of the reasons are:

n Growth potential: Different market research companies like IDC and Gartner have put the global BPO market size anywhere between $300–544 billion by 2004. That’s a huge number. Gartner, which does not even consider other non-business process related IT enabled services such as content/animation/transcription, still puts the Indian BPO opportunity at $2 billion by 2005. So the topline growth will be much sharper in an IT company that manages to successfully provide IT enabled services. IT services has already shown a slowdown. In less than two years, HCL E Serve already contributes about 6.3 percent of HCL Technologies’ revenue. And in OND 2002, it grew at more than 33 percent as compared to the software services business that grew about 1.5 percent. Msource, Mphasis’s BPO operations contribute almost one-fourth of its revenue in just two years.

n Stability: The BPO business is much more stable than IT services work. That is because IT services is project to project, so by definition the involvement with the client is temporary. The cost of switching the vendor is low for the client. On the other hand, in BPO, the cost of changing the vendor is huge for the client. Also, the revenue flow is more uniform.

n End-to-end services: With IT getting tightly integrated with business processes, it makes sense in certain types of BPO activities to be offered as part of an end-to-end package with IT services.

n Higher offshoreability: The BPO business is more offshoreable than the IT services business. That means the cost of providing is lower. The cost of under-utilization of capacity is also lower.

Within this short span of time, the entry of IT companies in this space has created a lot of positives for the whole industry.

The business, which in early months was dominated by either some serious professionals or the fly-by-night operators, has grown in stature and reliability, thanks to the entry of big names like HCL, Wipro and Infosys. This will help the serious players across the industry.

The industry will need a lot of funds for quick expansion once it enters the growth phase. Our reading is that phase has already begun. IT services companies with lots of cash reserves are the companies which can bring in lot of funds into this business. Expect major IT-company initiated M&As in 2003.

IT services is project-oriented. BPO is 24x7, year round activity. Business continuity is more critical. But this also means that BPO is more stable, because of the high cost of switching vendors by the client ...It’s different! nl HR quality is a matter of life and death in BPO. Unlike in software development, there are no buffers and safety nets. The BPO/call centre executive deals directly with your customer’s customer     BPO is a high-volume, lower-margin game, with revenue per employee averaging Rs 10 lakh per year, versus Rs 15–20 lakh in IT services

The changing business equation also requires that if Indian companies have to compete globally, they have be to balance between the cost advantage and the ability to do different things, some of which may not be possible to do in India. No wonder, many companies are making acquisitions in other geographies that will help them in doing a better mix-n-match as well as ensure better business continuity in case of disaster. This trend in India was kickstarted in a major way by HCL, when it acquired a big call centre in Belfast, Northern Ireland. It is running that successfully. Companies like Polaris and Mphasis have also expressed their desire to take similar routes. Only IT companies today have the bandwidth for such acquisitions. However, we expect a few Indian pure-play BPO companies to try out the IPO route this year.

Entry of IT services companies has definitely helped the industry and will hopefully continue to so that.

Shyamanuja Das