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Indian ITeS and BPO Industry

The Indian ITeS-BPO industry has been consistently growing over the past few years, in spite of rising competition from countries such as Philippines, China, Brazil, Mexico and Ireland. Its contribution to the service sector and to the country’s GDP has also been increasing over these years. The industry has come a long way from just offering traditional outsourced data entry work to providing high-end knowledge services to global clients. Yet there is a vast untapped universe in the Indian ITeS-BPO industry, which represents tremendous growth opportunities for the industry players.

The impressive growth of the Indian IT and BPO industry has contributed significantly towards the socioeconomic development by generating employment opportunities, foreign exchange reserves et al. Besides, the sector has facilitated other industries such as real estate, transportation, catering services, and has thus generated many employment opportunities in the country. The revenue of the sector (IT-BPO) has manifolded during the last decade from merely US$8.3 bn in FY00 to around US$71 bn in FY09 at a CAGR growth of 27%1.

The ITeS/BPO notably is the fastest-growing segment within the IT-BPO sector, and during the last decade it grew at a CAGR of 42.8%; the IT services and software revenue grew at a CAGR of 26.8%. The small and medium-sized enterprises have recently had ample avenues to explore in terms of IT services and business process solutions. Due to the boom in the banking, telecom, retail, logistics sector and several initiatives taken by the Central government and other state governments, the IT spending in the domestic market has increased impressively. In the last 10 years, the domestic IT services and software products and engineering services market grew by 21% annually and reached US$10.5 bn in FY09.

Nonetheless, the global economic slowdown has put a brake on the growth run of the sector’s performance during FY09 as the clients in the western countries are either delaying or cutting their IT spending, or re-negotiating the prices.

Going ahead, the challenge for the industry players lies in maintaining the level of competency and offering high level customer satisfaction at an affordable price. The current economic slowdown has changed the business scenario across the globe. The changes in macroeconomic fundamentals, protectionism measures are also few important risks looming large on the sector. Players need to adopt an innovative approach to tackle the situation by finding out alternative markets, adopting different business models, improving the quality of services, diversifying service line, and most importantly, focusing on other emerging verticals.

India’s service sector and its growing significance

The liberalisation of economic policy in early 1990s has transformed the entire business scenario in the country and resulted into entry of various global conglomerates in India. The government has not only made significant investments in developing infrastructure but also in introducing several path-breaking initiatives to attract investments both from the domestic and international entrepreneurs. These initiatives have ensured rapid industrialisation and have also generated much employment opportunities. As the economic activities thrived in the country a rising need was felt for quick and efficient service accessibility that was crucial for the productivity and competitiveness of the economy. The growth in the agriculture and manufacturing sector for instance largely depended on efficient and competitive services provided by banks, insurance companies, telecommunication companies, trade partners, entertainment companies, IT service companies and several other business services. As these services grew hand in hand with the major industries, there was a structural change in the Indian economy post-Independence, and there was also a substantial change in the sectorwise composition of total output of the economy.

The contribution of service sector towards overall economy, for instance, has gone up remarkably since Independence from around 29.5% in FY51 to 42.7% in FY91, and to more than 55.0% in FY08. On the other hand, the share of agriculture to national income declined from over 55.0% in FY51 to around 17.8% in FY08. The robust growth of service sector is largely attributed to India’s emergence as one of the fastest-growing economies in the world. The service sector witnessed higher growth than the world average during the past decade or so, thereby raising its share in the country’s GDP and the IT and BPO industry had a noteworthy role to play in this growth. The revenue of the IT and BPO sector as a percentage of GDP increased from around 1.8% in FY00 to 5.8% in FY09.

The service sector contribution to GDP in other emerging countries is also growing rapidly consequently contributing immensely towards overall economic growth. But comparatively, service sector’s share to GDP in India has grown much faster than any other emerging economies in the world. India’s access to external markets and continuous economic reforms has notably played a significant role in building a vibrant service sector, which reflects in the service sector’s export growth over the last couple of years. In 2007, India was the seventh largest service exporters in the world with a market share of 2.6% up from mere 0.6% in 19952.

India remained the leading computer and information service exporters in the world in 2007, though the global economic slowdown affected India’s IT and ITeS/BPO export earnings in FY09. Despite increasing competitive pressures from other low-cost emerging outsourcing destinations, India continues to remain an attractive outsource destination owing to its low cost of operations, high quality of products and services, and most importantly, its skilled labour pool.

Over the years, software has emerged as the leading contributor to India’s service exports with a share of 46.4% in FY09 up from 39.0% in FY01. Notably, the total services exports stood at US$101.2 bn for the year-ended March 2009 up from US$16.3 bn in FY01, at a CAGR of 25.6% during the same period. On the other hand, the IT industry revenue (domestic + exports) grew at a CAGR of 24.8% from FY01 to FY09, while the exports grew at 28.7% during the same period. Needless to say, that export constituted over 66% of the total revenue of the Indian IT industry in FY09. The significance of IT and ITeS/BPO in India’s service exports basket is evident from this fact. Apart from the IT and ITeS/BPO, other emerging service sectors such as telecommunication, banking and travel and tourism have also shown healthy growth over the past few years.

Indian ITeS-BPO industry and economic growth

The Indian ITeS-BPO industry has revolutionised global sourcing and has emerged as one of the sunrise sectors for the country. The success of the outsourcing of IT services was followed by global sourcing of business processes which in turn has increasingly become an absolute value addition for the global companies, and India with its large skilled manpower and favourable government policy initiatives has grabbed the opportunities by both hands.

Apart from aiding the socioeconomic development of the country, the ITeS-BPO sector has also driven the rapid growth of other sectors such as organised retail, automobile, aviation, real estate, banking and financial sector. According to NASSCOM data, the Indian ITeS-BPO sector revenue notably recorded a CAGR growth of 42.8% during FY00-FY09 and outpaced the growth of the IT services sector during this period, which grew by an average of 25.4%. In FY09, the ITeS-BPO export is estimated to have contributed over 86.8% to the total IT-BPO revenue, though this contribution was lower than that made in FY02 at 93.8%. The decrease in exports could be attributed to the growth of the domestic BPO over the last couple of years; during FY05-FY09, the domestic BPO grew at a CAGR of 34.1%, ably supported by the BFSI and telecom vertical.

India continues to dominate global offshore BPO market

The global outsourcing market has been expanding at a rapid pace in the past few years as outsourcing has become an integral function of every organisation in the past 10 years or so. Companies have been benefiting through global sourcing partnerships in terms of cost savings, enhanced business efficiency, ability to explore new markets, reduction in time-to-market and products and services among others. Leading global organisations have realised the importance of outsourcing and offshoring and are increasingly outsourcing their non-core activities to low-cost countries such as India, China, Ireland, and Philippines among others. India has taken centre stage in the global outsourcing arena and Indian vendors are progressively adopting more new business models with a blend of onshore, offshore and near-shore operations that gratify their clients and help them to increase their topline and bottomline.;

Share of market for business process offshoring 2004-2008

India continues to dominate the global business process offshoring market by offering valueadded services to its global clients. Global organisations are increasingly outsourcing their business needs owing to rapidly changing business scenario, intense competition from peers, and rising globalisation, to improve their performance. Offshoring of business services are done in different ways, such as moving the production from parent company by establishing a foreign captive affiliate, which is also known as captive offshoring. Besides, it also involves outsourcing of business activities to a third party service provider – either domestic or foreignowned. As mentioned earlier, India’s comparative advantage are its huge talent pool, higher working population, improved infrastructure facilities, and innovative business processes, which offer significant cost benefits to international clients. India’s share in global business process offshoring increased steadily from 32% in 2004 to 35% in 2008, according to data from UNCTAD-Everest Research Institute. In recent times, however, the Philippines has been emerging as a business process offshore destination; in 2008, it had a 15% share in the global business offshoring up from 9% in 2004. In India, several cities are emerging as favourable destinations for US-based and Europe-based companies to establish their delivery centres in cities such as Bengaluru, Gurgaon, Hyderabad, Pune, Mumbai and Chennai.

Indian third party BPO players moving up the value chain

Mix of BPO/business services revenue providers in FY09

There has been a rapid change in business offering models since the evolution of the Indian BPO industry, particularly from the days when traditional foreign captive players started outsourcing their business activities to Indian affiliates (GECIS, American Express etc). Currently, the Indian providers constitute around 45-50% of the total BPO business, while foreign captive players constitute 30-35% and foreign third party providers account for 20-25% of the total BPO business. In the IT services, product development and engineering services, Indian players constitute 70-75% of the segment, while foreign captive players constitute 10-15% and foreign third party players constitute 10-15%.

The foreign captive BPO players are enhancing their business operations and ramping up delivery centres in different emerging cities in India besides increasing their service offerings and employee size. However, in the wake of the current economic slowdown, few foreign captive players have started adopting a different business model to monetise their captive units by selling off their captive operations in India. For example, Citigroup Global Services Ltd, AOL call centre, American Express’s back office operations of global travel business in India and UBS India Service Centre Private Ltd, to name a few, have sold off their business operations in India to existing Indian BPO players. The Indian third-party offshore model has emerged, therefore, on account of growing client confidence on Indian third party vendors’ service deliverables, leveraging economies of scale, lower exit costs among others.

ITeS-BPO exports share goes up

The outsourcing segment has grown rapidly as services across a range of verticals have broadened and deepened. The services offered by the IT-BPO companies can be classified into six categories: finance and accounting, customer care, human resource, knowledge services, procurement services, vertical specific and a wide range of other ancillary services.

The Indian IT-BPO industry has matured in terms of size and operations, and providing outsourcing and offshore services to its US-based clients. Initially, IT services used to be outsourced to India, and there existed a few captive BPO players during late 1990s. However, the rapid expansion in the service offerings by Indian ITeS-BPO vendors has driven the overall revenue of the industry. The Indian ITeS-BPO players have moved up the value chain by offering high-end business solutions. The establishment of STPIs, growing number of SEZs are proving to be a boon for the IT-ITeS export growth. Additionally, government initiatives such as tax holidays, infrastructure development, investment-friendly policy initiatives have also aided the sector’s growth. Consequently, the ITeS-BPO exports share in the total IT industry exports (including ITeS-BPO, and hardware) from India has gone up from 19.5% in FY02 to 27.1% in FY09. The Indian ITeS-BPO players have been increasingly focusing on diversifying their offerings, exploring newer market, verticals and importantly continuously improving their quality of services, which have played an instrumental role in raising its share to total industry exports.

Resilient global business process offshoring market

The global economic slowdown is expected to provide windfall gains to the Indian IT-BPO industry, taking a cue from the previous slowdown in 2001-02, mainly due to Y2K and dot com bubbles. During the previous slowdown, Y2K and dot com bubbles had increased the demand for Indian service providers, especially in the US and Europe. So, the current slowdown caused by mortgage-led financial crisis across the world is also anticipated to create enormous business potential for Indian vendors, and in that case, the business process services space would be no exception. However, the challenge for the service providers lies in unlocking value from each and every dollar spent by the client.

Global offshore market 2004-2008

Generally, offshoring of IT and business process activities differs from industry to industry. BFSI companies have traditionally been leading in this trend accounting for around 41% of the total market, followed by hi-tech/telecom with 20% share, manufacturing 17% and retail, airlines, transportation and other merging sectors constitute the remaining share.

BPO spending by EMEA and APAC is on the rise

Notwithstanding the rising business activities in the emerging markets and Asia Pacific region, North America remains the largest BPO market in the world. However, the scenario has been changing rapidly over the years. In 2008, BPO spending by North American economies stood at around US$73 bn constituting around 63% of the total global BPO spending. The share of North America has been declining over the years due to spurt in BPO spending in other regions such as Asia Pacific (18% share) and EMEA (19% share), which have registered a growth rate of 15.3% and 11.8%, respectively in 2008. It has been observed that the acceptance of business process outsourcing has been gaining momentum in other European countries as well other than the traditional stronghold of the UK. Likewise, the Asia Pacific countries have also increasingly started outsourcing their business activities as they have gradually realised the importance and benefits of outsourcing to low-cost countries.

Key ITeS-BPO segment exports

Customer Interaction Services (CIS)

The CIS segment was the largest and one of the most important segments for the Indian ITeSBPO sector. It encompasses all forms of IT-enabled customer contact: inbound or outbound calls, voice or non-voice based support, sales and marketing, technical support and help desk services. The export earnings of this segment reported a growth of 18.4% in FY09 as compared with 28.4% growth achieved during the previous year. This segment constituted around 43.8% of the total ITeS-BPO export earnings of US$12.8 billion in FY09.

Segment-wise export revenue share in percentage during FY09

Financial & accounting (F&A)

F&A is another important segment of the industry and contributed around 22% to the total export revenue of Indian ITeS-BPO in FY09. Over the past few years, there has been growing demand for high-end accounting and financial services across the world, with India emerging as a favourable outsourcing destination in this sub segment. In order to provide a global delivery capability model and to tap the potential that the other markets offer, the Indian ITeS-BPO companies have begun to diversify their service offerings and segmental focus. The current turmoil in the financial sector in developed countries, particularly in the US, is likely to affect the quantum of work being outsourced in the short term and in turn affect Indian ITeS-BPO companies that are focused on this segment. But, in the medium and long run, this segment is expected to expand their outsourcing activities.

Besides, there are other two important segments such as human resource administration and procurement outsourcing that have started gaining momentum in the global sourcing arena and India is emerging as a favourite destination for those segments.

Human Resource Administration (HRA)

HR outsourcing is an emerging segment that has the potential to grow robustly in future. In fact, a few large international players such as Exult, Hewitt, and Fidelity have sensed the potential and have already established their offices in the Indian market. HR outsourcing provides various services such as payroll, travel and expense processing, talent acquisition and management services, employee and manager self-services etc. According to IDC, the global spending on HRA is expected to reach US$ 29.1 bn by 2012 from US$ 18.2 bn in 2008, at a CAGR of more than 12.5%. Importantly, India has the potential to exploit these sizeable opportunities to improve its market share. In FY09, HRA export from India stood at around US$ 385 mn, up from US$ 325 mn a year ago.

Procurement BPO

Procurement BPO is a relatively new concept in the Indian ITeS-BPO industry, contributing around 1.4% to the total BPO exports in FY09. However, this service is expected to grow rapidly over the next few years, majorly due to increasing number of service providers. As per IDC, the worldwide market for procurement services is expected to grow at a healthy CAGR of 19.5% to US$ 4 bn by 2012 from around US$ 2 bn in 2008.

Key Issues and Challenges

The industry has achieved several milestones in the past and is well-placed to bank on emerging opportunities. However, the industry needs to tackle various issues related to operation, regulation etc. Further, there are several external challenges such as the growing debate in the western world against outsourcing, impact of the sub prime crisis, and the slowdown in the global economy that need to be tackled. This section touches upon several key issues and challenges:

1 NASSCOM

2 RBI Annual Report 2009

Note: IDC & NASSCOM has changed the definition of BPO, due to which the BPO numbers are significantly different from what were mentioned last year