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Introduction – Indian ITeS and BPO Industry

The Indian ITeS-BPO industry has been growing consistently over the past few years in spite of rising competition from countries like Philippines, China, Brazil, Mexico and Ireland. Evidently, the sector has been contributing increasingly to the service sector and to the country’s GDP. The industry has come a long way from just offering traditional outsourced data entry work to providing high-end knowledge services to global clients; however, the sector still has tremendous untapped potential to offer to the Indian ITeS-BPO industry players.

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 overall economic development of the country. The global sourcing of business processes began after the IT services were outsourced successfully; therefore, it has now become an absolute value addition for global companies. India too has grabbed this opportunity with its large skilled manpower and favourable government policy initiatives.

Over the years the sector has been playing an important role in the overall economic development of the country by providing direct and indirect employment and by earning foreign exchange. Besides, it 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 grew at a CAGR growth of 42.8% during FY00-FY09 and outpaced the growth of the IT services sector that grew by an average 25.4% during the same period. In FY09 the ITeS-BPO exports accounted for more than 86.0% (estimated) of the total revenue of the ITeS-BPO industry, though it was lower than the contribution it made in FY02 at 93.8%. The domestic BPO expanded at a CAGR of 34.1% during FY05-FY09 largely driven by the BFSI and telecom vertical, whereas the exports grown at a CAGR of 29.3% during the same period. In FY09 domestic market contributed 13.1% to the ITeS-BPO industry compared to 6.3% in FY02.

Some of the major performance highlights of ITeS-BPO sector in FY09 are as follows:

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

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 ITeS-BPO sector. It includes 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 the segment grew by 18.4% in FY09 as compared with 28.4% during the previous year. The segment constituted around 43.8% of the total ITeS-BPO export earnings of US$ 12.8 billion in FY09.

Financial & accounting (F&A)

An important segment of the industry, F&A, contributed around 22% of the total export revenue of the ITeS-BPO sector in FY09. Over the past few years, there has been growing demand for high-end accounting and financial services across the world, and India has been emerging as a favourable outsourcing destination in this sub-segment. The Indian ITeS-BPO companies have started diversifying their service offerings and segmental focus for providing a global delivery capability model and for tapping the potential that the other markets offer. The current turmoil in the financial sector of developed countries, particularly the US, is likely to affect the quantum of work outsourced in the short-term; as a result, the Indian ITeS-BPO companies that are focused on this segment will be affected too.

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

Key Issues and Challenges

The Indian ITeS-BPO industry has been on a strong growth trajectory in the last decade. 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 its operation, regulation, among others. Further, there are several external challenges such as the growing debate in the western world against outsourcing, the impact of the sub prime crisis and the slowdown in the global economy that are confounding the industry. This section touches upon several key issues and challenges:

Indian ITeS-BPO industry and SMEs

Even though a few big Indian and multinational companies dominate the Indian ITeS-BPO industry in terms of revenue and in terms of employment creation, many small and mid-sized companies have also moved up the value chain by offering high end-to-end solutions through a global delivery model. These small and mid-sized BPO companies are increasingly adopting best practices from the industry leaders and are raising their share in the overall BPO industry by venturing into newer verticals, service lines and emerging geographies. Besides, the small and mid-sized companies are also envisaging opening up delivery centres in tier II, III and IV cities to improve their economies of scale to match up to the big companies. The small and mid-sized companies are facing stiff competition from the big companies in terms of pricing, volume and resources, therefore, it is imperative for them to survive competition by adopting newer business models and investing heavily in human resources to improve their quality of services, which is the prime reason for companies to source their work. In a bid to boost the confidence of SMEs the Indian government has extended the STPI Tax Incentive Scheme till 2010, which will undoubtedly help SMEs in reinvesting their profits and staying competitive

Most state governments have also taken initiatives to provide further impetus to the burgeoning BPO sector; for instance, the Karnataka government has announced the Millennium BPO Policy, which has underlined the future growth of the BPO sector in the state. The main objectives of the policy are as follows:

Besides these incentives, the policy also offers more incentives and concessions.

Outlook

Global ITeS-BPO spending

Outsourcing to low-cost countries continues to gain momentum in the current business environment, not only for reasons of cost and quality, but also as strategic business drivers. For instance currently, companies measure the advantages of outsourcing based upon various parameters such as reliability, speed to market, new market opportunities, lesser working capital, reduction in defects, higher customer satisfaction, and most importantly, emphasising on core competencies that help companies to improve quality and productivity. According to IDC, the global spending in ITeS-BPO witnessed 11.7% growth in 2008 at US$ 115.1 billion and it is expected to grow at a CAGR of 11.9% and touch US$ 180.7 billion during 2008- 2012.

Global segment-wise market share

Globally, CIS constitutes majority of the overall BPO spending (53.5%) followed by finance and accounting (22.6%), human resource (15.8%) and the training and procurement. Indian BPO companies are increasingly leveraging their advantages by raising their share in overall outsourcing arena. Globally, Americas and Europe Middle East and Africa contributed over 80% of the total spending on BPOs of US$ 115.1 billion in 2008; even though, the Asia-Pacific region’s share was quite low in these services, they registered the highest growth among all other regions in the world.

Road ahead

The Indian ITeS-BPO industry is expected to continue its march towards growth in future though its share of challenges is also expected to rise. The sector is likely to increase its specialisation in KPO, EPO and LPO. During the initial days the BPO sector was the driving force behind the Indian ITeS-BPO industry but currently the KPO sector, which involves providing high analytical services to global clients, is driving the industry’s growth. It is expected that the EPO and LPO segments will be the next big wave in the outsourcing arena.

However, in the backdrop of the current global recession, the ITeS-BPO industry is registering lower growth rate as compared with the previous few years. The financial crises in the US and the Europe have affected the overall spending on IT. It is important to highlight that export constitutes over 86% of the overall industry revenue and therefore, any crisis in the international market in general, and the US in particular, has a large impact on the sector.

It is evident that recession has taken a toll on the overall growth of the sector; for instance, during FY04 to FY08, the sector registered an average growth rate of around 39%, while in FY09 the growth declined sharply to 18.2%. Consequently, the BPO export revenue has also recorded a much lower growth of 17.5% during FY09 as compared with a 37.0% average annual growth rate during FY04 to FY08.

Nevertheless, the economic slowdown has opened up opportunities for the Indian ITeS-BPO companies, as global companies are likely to adopt outsourcing as an initiative to reduce cost. The Indian companies have to be proactive to grab the opportunities and should venture into newer markets, verticals and service line. Besides, the Indian ITeS-BPO companies should further explore the domestic market, which offers immense opportunities.