This highlights the reasons behind the recent success of India with respect to call centers (and allied industries) and illustrates the dynamics and trends that would shape this industry in the near future. Stages Of Growth – Depicting Ensured Growth And Profitability Prospects It all started with outsourcing to the local Indian partners, to evaluate the competence of the sub-continent for a period varying between 6 months to a year and having being convinced of the sustainability, establishing their own centers in the country. The growth has been supplemented with an increase in contact centers for captive purposes being set up by telecom majors like Bharti, financial services giants like CitiCorp and American Express and IT companies like EDS and Computer Associates. Further, the shift of a bulk of back-office processing work to India has also contributed to the overall growth. It is estimated that by 3Q 2002, the top three firms in India will span a total of 12-14,000 seats amongst themselves – which translates into 36,000 CSAs, occupying close to 1.2 million sq.ft. space even by conservative estimates. If we add other contact center functions and back office operations to this, the numbers become more impressive – 170,000 seats accommodated in approximately 15 – 16.5 million sq.ft. Global corporates are expected to continue outsourcing their outbound services since a greater level of control can be exercised, the performance can be monitored and measured easily and deliverables can be defined more easily as compared to in-bound services. This works in favour of the domestic industry since the client charge-back is generally higher than in case of in-bound services. Even in the global call center operator segment, the top three professional companies have already initiated operations in the country and others are in the process of quality evaluation through local outsourcing. Even the latter has expressed a keen desire to initiate their owned operations within the next year. This increasingly strong linkage with the global industry players has further led to a continuous enhancement in the quality and service standards amongst the Indian players and the globally accepted performance standards have become a norm for the industry also, providing further impetus and recognition for the Indian market. The industry growth rate has continued to rise – defying the global recession trends. The CAGR over the past two years has been in excess of 70% (in terms of employees) which is unparalleled across all other global destinations. The majority of investment is directed to Delhi, Mumbai and Bangalore. Even though the current tech-slowdown is expected to have an unavoidable impact on the industry, the growth rate will perhaps witness only a marginal decline. Operational Strategies And Benchmarks This can be illustrated by the fact that a number of corporates are now looking at the second stage of expansion after reaching the threshold in their first center. GECIS has already launched operations in Hyderabad and Bangalore after two centers in Delhi (Gurgaon). EXL- Conseco, after opening two centers in NOIDA (eastern suburb of Delhi) is currently expanding into Mumbai.
Functional Segments : High Value Added Services And Specialised Customer Support
Human Resources Concerns 1. Broadly speaking there are three strengths of the existing work force in India for a BPO operation.
2. Our interaction with various existing operators in India has brought forward the following concerns:
Sustained Advantage – Labour Quality And Cost With the average gross compensation for a CSA (in-bound services being in the range of US$ 2000-2500 per annum, it provides a substantial saving of upto USD 2 million per annum for a 500 seat call center compared to an alternate location in the United States or UK. Education And Skill Levels It needs to be mentioned that the salaries are increasing regularly at close to 5% per annum primarily due to increasing competition and increasing employment opportunities with domestic and transnational corporates. The salaries for the high-end technical services and executive staff are getting aligned to global standards – which again is evidence of the increasing competitiveness and acceptance of the Indian professional labour. However, the low employment levels (average of 37% in the four major destinations – Chennai, Bangalore, Delhi and Mumbai) in the country – coupled with increasing literacy rates will ensure that the salary differential (between India and other overseas destinations) in the call center industry will continue to exist for the next five to eight years at least. Compare this with the low break-even periods and it becomes obvious that the time to enter India is now. Labour Training And Skill Issues – Bulk Recruitment A Concern Secondary cities still lack the scale and capacity in this regard but this is not considered a limiting factor by the industry since internal corporate training is anyway considered sacrosanct by the corporates. At the same time, specialized trainers are quite mobile and available throughout the country. Accents and cultural backgrounds differ immensely across the country and even though in most metropolitan cities the medium for higher education is English, a certain degree of training is considered necessary and the extent (and hence costs and time) varies in different cities. Cities in the southern part of the country which have a strong local accent are hence not the priority destinations for voice-based operations, especially for manpower intensive operations (say an induction requirement of 1000 people annually). However since these destinations provide a substantial cost advantage, they are preferred for out bound operations for specific customer segments, including financial services, marketing and technical support. Compensation And Employee Susidies Food and transport are perhaps the second largest component of the employee cost-to-company.
Secondly, in the smaller cities the accrued savings can be quite substantial by lowering such costs.
Attrition Levels – Opportunity Costs The smaller domestic brands which do not have a strong HR policy and low compensation standards are the worst effected since the trained manpower becomes an easy target for the prominent brands – both international and domestic. Since the average salary levels are quite low, even a small differential in the salaries can become incentive enough for a person to shift to a better brand. However, outside the larger metros, attrition rates are fairly low (18-25%) compared to established overseas destinations. Since the opportunity cost in terms of business loss, extra cost in recruitment and training the replacement can be as high as 0.8 to1.5 times the annual salary of the employee – this further translates into a massive cost advantage while considering the 30-35% attrition rates in Ireland and UK. Operational Cost : Real Estate Most of the operators find it feasible to retain the choice in flexibility of infrastructure and utilities and hence prefer bare shell and core space. Since call center operations require high efficiency, regular configuration and large floor plates, even industrial properties are becoming viable locations for launching such operations. The industrial sector in India has traditionally been subsidised by the government, including the land prices. Due to this, the rentals in such properties are fairly low in comparison to commercial office space, and substantially lower than comparable property in UK, USA or Australia. In addition to a clear advantage in the rentals of such industrial property, the commercial property rates are most competitive in the entire South- East Asia region. Operational Cost : High Profitability And Break-Even Periods The break-even periods in India can be as low as 12-15 months, which is substantially lower than both UK and USA, even after a lower client charge-back. Further, by achieving higher return on investment even after reducing the client charge-back, companies can gain a substantial global operative advantage also. Real Estate: Costs Getting Standardized But Availability Varies Hence in the larger metros like Mumbai and Delhi (and even Chennai to some extent), properties in the suburban areas are the most likely targets while in Bangalore, Hyderabad and Pune, such properties can be found even in the off-CBD quadrants and alternate commercial districts within the city. For this reason, costs have become only a secondary concern for the companies. There has been a significant shift from last year when there was a clear distinction between the values across the country, with Mumbai leading the pack. This was primarily due to restricted supply of good properties in the low value suburban locations but the situation has changed significantly since then with adequate choice being available in each city. Availability of appropriate options within the most preferred quadrant in a city is however still an area of concern and requires detailed due-diligence before a decision can be taken. From bare 'Shell and Core' properties to flexible Grade A properties, there is an entire range of options which enhances the ability to control capital exposure and recurring costs. Selection of property is critical to maximize the cost advantage in establishing operations in India. Since most of the corporates are adopting retrofitted industrial properties for their operations, the prices for such properties have been homogenous across the country and for this reason it is imperative to identify and negotiate the lowest rentals in properties which suit all other requirements, even if makes only a marginal impact. Locational Concerns
Quadrant Preferences And Transport Cost Issues Due to the low employment rate in the urban areas as compared to UK or even USA, the labour is not hypersensitive to long commute times and travel problems. This gives more leverage for the operator to minimize his occupancy costs with commute distances being accorded secondary importance. However, this will have to be within limits of commute tolerance, which varies from city to city even within India. Each of the states are offering extensive subsidies and incentive packages in addition to the near 100% tax holiday on income from the call center operations. Registration with STPI further implies exemption from import duties and local taxes on cross border movement of equipment. For corporates who are looking at establishing their own campuses there are attractive incentives on land costs, exemption from transfer duties (which can otherwise constitute upto 12% of the transaction cost & relaxation in developments controls – such as increased FAR. Direct subsidies on employment are also being provided by certain states, which lead to a substantial saving on capital investment. Women working in the night shifts as well – this was a major concern on most enterprises working on a 24/7 basis and the laws has been amended in most of the states as part of the policy initiatives for advancement of IT in the states. Exemption from ESI and workmen compensation acts – even though most of the IT Enabled services do not come under the purview of this law due to higher salaries than the minimum limits defined under the law, it was still a concern for the lower level and junior employees. The prime concerns were in terms of extra documentation and administrative inconvenience. Infrastructure: Connectivity And IT Infrastructure Will No Longer Be An Issue Defining Locational Competitiveness Till late last year the infrastructure of DOT (Department of Telecom) and VSNL was not found adequate for the requirements of the region and the extent of fiber coverage in the country was also limited to the major cities only. All-fiber connectivity (to the submarine hub at Mumbai) was fairly restricted which was an impediment to the voice based call center operations. Between DOT , VSNL and Power-grid Corporation, and Bharti, most of the primary destinations in the country are hence linked to the submarine channels, providing adequate scalability in bandwidth on demand. After the likely privatization of long distance telephony and international full circuit leased access, there is likely to be a major improvement in availability and also a likely drop in the prices-which is currently perceived as a disadvantage in the country. Distribution of bandwidth is also going to receive a fillip with the launch of the 50,000 km Bharti fiber network in the country, tapping on i2i (Singtel cable) and Flag (landing at Mumbai). Coupled with the augmentation of bandwidth, we are also witnessing a steady improvement in the service and reliability of the domestic links and last mile which used to be a major concern till some time back. Even though no SLA is offered currently by VSNL (who has a monopoly over the international leased circuits), the uptime has increased to 95% from most locations. This factor, complimented by the SLAs being offered by the international carriers like WorldCom, MCI and Sprint, has significantly improved the acceptance of the country amongst the major industry operatives. Indian call center industry is on the threshold of second stage on the maturity curve and is moving towards an era of more stability and the initial euphoria has subsided. All variables point towards increasing competitiveness of the Indian sub continent for this industry. However, steps would need to be taken by the government agencies to improve the overall investment climate and evolve a supporting legal structure to ensure sustainable growth of the industry. With some key infrastructure privatization decisions expected to be taken by the government in Q2 next year, the competitiveness is expected to increase even further. About Jones Lang LaSalle Incorporated: |
Published: Tuesday, February 4, 2003
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