Industry Research : Losing Cost Advantage, BPO Companies Stare at Slipping Growth
India’s billion dollar business process outsourcing (BPO) industry is going through a rough phase with increasing pressure on margins and diminishing cost arbitrage. India’s cost advantage as an offshoring destination, its trump card, has dropped by 30-40%.
Quicker response time, better technical support and near-shore advantages are driving businesses to other outsourcing destinations, say experts. In addition, wage inflation over the years, forex losses and poor hedging strategies have impacted the margins of BPO companies further.
Despite the aggregate revenue for FY12 expected to cross the $100-billion mark, industry watchers feel the sector is facing an acute identity crisis, with the lack of vision and innovation dragging down business volumes. Adding to the challenging climate is the high attrition rate. The sector, which used to attract employees in droves, is now finding it difficult to hold on to them due to the absence of a distinct career graph and dipping perks.
"The margins are extremely under pressure and it will continue with rising labour costs. BPO is a very operation-intense game and today there is not much of differentiation among service providers. The conventional BPO service has become extremely commoditised," says Canaan Partners, India, MD Alok Mittal. The California-based venture capital firm focuses on technology and BPO firms.
Genpact’s senior VP Shantanu Ghosh feels margins in case of call centre business will face continuous squeeze. "BPOs with just customer service offerings will definitely have margin challenges. In our case, percentage of customer service is only in single digit," he says, adding that most big players are moving up the value chain to boost up margin. "However, from the pricing perspective, it is difficult to generate big margins. Pricing has been under pressure due to increasing competition," says Ghosh.
In the last four years (2008-2012), the compound annual growth rate (CAGR) for the sector has been sluggish a 12.47% against India’s IT services exports, which posted a 17.23% growth during the same period. Even in FY13, a challenging year with foggy visibility in client spend, Nasscom predicted IT services to grow by at least 11%.
A 2012 study by Hackett Group, a global consulting firm, highlighted that offshoring of jobs to India will begin to decline by 2014. The study predicted the traditional model of US and European companies shifting finance, IT, and other jobs offshore to reach the end of its "lifecycle over the next 8-10 years, as these firms run out of jobs suitable for moving to low-cost countries". According to the research, challenges facing the Indian offshoring market include local wage inflation and increase in competition from other low-cost labour markets.
"We clearly see the growth levels declining, from double to single digits, as the number of jobs left to be moved offshore draws down. As the rapid growth of the recent past begins to abate, we’ll see a movement towards a more commoditised market," says Hackett Group director Martijn Geerling.
Talent crunch and sky-rocketing attrition rates are adding to the woes. "Attrition is one of the biggest challenges being faced by the industry. Attrition is the manifestation of the demand-supply gap. We have not fine-tuned our skill sets. Today we don’t see employable candidate as our system is producing mostly educated unemployable youth. As a country we have to upgrade the education system," says Quatrro BPO Solutions CMD Raman Roy.
However, experts feel that a monotonous work profile and limited career progression also restrict youngsters from seeking BPO jobs. Companies have realised that sleek interiors and swanky glass facades no longer appeal to employees looking for long-term career options and stability at work. In the last few years, attrition rate in the BPO sector has peaked at 40-50%, making it the highest amongst all industries.
"BPO is not high-value work. It is a clerical and repetitive role. That’s why the attrition level is high. Though companies have employee engagement programmes, it doesn’t change the nature of the job," says Sid Pai, partner and MD, TPI India, a sourcing advisory firm.
A Gallup study released in November that analysed more than 75,000 respondents across eight BPO organisations over a two-year period stated that two out of every three employees in the BPO industry are not engaged in their workplace. The survey noted that a lack of workplace engagement results in low organisation loyalty as well as an unwillingness to recommending their organisation to potential candidates in their own networks.
According to Nasscom, the Indian BPO industry employs about 8.76 lakh people across 500 companies.
WNS CEO Keshav Murugesh points out that companies which have managed to articulate the differentiation of services and positioned themselves as high value-added services providers are starting to see better growth. "Over the last few years WNS’ revenue was decelerating. But last year we had an organic growth and in FY13 we have guided double-digit growth. We have verticalised our services in domain and have adopted technology-enabled non-linear model," says Murugesh.
According to Nasscom, software services is the fastest-growing segment, clocking 19% growth in FY12, while BPO exports grew at 12% over last year. "Gone are the days of over 30% growth for the BPO sector, going forward it will be in low single-digit," says TPI’s Pai.
During FY12, within software and services exports, IT services stood at 58%, while BPO accounted for 23%. "The Indian BPO industry has not got into value proposition yet, which is one of the main reasons why growth is stagnant. Today we have fundamentally different buyers for outsourcing," says Pai, adding that scalability has become a major concern for the companies. "Today none of the standalone BPO firms are of significant size. They are mostly in the $350-million range."
Gaurav Gupta, vice-president and partner at consulting firm A T Kearney feels that BPO businesses of the Indian IT firms are not growing any differently than the pure-play firms. "Take the aggregated BPO business of the IT firms – it will be under15%. They are all in the 10-15% growth band," notes Gupta.
Earlier, global private equity (PE) firms were keen on funding BPO companies because of the growth potential. "Private equity firms look for higher value exit, which is difficult in today’s market. To identify the next level of innovation is the challenge for investors," says Mittal of Canaan Partners.
"BPO business has become a big-guy game. Smaller players with niche competencies will get acquired. Like in analytics space, everyday you hear firms getting acquired by larger firms. It is a very consolidated game and a big player’s market," says Genpact’s Ghosh.
Posted by Veronica Silva Cusi, news correspondent
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Published: Monday, December 3, 2012