11/06/07

John Chambers, CEO of Cisco, once said that “there is no substitute for being in the right industry at the right time.” By that account, the BPO industry in India is where one should be today. Several of my readers have asked me to put together a primer on BPO. So here goes. We will look at what BPO is, the key numbers, the industry structure & its evolution, key trends and some potential roadblocks.

Outsourcing is a well understood, tried & tested management process that global companies have been using to move to a “boundary-less” organizational model. From its initial focus on cost-cutting, outsourcing is now increasingly viewed as an enabler for long-term competitive advantage, process efficiencies and co-innovation. Most of the media noise over the last decade has focused on IT outsourcing (ITO) – Think helpdesk support, data center operations, application delivery & support. Business process outsourcing is the process equivalent of ITO – Think payroll processing, financials & accounting and customer support. And then, there is the off-shoring dimension. Countries such as India, China and South Africa have been vying for a share of the global outsourcing market. In this post, I will treat outsourcing & off-shoring differently to the extent I can, so that the big picture is a little clearer.

The Numbers

OK, let’s dive right into it:

  1. According to TechNewsWorld, the global outsourcing market (including all services, industries & geographies) is estimated at over $5 Trillion

  2. Gartner estimates that total Global IT spending in 2008 will exceed $8 Trillion

  3. Depending on which analyst you ask, the Global IT outsourcing market is anywhere from $100B to $600B. The more concrete numbers here are around the off-shoring component. According to NASSCOM, the Indian IT industry (includes a small BPO component) raked in $24B in 2006 and $32B in 2007. NASSCOM estimates that the Indian IT sector will generate $60B by 2010. As of 2007, the Indian IT sector employed 1.6M people. That is 1.6M jobs that did not exist a few years ago!

  4. Now for the BPO numbers. According to IDC, the global BPO market in 2008 is estimated to be around $680B. Gartner estimates that the off-shored component of BPO in 2007 is $25B. And NASSCOM estimates the size of the Indian BPO sector in 2007 is $8.4B. That is, India currently has 33% of the global off-shored BPO market and that less than 5% of the global BPO market is off-shored. Most estimates put the size of the Indian BPO market by 2010 at $20B. As of 2007, the Indian BPO sector employed 553K people. Again, these 553K jobs did not exist 4 years ago. And McKinsey estimates that the Indian BPO sector will employ over 1M people by 2008.

  5. And while we are discussing numbers, let us also talk about KPO. Evalueserve estimates that the Indian KPO sector will generate about $10B and employ 250K people by 2011

These numbers aren’t as outrageous as FaceBook’s reported $15B valuation by Microsoft, but are staggering nonetheless. The IT, BPO and KPO sectors in India are looking at a CAGR of 20-40% over the next 5 years. Remember John Chambers’ pearls of wisdom?

The Services

Let’s come back to the topic of our blog – BPO. What is it? PwC suggests that the BPO market could be broadly broken down into three functional areas:

  1. Business Administration – Payroll, HR, Finance and other general back-office functions

  2. Supply Chain Management – Procurement, Warehouse / Inventory Management, Transportation & Logistics

  3. Sales, Marketing & Customer Care – Analytics, Acquisition, Retention, Cross & Up selling

More specifically, the key BPO services that have been offered by Indian vendors over the past 5 years are:

  1. Customer & technical support services (a.k.a Call Centers)

  2. Telemarketing services

  3. Helpdesk services

  4. Insurance processing

  5. Data entry, transcription & conversion

  6. Scanning & OCR services

  7. Bookkeeping & accounting services

There is a fair bit of grey area between BPO and KPO services. I think of BPO services as those that resemble the proverbial assembly line, with maybe a little bit of data reconciliation and research involved. Processes that require deep domain or industry knowledge, research & analysis, taking a step back & looking at the larger picture, are what I would consider to be in the realm of KPO services. Having said this, BPO services now include a number of sub-categories such as:

  1. Legal Process Outsourcing (LPO) – Starting with low-end transcription work, these services now include patent processing, market identification, litigation documentation & legal research

  2. Research Process Outsourcing (RPO) – This is the R&D in the bio-tech and pharmaceutical sectors (drug discovery, clinical trials etc)

  3. Human Resource Outsourcing (HRO) – From its humble beginnings, this sector has grown to include payroll management, training, staffing, benefits administration, retirement planning & compensation consulting

  4. Medical BPO – Apollo Hospitals in India is now offering outsourced hospital administration services

  5. Procurement BPO – This is the management and / or execution of one or more procurement activities, all the way to outsourcing the entire procurement function

The Industry Structure & Evolution

According to a recent PwC report, BPO in India evolved in four distinct waves:

  1. In the 80s and 90s, Fortune 1500 companies like AmEx, GE and CitiBank setup call center and back-office operations in India. These were “captive” units. That is, they were owned and operated by the parent company. So, in essence, this wasn’t outsourcing per se. Rather, a multinational corporation was just leveraging a global labor pool

  2. Then, in the early 2000s, venture funded BPO companies, like Spectramind, sprung up and provided BPO as a service

  3. Next, leading IT services companies like Wipro, InfoSys and HCL leveraged the natural synergies with their IT & software business and extended their offerings to include BPO. Most of these firms built BPO capabilities through acquisitions rather than organic growth

  4. Next, we are now seeing domain / industry specific players, like TechMahindra, entering the BPO market to “verticalize” their offerings

Sanjeev Kumar, a PhD candidate at UMich’s Ross School of Business, and his advisor, Prof. M.S. Krishnan, have come up with the following model to describe how BPO is evolving. I think this model is very descriptive, though I would argue that what they call BPO 3.0 is being referred to as KPO in the trade rags. For Sanjeev’s complete article, click here.

The Key Trends

  1. One key trend we have seen is for service provides to “move-up-the-value-chain”. Wipro, InfoSys and other Tier 1 ITO vendors have entered the BPO space in the last 2 – 3 years. I think the CIO / CTO mind-share that all the ITO vendors are clamoring for is pretty diluted. So, these vendors are moving to more of a solution focus, rather than a pure technology focus. And after BPO, the next logical step will be for these vendors to include KPO services (BI, Analytics, Strategic Advise) in their portfolio

  2. The attrition rates are coming down, especially as the BPO vendors move to Tier II and Tier III cities in India. Some recent estimates put the attrition rates at around 15% for non-voice BPO services

  3. India’s share of the global off-shored BPO market has been declining. So, we are seeing Indian BPO vendors establishing beach-heads in other countries such as China and Ireland. HCL recently bought an Irish call center and used that as leverage to get a sizeable BPO contract from British Telecom

The Key Roadblocks

  1. The weakening dollar will continue to be the “monkey-wrench” for Indian BPO vendors. The only solution for these vendors is to continue to deliver higher-value services that justify higher bill rates. The other hedge strategy that is already underway is to start building capabilities in cheaper off-shore destinations

  2. The huge employment numbers suggest that there will be significant HR issues in the near future. Putting together a labor pool with millions of “BPO worthy” employees will take a minor miracle, even with India’s large educational infrastructure

The Key Takeaway

I understand that most of us in Corporate America who wear IT or business operations hats are wary about BPO & off-shoring. We can continue to debate what these trends & numbers mean for the American economy and employee. My key goal in this post is to establish that BPO & off-shoring are real, big, growing and here to stay. Make sure you think about this when launching your start-up or planning your next career move.

Sampath

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