09 August 2011

BPO: Is Doomsday Near?

Doomsday, Armageddon, end of the day, as we all know these words or phrases have negative connotations, and outside religion they can never have any positive aspects associated to them. For that matter, even the slightest doubt that something is heading for any of these cannot be good.

According to a NASSCOM report the IT/BPO sector is estimated to aggregate revenues of $88.1 billion in FY2011 of which $12 billion is from the BPO sector. They are also estimating the domestic segment to grow and reach 127 billion by 2011 and are predicting a very bright future for the industry. It seems to be such a great time for the BPO segment, or is it really?

There are many developments in the Indian BPO industry that might not have a very positive effect on the industry, which makes it doubtful on the prospects of the industry. To begin with, the STPI Act ending on the 31st of March, MAT to be levied on units operating in SEZ, a lack of availability of skilled labor, an increase in labor cost, and finally other countries like Philippines are gaining more prominence in the market.

It is these factors in the segment that makes one wonder 'Is the future going to be a bright one for Indian BPO sector or is it nearing its doomsday?'

The Budget Woes

For long, IT/ITeS companies had been under the protective umbrella of the STPI Act. Launched by the Indian Government back in 1991, the STPI Act provides facilities to IT industry for undertaking software development and IT enabled services for 100 percent exports using data communication links in the form of physical exports including export of professional services. Individual units can also do business in the domestic market up to 50 percent of the exports. With the act expiring on the 31st of March and the government is not showing any signs of providing an extension to this, spells trouble brewing for the BPO players. Also companies in Special Economic Zones were safe from MAT till now, but the recent budget made it clear that this will no longer be so. The levying of MAT along with non-extension of STPI Act beyond FY11 will have a major negative impact the IT/BPO sector as profit margins of these companies(especially small and medium) who enjoyed tax exemptions under the above mentioned schemes is expected to come down.

Though this might not affect the giants in the industry very badly it can be a knockout punch for the small and medium companies who are still surviving from the recession. "SMBs will get hurt due to the withdrawal of tax benefits here. On the other hand several other competing countries have these benefits and naturally business will start moving towards those countries," says Shanmugam Nagarajan, Co-founder & Chief People Officer, 24/7 Customer. But being small and medium in size seems to have its own advantages, "The benefits of being small are that you can be more nimble and more agile; you can also be more responsive, faster and better to client need. The SMB sector has to learn to exploit that more and more, as it looks to win larger contracts in the industry," says Manoj Malhotra, CEO, Salient Business Solutions.

Post recession many of the companies are looking to outsource everything other than their core processes and are no longer just looking at the cost advantage or labor arbitrage; rather they are looking for service providers who are technologically advanced and are capable of providing niche end to end solutions. The prominence that Business Transformation Outsourcing (BTO) gained in the recent times is due to this. BTOs help its clients in more ways than one; they help in cost and labor arbitrage, reduction in time required for product development, helps in reduction of complexity of major projects, and many more. So a migration to BTO models might just help our BPOs.

Well, the migration to BTO model might not be an option anymore, "The companies have no choice but to deliver more value as customers are expecting more value added to the services being offered," says Rahul Kanodia, Vice Chairman and CEO of Datamatics. "This is good as it forces the company to move up the value chain and stay more competitive. The companies can also charge a premium price for these value added services and make profit from it," Kanodia added.

Unskilled Labor, Threat of New Geographies - The rising wave of challenges

Talented and skilled employees are the main reason behind any company's success. While talent retention has always been a challenge for BPOs, now they are staring down the barrel of a different kind of issue, lack of availability of skilled labor. As per a NASSCOM report, the outsourcing industry is expected to face a shortage of 262,000 professionals by 2012. The direct result of the lack of availability of skilled labor will be the inflation of pay roll cost. The major cost factor for a BPO is its pay roll cost, about 50 - 70 percent of the total operational cost, when this goes up the profit margin goes down. This will in turn force the BPO companies to increase their service costs, which will make their customers look for cheaper alternatives. Lack of the availability of skilled labor together with increase in labor cost can be a lethal combination not just for SMBs, but also for the giants of the industry.

"We need an excellent education system that train individuals for jobs in BPO industry as well. If academia introduces courses in spoken English and business communication at least for the last two years of school or college and make this compulsory, this will help in eradicating the scarcity in talent pool in the industry," says Nagarajan. Philippines have a large English speaking population created through change in their educational structure. So Philippines has two advantages over the Indian BPO sector, cost arbitrage and availability of skilled labor.

A report by World Bank highlighted that last year Philippines outstripped India as the world's "call center capital" in terms of manpower and growth in BPO receipts and the industry data showed that at the start of 2010, revenue generated by the BPO sector in the Philippines stood at $5.5. This is no longer a negligible threat. As of now Philippines BPOs are concentrating more on the voice processes, mainly of the U.S. clients, and they are not very strong in the non-voice area, whereas India is very strong in the non-voice processes. But one can see that it is only a matter of time before they gain strength in the non-voice areas as well.

"India has another huge advantage, which is its gigantic domestic market. This market is a huge opportunity for the Indian BPOs to leverage on. This is something the Philippines does not have," says Kanodia, pointing out an advantage India has over Philippines. Indian domestic BPO market is expected to grow by 16.9 percent in FY2011, to reach Rs 127 billion. This presents an enormous opportunity for the Indian BPO companies. The companies should not shy away from this and should leverage it to the utmost extent. This can enable them to go a long way.

What should we do to survive the Doomsday and stay afloat?

"It is given that there will be a cost arbitrage. But if you are going to win the contract you cannot rely solely on that, because you can be rest assured that there will be at least four others on the same table with you who would have the same cost arbitrage or even better. So cost arbitrage will remain an important factor, but not the sole defining or decision making criteria, and you have to provide more than that to win a contract or to swing a job in," says Malhotra. So low cost is no longer one of our strengths; we cannot compete with the likes of Philippines in terms of cost arbitrage. We have to look at our strength which is the experience we gained trough working with different companies in the field for several years and start providing more value added services to the clients.

Secondly much attention should be given in developing the necessary work force. BPOs have already started working with universities for developing course models that equip the students with necessary skills to be a part of the industry. As Nagarajan mentioned, a focus on spoken English and business communication in the school or university level will go a long way. This will definitely help in increasing the availability of workforce in the industry.

Government support plays a huge part. "When we were working with China, the government was giving the company that we partnered with, 200,000 squre feet of fully furnished office space, free computers and software, no electricity charges, no water charges, no tax for five years, no employee tax for two years, and subsidized housing for employees. In China the operational cost is about half of that in India, plus all these support from the government, there is no way India can compete," says Kanodia. Governments in countries similar to ours around the world are providing more and more support to the industry understanding the real potential of it. Our Government has to do the same for the uninterrupted growth of Indian BPO industry.

As a whole, with all the dark clouds of the immediate threats for the BPO industry, it definitely looks like the doomsday is near. Still one can slightly see a ray of hope emerging from all dark clouds, which suggests that this need not be the end. But the industry has to act now and act fast if it wants to escape and survive.