Businessworld

Price is crucial = as=20 employees on voice processes are paid 12-15% higher wages = than their=20 non-voice colleagues. That=E2=80=99s because the odd hours = and stress has=20 caused an attrition rate of 40-45% among voice employees as = against=20 30-35% for non-voice work. This increases recruitment and = training=20 costs. Vikram Talwar, CEO, exl, estimates that Rs = 45,000-50,000 is=20 spent on training an agent and if he leaves within three to = five=20 months, it increases overall costs of = operations.

Second,=20 unlike in the past, costs (of labour, in particular) may not = be an=20 advantage for long. Overall costs of BPO operations are = rising=20 rapidly. Unless Indians graduate to more value-added = business =E2=80=94 or=20 contain costs =E2=80=94 they will become financially = unviable given the=20 rock-bottom prices in the business. For non-voice work like=20 transactions processing, a company billing below $6 will be = unable=20 to recover costs. =E2=80=9CLabour costs should be no more = than 30% of the=20 total BPO costs. So, if small players desperate for deals = want to=20 survive, price cutting will only lead to a quicker = end,=E2=80=9D says Sujit=20 Baksi, CEO of HCLT BPO.

Already, average labour costs = are=20 30-50% of total costs (up 15-20% since last year). The = weakening=20 dollar adds to cost pressure. Of course, as of now, the = dollar=20 fluctuation is not very high, so it is not a cause for = worry. =E2=80=9CBut=20 those who promise to deliver at low rates, this (dollar = fluctuation)=20 could have a greater impact,=E2=80=9D says = Maheshwari.

Added to this=20 are customer acquisition costs =E2=80=94 about 10-15% of the = revenues.=20 Incidentally, for captive units like those of Convergys and=20 Accenture, this is not a consideration as they are moving = existing=20 business here. But others, like a lot of technology = help-desk=20 operations, fell into the desperate trap of offering = technology=20 troubleshooting at an unviable $4-5 an hour.

The = third factor=20 is the lack of experience in dealing with large $100-million = contracts. In fact, for the dozen-odd big Indian players, = getting to=20 the $100-million club will depend on their ability to ramp = up=20 operations rapidly. Here, the 40% average attrition rate is = the=20 biggest hurdle. More importantly, firms will need to = consolidate=20 business within a few clients. Ideally, for a 10,000-people = centre,=20 there should be only 25 clients.

=E2=80=9COtherwise, = the management=20 will be stretched too thin. There will be large number of = people in=20 the middle and top management. Relationship-building will be = a=20 problem and companies will start losing control,=E2=80=9D = says Shyam=20 Viswanathan, associate dean, Indian School of Business, = Hyderabad.=20 Unless, of course, the business is highly commoditised like = that of=20 Automatic Data Processing (ADP). The $7-billion payroll = processing=20 company offers services to thousands of = clients.

Daksh CEO=20 Sanjeev Aggarwal says: =E2=80=9CWhen we are a 10,000 people = operation, we=20 don=E2=80=99t plan to have more than 25 clients. So we can = manage operations=20 better, without diluting quality.=E2=80=9D

But = ramping up operations=20 with just a handful of clients will, in turn, depend on how = quickly=20 Indian BPO companies are able to capture more business from = the same=20 clients. The critical issue here is not to repeat the = mistakes made=20 by IT companies =E2=80=94 that of getting stuck with plain = vanilla=20 businesses. Says Ashwani Srivastava, CEO, Valdel = Corporation, a new=20 BPO start-up based in Bangalore: =E2=80=9CA lot of = third-party players will=20 be saddled with vanila processes. The high-billing work may = not come=20 their way on grounds of data protection, certifications and = lack of=20 skills.=E2=80=9D

The winners will be those who can = convince=20 their clients to trust them with more end-to-end processes. = Thomas=20 Mead, chief sales and marketing officer, exl, says: = =E2=80=9CMost companies=20 are doing business task outsourcing =E2=80=94 data entry, = staffing, payroll=20 processing or call centre work. These are subsets of large=20 processes. HR has 18-22 sub-processes. Someone doing only = payroll=20 cannot claim to be doing HR. A lot of the end-to-end = processes are=20 yet to come to India.=E2=80=9D

The Threats

The $1.3-billion call = centre=20 company Convergys Corp. is nearly half as big as = India=E2=80=99s entire BPO=20 industry. Its 45,000 employees operate from 46 facilities in = the US,=20 Canada and elsewhere. In November 2001, Convergys set up = operations=20 in India. Just 18 months later, it has 4,464 employees (as = on 2=20 July), growing at 40 per week. Another US-based IT major, = the=20 $21.6-billion EDS (25% of its revenues comes from BPO), set = up a=20 700-seat centre in Mumbai in May. And the US-based = $11.2-billion CSC=20 has set up a 1,000-person facility in Noida, of which 100 = are in=20 BPO.
Global third-party BPO majors like these offer = India=E2=80=99s=20 dozen-odd outfits on the high growth path their biggest = threat.=20 Especially because their Indian operations can offer the = same=20 advantages that Indian companies can. As Indian BPO firms = grow in=20 size, they bid for large contracts. And for 70% of such = deals, they=20 already compete with these MNCs.

Here, the MNCs have = the=20 advantage of financial muscle to drive down prices. Says = exl=E2=80=99s Mead:=20 =E2=80=9CWhen EDS, CSC, Accenture get moving in a serious = way, they will be=20 playing for such large contracts that a single order would = be bigger=20 than most of the companies rated by Nasscom in the Top 10 in = India.=20 They will routinely sign contracts greater than $100=20 million.=E2=80=9D

Another big threat lies in the = mushrooming of small=20 BPO companies (nearly 300, though Assocham estimates 400). = Not too=20 long back, while bidding for business through the middlemen, = the=20 glut of medical transcribers drove the price of a line of=20 transcription down from 12 cents to as low as 2 cents, = undermining=20 both quality and profitability. Most medical transcription = companies=20 went bust. More than driving down rates, these companies had = a=20 negative effect on the industry as a whole because of their=20 inability to deliver as per the contract.

Already, = this=20 phenomenon is beginning to spoil the BPO space =E2=80=94 = with companies=20 quoting low billing rates to grab business. So while big = domestic=20 players are announcing capacity expansion virtually every = quarter,=20 smaller players like First Ring and Icon Data are struggling = for=20 survival. Icon Data acquired a sub-contracting BPO company = in the US=20 recently, but with largely voice-based operations, it could = be=20 feeling the heat. Add to this, the low average capacity = utilisation=20 of the industry of 1.6 (of the three, eight-hour shifts=20 possible).

At the end of the day, the Indian BPO = sector has=20 more to fear from the failures than the MNC stampede. After = all, the=20 former will do more harm to the image of the country and its = capabilities than any price cuts that the MNCs may engage = in.