On the supply-side, despite the continued growth in M&A activity, the market remains significantly fragmented. Large service providers are responding to customer demands for a more extensive service portfolio by expanding into related areas of Finance and Accounting services (e.g. billing, collections), HR outsourcing, etc. Additionally, large IT services firms are leveraging their existing client relationships as well as expertise in IT outsourcing and other areas of business services outsourcing, such as Finance and Accounting, insurance, healthcare, and payment services, etc., to expand their capabilities in the customer care segment. This trend is accelerating the adaptation of IT to BPO solutions.

 

Technology adaptation to BPO is also helping drive down costs, by allowing service providers to choose alternative channels such as interactive voice response (IVR), innovative technology platforms and Web-based service delivery; and helping develop newer engagement models such as hosted contact center outsourcing that offers a discounted access to client organizations, without them having to incur high capital expenditure.

 

The challenges faced in 2007

Significant global integration and consolidation is taking place in the BPO space and Indian BPO companies must factor in this trend to get their strategies right. 

Having established a brand that connotes quality and lower cost, the Indian BPO sector has emerged as a dominant global player and is poised to be the main beneficiary of this aggregation opportunity. Some of the changes happening outside and within the Indian BPO industry are rapid but subtle, and likely to be overlooked. These changes need to be factored in by BPO companies to get their strategies and decision making aligned to various opportunities which exist in the global market.

 

Some of the challenges, which will have a lasting impact on the Indian BPO sector, are as follows:

• The Sub prime crisis in the US
  Never before has the US mortgage industry experienced such a dramatic need for new operating models such as outsourcing. Mortgage lending firms have been forced to navigate rough waters churned by the housing bubble, the sub prime crunch, and a tighter lending environment. Now lenders must explore every avenue to boost operational performance and drive efficiencies. Increasing sophistication by Mortgage Process Outsourcing (MPO) providers allow opportunities for lending firms to combat these problems, but lenders are only now beginning to explore the breadth and depth of provider services. Many lenders have yet to grasp how to drive maximum value from MPO.
  
  In the current business environment, the mortgage industry, more than any

  Considering the recession in the US, offshoring is an imperative and hence, anti-outsourcing rhetoric won’t have much impact. BPOs in India are going to benefit from the global credit crunch as companies will resort to more offshoring to minimize impact on falling margins Ranjit Narsimhan Chief Executive Officer HCL BPO

  other, should be focused on increasing efficiencies and controlling costs from outsourcing. The ongoing sub prime crisis, which evolved from a liquidity crisis, has forced at least 100 mortgage lenders to close their doors. Even the September 18, 2007, reduction of the Fed Funds rate by a half-point to 4.75 percent, while believed to spur markets generally, is expected to have little effect on mortgage rates, especially in the short term.
  
  Meanwhile, the industry should remain braced for declining origination volumes, predicted to drop to less than US$ 2.25 trillion from a 2003 peak of about US$ 4 trillion, according to the Mortgage Bankers Association (MBA). Lenders will also suffer from a lack of buyers on the secondary market, who have lost their taste for illiquid mortgage securities. Fewer loans mean higher origination costs per loan. Couple this with discounts and incentives to get qualified borrows in the door and lenders are having a hard time turning a profit and staying productive. Since 2003, loan officer productivity has decreased 40 percent, while origination costs per loan have more than doubled, according to the MBA. The average income per loan this year is anticipated to be under US$ 250 from nearly U$ 1,500 in 2003.
  
  

  It’s expected that banks and other financial institutions will downsize staff in the first half of 2008. After the restructuring, these institutions will start outsourcing their back-office work to cut costs. Rohit Kapoor President and COO EXL Service Holdings

  Outsourcing in the mortgage industry began with farming out information technology functions to save costs, but the practice has since evolved to include increasingly detailed and industry-specific business processes executed by companies with operations around the world. The US$ 20 billion business-process outsourcing (BPO) market will grow by nearly 20 percent between 2005 and 2010, according to industry sources.  Within BPO, the highly complex Knowledge Services, a part of MPO, is predicted to swell by a 50 percent compound growth rate by 2010. Mortgage lenders, like other financial services firms, joined the IT outsourcing wave but are just now experimenting with more complex forms of outsourcing. They will be forced into this, however, if they aim to remain competitive.
  
  Analyst firm Forrester has predicted that the US technology economy will flirt with recession but will post another decent growth year in 2008. “The US economy is expected to be weak in the first quarter of next year but will be stronger as the year progresses,” it said. This growth will continue to provide opportunity for offshoring of various levels of services to mostly offshoring nations.
  
  
• Talent and Attrition–Cost of Retention have increased
  Lately, retaining middle and senior management teams is proving to be a challenge. There is significant movement at this level between jobs. A year at the middle management level in any large BPO major is a ticket to senior levels elsewhere. This is a key risk as it has the potential to derail growth and stability of BPOs. This demand-supply gap at the top level and also the skill set required for handling scalability and multicultural integration of operations is an opportunity for experienced expat managers to move into India operations, as has been the case in the airline industry. Also, Indians who are senior managers overseas are heading back.
  
  With the industry moving into a mature phase, there is a certain sophistication that has come in, thereby decreasing many transaction hurdles and speeding up the pace of growth. The key here is the India brand. Hence we are seeing reverse mergers with Indian firms attempting to acquire/acquiring larger global players. Business control is moving from customer facing to delivery capability geographies.
  
  According to McKinsey & Co., the industry leaders who are setting best practices in human resource management and retention actually pay less than the laggards and are leveraging effective people management practices rather than higher compensation to keep their teams intact. This is especially true in case of large players; where they continue to employ 2,000 personnel every quarter–to bring down the sourcing cost effectively. The BPO companies have tied-up with colleges to train the talent while they are doing their college degree. This has proved to be an effective model for cost reduction as well as manpower retention.
  
  
• Currency Dynamics
  The rupee rise against the dollar is a major test for Indian BPO players as they bill in dollars for the work done entirely offshore, while expenses are met in rupees. And worst, as we all know, the IT expenditure budget of the customer does not increase. It remains where it was. Therefore, customer hedging is not possible in most of the engagements.
  
  However, in the recent past, customers have become receptive to such changes, as they have realized that only if the outsourcee is profitable will the outsourcer benefit.  Some of the BPO companies have convinced some of their clients to bill in rupees instead of the US dollar.
  
  According to analysts, one percent rise in the rupee translates into a 50-basis point negative impact on BPO margins.
  
  Alternatively, firms are increasingly focusing on high-margin service lines such as finance and accounting, legal process outsourcing, risk management services, analytics, advisory and process re-engineering.
  
  According to NASSCOM, the BPO sector is looking at improving productivity and providing greater value to customers.  Companies also need to combat competition from other emerging destinations such as the Philippines and China, which are also trying to replicate our model. The Yuan has appreciated less than the Rupee and the Chinese government has been offering various incentives to its BPO companies. By and large, people here have realized that the rupee-dollar rate is impacted not by any specific action that a country takes but by being a part of the global environment.
  
  Commented Som Mittal, President, NASSCOM “I don’t think anybody can forecast where the Rupee will stabilize, but most of BPO (and IT services) companies have realized that they will have to work in an uncertain environment, and that the Rupee can appreciate further.”
  
  
• Extension of the Tax Holiday
  Yet another challenge facing the IT-BPO industry is the expiration of the income tax holiday period in 2009. Extension of this fiscal incentive tops the industry’s wish-list this year.
  
  “The extension of the STPI scheme is important for India to remain competitive on at the global level. Countries such as China and the Philippines are offering 10-year tax holidays to their IT companies. Whether the tax holiday is extended or not will have a decisive impact on the BPO sector,” stated Raman Roy, Managing Director of Gurgaon-based Quatrro BPO Services.
  
  According to leading analyst firms if all the existing challenges are coupled with the expiration of the STPI scheme in 2009, BPO companies will lose 7-10 percent of business margin. This will happen on account of the fact that the BPO sector is still in a nascent stage and has a head-count based pricing model. Analysts add that only five percent of the work from India is centered on the transaction-based pricing model, where it is possible to increase revenue as well as the profit margin without increasing manpower or resources respectively.
  
  At the end of the day, the BPO industry will continue to explore new avenues, including the global delivery network, to de-risk existing challenges.
  
  

Clearly, the Indian BPO sector has significant head-room for growth. The potential five-fold expansion in the Indian BPO market will bring huge payoffs to the country’s economy, employment and development. It’s time then for the sector to combat the challenges and maintain momentum and global competitiveness.

 

Editor @ NASSCOM BPO Newsline
Source: Web Resources