Roadmap 2012 – Capitalizing on the Expanding BPO Landscape

The sector, that has grown manifold in size and matured in terms of service delivery capability and footprint over the past decade, is now at an inflexion point. Today, it faces a unique opportunity to enhance its role as a full-service, value-adding partner. There is significant headroom in the addressable BPO opportunity for buyers and providers, and there are sizeable untapped areas across a wide spectrum of segments. Also, the Indian BPO sector is favourably positioned to benefit from its established delivery capabilities, which influence buyers’ decision to expand their global sourcing exposure.

The Study shows that going forward, the Indian BPO sector, at its current momentum, can reach around US$ 30 billion in export revenues by 2012. However, the sector can set itself a stretch target of US$ 50 billion (that is, approximately five times its present size) in export revenues by 2012. A five-fold growth in the Indian BPO market will add nearly 2.5 percent directly to India’s GDP from exports earnings and provide direct employment to about 2 million people. This will also spur growth in smaller Tier 2 and 3 cities to enable a six-fold growth in the number of delivery centers that will be required to support the enhanced target for the sector.

Key highlights

According to the Study, the Indian BPO sector has been growing at more than 35 percent over the past three years. BPO is the fastest growing segment of the overall offshore market, and currently estimated at US$ 26-29 billion. While labour arbitrage has been a key driver for this growth, other factors such as access to talent, service quality, productivity, and time-to-market have gained importance.

The Indian BPO industry could grow nearly five-fold to reach US$50 billion in size by 2012

Source: NASSCOM-Everest India BPO Study (2008)

The NASSCOM-Everest Study also indicates the following:

• The Indian BPO sector has grown over the last decade to achieve nearly US$ 11 billion in export revenues
• The sector employs more than 700,000 people, and accounts for more than 35 percent of the worldwide BPO market.
• This growth has been driven by accelerated adoption by buyers of different sizes, from across industry verticals and geographies, and rapidly evolving supply-side maturity across service segments.
• This is reflected in the widening of the service portfolio, increased scope of services, greater penetration across verticals and geographic markets served, evolution of business and engagement models, and development of global delivery capabilities of Indian BPOs.
• Most horizontal BPO segments (Customer Interaction and Support, Finance and Accounting, Human Resources, Procurement Services, and Knowledge Services) have matured significantly and account for more than 70 percent of the Indian BPO sector.
• While Customer Interaction and Support (CIS) and Finance and Accounting (F&A) have been the dominant horizontal market segments, other service segments like Knowledge Services are increasingly becoming important and continue to drive market maturity.
• Many horizontal services are now demanded and offered across verticals. Everest’s full-service index for the aggregate industry shows that providers offer CIS, F&A and Knowledge Services across multiple verticals. In addition, both buyers and providers increasingly cover end-to-end services within each horizontal.
• The maturing sector is focusing on vertical-specific processes in response to evolving buyer needs. Providers are developing vertical specialization to increase breadth and depth of service delivery.
• The buyer (i.e. customer) profile of the sector shows increased diversification in terms of geography and size. Buyers from the UK, Continental Europe and Asia Pacific are increasingly offshoring delivery of business processes to India.
• Similarly, there is increased awareness and adoption amongst mid-sized and small buyers.
• The domestic Business Process Outsourcing market has also grown rapidly and is expected to touch around about US$ 1.6 billion by FY2008.
• The provider landscape has \witnessed significant changes. In addition to establishing captive BPO centers, buyers now have a substantially large choice of third-party vendors to engage with. Several hybrid sourcing models like build-operate-transfer and virtual captives are also being used.
• The market is witnessing increased merger and acquisition (M&A) activity, as providers are looking to build scale and acquire new capabilities rapidly, particularly to increase geographic reach and acquire key service segment capabilities.
• Efforts are also underway to deliver value beyond cost savings and sustain high growth levels through increased use of tools and technologies, adoption of standards and best practices, and leveraging a global delivery model.
• The delivery footprint of the Indian BPO sector now extends to over 75 cities across 25 countries outside India. Within India, the delivery footprint of the BPO sector now extends to more than 30 cities across the country, and covers many Tier- 2/3 cities.

Looking to the future

The NASSCOM-Everest Study shows that while the Indian BPO sector has come of age, there is still room for improvement. The sector needs to tap the addressable market opportunity from exports and from serving the domestic market. A bottom-up analysis indicates a total export BPO market opportunity of US$ 220-280 billion by 2012. The domestic Business Process Outsourcing market provides an additional US$ 15-20 billion opportunity for the sector by 2012.

Outlining the business opportunity that lays ahead, the Study states that:

• There is a large market opportunity not only for established industry verticals like Banking, Insurance and Manufacturing, but also for buyers and providers in many other emerging verticals.
• The Banking and Capital Markets, Insurance and Manufacturing verticals together constitute almost 70 percent (US$ 160-190 billion) of the total US$ 220-280 billion export market opportunity over the next five years.
• However, emerging verticals such as Technology, Telecom and Travel and Transportation also provide opportunities in excess US$ 10 billion by 2012. Other segments such as Media and Publishing, Pharmaceuticals and Life Sciences, and Energy and Utilities represent significant untapped potential.
• Over the next five years, vertical-specific BPO services will provide a larger market opportunity (60 percent; US$ 145-175 billion) compared to horizontal BPO services.
• Horizontal BPO services, which currently account for a greater share of services offshored to India, also provide a significant addressable market opportunity of around US$ 75-105 billion spread across traditionally mature areas like CIS and F&A as well as emerging segments like HR, Knowledge Services, and Procurement Services.
• Buyers and providers need to expand their relationships into middle-office and front-office services, which together represent an opportunity in excess of US$ 100 billion by 2012.
• Back-office processes are expected to remain the largest opportunity areas over the next five years (providing more than 50 percent of the overall market opportunity).
• Back-office opportunities extend beyond traditional SG&A (e.g., F&A, HR) functions; services such as transaction processing activities in Banking and Capital Markets, investment operations in Capital Markets, supply chain and logistics support for the Manufacturing, Retail, and Travel industries are some examples of high-potential back-office services.
• There is significant BPO opportunity for buyers and providers across geographic markets. While North America is expected to contribute roughly 70 percent of the total market opportunity for the Indian BPO sector, both providers and buyers should increasingly look at exploiting opportunities in the UK, Continental Europe and Asia Pacific.
• English-language based business processes from these geographies represent a huge market opportunity of US$ 45-75 billion by 2012.
• Furthermore, the domestic Business Process Outsourcing market (in verticals such as, Banking, Retail, Insurance, Media, Telecom, and Government) provides an additional US$ 15-20 billion opportunity for the sector.
• It is possible for Indian BPO providers to maximize the available market opportunity by developing a stronger near-shore presence, strengthening language and cultural capabilities, and developing distinctive value propositions.

Considerations for future growth

Efforts being undertaken by the Indian BPO sector will enable it to grow rapidly in the future. Continuing on current growth momentum could help the Indian BPO sector reach about US$ 30 billion in export revenues by 2012. However, comparing past growth trends with the significant future market opportunity, the Indian BPO sector can set itself a stretch target of US$ 50 billion (that is, approximately five times its present size) in export revenues by 2012. A fivefold growth in the Indian BPO market will add nearly 2.5 percent directly to India’s GDP from exports earnings and provide direct employment to about 2 million people. This will also spur growth in smaller Tier - 2/3 cities to enable the six-fold growth in the number of delivery centers that will be required to support the stretch target for the sector. Also, it is important to note that secondary impact of the Indian BPO sector’s growth on employment in related service industries and consumer spending is likely to be multiple times as compared to the direct impact.

In order to capture a significant part of the available opportunity, and achieve its ambitious targets, the various stakeholders of the Indian BPO sector will need to face numerous challenges and undertake the following:

• manage multiple internal and external considerations
• overcome supply-side constraints such as talent and infrastructure
• combat emerging competition from other offshore destinations
• sustain their cost advantage and economic value proposition
• Scale their value propositions in line with evolving buyer expectations

One of the biggest challenges facing the sector going forward is the issue of manpower. From a people perspective, capturing a fivefold growth will put pressure on talent availability at all levels. While the number of people required to support impending growth are available, unless the current focus on “ready-to-eat” talent is altered, the future growth may lead to a shortage of 0.8-1.2 million entry-level graduates by 2012.

This shortage may become further accentuated on account of competition for resources from domestic industries such as Retail, Insurance, Telecom, and Banking, as well as from additional requirements to support growth in domestic BPO business.

Middle-management personnel with domain experience, largely sourced from the domestic industry, will also be in short supply. Sector-specific skill shortages (specialized skill categories for vertical-specific processes such as actuaries for Insurance BPO) are also likely to emerge. Additionally, a significant part of the fresh, entry-level pool is difficult to access, due to geographic distribution of employable talent. Tier 2 and 3 cities in India will have to meet approximately 50 percent of the additional talent requirements. This will necessitate creation of physical and social infrastructure in these cities.

Another challenge for the sector is growing competition from other offshore/ nearshore BPO destinations that are emerging as viable options for BPO delivery centers (e.g., Philippines, Eastern Europe, Latin America, and China). These locations also offer lower cost than source geographies, provide sizeable pools of talent, and offer valuable leverage points to buyers. Further, these competing destinations are continuing to reshape their fiscal and regulatory incentive structures to attract buyers as well as providers of BPO services.

Finally, of course, the Indian BPO sector has to deal with the fact that adverse currency movements and wage inflation in India are putting pressure on the operating margins of providers. Compared to the US dollar, the Indian currency appreciated significantly since 2002—a trend that is likely to continue in the near term and even in the medium to long-term. Inflationary pressures on operating cost are unlikely to ease, due to resource scarcity and overall economic growth. Scenarios on potential momentum indicate that cost-arbitrage can diminish in the medium-term. As a result, reliance on a cost-savings-driven value proposition alone will not be in the best long-term interest of the Indian BPO sector.

Given this environment, the sector must optimize the current environment in order to continue the cost-arbitrage-led proposition, and innovate to continue building new, higher-value propositions for buyers.

There is early evidence of providers stepping-up to deliver such initiatives and value-add results to buyers.

Broadly speaking, the Indian BPO sector will need to work along eight action themes in order to realize its potential and maintain and accelerate its growth trajectory over the next five to ten years. The sector will have to focus on the following, according to the NASSCOM-Everest Study:

• Protect India’s cost advantage to ensure that buyer interest, adoption and growth are sustained
• Create “BPO hubs” with the enabling physical and social “eco-system” to drive BPO-led growth broader and deeper within India
• Increase employability and access untapped talent pools by creating greater linkages between the current education system and the needs of the BPO sector, and facilitating the development of BPO-specific education models
• Encourage the growth of domestic BPO market to enhance the competitiveness of Indian industry, create additional employment, and facilitate development
• Up-shift” the third-party and captive value proposition to effectively deliver against changing buyer expectations
• Shape an “integrator” role for the Indian BPO sector in the emerging global services supply chain
• Communicate the true performance and potential of the sector to a broader set of stakeholders, including buyers, employees and Government
• Help buyers embrace the overall opportunity of India’s BPO sector in a more meaningful way

Provided the Indian BPO sector can proactively align itself with this growth framework, the country can expect the sector to achieve its “stretch target” and sustain its leadership in the global BPO space.