INDIA'S EXPORT OF BPO SERVICES: UNDERSTANDING STRENGTHS, WEAKNESSES AND COMPETITORS

Meenakshi Rajeev B P Vani

Business Process Outsourcing (BPO) industry is of significance to India owing to its role in generating foreign exchange and providing employment to the educated youths of the nation. Recent global economic crisis has brought up several questions concerning future prospects of the industry. This paper based on an all- India level field survey highlights the strengths and weaknesses of the BPO sector - on the basis of which the future development strategies can be chalked out. By considering a number of indicators and in turn constructing a 'country attractiveness index' position of India vis--vis its competitors has been presented. The paper emphasizes the need to provide marketing assistance to the BPO companies in the SME segment and ensure speedy development of two and three-tier cities in the country.

INTRODUCTION ith the development of information and communication technology (IT), service delivery mechanism has changed radically. Consequently, services that can be handled using computers and telecom networks have come to play a significant role in the Indian economy. Business Process Outsourcing (BPO) industry is a result of this technological revolution. While there is a lot of discussion about this sector in media and elsewhere, this paper looks at the industry more methodically, from the perceptions of the managements of the BPOs, to examine india's future prospects in this segment by focusing on the strengths, weaknesses as well as competitors. Business process outsourcing (BPO) generally refers to the operation of letting out the task of performing certain functions of an enterprise to another enterprise, often a third party and, in some cases, a subsidiary of its own. These functions are usually non-strategic and non-core in nature though they can be very critical for a business enterprise (see
Journal of Services Research, Volume 9, Number 1 (April-September 2009) 2009 by Institute for International Management and Technology. All Rights Reserved.

52 India's Export of BPO also Rajeev and Vani, 2007). Outsourcing of some activities to a distant location has become possible due to the development of information technology (IT). Such cross-border IT-based services, usually termed IT enabled services, are functions that are provided from one location to another over telecommunication or data networks (through wireline or wireless devices) and are either externally contracted (third party outsourcing) or provided by a remote subsidiary of the same company (captive BPO). Many of the well-known multinational companies abroad such as GE Capitals, HP, Bechtel are benefited by locating its subsidiary in cost effective countries like India. In BPO literature three terminologies are used as below, depending upon the distance of outsourced location from the parent company. On-shore BPO: When an enterprise outsources its activities to another company located in the same country. Near-shore BPO: When activities are outsourced to a neighbouring country. Off-shore BPO: When business processes are outsourced to a remote or far off country. While on-shore and near-shore BPOs existed from long ago, offshore activities are gaining momentum only in recent years. Vertical integration of production operation was a reigning ideology at one time. Economic theory however tells us that beyond a certain size, the cost of managing a large organization, in particular, cost of monitoring (Williamson, 1967) can outweigh the potential benefits. In recent times, however, enterprises are more disintegrated in their operations and tend to concentrate only on their core competence. Though subcontracting is prevalent in the manufacturing sector, with the advent of information technology, outsourcing of services has become possible. Today, organizations all over the world are under constant pressure to provide value to their customers and meet the challenges of competition. The primary factor that directly or indirectly contributes toward the success of an enterprise is the cost of production and operation. Among the many initiatives that have succeeded in reducing the cost of producing goods and services is the outsourcing/

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off-shoring model. This model has taken many forms and its characteristics have been refined over a period of time. There are now less developed countries equipped with computer technology and skilled manpower, which can perform some of these tasks at much lower cost. BPO companies being specialized in specific jobs can deliver output better than the parent organizations. In other words from the point of view of operating cost it is optimal to outsource. Costs can be reduced in various ways. Cost of managing an enterprise involve the following: i) ii) iii) iv) v) Real estate costs Infrastructure costs Technology costs Cost of human resources Cost of hiring, training and retaining people etc.

Through outsourcing, the parent company not only can reduce various cost components but also by concentrating only on core activities, and not on peripheral ones, a company can increase its efficiency and thereby raise the stakeholders' value. Further it aids to create a global brand name and facilitates risk diversification. These risks can be geographical or political, and are often beyond the control of an enterprise. Thus cost cutting, though considered important, no longer remains the sole driving force for outsourcing. India has a number of positives to operate successfully in this segment. India being one of the world's most populous countries naturally has a large pool of human resources. Government's continued investment in higher education since independence in terms of establishment of educational institutes as well as subsidization of education have produced a pool of knowledge-workers capable of performing skilled and specialized tasks. Already having a strong IT sector helped further to develop India's IT-enabled services sector. In addition, due to the rupee dollar exchange rate, Indian labour turned out to be considerably less expensive for the US business enterprises. Traditionally, English language skill is also high amongst the Indian population, compared to other Asian countries. Given India's value

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54 India's Export of BPO proposition, multinational organizations came up to establish captive units in India or outsource processes to third party service providers. However, as the possibility of off-shoring has increased over time and in particular white collar jobs have began to shift to the developing world, there have been protests amongst the labour union activists of the West against off-shoring. Though fewer than 0.3% jobs have been off-shored (according to Goldman Sach's estimate) it has been argued that outsourcing to an off-shore location would invariably reduce the employment opportunities in the home country and hence may be detrimental to the growth of the overall economy (see also Bhagawati et al, 2004). Given such backlashes, the off-shoring industry faces further challenges. It has to constantly prove its superiority in service delivery, cost efficiency and compliance with data security norms. In addition, competition amongst the off-shoring service provider countries have also increased over time. Given the opportunities and challenges of the global BPO market, several important questions arise for India as a player in this segment. First, how is the Indian BPO industry coping up with the challenges? What are our strengths to be highlighted in the global market and what are the shortcomings that needs to be overcome? How do we compare with our competitors and what should be our strategies to effectively compete in the market? Given the fact that India's success in this industry has significant implications on its economy in terms of export revenue and employment generation for educated youths, these questions are of importance. This paper based on a survey of industry personnels all over India and focuses on some of these issues. SURVEY METHODOLOGY NASSCOM compiles a list of BPO companies registered with it, which was used for the selection of the sample. We concentrated mainly on the three major service lines viz., customer care, financial and health care BPOs. The survey covered all major locations viz., Bangalore, Mumbai-Pune and Delhi-Gurgaon regions, Hyderabad and Chennai. Thus a typical stratum under consideration is "location sub-sector/ process". For each stratum we selected a large number of firms and sent them requests to participate in the survey. The firms that responded positively after repeated requests were later interviewed. It was found
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that getting appointments from the CEOs or higher level management personals is a rather difficult task. Thus even though we have first attempted to select our sample using random sampling technique, it was not possible to carry our this sampling procedure. In order to get an idea of the problems and prospects of the BPOs operating in the second-tier cities, we have covered firms from Thiruvananthapuram in Kerala and Mangalore in Karnataka, using the list of firms obtained from the respective software technology park India (STPI) offices. We reiterate that difficulties were faced in obtaining appointments with the managements of the firms; given their busy schedules, one needs to wait quite a while for an appointment. Further, it has also been observed that companies are reluctant to disclose financial information. Not withstanding these difficulties we have covered 70 firms (CEOs or higher level managerial personal) from different locations and service lines. Thus sample size in this study is 70 and sampling technique can be termed as snow ball sampling (locations covered are as mentioned above). STATUS OF THE SECTORS As far as the status of already existing BPO sectors are concerned, our respondents have ranked them as very good, good, moderate and not so good and we have arrived at status indices of different existing sectors on the basis of these rankings given by the industry personnel. Accordingly it has been observed that financial services sector is perceived to be doing the best followed by the customer care segment. It must be kept in mind that these divisions are not completely mutually exclusive. A financial BPO for example, may have a customer care component as well. The customer-care segment comprises all customercare services including help desks and cuts across different verticals. Data analytics, that is, detail analysis and forecasting of data, is considered as third in terms of performance. Medical services come almost at the end due to our perceived failure in the medical transcription segment.

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56 India's Export of BPO As far as future potential is concerned, the sectors in which India would continue to face rapid demand growth due to its past performance records are (as perceived by our respondents) shown in Figure 1. Both financial services and contact-centre related services are expected to have high demand growth in future, followed by health finance-related services including medical coding, billing and insurance. More precisely, the highest percentage of our responded firms ranked financial and call-centre services as the high growth potential sectors. Data analytics is also seen as a potential area for India (NASSCOMMcKinsey Report, 2002). HR, legal services and tech-support activities have modest growth potential and due to past records, medical transcription is considered by the respondent firms as the one that may not a have very bright future. Services arranged according to the average rank attained are presented in Figure 1.
Medical T ranscription T ech Support Legal Service HR IT Development/software development Data Analytics/R & D Health Finance Call Center Financial Sectore
0 2 4 6 8 10 12 14 16 18

Source: Field Survey Conducted by the Authors

Figure 1: Services Arranged According to the Growth Potential Rankings Some of the potential higher-end activities in which India could and should make its presence felt in the global market are higher-end health care and financial services. Highest percentage of the respondent firms has considered this segment as the future potential for Indian BPO industry (shown by the top most circle, Figure 2, a bigger circle represent correspondingly higher potential).

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18 16 14 12 10 8 6 4 2 0 -2 -2 0 2 4 6 8 10 12 14

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16

18

Higher end health service Legal Service

Financial Sector Animation

HR CADD/CAM/Engineering

Data Analytics/R & D T ech Support

Source: Field Survey

Figure 2: Potentials for Different Higher-end Sectors in the BPO Industry In financial services, equity research, financial data analysis and projections are some of the higher end options, which also have high potential for India. HR, data analytics (higher end market research) and R & D activities are also potential areas of interest for the Indian BPO industry. There are a large number of legal services that can be off-shored and India has the human capital to carry out such services. Similarly, given the number of engineering graduates India produces, CAD/CAM is another highly attractive area. As far as animation services are concerned, we still have not taken advantage of the full potential of this segment. In health-care, there are post-operative care-related services, which can be provided from an offshore location. Given that India has a large pool of competent doctors, tele-radiology is another higher-end health care service, which should be developed in future. Other such related higher-end health care services are tele-dermatology, diagnosis of skin related problem on the basis of skin images; histopathology where a sample of tissues are made into a slide and the image is digitized which can be analyzed remotely and so on. But for all these services to be performed doctors need to have US recognized degrees.

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58 India's Export of BPO STRENGTHS In order to effectively compete in the global market for export of services, India's major strength is its manpower and cost advantage. The maximum number of respondents has considered these two reasons as the most crucial ones. More precisely, 31% of the respondent firms consider wage advantage as the vital reason for India's success in the BPO segment and another 27% consider availability of skilled labour as the most important factor. The quality of processes followed by Indian BPO firms and their technical know-how (mainly IT knowledge) also play important roles. Though the time difference is a disadvantage as far as call-centres are concerned, in health care sector, especially in the medical transcription jobs, the time difference is to our advantage (see also Bhide, Rajeev and Vani, 2005). Good work ethics and timely delivery also play a very important role in the success of a firm (Figure 3).

Source: Field Survey

Figure 3: Reasons for Success of Indian BPO Firms BEST PRACTICES FOLLOWED BY SUCCESSFUL INDIAN BPOS The best practices that are fundamental for the success of BPO firms in
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India, as perceived by the respondents are good HR practices and strict adherence to quality control norms. Given the strain involved in these jobs, the attrition rate is usually quite high and poaching is also common in this sector. Therefore, retaining top-grade employees become crucial for survival. In fact, 77% of the firms considered the best HR practices to be the most critical component, followed by 58% that considered quality processes ensured through various quality control norms (Fig. 4). Since there are multiple responses on best practices, these percentages do not add up to 100.
81.25 90.00 80.00

70.00

54.69

60.00

50.00

40.00 21.88 30.00 18.75 17.19 14.06 14.06

20.00

10.00

0.00 Better HR Practice Focus on quality / quality control Maintaining good client relation Good Technology and Infrastructure wide area of activity Good Process Marketing sense & cost effectiveness

Source: Field Survey

Figure 4: Best Practices followed by Indian Firms Maintaining good client relations is also essential; however, if one sticks to quality norms and can retain the best employees, the rest is automatically assured. Diversifying to more than one activity and providing end-to-end solutions are also considered to be a key to success by about 18% of the firms. Weaknesses/Problems of the Indian Companies Our sample consists not only of large third party as well as captive BPOs but also of smaller sized BPOs (employment less than 300), both
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60 India's Export of BPO from the metros as well as from selected two-tier cities. This is done to get a more representative view of the sector.
Lack of finance Cultural difference Poor legal acts Insufficient infrastructure & telecom facility Competation from other countries Lack of skilled workforce Lack on quality Attrition/labour cost Market access difficulty
0 1 2 3 4 5 6 7 8 9

Source: Field Survey

Figure 5: Weaknesses of Indian BPO Firms Due to inclusion of the smaller companies, the maximum numbers of companies have reported marketing as the major problem (Figure 5) faced in this sector. Though it is well known that the global BPO market is huge, smaller sized firms suffer from lack of information. Transaction costs to explore market possibilities is also very high (ideally one needs to have an office in the USA). Unlike in the manufacturing sector, subcontracting is not a practice prevalent in this industry. Our survey reveals that only 26% of the BPO firms outsource some part of their work (Figure 6). The reason for not outsourcing is mainly that the industry being an emerging one, most of the firms are in their own growth mode. Some firms also have quality concerns for subcontracting their work to a smaller firm. Some of the higher end work that are currently subcontracted relate to software development necessary for efficient delivery of outsourcing services of a BPO firm.

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Own Gro wth mo d e 46% Yes 26% No 74% Qualit y co ns id erat io ns 28%

Source: Field Survey

Figure 6: Percentage of Firms Involve in Subcontracting Work to a Smaller Firm The next important problem faced by this sector is the high attrition rate and poaching (Figure 7) leading to increasing labour costs (for retaining and continuous training). It is feared by many that this may reduce India's competitiveness in the long run.

No 13%

Yes 33%

Yes 87%

No 67%

Yes: Facing poaching problem

Source: Field Survey

Figure 7: Share of Firms Facing Poaching Problems in Large and Small Cities

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62 India's Export of BPO But it has been observed during our survey that smaller cities face much less poaching problems. Due to lesser number of firms in places like Thiruvananthapuram there is non- poaching agreements between the firms leading to lower labour cost. Consequently attrition rates are also lower in the smaller cities. Though we have a large pool of graduates and technical degree holders, when it comes to performing quality work there are only a few who can live up to the expectations of (foreign) client firms. This has led to high training costs for the firms. Thus, lack of skilled manpower (not mere degree holders) is another important cause of concern for the industry. While there are a number of areas India need to strengthen its competence, these two are the crucial concerns of the Industry. Competition from other countries, lack of cultural affinity, high telecom tariffs and infrastructure bottlenecks concerning roads and power supply are also considered to be few other problems by the BPO firms under survey. Legal compliances also creates problem for outsourcing work to India as we still do not have a data security act in place. Sector-wise rankings in terms of extent of competition reveal that call center BPOs face the toughest competition followed by the financial BPOs. COMPETING COUNTRIES Though currently India is considered to be a leading supplier in the offshore BPO market, its entry in this segment has been relatively recent. There are near-shore developed countries like Canada, Australia and Ireland, which have been traditional players in the outsourcing activity. Countries like the Philippines or Mauritius, which for historical reasons have cultural affinity to the West, are also favourite destinations for outsourcing. Countries from the erstwhile Soviet Union, on the other hand, are looking for shares in the higher end segment. Other upcoming suppliers in the industry include the Asian giants like China, Singapore, Malaysia and so on. Our field survey reveals that Indian BPO firms perceive a comparatively higher level of competition in the contactcentre segment, which is followed by the financial services and higher end data research segment. However, the size of the BPO market is currently considered to be large enough to be able to accommodate a
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number of players. Notwithstanding this, it is essential to know the strengths and weaknesses of other competing nations in order to retain India's competitiveness in the long run. India is superior to most other countries in terms of human resource availability and cost of human resource. However, China supersedes India in these two indicators. India's business start up time is twice that of China and 12 times higher than countries like Singapore. Though telecom tariffs relevant for this sector (bandwidth tariffs) have come down considerably, India's tariffs are still higher than most of its competitors. Below we compare India with the competing countries in terms of certain indicators available from various secondary sources. COMPARING INDIA WITH THE OTHER PLAYERS Indicators Based on Secondary Data Human Resource: As far as the human resource strength is concerned, India and China top the list in terms of total population (Figure 8) and the number of educated youth. Educational qualification needed for employment in the industry is only the higher secondary level (12th standard). Thus the number of students enrolled after the 12th standard (given by tertiary enrollment) gives an indication of the available manpower for the BPO sector, in terms of which India and China are again ahead of other countries. Russia, Indonesia, Philippines and Canada too have a large pool of potential labour force available for this sector.
35000 30000 25000 20000 15000 10000 5000 0
South Africa Australia Hongkong Mexico Canada Ireland Phillippines Netherlands Singapore Indonesia Malaysia Thailand China India Russia Ukraine

1400 1200 1000 800 600 400 200 0

Population

PPP percapita gross national income

Source: World Development Indicators, World Bank, 2004

Figure 8: Per capita Income and the Size of Population of the Competing Countries
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64 India's Export of BPO In terms of graduate salaries India's salary levels are though low, Mexico and China appear to have lower salary levels than India. In addition labour regulations of India are much more stringent than many other competing countries. Telecom tariffs (bandwidth tariffs) in India have though come down is still higher than most of the competing countries. Similarly, bureaucratic procedures are still complicated. India's business start up time is 10 times more than Ireland and 2 times of that of China. Considering all these indicators from the secondary data sources we have constructed an overall country Attractiveness Index for the industry which is presented below. An Overall Index Using several indicators relevant for the BPO industry we have constructed an index of attractiveness for different countries. The index incorporates a number of indicators and assigns different weights according to the relative importance of an indicator. Cost of service being the most important criterion, graduate salaries is introduced with highest weightage. Next we introduced number of graduates, followed by a ranking of cultural affinity and English language skills of different nations arrived at from our primary survey. Subsequently, the ranks of countries according to bandwidth tariffs are also incorporated as an indicator for the index. We also constructed an index of 'general infrastructure' of a country based on several physical infrastructure related variables like paved roads, number of internet users, power generations etc., after making them comparable across countries. Data source for these variables: World Development Report, World Bank, 2004. This is gone in the index as the forth-important indicator. Next business start-up time and labour regulation index provided above are also incorporated in the index. Given the ordering of the indicators as above, 'definite package' is used to select the weights and an index is constructed. According to this overall index, India is the most attractive location closely followed by China and then the Philippines (details shown in Figure 14).

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0.8 0.6 0.4 0.2 0
ada Sin gap ore Ru ssia ia lan d Au s tr a li a Ma lay sia Ho n gk on g Me

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S1

Ph il

Source: Computed by the Authors

Figure 14: Country Attractiveness Index POLICY IMPLICATIONS AND CONCLUDING REMARKS This survey based study brings out important implications for the industry. First, it highlights the strengths of the Indian BPO industry on which it can build on further. It also brings out the weaknesses to be dealt with for future development of the industry. Given the availability of human resources a BPO firm should always endeavour to move up in the value chain as the profit margins of the knowledge process outsourcing is much higher. Financial services sector is one area where such movement is comparatively easier. The above analysis shows that though human resource cost is to India's advantage, both in terms of human resource as well as salaries of employees, China is a potential competitor to India. Currently, China's major weakness is the lack of English language skills, which it is aggressively seeking to overcome by providing special language training to its youth. Our field survey, on the other hand, reveals that though we have graduates supposedly with good English knowledge and other related skills, in practice it is rather difficult to find quality employees, resulting in high training costs for BPO firms. To reduce such costs, poaching takes place, which is considered to be a major threat to the industry. Given the problem of attrition and poaching, better HR practices assume considerable importance for the industry. Industry should come forward to establish training institutes from which it can draw upon human resource in future. Disaster management is another aspect which lacks sufficient attention of the industry. One of the major problems that small BPOs

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Ch ina

Ind

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66 India's Export of BPO face is that difficulty to locate marketing linkage. Here state initiatives are necessary. Two distinct policy measures from the part of the state can aid the industry. In addition to private endeavours, given the state's role in education sector in India , it has also to intervene in creating a curriculum suitable for this industry, incorporating e.g. training in communication skills, cultural background, and financial and legal regulations of western target countries. The second is to develop two tier cities. Transportation is a major constituent of the employee-related costs of Indian BPOs located in the metros, whereas this cost component is almost negligible in the 2- and 3-tier cities as the survey findings suggest. Further, comparison of expected salary in two-tier cities vs metros shows that while average per annum salary of an agent-level employee is Rs90,000 in Bangalore , in two-tier cities like Mangalore this cost reduces to Rs 70,000 (survey findings). Thus, if one establishes a setup of 1000 employees there can be cost savings of Rs 2 crores per year. Another important advantage in some of the developed nations, like Ireland or Canada, is the simplification of business procedures and reduction of business start up time. As mentioned above, captive BPO firms say that complex bureaucratic procedures and uncertainty caused by unclear regulations may prompt them to reconsider their future investment plans. India should evolve strategies to expedite the bureaucratic process and make it clear and simple. A high level of bandwidth tariff in India is another concern for the industry. Many of the competing countries like Singapore, Philippines and others have already liberalized the telecom sector, resulting in low tariff rates and excellent telecom infrastructure. China is also liberalizing its telecom infrastructure. Though India is already on the move in this direction, VSNL would have to further reduce the cost of the broadband facility. Thus to conclude this research work evaluates the strengths and weaknesses of India as a player in this segment vis--vis its competitors. While the major strength of Indian BPO industry is the availability of cost-effective manpower, ironically, it has been observed that the major challenges faced by the industry in India are also mainly HR-related. If
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we wish to develop this industry in our country, a focused educational curriculum that prepares our youth specifically for this industry, is a must. Mere degree holders cannot serve the industry and this in turn would mar the attractiveness of India. Side by side, a determined effort is necessary to reduce infrastructural bottlenecks like roads, uncertain power supply and high costs of telecommunication. REFERENCES
Bhagwati, J., Panagariya, A. and Srinivasan, T.N. (2004) 'The muddles over outsourcing, Journal of Economic Perspectives, 18:4, 93-114. Bhide, S., Vani, B.P and Rajeev, M (2005) 'Outsourcing business processes to offshore location: the Indian experience', Paper presented at the 30th Annual Conference of the Federation of Asian Economic Association, Manila, 2005. National Association of Software and Service Companies (NASSCOM) (2002) NASSCOM McKinsey Report. Rajeev, M. and Vani, B.P. (2007) 'India's export of selected BPO services, understanding strengths and weakness', ISEC Project Report (Funded by Ministry of Commerce and Industry, Government of India. Telecom Regulatory Authority of India (TRAI) (30th April 2004) 'Fixation of ceiling tariff for international private leased circuit (IPLC)', Consultation Paper number 10/2004, Economic Division. Williamson, O.E, (1967) 'Hierarchical control and optimum firm size', Journal of Political Economy, 75:2, 123-38. World Bank (2004) World Development Report, Washington.

Meenakshi Rajeev, Professor of Economics, Institute for Social and Economic Change, Bangalore. BP Vani, Institute for Social and Economic Change, Bangalore. ACKNOWLEDGEMENT We have been benefited greatly from a study on the BPO industry commissioned to us by the Ministry of Commerce and Industry, Government of India. We are also thankful to Shashank Bhide for many useful suggestions.

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