Challenges for the BPO sector

The IT enabled services (ITES) and Business Process Outsourcing (BPO) constitute the fastest growing industry in India. BPO industry is considered to be a part of the ITES industry. The Indian ITES sector is expected to generate nearly 2 mn jobs in the country in the next few years. The revenues from this industry, which stood at $1.4 bn in 2002 are expected to rise sharply to $24 bn by 2008 according to a Nasscom-McKinsey report. It's hot... Today, India is the hottest destination for any company which wants to outsource its business processes. But what can be the reason for India being so popular with the companies worldwide? The attractiveness of India can be contributed to three basic factors - Cost, People and Environment. India ranks first among a host of desirable nations in terms of cost (which includes employee cost, infrastructure cost, management cost and the tax structure). It beats all its competitors on the people front as well. The people factor is evaluated on the lines of size of the job market, workforce education level, language barriers, past outsourcing experience and employee retention. When it comes to environment (which includes country risk, infrastructure, cultural compatibility, proximity etc.) however, India lags behind countries like Canada, Australia and Ireland. This is also being taken care of by government initiatives like the corporate tax exemption to all ITES companies till 2010. Apart from these, the fact that India has 53 of the 83 SEI CMM Level 5 companies3 and that companies outsourcing to India have experienced cost savings in the range of 30% in the first year itself, have added to the attractiveness of India as 'the' destination for outsourcing. Given the strengths of India, it is no wonder that it is the first choice of nearly 82 % companies in the US for outsourcing. The scenario however, is not as rosy as it looks, for this sector with enormous potential. Like any other industry during its growth phase, this industry is also going through its share of turbulence. The fact that the growth has been very sharp has added to its problems. However, all these ups and downs would help the industry in stabilizing and maturing. At least that's what experts and past experiences say. The Challenges of Growth.... The major challenges being faced by the ITES or BPO industry in India can be classified into internal and external challenges. The internal challenges include shortage of competent managers for the middle and senior management and the high attrition rates. The external challenge is in the form of opposition from the US politicians and the UK labor unions against shifting of the BPO operations by local companies to India. The

threat of real competition from other players like Philippines also exists, but doesn't seem to need our immediate attention. Let us look at some of these issues. A speaker at the ITES-BPO Track at Nasscom 2003 commented that it is not ITES, but HRES. That succinctly explains the importance and value attached to the 'people' aspect in this service industry. The fact that this industry is still in its nascent stage in India has led to the dearth of experienced middle management level team leaders and senior managers. Nasscom President Kiran Karnik agrees that shortage of middle and senior level managers is in fact a critical issue. Entry-level recruitment and employment has not been a problem with so many fresh graduates with good language skills, available readily in the job market. The problem is more intense for the third-party outsourcing companies which have just ventured into this business. They cannot even invest in training, given their financial and other constraints. Captive BPOs like GE and American Express, which are established players in the business, have no such problems. They in fact invest substantially in training their managers. However, they have been facing a problem of a different kind. Their middle and senior level managers are being poached by the new entrants to the industry. Reports say that large and established players face an attrition rate of 45% against the industry average of 35%. Everyone agrees that hiring from competition is a cyclical process and will not help the industry grow, but with very few options available, they resort to the easiest solution - poaching. That brings us to the next issue - high attrition rates. Attrition means not only loss of talent, but also includes the cost of training the new recruits. The attrition rate in the industry has been hovering around 35%, which is quite high for any industry. An average Indian call center employee works with a company for 11 months, where as an average UK call center employee stays in a company for 3 years. It is expected that the attrition rates would come down once the growth stabilizes. Steep growth is one of the reasons for the high attrition rates, according to many in the industry. According to a survey by People-One Consulting, an employee's leaving the organization happens typically in the first couple of weeks of joining. The reasons are many -- high stress levels, monotonous nature of the job, demand-supply disparity and lack of career growth potential on the professional front; loss of identity, mismatch with normal cycle, complete change of life style and lack of comfort on the personal front. Add to this, the 'poaching' strategy being adopted by the players in the industry. What else can we expect, but an attrition rate of 35%? Tackling the Attrition Problem... The industry players are trying out all the tricks in the book to tie down their employees and keep them locked in a safe. They have been offering excellent infrastructure facilities in the form of ergonomically designed work stations and spacious, airconditioned offices.

They have been offering industry specific benefits like 24/7 cafeterias and home pick-up and drop facilities apart from regular benefits like retirals and loans at low interest rates. They have been arranging special weekend parties and offering incentives like tickets to exclusive music shows and dance parties. Some players are also sponsoring the higher education of their employees. This is one of the best ways of retaining a skilled employee for 2-3 years with a company. All this really goes well with a typical employee, who is in his early twenties, fresh out of college and unmarried. The industry has been quite benevolent on the compensation front as well. According to a Hewitt Associates survey conducted last year, the highest salary increase in the Asia Pacific region was in India. Within the country, it was the ITES industry which recorded the highest growth of 14%. The variable pay component varied in the range of 15-70%, which is exhorbitant, to say the least. All these measures are at the organizational level. At the industry level, companies have tried to get into informal agreements with competitors to avoid poaching. Though these agreements have no legal sanctity, they are based on mutual faith of the companies. For example, GE, HSBC, Nipuna, Microsoft, etc. informally agreed that they would not recruit someone who has worked for less than a year with his employer or someone who has switched 3 jobs in 2 years. Similarly, Tracmail, Infowavz, Transworks, Epicenter and Global Telesystems have all entered into an informal understanding to arrest poaching. In spite of all these measures, the attrition rates have remained high. All these attempts by the employers have resulted in only partial success. What should companies do to curb this unhealthy trend? Experts feel that appropriate staffing strategies and managing employee morale are the key areas. Recruiting the right kind of people not only at the entry level but also for the middle management level can be a big contributing factor. Any fresh graduate in need of a job would say that working during odd hours and adapting to a new life style is not a problem, but when it actually comes to adapting to a completely different way of life, they find it difficult to reorient themselves. Adequate care should be taken in choosing and employing candidates in the entry level positions. Companies should also be willing to invest in training employees to take up higher responsibilities as team leads and managers. A strong middle and senior management helps in arresting attrition at the lower levels and consolidates the organizational culture and character. Another important area of concern is the limited growth potential for an employee in this industry. Organizations should concentrate on individual career growth of employees and succession planning in the organization. Planning for growth both vertically and horizontally can bring a little reprieve to the employees. Horizontal growth can be in the form of promoting the employee from simple to more complex processes within the organization. This will enhance the learning of the employee and make him "feel-good".

The 'International' Issue The latest addition to the basket of woes of the BPO players is the hue & cry on outsourcing to India by the labor unions in the UK and the politicians in the USA. In the UK, the call center industry employs nearly 800,000 British workers and is a vital part of their economy. Labor unions are playing the card of 'patriotism' to stop UK based companies from outsourcing their back-office operations to India. The fact that it is election time in the USA and perhaps in the UK too, has added fuel to the fire. The media, the unions and the politicians in these countries have jumped on the 'backlash' bandwagon and have been making strong statements on outsourcing to India. However, there have been some rational-thinking bigwigs who have been opposing this backlash. The issue is expected to cool down slowly, with the elections getting over and better business sense prevailing over the outsourcing companies. The Indian BPO industry can also launch a friendly and soft campaign against the backlash, explaining the advantages of outsourcing, especially to India. The Threat of Competition Many competitors like Philippines, Ireland and even China are expected to catch up with India in the future, but they have their own constraints. China, which is being forecasted by some as the biggest threat to the Indian BPO industry, for example does not have English-speaking populace who can meet the requirements of a primarily English clientele. India outruns all its competitors when it comes to availability of quality services at the lowest possible rates. However, this does not mean that the Indian BPO industry can sit back and relax. It needs to gear up and prepare itself to face the competition. The strategy of the Indian industry should be to go up the value chain and offer more specialized services that can create a special position for it in the global outsourcing industry. It should not completely bank on the low-end services as they are cost-based and can be transferred to any country that offers the same services at a cheaper rate. To Conclude... The Indian ITES industry should consolidate its position in the business of outsourcing by strengthening its domain knowledge and becoming more specialized in terms of the services offered. It should aim to go up the value chain without restricting itself to lowskilled jobs. It has to continuously strive to maintain its position of competitive advantage over other countries in the fray, in terms of low costs, quality people and conducive environment. It should also realize that unhealthy practices within the Indian industry can affect its competitiveness in the global BPO arena and therefore curb such practices. With the international business world eyeing India as a hot ITES destination and the Indian industry gearing up to bring in a new revolution, India is bound to become the BPO and ITES hub of the world.