The panel: (L to R) Wipro Spectramind's Raman Roy, FTV's James Hale, Nasscom's Kiran Karnik, AT Kearney's Stephan Spohr, Broadview's Edward Males, BT's Priya Srinivasan, Vertex's Dan Sandhu, Norwich Union's John Hodgson

The Indian BPO industry has created history of sorts by going into fourth gear consolidation within three or four years of taking birth. One key reason seems to be that large Indian BPOs are perfect targets for MNCs and domestic businesses looking to enter the sector. Another, more controversial reason as it emerges could be the role of the venture capitalists in these companies who could be pushing for sellouts in the pursuit of exit opportunities. BT's Priya Srinivasan caught up with a handful of experts at the Nasscom India-ITEs BPO Strategic Summit in Bangalore last week for a brainstorm on the evolving business models for Indian BPOs.

The participants in the roundtable were John Hodgson, the Offshore Programme Director of Norwich Union, Edward Males, Managing Director (Investment Banking), Broadview International, Raman Roy, CMD, Wipro Spectramind, Stefan Spohr, VP, AT Kearney, Kiran Karnik, President, Nasscom, James Hale, Managing Partner, FTV Management Company, Dan Sandhu, Head (Offshore Business), Vertex.

BT: Lets begin with some of the interesting BPO models in the business today. Mr Hodgson, you have an interesting Build Operate Transfer (BOT) model for the Indian market with players like WNS and EXLService. Could you explain the strategy?

Hodgson: I had some very ambitious targets to hit. So I built a multiple hybrid model. Its hybridised between suppliers and between captive, outsourced and BOT. I had to balance internal and external constraints while deciding on the model. People in my business are very uncomfortable with outsourcing. One of the ways of selling it back to my stakeholders was to say ''look we are not losing this business forever, we are using people who have the skills on the ground to start the business for us and when its reached stability it will transfer back to between one and three years''.

"If the buyer is able to make things attractive enough, it will be an offer no seller could refuse" Kiran Karnik/ President/Nasscom

BT: Mr Hale, as an investor, how would you view this arrangement?

Hale: There is a continuum of value depending on the expected the cash flow between the two firms and more the contractual relationship, the easier is the value described.

Roy: In majority of the cases, these decisions are driven by what is saleable within the organisation rather than the strategy.

BT: Mr Spohr, what do you foresee as the dominant model five years down the line?

Spohr: There is probably going to be a smaller number of mature large-scale providers-three or four usual suspects. Like in most other industries, you will have a significant number of small specialised service providers. The shakeout will happen.

Males: It has been an immature industry with immature customers, but the customers are maturing in terms of what they think works and if you (Indian BPO) can demonstrate a transformational edge, it would help.

Roy: As this industry evolves, the solutions that will come out of India will be India-centric solutions. For example, today when you take a process reengineering or upgradation solution, you are basically changing a solution originally created in the developed economies to reduce manpower. But, manpower for me is cheap and India-based solutions will reflect this scenario.

Hodgson: That's a very important point. We are going through a mindshift in our business at the moment. We have grown up with the idea that automation is good, get people out of the process, they are expensive.

That's ingrained into us. But because we are moving (transaction processing to India) and the labour capital tradeoff is so different here, products that we had ceased to offer five or six years ago because they were too labour-intensive, we find suddenly that you put an Indian there and these products start looking attractive again. All people are saying at the moment is we are taking a 40 per cent saving, isn't that great? No actually, that's just the first step.

BT: Indian BPO is faced with a squeeze on margins-high costs (salaries) and falling prices since the companies are undercutting one another. What are you doing to address that?

Roy: Margins will finally stabilise between 17 and 20-21 per cent. In addition to rising costs, there is the appreciating rupee which is a big blow. Cost reduction is being looked at by the more mature players, but on the revenue side, well, all Wipro Spectramind has been able to do is walk away from deals that don't make commercial sense.

It hurts when I face the board and say, by the way we had the right of first refusal for this big deal everyone is talking about at a price that was not economically viable. Believe you me, I have a tough time convincing my board. It hurts.

"Margins will finally stabilise between 17 and 20-21 per cent" Raman Roy CMD, Wipro Spectramind	"Not only is selling out bad, now even venture capitalists are bad " James Hale Managing Partner, FTV Management Company	"It has been an immature industry with immature customers" Edward Males MD (Investment Banking), Broadview International

BT: Now coming to the other side of falling margins, which seems to be the sellout model being followed by Indian BPOs. We said Spectramind, Daksh and TransWorks were the big daddies and look at the scenario today-all sold out. Is the driver falling margins?

Sandhu: I think it's purely an entry strategy (for players like Wipro, IBM or Birlas). The cost of entry is very high. The cost of getting the economic savings by virtue of scale takes time and if you can leap frog, why not?

BT: That's the buyers viewpoint. What's the seller's viewpoint?

Karnik: The buyer makes it so attractive, it's an offer you can't refuse, ask Raman!

Males: There's a truism in investment banking-when the gorilla comes knocking on the door you answer the door.

BT: Still, I'd like to understand the compulsions of the seller a little better. It's no coincidence that all the big daddies of BPO have been falling like nine pins, is it?

Males: There is a line of thinking here that is disturbing: Selling out is somehow bad. There are some great reasons to sell or merge with someone that gives you the platform to take the business forward. There are enormous structural impediments in growing businesses. There are cases where companies simply need a further leg up-access to brand, capital, people, customers, whatever. Selling is the next step in the growth of a company.

BT: I buy that argument on a case to case basis but not when the top players in an industry sell out one after the other in rapid succession.

Hale: Look, we talked about this earlier, there are two or three world class Indian it organisations, why haven't they been bought?

BT: That's precisely the point. And if I may point out a fundamental difference between the IT services companies that you are talking about and the BPO players, it is that the former were not venture funded. There have been stories of undue pressure from VCs to sell in more than one case of late.

"It's purely an entry strategy (for players like Wipro, IBM or Birlas). The cost of entry is high" Dan Sandhu Head (Offshore Business), Vertex	"There is probably going to be a smaller number of mature large-scale providers " Stephan Spohr VP, AT Kearney	"We are going through a mindshift in our business at the moment" John Hodgson Offshore Programme Director, Norwich Union

Hale: Not only is selling out bad, now even venture capitalists are bad.

Roy: When you take venture funding you know that someday the venture capitalist is bound to exit. Unless you create proper exit options, the vc is not likely to be interested. The management also happens to own a piece of the company. I did. And hey come on it was a darned good deal.

Males: If IBM comes knocking on your door and you don't answer it, they will go somewhere else. In fact, right now the Indian companies are doing very well. Wait until they don't do so well and that is when the divergent views between management and VCs will really come into play. It happens in every mature venture funded community and you haven't even seen it yet (in India).

BT: To sum up, I'd like to go back to a phrase Mr Males used in an earlier session, is the Indian BPO industry becoming a victim of its own success? Has it become victim to the valuation and exit strategies of VCs and the entry strategies of MNCs?

Males: The question actually was: does the tech economy here have the ability to take on the same view that it did in the 70s with respect to growth to build world transforming businesses and my answer is simply some (companies) will emerge. But the fact that people are coming knocking on the door is testimony to the great success that the Indian story has been.

BT: Finally, are we all agreed on the view that they will all exist but as part of IBM, Accenture or whoever?

Roy: I like the way you ignore Wipro and where we are at today. I think there is a huge opportunity for companies to emerge and they will take different steps to bridge the gaps in bouquet of offerings to the customer. I don't see how being Indian or non-Indian really matters. In one way it is poetic justice (for me). The same company IBM that has just acquired a large player had laughed at me when I called on them four years ago about delivering services out of India and lost no time in showing me the door. I went back and got thrown out again. And look at what India has created today-IBM's story is incomplete without India and that is the success we have created.

Karnik: Look at Indian information technology services companies like Wipro and HCL. They are big in business process outsourcing. So if your question is are there is going to be pure play independent large BPO companies that are Indian, then there could be some question marks there, but generally they will exist in some form or the other. Does that answer the question?