From Voice To Value
Call centres still account for 82 per cent of the ITES industry's revenues, but to stay competitive in the long term, India's BPOs must look into more critical and high value processes.

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It is quarter past three in the morning. sitting in her well-lit cubicle at a leading call centre on Bangalore's Hosur Road, Sally, aka Shalini Mathur, is on the phone, coaxing a Californian resident to opt for a pre-approved loan from a global banking giant. The monitor in front of her displays the credit history and creditworthiness of the prospective client. After explaining certain details and double-checking some credentials in a four-minute chat, Sally signals a thumbs-up to her team leader hovering anxiously in the background. A loud cheer breaks out in the room as the team celebrates hitting the shift's goal of 20 closures.

One small deal for a call centre agent, but yet another (giant) vindication of a business model that didn't exist as recently as 1999. Indeed, it is on such minor triumphs that India's IT-enabled services (ITES) industry has been able to build a projected $8.5-billion (Rs 39,950 crore, 2006-07) business from nothing, employ 520,000 people, and become the country's calling card around the world. The rush to outsource back office work to India has been so strong that the industry, also known as business process outsourcing (BPO), has grown at a compounded annual rate of 35 per cent over the last five years.

Yet, the ITES players, or BPOs, are beginning to feel a little vulnerable. That's partly because despite its soaring revenues, the industry is fragmented and there are new low-cost outsourcing destinations emerging elsewhere in the world. Sure, the top 10 BPOs account for about 20 per cent of the industry's revenues (see The BPO Stack-up), but there are 190 other players. Besides, about 80 per cent of the $6.3 billion (Rs 28,350 crore then) in revenues last year came from voice calls, whether it was outbound calls (that is, a marketing call like Sally's) or inbound calls from customers for assistance. When a BPO from India pitches for a contract, it often must fend off contenders from countries such as Hungary, Ireland, Czech Republic, China, Vietnam and the Philippines.

Infosys BPO's Chaudhry: He believes that a true BPO should mirror the back office operations of most large corporations	Xansa's Hall: Feels that transition to a more knowledge-based work has become mandatory for the industry to survive and grow

We'll come to the country challenge towards the end, but, meanwhile, what's wrong with voice? As IT major Wipro discovered soon after acquiring Delhi-based Spectramind four years ago, voice is too competitive a market with low margins. Whereas a more value-added work, such as accounting or claims management, takes only as much in terms of investment per seat, but fetches more revenues. Says Sudin Apte, Senior Analyst and Country Head (India), Forrester Research, a consulting and research firm: "While what has been achieved is commendable, players must realise that low cost alone cannot be a permanent advantage. Other low-cost emerging destinations may eventually undercut India on price." So, while voice business may be easier to acquire, it will increasingly get harder to retain it unless players move away from 'pure voice' to 'value-added voice'.

The good news: The shift is already happening from low-end voice work to higher-end data work, asserts Ashish Taneja, CEO, Vertex (India). Lately, he notes, there has been an increased focus on acquiring non-voice processes, as many BPO companies are looking to expand their areas of services and expertise, which would in turn help the industry grow to a more mature level. Taneja feels that voice work requires a lot of operational management bandwidth and expertise with hands-on focus on day-to-day operations. Others like Louis Hall, Chief Operating Officer, Xansa (India), point out that the transition from a low-end voice-based work to a more knowledge-based work has become mandatory for the industry to survive and grow.

neoIT's Satpathy: In his view, while voice may be profitable at present, the BPOs should use this opportunity to move up the value chain	ICICIOneSource's Mukerji: Unlike others, his opinion is that voice services can be highly profitable and sustainable

There are others, however, who believe that voice in itself can be an extremely profitable proposition and a move towards data is not inevitable. "We don't believe that voice is low-end," declares S. Nagarajan, coo, 24/7 Customer, a Bangalore-based BPO. "It is a myth that needs to be busted. Fortune 500 companies are handing over their end-customer experience management to companies like us. Their brand value depends on how we manage their end customers, and that is not low value." Ananda Mukerji, MD and CEO, iciciOneSource, also says that voice services can be highly profitable and sustainable.

Perhaps what most BPOs will end up doing, as Sandeep Dhar, President, Mphasis BPO Services, says, is add non-voice work to voice. After all, work that is low on knowledge and high on repetition can easily be automated with technologies such as Interactive Voice Recognition System. And work that is low on complexity or expertise can easily be offshored to a more low-cost country than India (see The India Advantage). "At present, voice may be profitable, but the BPOs should use this opportunity to move up the value chain," says S. Satpathy, Senior Director, neoIT, a consulting firm.

Needed: Differentiation

For that to happen, Indian BPOs will have to develop deep domain expertise. They will have to start differentiating themselves based on their domain expertise and knowledge of verticals. "Right now, Indian players are trying to be everything to everybody. This is not a viable model," says Forrester's Apte. That would mean a BPO just focussing on, say, payroll management, mortgage transactions or credit risk assessment. Otherwise, the BPO would need to create verticals where it builds strong domain expertise. "We have been targeting non-voice business for a while and this contributes 70 per cent of our business. We focus on offering industry-specific solutions covering voice, no-voice and KPO processes," says Neeraj Bhargava, CEO, WNS. Some like 24/7 Customer's Nagarajan already see the industry entering its 'third generation'. While the first generation was all about cost and quality play, and the second was about process improvement, "the third generation is all about moving from cost to value play-a clear shift from offering services to offering solutions".

Not surprisingly, then, the buzzword in BPO, as much as in it, is business transformation. Customers aren't merely looking for lower costs or better processes. They want processes that dramatically improve their own business performance. With the result, the BPO industry, although less than a decade old, has been realigning itself. The most significant development is the coming together of it services with ITES. Although not many it companies would concede now, they were late to spot the synergies with ITES. Infosys Technologies did not set up its BPO arm, Infosys BPO (earlier called Progeon), until 2002; Satyam Computer Services launched Nipuna only in 2003; Tata Consultancy Services didn't have a BPO division until 2002, and Wipro, recognising that it was late to seize the opportunity, acquired Spectramind in July 2002. "We started in 2003 with a large voice engagement, which was basically what we needed to give us the size to get started," says Venkatesh Roddam, CEO, Nipuna.

24/7 Customer's Nagarajan: Doesn't believe that voice is low-end, but says the industry is entering its 'third generation'

It hasn't been easy for it companies to manage their BPO business (Roddam says a year ago, most of his time was spent on day-to-day issues rather than strategic issues). But integrated offerings are giving them an edge in the market place. For instance, the big it players can cross-sell their BPO services to existing software services customers, and offer a price and service proposition that can be hard to beat for a stand-alone BPO. Indeed, a few pure-play BPOs have cottoned onto this fact and are tying up with system integrators and other software product and service vendors. iciciOneSource, for example, has struck a marketing alliance with Metavante Corporation, which in turn has picked up an 11 per cent stake in ICICIOneSource. "The strategic partnership will open up the client base for ICICI and penetrate the American market, where we are a relatively unknown brand," says Mukerji. Metavante is one of the top three bank technology and payment processors in the US, and works with 91 of the top 100 banks in America.

Beyond BPO: KPO

KPO, or knowledge process outsourcing, is quite a different world compared to BPO. Here's a scene that should illustrate the difference: It's a recent day in Bradford, Massachusetts. A 28-year-old female accident victim has just been rushed to the St. Luke's Hospital half-past-two in the morning. In the emergency room, doctors perform various scans like x-ray, MRI and ct scan on the victim. Within three minutes of the scans being generated, a radiologist sitting in Whitefield, Bangalore, receives the images online, studies them and sends back a report, enabling the doctors back in the us to take appropriate actions to save the patient's life. Time taken from the moment the scans are taken to the radiologist's report going back to the doctors: 20 minutes. Unlike our Sally, Dr Arjun Kalyanpur doesn't cheer every such incident, but the Yale-trained doctor sure knows that he has a good thing going. His four-year-old Teleradiology Solutions is a classic example of the KPO opportunity that India has begun to tap.

With its vast pool of well-trained professionals like doctors, engineers, teachers, lawyers, chartered accountants, MBAs to even journalists, India is experiencing a second wind in the BPO space, doing everything from equity research to business and technical analysis to animation to IP filing to accounting advisory services. In other words, the top end of the BPO value chain is the KPO industry. Unlike voice-based work, in KPO the billing rates can be as high as $26 or Rs 1,222 per hour per seat and the margins are also correspondingly higher. In 2005-06, of the $6.3 billion earned by the Indian BPO sector as a whole, $1.2 billion or nearly a fifth of it came from KPO work. India's it Ministry estimates that by 2010, India can tap 15 per cent of the $54 billion (Rs 2,53,800 crore) global KPO opportunity.

Marketics' Ramakrishnan: His company mines data and advises clients on stocking and display decisions, thus increasing their profitability

It is not just the billing and margins that separate KPO from BPO. Unlike low-end BPO, which is necessarily a game of scale, KPO can be niche and still extremely profitable. Lokendra Tomar, VP, Integreon, which is into document, content and knowledge services, says that even a 200-300 people operation is viable. Amitabh Chaudhry, CEO & MD, Infosys BPO also claims that his company has been alive to the KPO opportunity from day one. "When we started in 2002, we took the view that a true BPO should mirror the back office operations of most large corporations-that is while voice is an important part of the operations, it is not the dominant part." As a result, the contribution of voice to Infosys BPO's topline of Rs 380 crore is less than 20 per cent. KPO in itself fetches around 10 per cent of the revenues.

Another major advantage in KPO is that attrition rates are much lower: 25 per cent versus 70 per cent. "The knowledge and skill sets required in a KPO are high and pay scales are also proportionately higher," points out Gautam Sinha, CEO, TVA Infotech, a placement advisory firm. It is not uncommon to encounter Ph.D's, IIT- and IIM-trained professionals working in KPOs. And the engagements can be interesting. For instance, lawyers with medico-legal outlook were employed by a Bangalore-based legal BPO that in turn was working with the main legal team of pharma giant Merck in its Vioxx battle. Since this is a niche area of expertise, salaries are high and people less prone to switching jobs.

Unlike BPOs, a KPO's central proposition is not wage arbitrage. Yes, that certainly is one part of it, but in some segments such as equity research or financial modeling, relatively easy availability of high-end skills is the driver for offshoring. Take the case of Marketics, an analytics firm that advises its customers (like supermarket chains) on important stocking and display decisions. "It is not about cost. Supermarkets sit on loads of data. We mine that data, add value and advise clients on how to become more profitable," says S. Ramakrishnan, CEO, Marketics.

A NASSCOM-Baring Private Equity Partners (India) report for 2005-2006 indicates that the global market size for analytic services alone could reach $14-16 billion (Rs 65,000-75,200 crore) by 2010, growing at 45 per cent a year. Of this, up to $12 billion could be supported from India-based delivery centers, reckons the report. There are a few causes for concern. Ashish Gupta, coo, Evalueserve, points out that on an average Indian salaries in the sector are going up by 14 per cent and that there is a supply constraint in talent. Tomar of Integreon, however, pooh-poohs fears of a talent crunch. "We produce 25-30,000 MBAs a year, of which nearly 5,000 qualify for KPO industry. We also have enough lawyers, bio-technicians and teachers."

Tomar's comment in a way answers the larger question of India's competitiveness as a global offshoring destination. There's simply no other country in the world that churns so many inexpensive, English-speaking graduates. Besides, Indian BPOs and KPOs are setting up centres closer to their customers and acquiring BPOs abroad (see Time to Consolidate? on page 142). Therefore, as far as the eyes can see today, India should remain the global back office of choice.