The Indian BPO industry continues to chart strong growth at 33% for FY 2006-07, with employment crossing 550,000 during the financial year FY07. Indian BPO revenues are expected to grow to $10.5-11 billion in FY 2007-08 from $8.4 billion in FY 2006-07.

ValueNotes looks back at some of the significant events that impacted the BPO industry in 2007.

Over the last couple of years, the industry has grown at a frenetic pace. The year 2007 witnessed several Indian vendors building a strong global footprint and entering the knowledge services space corroborating our views in the "Likely trends for the year 2007", published by ValueNotes in December 2006.

Landmark Deals

Over the last two years, large Indian outsourcing giants such as TCS, Genpact, and WNS have been on an acquisition spree in a bid to widen their scope of services and geographical locations. These acquisitions of (largely) US-based companies are primarily intended to strengthen their marketing front-end and provide them easier access to newer markets and geographies. Some of the more noteworthy deals are discussed below:

HOV Services (NSE: HOVS) acquired US-based Lason for $148 m
HOV Services acquired Lason which is almost 8 to 10 times its size! Lason has a large offshore presence. With this acquisition, HOV Services gained a strong offshore capacity as well as onshore presence, with its headcount touching 12,000.
While there have been relatively smaller cross-border acquisitions by Indian vendors in the past, this acquisition stands out primarily because of the size of the deal.

Wipro acquired Infocrossing
Wipro acquired US-based Infocrossing (FY06 revenues at $229 m) for an estimated $600 m. Infocrossing is into IT infrastructure outsourcing, BPO solutions, Healthcare, IT, enterprise application services and managed services.

Acquisitions in healthcare

• Apollo Health Street acquired Zavata for $170 m. The combined entity has a target of approx. $100 m in revenue by March 2008. With this acquisition, AHS has become the largest healthcare BPO in India.
• FirstSource acquired US-based BPM, which is focused mainly on healthcare claims processing. FirstSource plans to offer the option of offshore/onshore delivery to its clients and thus will retain the 300-strong workforce of BPM in US. The acquisition deal was speculated to be around $40 million. FirstSource also acquired US-based MedAssist for $330 m. Kentucky-based MedAssist is one of the leading companies offering revenue cycle management services to the US healthcare industry.
• SPi, ePLDT's BPO subsidiary acquired Springfield Service Corporation (SSC), one of the top ten players in the medical billing and revenue cycle management space for $44 m. With this acquisition, SPi will add further capabilities to its healthcare segment.

Integreon acquired CBF Group
Integreon Managed Solutions, provider of legal and document services acquired CBF Group Inc., a US-based company providing 24/7 administrative services to lawyers, for an undisclosed amount. Integreon has 2,000 employees, with 1,200 in India. Ayala Corp., Integreon's majority shareholder based in the Philippines has financed the acquisition.

Blackstone group buys Intelenet
The Blackstone group bought HDFC and Barclays stake in Intelenet for $200 m. With over 17,000 employees, Intelenet provides contact center and transaction processing services.

Target KPOs!

• WNS acquired Marketics, a Bangalore-based analytics company for $65 m. This acquisition is driven by the need to strengthen the knowledge services business of WNS.
• Cognizant acquired marketRx, a niche firm that caters to specific market analysis needs of pharmaceutical and life science companies for $135 m. With this acquisition, Cognizant will increase its capacity in the analytics sector and will be able to offer more services to the life sciences industry.

Indian vendors are aggressively working to minimize their over-dependence on India, as well as build a strong global front-end. The trend towards rapid creation of delivery and marketing capacity across the world will ensure that Indian providers become more competitive in the light of an adverse trend in the Rupee Dollar exchange rates. Further, several large BPOs are acquiring KPOs driven by the need to differentiate and specialize.

Significant Contracts

• Philips awarded a huge F&A deal to Infosys. Infosys BPO will provide finance and accounting services and the processing of purchasing orders. The vendor will acquire the back-office units of Philips in India, Poland and Thailand, including 1,400 employees from these units. Infosys will pay $28 m for the three units.
• TCS won one of the largest contracts from Nielson. TCS signed a 10-year IT and business services contract with Nielsen worth $1.2 b. TCS will provide a range of services including software, back-office and knowledge services.

RBI Relaxes Norms for Outsourcing

As per the new norms from RBI, authorized banks can allow BPO firms to pay for equipment to be imported and installed at overseas location without bringing them to India. However it is mandatory for BPO firms to take approval from the Indian Ministry of Information Technology.

SC Ruling on Captive BPO Taxation

The Supreme Court's verdict in the Morgan Stanley case cleared some ambiguity associated with taxation of captive BPOs in India.

• If the foreign enterprise compensates its captive unit on an arm's length basis, it will not be taxed in India.
• As long as the transactions are held at arms' length, no further profits will be attributable to the PE. However, the risks assumed by the foreign enterprise should be taken into account while ascertaining the transfer pricing.
• There is no agency PE if the captive BPO functions more like a back-office center and contracts are neither entered nor concluded by the captive unit.
• The service PE is applicable in the case of deputation of personnel by the foreign enterprise. However the same will not hold true in the case of stewardship activities.

With this latest ruling, and the revenue department's rights to examine each case for compliance with the (still complex) rules, the BPO and IT industry in India heaved a big sigh of relief.

Subprime Crisis and Strengthening of Rupee Creates Jitters for the Indian BPOs!

• Several Indian vendors with greater exposure to the financial services industry were hit by the subprime crisis. First Magnus Financial Corp, one of WNS' key mortgage clients, filed for bankruptcy and decided to discontinue offshoring. GreenPoint Mortgage, a mortgage arm of Capital One and a key client of Infosys BPO declared bankruptcy. GreenPoint Mortgage is also a client of iGate.
  Several vendors are aggressively trying to diversify their service focus and target markets, moving from the US to Europe, Asia and Latin America.

• The strengthening rupee over the last few months hit the Indian outsourcing industry's competitiveness. The impact was visibly higher on small and mid-size companies, which have very low pricing power due to undifferentiated offerings.

The increasing margin pressures hit several large BPO vendors. Indian IT vendors that have until recently favored the dollar market have now eagerly started looking at new opportunities in terms of service focus and markets.

Watch out for the next newsletter on "BPO 2008: The Year Ahead".