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Wednesday, 03 September 2014
Opportunities in the Indian Domestic BPO Market
Tuesday, 10 March 2009

The Indian domestic market for BPO has traditionally not interested the large service providers. But this is changing rapidly as companies are waking up to the potential opportunity in this neglected but rapidly growing market within India. A few large IT deals in the past few years, especially in Banking, Financial Services & Insurance (BFSI) and telecom, have helped spark the interest of IT service providers, which is now spilling over to the domestic BPO sector.

Captives command a larger share in the market

In the short history of domestic BPO, the captive model is more developed. Large banks and telecom operators like ICICI Bank, HSBC, VSNL, and BSNL established their captive centers way back in the 90s. Growth in third-party capacity has happened more recently.

According to our research, the market being catered to by third-party players is estimated at $417 mn (Rs 18 bn) for FY08. There is considerable difficulty in sizing the ‘captive’ segment, as many Indian companies have in-house units, which are not captives (i.e. separate offshore units) in the normal sense. Nasscom-Everest estimates $1.6 bn (Rs 69 bn) for the total domestic BPO market. Hence, our calculations indicate that third-party players constitute 26% of the market.

With growing client awareness about outsourcing and increasing service provider interest and maturity in the domestic market, we believe that the share of third-party service providers will increase significantly.

The general perception is that only low value services (like data entry, digitization, etc.) should be outsourced to third-party providers. However, as the industry matures, customers are beginning to realize that captives are not the obvious choice and better alternatives are available.

Service provider landscape

There are over 700 service providers offering a variety of BPO services to the domestic market.

The ‘organized’ segment comprises of large service providers with over 400 employees and a significant focus on the domestic market. As of March 2008, these service providers employed close to 107,500 people.

Share of third-party service providers 26% of total market (FY08)

Image
Source: ValueNotes Research, Nasscom-Everest

Based on their size and market focus, we have classified third-party service providers into four groups - International Leaders, India Leaders, Emerging Companies and ‘Me-too’ Players.

Third-party service provider segmentation

Service Provider Group

Service Providers

Key characteristics

International Leaders

IBM-Daksh, HTMT, MphasiS BPO, FirstSource, HCL, Intelenet

Established BPO vendor with total employees > 5,000

Primary focus on international markets

Presence across multiple locations

Typically <20% revenues from domestic clients

India Leaders

Aegis BPO, Andromeda, InfoVision, Omnia BPO

Established BPO vendor with total employees > 5,000

Primary focus on domestic markets

Typically >60% revenues from domestic clients or substantial scale of domestic operation

Emerging Companies

ATS Services, Caretel, Intouch,  Kankei, Magus, Spanco, vCustomer, Shell Transource

Employee size 500 to 5,000

Limited to specific verticals or horizontals; specialized offerings on a small scale only

Cater to domestic and/or international clients

‘Me-too’ Players

GK Management, Access Systems

Typically <400 employees

Offering undifferentiated low value services

Limited presence in terms of delivery centers and marketing setup

 Source: ValueNotes Research Report: Opportunities in the Indian Domestic BPO Market

Telecom is the largest vertical

In terms of contribution by vertical, telecom contributes approximately 40% (or Rs. 7.2 b for FY08) to the total third-party BPO market. Telecom together with Banking, Financial Services and Insurance (BFSI) contributes nearly three-fourths of the total revenues.  The exhibit below presents an industry-wise revenue break down for FY08.

Image
Source: ValueNotes Report: Opportunities in the Indian Domestic BPO Market
Note: Others includes Technology, Logistics, Manufacturing, Utilities, Media and Entertainment


Unlike the international BPO market where a sizeable business comes from the BFSI vertical, the domestic BFSI market is yet to fully realize its outsourcing potential - primarily due to stringent regulatory constraints, relatively low levels of maturity of processes and IT systems, and resistance from politically-backed trade unions (especially in public sector banks).

Initial focus on sales & marketing activities

BPO activities in India can be broadly broken down into three functional operations: Sales & Marketing, Finance & Accounting and Human Resources. The activities can also be broken down in terms of services offered to clients: voice-based, non-voice-based, data management and analytics services. Apart from these, there are also services that are domain specific, for instance, revenue accounting for airlines or underwriting or actuary services in insurance. The exhibit below presents the various sub-processes within each broad heading.

Services outsourced

 Image

Indian companies (across verticals) are largely seen outsourcing parts of their sales and marketing function, such as customer care (information and query handling), outbound calls (tele-marketing, selling and cross-selling products), non-voice mail and chat marketing support, customer satisfaction surveys, etc.

A majority of large service providers are moving towards offering complete customer relationship management (CRM) solutions. In fact, several of them are positioning themselves as complete CRM solutions providers.

The mix will change as the industry matures, and the share of sales and marketing will reduce in the medium term.

India opportunity

Strong growth enablers exist for all the sectors of the economy driven by:

  •  Trade liberalizations and regulatory reforms
  •  Capital inflows including rapidly expanding FDI inflows (~$25 bn during 07-08) into manufacturing and services sectors alike
  •  Increasing acceptance of India as a manufacturing-cum-services sourcing hub
  •  Surging domestic demand influenced by favorable demographics (~60% of population in the age group 15-60 years)
  •  Rising income levels (India’s middle class to jump 10 times its current size to cross $500 mn by 2025)

Economic growth will positively influence the domestic market, resulting in the growth of the domestic BPO market.

Explosive growth ahead


Our research indicates that the total third-party BPO market will grow at a CAGR of 44% over FY08-FY12 to reach $1.8 bn (Rs 77 bn) by FY12. Based on market size, outsourcing maturity and realizable opportunity, we have classified the verticals into Developed and Emerging opportunities. The exhibit  indicates growth in each vertical by FY12.


Third-party BPO market size - FY12

Image
Source: ValueNotes Research Report: Opportunities in the Indian Domestic BPO Market
Note 1: Others includes technology, logistics, manufacturing, utilities, media and entertainment
Note 2: In some cases, we have taken a conservative growth estimate. However, certain enabling factors (eg. de-regulation of banking sector) are likely to result in additional discontinuous opportunities.


Developed Verticals: Banks and telecom operators have been the pioneers in outsourcing, and we believe that these two verticals together with the government will account for the bulk of outsourcing volumes in the medium term.

Rapid growth verticals


Source: ValueNotes Research Report: Opportunities in the Indian Domestic BPO Market

The size and growth of these industry segments coupled with awareness of outsourcing benefits makes these potentially the most attractive verticals.

Emerging Verticals: Currently, there is low level of outsourcing penetration in financial services, insurance and retail verticals. Only a few support services such as HR, finance and accounting and IT are outsourced. Companies in these verticals are yet to explore outsourcing in all their non-core as well as core areas.

While logistics, airlines and travel & hospitality are currently low on outsourcing awareness, we believe that there lies a latent potential in both these verticals that is yet to be realized.

Reforms can provide additional triggers

Growing at a CAGR of 35% over the next five years, the domestic BPO market is estimated to reach $5.3 bn (Rs 229 bn) by 2012, from the current $1.6 bn (Rs 69 bn). However, the addressable opportunity is 10 to 15 times the current market size.

Unlike the offshore BPO market, labor arbitrage is not a key driver for this growth. Currently, industry growth and organized sector growth are the compelling drivers for outsourcing. Other factors such as focus on strategic and core processes, heightened competition, improvement in productivity and reduced time to market will gain importance over time.

Furthermore, any reforms in the next couple of years (post elections) could provide a significant upside surprise.

Despite the growth, key constraints across segments are lack of scale (for individual companies) and regulation. The exhibit Key Constraints maps the verticals across these parameters.

Key constraints

Sectors

Outsourcing

awareness

Drivers for outsourcing

Opportunity areas

(FY08-FY12)

Banking

High in private and foreign banks

Implementation of the third phase of reforms

Increasing competition from private banks

Increasing centralization/ computerization

Customer support (inbound, outbound)

Collections

Analytics

Telecom

High

Escalating subscriber numbers

Enhancing customer satisfaction by providing value added services

Entry of new players

Customer support

Customer analytics

Data services

Government

Medium

e-governance

Emergence of new services

Success stories Railways, etc

Digitization

Voice-based services

 

 Image
Source: ValueNotes Research Report: Opportunities in the Indian Domestic BPO Market

  • Significant scale exists amongst banks, telecom operators and government departments. This makes them attractive targets for BPO service providers. However, reforms in the banking sector will trigger exponential growth for outsourcing.
  • While the government sector is positive on both scale and regulatory constraints, there are other constraints such as lack of centralization, difficulty in identification of the decision making authority and resistance from employee unions that makes the government sector hard to crack. Again reforms will provide a huge discontinuous opportunity that is not captured in our growth rates.
  • Verticals such as retail, airlines, financial services, logistics, insurance and travel and hospitality are less hindered by regulatory constraints. But these sectors are fragmented and lack scale. In retail and logistics, growth in the organized market will drive the growth in outsourcing.

Going forward, we believe there will be increased buyer awareness and adoption of outsourcing across industry verticals, which will drive the future growth. Post FY12, we believe that outsourcing will no longer be an option. It will become a crucial competitive advantage. Early skeptics in banking and telecom have now become late adopters. A similar trend will follow in other verticals.

 


 
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