The Indian BPO Industry: Odds and Opportunities

Wednesday, 06 May 2009

Globally, businesses are facing greater complexity in terms of increasing cost pressures, stricter regulatory compliances and rising customer demands on the quality of products and services. Globally, businesses are facing greater complexity in terms of increasing cost pressures, stricter regulatory compliances and rising customer demands on the quality of products and services. With the current economic environment pushing companies towards greater austerity measures for cost control, offshoring seems to be a logical option. However, there has been a slowdown in offshoring also.

In the recent past, several companies (although for different reasons) have shifted work back to the U.S. or are planning to do so.

The United Airlines cut 165 jobs from India and shifted them to the U.S. in February.
Delta Airlines canceled its contract with Wipro BPO and has shifted the work back to the U.S. The Airlines was saving a $25 m a year when it outsourced its customer care services to India.
Chrysler, the automobile manufacturer is also expected to move its customer-service centre back to the U.S.
Sallie Mae, loans provider plans to shift 2,000 jobs from India, Philippines and Mexico to the U.S.
JPMorgan, which has two call centers in India, is also considering shifting work back to Florida.

While the Indian BPO industry established strong growth trends over the last few years, the recent financial results of most BPOs suggest that the slow down has definitely impacted their growth and they are exercising caution, by way of severe cost rationalization measures. To add to the challenges, Obama’s recent announcement on tax reforms has raised concerns for the offshoring industry.

Odds and Opportunities

We believe that the impact of this impending law regarding taxation on overseas profits of corporates will not hurt the industry in a big way. A majority of the global corporations have already invested a significant amount of time and money in offshoring (captive as well as third party) over the last couple of years.

Tax reforms will no doubt hurt the ‘offshore attractiveness’. However, bringing back the (offshored) operations in-house is not an attractive option for these companies in the short term, as it may eventually add to their costs. The corporations will have to weigh the cost of losing tax incentives vis-à-vis the benefits of offshoring which go beyond cost savings.

Large offshore service providers have been looking at captives as buyout targets. Some organizations are restructuring their businesses by divesting their offshore captive BPO units. Recent deals such as the Dell-Teleperformance deal signify that BPOs with cash reserves are buying out these units to increase their scale of operations, expand their client base and to develop multiple delivery centers.

With companies looking at ways to transform from a cost center to a profit center, the current uncertain business environment provides an opportunity for the offshore service providers to get more efficient. Further, outsourcing is moving towards a "global supply chain", signifying that in future, outsourcing decisions will be taken more strategically.

Multiple sourcing models (increasingly hybridized) and an improving and widening array of options in terms of locations and vendors will enable buyers to leverage capabilities and global arbitrage opportunities. We will see companies increasingly experiment with arrangements such as multi-shoring and risk-sharing models, with the aim to maximize labor arbitrage as well as enhance value creation.

Going forward, we believe that offshoring will see its share of odds and opportunities. However the industry may experience a minor hiccup, in the form of prospective offshorers postponing their immediate offshoring plans, till a clearer picture emerges. Till then, the focus will be on retaining existing contracts with the US clientele and reinforcing their focus on Europe and Asia Pacific.

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