New Battleground for BPOs

Thursday, 04 June 2009

Offshoring has been driven by the ubiquitous ‘cost advantage’ offered in a lower cost location. In a scenario of financial instability in global markets, questions about India post-Satyam and 26/11, the BPO industry is facing increasing margin pressures. On the backdrop of the economic slowdown, Nasscom has revised its growth estimates for the IT-BPO exports to around 16% to 17% from the earlier 25% to 30% in FY09. As the world is coming to terms with the widespread impact of the financial crisis, service providers are playing cautious. Service providers are looking at ways to manage their costs in order to provide the same level of cost savings to clients, while maintaining their profit margins. The ‘people cost’ forms a major chunk (>50%) of the total cost for Indian BPOs. Over the last couple of years, overall salaries in the US have grown at an average rate of 3% p.a., whereas in India average salary growth has been around 15% p.a. or higher. This led many to question the sustainability of offshoring. In addition, lower productivity in India means that actual cost savings are in the range of 20% to 50%. Some analyst reports and recommendations suggest scenarios where, in the next 10 to 15 years (or sooner!) cost savings from offshoring will disappear. However, we do not prescribe to this theory for several reasons: The wage growth differentials are often over-hyped. While individual salaries have been growing at this pace, overall wage costs growth is around 7% to 8%. This is because there is an influx of fresh (junior) employees at lower wage levels. The past increases in salaries are already generating supply responses, and increased supply will dampen wage inflation. The current pressure on margins will prompt an industry-wide slow down of wage hikes. Reining costs and enhancing productivity Indian BPOs have enormous ‘slack’ in the system – largely due to low productivity levels. A balance between removing the ‘fluff’, moderate wage growth and productivity improvement will provide significant margin benefits for vendors going forward. In fact, several large BPOs are reducing their staff strength and their bench in order to increase their productivity. A consistent 15% wage growth (which has been the story so far) with negligible productivity gain will turn out to be an unviable proposition. The following exhibit measures the impact on margins for different scenarios for the year 2012. Impact of productivity improvement on margins Source: ValueNotes Assuming that the billing rates remain at the current levels and the dollar-rupee equation does not change significantly, productivity improvement of 15% and an average 10% wage growth (or lower) can provide 20% improvement in vendor margins by 2012. The addition of more high value services and expansion of services to other segments can contribute additionally to increased margins. Productivity enhancement is the key towards survival from competitive threats! While the current economic environment will push businesses towards greater austerity measures for cost control, offshoring will emerge as a stronger option in the long term. In the next couple of years, we will see several BPOs and KPOs struggle, crumble or go under; the stronger ones will survive to emerge as winners when offshoring regains momentum. Providing cost effective services along with innovation in processes, technologies and products will enable BPOs to sustain in this current situation.

 

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