The prime driver for BPOs in India has always been cost effectiveness, but that differentiating factor is now fading away. Is Indian BPO industry finally headed towards the death bed? by Ashutosh Harbola
Business Process Outdated! Survival of the fittest is a phrase that British polymath philosopher Herbert Spencer first used in 1864 after reading Charles Darwin’s work On the Origin of Species. Simply put, it meant ‘only the fittest organisms will prevail’; and the very definition of ‘fittest’ has also changed with time. Those who understood it did sustain and those who didn’t went into oblivion; be it in the living world or in the corporate terrain. In fact, if the latest signals are anything to go by, then the BPO industry could be one inevitable addition to the extinct list, as its cost advantage fritters away; which means it certainly doesn’t remain the fittest on that count.
A latest Nasscom report would indicate this very speculation as baseless. As per the report, the $50-billion IT-BPO industry is headed for a 13-15 per cent growth in FY2010-11. But the recent survey by Pierre Audoin Consultants (PAC) seems to be a clarion call of sorts, since it is only the latest of a series of reports that indicate how India is moving away from being the epicentre of cheap outsourcing centres and nations like China, Vietnam, et al, are becoming the most preferred spots to serve as offshoring centres. Only, the threat looks more real than it ever did in the past.
While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago, as compared to their US counterparts, the difference today is marginal. The major contributor to this rising cost has been the wage inflation, which was over 8 per cent in 2009 and is expected to touch a steeper 10.9 per cent by 2011. “With time, India’s price advantage will continue to diminish; hence, it needs to find a niche and continue to reinvent the business models, services and enabling technologies,” cautions Vishal Deep Dhillon, Regional Director – Asia, CSC.
Countries like China, Vietnam and Philippines are emerging as a big threat to India’s dominance in global offshoring industry. Thanks to the low-cost advantage and heavy investments to promote English as a spoken language, China has witnessed a whopping 212 per cent and 170.2 per cent y-o-y increase in signed off shoring contracts (worth $12.69 billion) and executed contracts (worth $7.34 billion) respectively in 2009 when compared with 2008. Not only this, the dragon nation has also added an astonishing 3,287 enterprises and 5,85,000 employees to its outsourcing industry count in 2009. Business Process Outdated! The Filipino BPO industry (with a growth rate of 19 per cent in 2009) is also in a neck-to-neck competition with India. In fact, Philippines has emerged as one of the top destinations (with 15 per cent market share) for outsourcing over the past few years; with revenues growing from $100 million in 2001 to $6.1 billion in 2008. The threat from Vietnam cannot be undermined too. While salaries of BPO workers in Vietnam are the lowest among almost all major offshore destinations (they are 40 per cent lower than India and China, and more than 80 per cent lower than Singapore), tax rates, too, are at par with other emerging markets. For instance, outsourcing software development work to a Vietnamese firm can cost a company up to 50 per cent less than what it would have cost it had it outsourced the work to India.
Historically, large talent pool has been one of India’s major strengths, but if one goes by a latest ASOCIO-KPMG report, employability of Indian graduates at present is considered to be really low, with EIU rating India as 2 on a scale of 5 on quality of labour force. This has made multinationals hesitant in outsourcing their work to India.
The next stumbling block is the high attrition rate in the Indian BPO industry which is invariably high (35 per cent) when compared to its Asian counterparts. The increasing cases of data breaching too are affecting outsourcing to third parties in India. Then there is the slated withdrawal of STPI scheme in FY 2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20 per cent for a BPO at present. This is expected to go up to 33 per cent, if the scheme is withdrawn. In all, the future of the BPO industry doesn’t look as sunny as road mapped by Nasscom with optimism deep sunk within. So is the major job provider (2.23 million) finally heading towards the death bed or is there a way out?
One possible way out could be to take BPOs to tier 2 and tier 3 cities where rising costs could be managed as compared to high cost offerings in the metros or tier 1 cities. The challenge there will be the training gap, but the investment does have long term potential. The next way could be to innovate within long term sustainable verticals like KPO (Knowledge Process Outsourcing), LPO (Legal Process Outsourcing), et al, for which even outsourcers are ready to pay a high price as they derive utility from them. In fact, Joel Perlman, Co-founder & President, Copal Partners feels that the next big opportunity for India could be DPO (Document Process Outsourcing) “KPOs and DPOs are high growth areas and India is well positioned to become a leader here,” he told TSI. K. M. Nanaiah, Managing Director, Pitney Bowes too holds the same view and feels that DPOs certainly have the potential to be the next big thing in India.
No doubt, because of its sustained cost competitiveness, experienced and large labour force, India has been considered to be a favourable BPO location in the past. But not any more! With radical changes in global economic environment & growing sophistication of customer needs, it’s now inevitable to evolve further. It’s therefore imperative for all stakeholders to identify challenges and put an action plan in place to meet them and identify areas that can catalyse future growth. If they are able to do so, good enough! If not, BPO, an acronym that most Indians rejoiced in, will soon become a reason to mourn over!
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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A latest Nasscom report would indicate this very speculation as baseless. As per the report, the $50-billion IT-BPO industry is headed for a 13-15 per cent growth in FY2010-11. But the recent survey by Pierre Audoin Consultants (PAC) seems to be a clarion call of sorts, since it is only the latest of a series of reports that indicate how India is moving away from being the epicentre of cheap outsourcing centres and nations like China, Vietnam, et al, are becoming the most preferred spots to serve as offshoring centres. Only, the threat looks more real than it ever did in the past.
While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago, as compared to their US counterparts, the difference today is marginal. The major contributor to this rising cost has been the wage inflation, which was over 8 per cent in 2009 and is expected to touch a steeper 10.9 per cent by 2011. “With time, India’s price advantage will continue to diminish; hence, it needs to find a niche and continue to reinvent the business models, services and enabling technologies,” cautions Vishal Deep Dhillon, Regional Director – Asia, CSC.
Countries like China, Vietnam and Philippines are emerging as a big threat to India’s dominance in global offshoring industry. Thanks to the low-cost advantage and heavy investments to promote English as a spoken language, China has witnessed a whopping 212 per cent and 170.2 per cent y-o-y increase in signed off shoring contracts (worth $12.69 billion) and executed contracts (worth $7.34 billion) respectively in 2009 when compared with 2008. Not only this, the dragon nation has also added an astonishing 3,287 enterprises and 5,85,000 employees to its outsourcing industry count in 2009. Business Process Outdated! The Filipino BPO industry (with a growth rate of 19 per cent in 2009) is also in a neck-to-neck competition with India. In fact, Philippines has emerged as one of the top destinations (with 15 per cent market share) for outsourcing over the past few years; with revenues growing from $100 million in 2001 to $6.1 billion in 2008. The threat from Vietnam cannot be undermined too. While salaries of BPO workers in Vietnam are the lowest among almost all major offshore destinations (they are 40 per cent lower than India and China, and more than 80 per cent lower than Singapore), tax rates, too, are at par with other emerging markets. For instance, outsourcing software development work to a Vietnamese firm can cost a company up to 50 per cent less than what it would have cost it had it outsourced the work to India.
Historically, large talent pool has been one of India’s major strengths, but if one goes by a latest ASOCIO-KPMG report, employability of Indian graduates at present is considered to be really low, with EIU rating India as 2 on a scale of 5 on quality of labour force. This has made multinationals hesitant in outsourcing their work to India.
The next stumbling block is the high attrition rate in the Indian BPO industry which is invariably high (35 per cent) when compared to its Asian counterparts. The increasing cases of data breaching too are affecting outsourcing to third parties in India. Then there is the slated withdrawal of STPI scheme in FY 2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20 per cent for a BPO at present. This is expected to go up to 33 per cent, if the scheme is withdrawn. In all, the future of the BPO industry doesn’t look as sunny as road mapped by Nasscom with optimism deep sunk within. So is the major job provider (2.23 million) finally heading towards the death bed or is there a way out?
One possible way out could be to take BPOs to tier 2 and tier 3 cities where rising costs could be managed as compared to high cost offerings in the metros or tier 1 cities. The challenge there will be the training gap, but the investment does have long term potential. The next way could be to innovate within long term sustainable verticals like KPO (Knowledge Process Outsourcing), LPO (Legal Process Outsourcing), et al, for which even outsourcers are ready to pay a high price as they derive utility from them. In fact, Joel Perlman, Co-founder & President, Copal Partners feels that the next big opportunity for India could be DPO (Document Process Outsourcing) “KPOs and DPOs are high growth areas and India is well positioned to become a leader here,” he told TSI. K. M. Nanaiah, Managing Director, Pitney Bowes too holds the same view and feels that DPOs certainly have the potential to be the next big thing in India.
No doubt, because of its sustained cost competitiveness, experienced and large labour force, India has been considered to be a favourable BPO location in the past. But not any more! With radical changes in global economic environment & growing sophistication of customer needs, it’s now inevitable to evolve further. It’s therefore imperative for all stakeholders to identify challenges and put an action plan in place to meet them and identify areas that can catalyse future growth. If they are able to do so, good enough! If not, BPO, an acronym that most Indians rejoiced in, will soon become a reason to mourn over!
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Run after passion and not money, says Arindam Chaudhuri
IIPM BBA MBA B-School: Rabindranath Tagore Peace Prize To Irom Chanu Sharmila
Prof. Rajita Chaudhuri's Website
IIPM’s Management Consulting Arm - Planman Consulting
Arindam Chaudhuri (IIPM Dean) – ‘Every human being is a diamond’
Arindam Chaudhuri – Everything is not in our hands
Planman Consulting
Social Networking Sites have become advertising shops
IIPM makes business education truly global
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I think about add this material in my RSS. Do u think its ok?
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