Mphasis CEO projects frantic BPO growth

Jerry Rao is clearly enjoying his ride on the crest of the outsourcing wave that has rolled over many industrialized nations.

The chief executive officer of IT and BPO (business process outsourcing) company MphasiS BFL Ltd. in Bangalore, India, believes the service provided by his company and rivals is just the beginning of a development that will dramatically change the way companies operate in a globally networked economy.

Rao compares the rise of BPO to that of e-mail: in the early days of e-mail (Rao was a member of a 200-person research team probing the new electronic messaging service in 1982), nobody knew where e-mail was headed, but today everyone agrees it has revolutionized the workplace.

During a break in a conference earlier this week near Bonn, Germany, by the Development Gateway Foundation on providing IT aid to developing countries, Rao talked to IDG News Service about his company and the position it has achieved in the frantically growing market for IT and BPO services.

IDGNS: The ability to scale to large projects has become an issue in the budding outsourcing business. Has India so far been able to skirt this problem?

Rao: India graduates 300,000 engineers and 3 million students every year. No other country has that depth. So on the supply side, India definitely has an advantage over other countries, such as the Philippines. On the managerial side, however, scaling is still a major challenge in India. There are no Indian companies with 100,000 employees. As we move into these levels, we are challenging ourselves managerially to continue doing a good job. Indian managers are very good. But when you have 30 to 50 percent growth every year over a five-year period, it’s very hard to keep scaling.

IDGNS: Can you survive on your own?

Rao: This is a valid question. All of us in the industry are interested in knowing how many players can survive in this space. In our case, I’m optimistic that we can make it without being acquired for a couple of reasons. First, just look at the empirical data. Two years ago, we were number 22 in market capitalization among Indian companies. Today, we’re number eight. Second, we’re pursuing a differentiated strategy, which combines IT and BPO (business process outsourcing) in a new way.

IDGNS: Could you elaborate on this new combined approach?

Rao: Let me give you an example. Earlier this year, we did several thousand U.S. tax returns with 60 accountants in India. With our IT services expertise, we were able to set up a software platform in our data center in Texas so that data never had to leave the U.S. Thanks to our expanding BPO business, we had 60 accountants in India completing the returns. So we were able to straddle both sides. That will be our unique differentiator.

IDGNS: How does acquisition of Kshema Technologies Ltd. fit into your strategy?

Rao: We have a great desire to move into the big league. To do that, we have to provide an end-to-end service from embedded systems to BPO. Within MphasiS, we had a small embedded systems practice, worth about $10 million, but we didn’t have great leadership because most of us come from the application side. So we were on the lookout for leadership. Kshema had a similar sized embedded systems business, worth about $12 million. They had good leadership but didn’t have scale. So when we put the two together, we had a $20 million-plus business with embedded systems, good critical mass and a nice set of customers, such as Samsung Electronics Co. Ltd., Hewlett-Packard Co. and Symbian Ltd.

IDGNS: How do you plan to move up the value chain and license intellectual property in embedded software and related markets?

Rao: By and large, most India companies are more into services; they aren’t interested in having their our own intellectual property. The same applies to us. Could this change? Perhaps, if we discover opportunities. But I prefer not to speculate and give away what we may be working on. Let me just say that we are currently so successful in services and make such good margins that we are a bit hesitant to invest in intellectual property at this point in time.

IDGNS: What about your new expansion in Mexico and China?

Rao: Mexico is a BPO center, while China is a development center. We have pretty much broken even in China and are close to breaking even in Mexico. The first phase is coming to an end. Now it depends on how we can scale up.

IDGNS: But what exactly prompted these moves in the first place?

Rao: We had various reasons. In the BPO area, for instance, we didn’t want any U.S. customers to say ‘Hey, I’m bilingual, 35 percent of my transactions are in Spanish. If you can’t handle this business, I don’t want to give it to you.’ So we decided we’ll give them a one-stop service. All they have to do is send their messages to our data center in Texas, and we’ll separate them between Spanish messages, which go to Mexico, and English ones, which go to India. That was the reason for setting up the Mexican operations. We established the China business for a couple of other reasons. First, we wanted to diversify our Indian development bench. Second, we wanted to appeal to Japanese customers who — from both a time zone and psychological distance perspective — feel more comfortable in China than they do in India. And third, we found some decent talent. Business isn’t fantastic at this point in time but we’ve broken even.

IDGNS: Are you generating any sales from Chinese companies?

Rao: We haven’t done much domestic business. Most of our business comes from Japanese and U.S. companies using China as their base.

IDGNS: Why are U.S. companies going through your Chinese operations?

Rao: These are mostly Hong Kong and Taiwanese subsidiaries of U.S. companies. It’s just easier for them to work together — in terms of time and communications.

IDGNS: Some companies already regret their outsourcing decisions. Would you agree that some have shown a naïve readiness about outsourcing and moved perhaps too quickly on this front?

Rao: Whenever there is explosive growth, all kinds of things happen. Companies are diligent and have to execute. Some execute well, some don’t. Some divisions execute well, some don’t. Some managers execute well, some don’t. When it comes to cost, India has a true value proposition, which isn’t going away, not to mention the quality of software development.

IDGNS: What about competition coming from other countries?

Rao: I think South Africa and the Philippines are definitely competitors. The only issue is whether they are able to scale to the level that Indian companies can. Also, in terms of project management methodology and quality control, we have a little bit of a lever. In the long run, however, China will emerge as India’s most significant competitor because of its vast labor supply. The Chinese, of course, still have to solve the English language problem, which I believe they will because when they are determined to do something, they do it. I’m told, for instance, that they have an ambitious program to have every cab driver in Beijing speaking English by 2008 for the Olympic games. These are the kinds of things that are believable. Not only that, China has a huge domestic market. So we need to worry.

IDGNS: Do you think the present interest in outsourcing will subside any time soon?

Rao: I don’t think so. We are redefining the way work is done. By the way, I don’t think we should use the word outsourcing anymore. We should call it 24x7x365 (24 hours a day, 7 days a week and 365 days a year) global supply chain management in the services industry. We’re changing the way workflows take place in supply chain, paper and IT-intensive industries in much the same way Henry Ford changed processes in car manufacturing.