India moves up the outsourcing ladder

BANGALORE, INDIA – India’s business process outsourcing (BPO) companies are looking at the opportunity to get into new high-margin business, as major multinationals are increasingly moving higher-end, analytic business processes to the country.

India has for long been a favored outsourcing location for major multinational companies like General Electric  in Fairfield, Connecticut, and Citigroup in New York, which have outsourced to the country activities such as software development, call centers and back office functions in an effort to tap into a skilled workforce with lower salary demands. But now, companies’ outsourcing strategies are gaining variety and sophistication as they explore outsourcing functions like equity analysis, market research and even patent filings.

While many of these outsourcing efforts are operated by the multinationals themselves, Indian BPO companies are seeking to take advantage of the trend.

“Indian vendors are making a conscious effort to move up the value curve and target new service lines for better price realization and higher stickiness of the relationship with the customers,” said Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM) in Delhi. “Several under-the-radar opportunities exist such as engineering design, clinical trials, market research, and equity research that are being increasingly tapped by Indian vendors.” In the year to March 31, 2003, India’s BPO industry grew by 59 percent to $2.3 billion, according to NASSCOM.

The new wave of outsourcing is also still driven primarily by multinationals setting up captive, wholly-owned subsidiaries in India. J.P. Morgan Chase & Co., a large financial services company in New York, is for example setting up a research team of 40 analysts in Mumbai. Starting with outsourcing back office processing work to India in 1999, Frost & Sullivan (F&S), a Silicon Valley, California-based market research and consultancy firm, set up an analyst team at its Global Innovation Center in Chennai in 2000. The center currently has about 160 staff of which half are analysts working in the various industry practices of F&S, while the other half work on back-office processing.

Firms outsourcing research and analysis to India are typically reluctant to discuss their plans because of protests in the U.S. and Europe against the moving of jobs out of those regions. However U.S. banks, brokerage firms, insurance companies, mutual funds and other financial services firms are planning to relocate more than 500,000 jobs offshore — representing eight percent of their workforce — over the next five years, according to a study conducted by the financial services practice of management consulting firm A.T. Kearney in Plano, Texas.

If until recently offshore job transfers have primarily focused on back-office functions such as data entry, transaction processing, and account reconciliation, the new relocations will involve a wider range of high-end internal functions including financial analysis, research, regulatory reporting, accounting, human resources and graphic design, according to the A.T. Kearney study. The relocations are expected to reduce annual operating costs by more than $30 billion. A.T. Kearney already does some of its own research work from India.

It may take some time before the new opportunities in research go to India’s large number of BPO companies. Some BPO companies prefer to consolidate first in their mainstream back office and call center business, before getting into the higher-end analytics business.

“Over the next 12 to 15 months our focus will be to expand current BPO operations and improve utilization, while at the same time evaluate and consequently, based on our evaluation, put together a plan to offer these kind of services,” said Prakash Gurbaxani, chief executive officer of TransWorks Information Services Pvt. Ltd., a Mumbai-based BPO company.

Exlservice has the necessary bandwidth and talent to provide the higher value analytical work, according to Vikram Talwar, the company’s chief executive officer. Exlservice has its marketing front-end in New York with BPO operations in Noida near Delhi.

“However the clients we deal with, particularly in the financial and banking vertical, are currently focused on migrating the larger volume call center and back-office jobs because of the larger savings, greater comfort and lower risk perception,” said Talwar. “As and when our clients are ready we will move into the more analytical work. For the moment the margins for the work we do are acceptable.”

Although some multinational companies are testing the waters through captive centers, clients are still not convinced that the higher value work can indeed be done in India, according to Talwar. “With a few exceptions, the majority of the work being currently done by Indian companies is of the call center and back-office processing type,” he said.

There are a number of hurdles for BPO companies trying to get into the high-end analytics business, according to Marc Vollenweider, president and chief executive officer of Evalueserve.com Pvt. Ltd. in Gurgaon near Delhi, which offers financial analytics and research on markets, countries, and companies to several U.S. financial services firms. Evalueserve started operations as a business information services company.

“One has to demonstrate such a wide area of skills in both verticals and functional areas that this requires a significant critical mass already,” Vollenweider said. “Our field has matured already, and anyone who tries to enter will have to cross many skill barriers, and only very focused players will be able to achieve this. Broad-based BPO players will waste their time and money.”

The qualifications of staff required by companies focused on research is also quite different from that currently hired by BPO companies. While BPO companies typically hire university graduates with the equivalent of bachelors degrees, companies focused on analytics have to hire more qualified people such as those holding degrees like Masters in Business Administration (MBA). About 60 percent of Evalueserve’s staff hold double degrees, and the second degree is in most cases an MBA or an engineering degree, according to Vollenweider.

The demand for staff with specializations is likely to push up salaries and increase staff turnover in the Indian outsourcing industry — one which is already reeling under a high attrition rate.

“The current average rate of attrition faced by the (BPO) industry is between 30 to 35 percent,” said Karnik. “Managing attrition is becoming increasingly important, not only because knowledge professionals are the lifeline of a service oriented industry, but also because of the high staffing costs in this sector.” Poaching of staff by competition is the main reason for the employee attrition in BPO companies, Karnik added.

Indian BPO companies privately put the blame for attrition on large-scale hiring by multinational companies like Plano, Texas-based Electronic Data Systems (EDS) and Bermuda-based Accenture, who are offering services to their customers worldwide from India.

“There are some multinational operations that are indeed ruining the market as they view operations in India as a lower-cost center rather than a profit-oriented operation,” said Talwar. “However, I am sure that over time they will understand the folly of their hiring and compensation strategy.”

As disturbing for the BPO industry is the trend for staff to leave the industry altogether. The problem is more acute in call centers than in back-office processing operations, according to Talwar.

“The staff working at call centers tend to be younger and look at their jobs as fillers in between higher studies or other professions, ” added Talwar. “The other reason is the highly stressful nature of the job. Answering calls all the time, and that also at night, makes this probably the most stressful job around. Lastly they travel long distances for several hours a day to get to work. This adds to the stress and the need to move back into daytime jobs.”

BPO companies are currently devising ways to reduce staff attrition. In search of new pools of manpower, some of them are moving to smaller towns and smaller cities.

“Tier-two towns and non-metros such as Jaipur, Chandigarh, Kochi, Mangalore and Jalandhar are now emerging as the next choice for expansion by many of the BPO players,” said Karnik. Companies like Exlservice have begun hiring older staff who are more dependent on income from their jobs, and are also providing housing near the facility to cut down on commute time and stress.