The Hindu Business Line : `BPO sector to chant productivity mantra' — No let-up in demand, best-of-breed players to gain

BPO contract values are falling but the driver behind that is not a tapering-off of demand. On the contrary, with tight budgets projected for 2006 in the US markets, there is set to be a boost in demand for IT and business process outsourcing.

The fall in contract values is because of an increasing tendency to contract for a single process, a reduction in the capital contribution required as well as an internalisation of offshore service rates . There is a strong trend favouring the best-of-breed players in the BPO market and this is likely to continue for the next 2-3 years.

Contract renegotiations are, however, on, according to Mr Siddharth Pai, Managing Partner, TPI, a sourcing advisory that handles IT deals greater than $50 million and BPO deals greater than $25 million. IT and BPO deals are no longer being bundled, according to Mr Pai, and the less IT-dependent deals such as outsourcing of finance and accounting, and HR outsourcing are easier to `lift' and outsource, and are increasingly the norm, according to him. That effectively means that the best-of-breed players are in a better position to make the most of the trend than those who link their BP skills with their IT service capabilities.

Several Indian third party service providers have been trying to get cross-sell benefits by pushing their IT and BP skills together, and while that might work for some existing clients, most clients are more likely today to look for the best player in a certain category and outsource that function or process to him, according to Mr Pai. There is a softness in the outsourcing market that is likely to continue into the next quarter. There is a strong push to offshore single processes, even as voice and CRM shows a decline in demand, according to TPI.

One good trend for the Indian industry has been the increasing offshore component in large outsourcing deals. TPI says offshore accounts for 44 per cent of total deal value for transactions it advised on and 28 per cent of TPI-advised deals have an Indian offshore provider component.

More MNCs are accelerating on global services delivery in the next 18 months - even as labour arbitrage drives the market now. In the future it will be productivity increases that will differentiate players. Initial outsourcing will seek cost savings but 12-18 months down the line, the relationship will require very high process/vertical knowledge and process improvements.

"Indian providers are clearly better on offshore delivery than the MNCs and they will come ahead in the global race if they can replicate the delivery model in other countries as well," says Mr Pai.

The strategic choices for Indian service providers are therefore clear: Either they have to become the best-of-breed players able to command premiums for their process and domain knowledge or they have to become the best factories — unbeatable on the offshore delivery front, but with a global delivery base.

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