The Hindu Business Line : Still above the water

In times uncertain, the silver lining has never vanished for BPO vendors. Notwithstanding the impact of the global downturn, the business process outsourcing (BPO) firms are relatively optimistic about their business outlook compared to their IT services counterparts, and continue to invest in expanding their capabilities to cater to the rising demand for their services.

Longer-duration contracts, ramp-up from existing customers and healthy renewals of existing deals make these BPOs confident even as the longer sales cycles remain a cause for concern. Also, BPOs are well poised to take advantage of the economic recovery process as customers would first think of offshoring or outsourcing their back office services as part of cost-take out strategies. Though not completely immune to the economic downturn, BPOs continue to be in hiring mode whereas ‘layoffs’ has become the buzzword with the IT services firms.

As most of the services offered by Indian IT vendors are discretionary in nature, many such projects have either been deferred or cancelled by clients, thereby creating uncertainty on their business outlook. On the other hand, BPO services are generally non-discretionary in nature and focused on cost take-outs and improving productivity. These services are essential to keep the customers’ business running on a day-to-day basis, and often deal with the customers’ client processes.

Slow but not negative

“The BPO market has seen a slow growth, but not a negative growth,” says T.J. Singh, research director for BPO at Gartner Inc. “The growth rate will be between low single and mid-single digit. But, the market is still attractive,” Singh adds.

Admitting that business is certainly slower than a year earlier, Ananda Mukerji, CEO and MD, Firstsource Solutions Ltd, says growth rates will stay depressed in the immediate term as customers’ growth has been impacted. However, Mukerji is confident about the fundamental value proposition that BPOs offer to customers in terms of cost take-outs and productivity improvements. Firstsource is seeing traction in key verticals such as telecom and healthcare, while banking continues to be slow.

GROWTH FROM EXISTING CLIENTS:

Many of these BPOs have been able to post a healthy growth in recent quarters mainly due to the ramp-up from existing customers. “Majority of our growth is coming from existing customers, while the sales cycles continue to stay elongated,” says Anand Vora, chief financial officer of Hinduja Global Solutions.

Existing customers, who have tasted the benefits of outsourcing or offshoring, would want to do more because of the downturn. “If a client has been off-shoring two processes and has seen significant benefits, he now wants to offshore other processes,” Vora adds.

The customer stickiness in BPO business is higher because of the longer duration of contracts. “The new contracts will take time to fructify as customers have to go through the churn,” says Singh. “There are some customers who will say ‘we need to ride down the wave’ and not make major investments. Others will make use of this environment to make investments,” he says.

Further, new client additions will be lower because some companies are re-evaluating internal sourcing strategies amidst the economic uncertainty.

Quoting an October 2008 poll on customers’ spending pattern, Singh says about 38 per cent of them in North America will increase the scope of work with existing vendors, while 40 per in Europe will increase volumes and 17.6 per cent in Australia would increase volumes. “The increase in volumes could be up to 25 per cent,” says Singh. . Some 79 customers in North America, 95 in Europe and 20 in Australia were polled by Gartner.

Some BPO firms are seeing new deal wins in the marketplace. “The current environment is also producing new opportunities, such as reengineering projects focused on increasing cash flow, deflation-focused sourcing and analytics; increased collection work, which leads directly to our solution focused on cash gain. We are continuing to close new deals as well as grow from expanding existing relationships,” says Pramod Bhasin, President and CEO, Genpact Ltd, in a recent post-earning call.

“We are very optimistic about the opportunities in a recessionary environment, both with existing clients and potential new ones. But we are taking a cautious approach for the present” Bhasin adds.

Singh says that BPO companies are also providing more application, consulting and infrastructure services apart from regular services such as contact centre and other back-office services.

As a result of greater bundling happening, the outlay on application, infrastructure and consulting has gone up to 37 per cent of the total BPO budgets, up from 24 per cent in 2006. “This is cannibalising the IT services market,” says Singh.

Besides, many BPO firms are seeing a healthy renewal of contracts with their existing customers.

WNS Global saw its existing contracts renewed by customers such as Centrica, SAS Airlines and SITA.

Despite longer sales cycles, as customers delay their decision making process, the deal pipeline for BPO companies continues to be healthy, which adds to their advantage.

“Our pipeline across insurance, utilities, and transportation continues to be robust,” says Vikram Talwar, executive chairman of EXL Services. “We continue to see strong signals from new clients as well as existing strategic clients,” he adds.

Pricing pressure

BPOs, however, face pricing pressure, like their IT counterparts. The pressure is severe where the customers’ revenues have been impacted by the downturn.

“While we are seeing pricing pressures, we have multiple levels such as managing wage inflations, utilisation of infrastructure and managing discretionary expense to offset these trends,” says Bhasin.

Also there has been a trend towards transaction-based pricing as customers look to convert their capital expenditure into operational expenditure while fighting the downturn.

“Customers are increasingly looking at adopting the transaction model as cost-cutting becomes imperative,” says Gautam Thakkar, Vice-President, Infosys BPO.

Gartner says more clients are asking about offshoring in Q1 2009 as compared to a year ago as cost take-out has become a big issue.

“In the first half of 2009, we expect higher uptake of offshore BPO services,” Singh says.

Despite the challenging market, many a BPO firm continues to expand its global delivery network and build capabilities. Genpact, which opened new facilities in Guatemala, Morocco, Oman and more recently in Lublin, Poland, plans to increase its headcount by a tenth to 39,000 by the end of this year.

Firstsource, which added some 3,000 employees in the December quarter, opened four new delivery centres in India plans to add more in Bhopal and Coimbatore.

WNS Global, which is looking at the Asia-Pacific market as part of its diversification strategy, is exploring options to set up a delivery centre in China, says Neeraj Bhargava, Group CEO, WNS Global.

The company also plans to double its employee headcount in Philippines to about 1,000 within a short time, he adds.

Hinduja Global plans to open its second delivery centre in Manila and to have a 500-1,000 people facility over the next six to eight months, while EXL Services Ltd is adding an additional 500 seater in Pune.

vishwa@thehindu.co.in

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