bppo indus projct

8/8/2019 BPPO INDUS PROJCT

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INTRODUCTION TO BPO INDUSTRY

The business proc ess outs ou rc ing indust ry in India refers to the business process

outsourcing services in the outsourcing industry in India, catering mainly to Western operationsof multinational corporations (MNCs).

As of 2008, around 0.7 million people work in outsourcing sector (less than 0.1% of Indians).Annual revenues are around $11 billion around 1% of GDP. Around 2.5 million people graduatein India every year. Wages are rising by 10-15 percent as a result of skill shortage.

SIZE OF INDUSTRY

The industry has been growing rapidly. It grew at a rate of 38% over 2008. For the FY09financial year the projections is of US$7.2 billion worth of services provided by this industry.The base in terms of headcount being roughly 400,000 people directly employed in this Industry.The global BPO Industry is estimated to be worth 120-150 billion dollars, of this the offshoreBPO is estimated to be some US$11.4 billion. India thus has some 5-6% share of the totalIndustry, but a commanding 63% share of the offshore component. The U.S $7.2 billion alsorepresents some 20% of the IT and BPO Industry which is in total expected to have revenuesworth US$36 billion for 2008. The headcount at 400,000 is some 40% of the approximate onemillion workers estimated to be directly employees in the IT and BPO Sector.

The related Industry dependent on this are Catering, BPO training and recruitment, transportvendors, (home pick up and drops for night shifts being the norm in the industry). Securityagencies, Facilities management companies.

Revenues expected to grow at CAGR of 38%over the next 5 years


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IT & BPO INDUSTRY: INDIA CAN SUSTAIN ITS GLOBALLEADERSHIP POSITION

The Indian IT and ITES industry is booming as outsourcing and offshoring are catching up fastin the global arena. NASSCOM, the apex organisation of Indian IT & ITES industry, along withMcKinsey prepared a detailed report on the future potential of the industry and what India needsto do to get a larger share of the global offshoring cake.

In the last decade, the IT and BPO industries have seen substantial offshoring. India has been theleading offshore destination during this period, and now accounts for 65 per cent of the globalindustry in offshore IT and 46 per cent of the global Business Process Offshoring (BPO)industry. The global offshoring market continues to grow rapidly, as the proven benefits of

offshoring (also termed global sourcing) induce more and more companies to adopt these practices and providers develop the capabilities to serve even more sophisticated customers.

A detailed analysis indicates that the addressable market for global offshoring exceeds US$ 300 billion. We believe that India can sustain its global leadership position, grow its offshore IT andBPO industries at an annual rate greater than 25 per cent, and generate export revenues of aboutUS$ 60 billion by 2010. Additionally, export growth can be further accelerated through deep andenduring innovation by industry participants. Such extensive innovation could generate anadditional US$ 15-20 billion in export revenue over the next five to ten years.


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IMPACT OF RECESSION ON INDIA

INTRODUCTION The fear of a recession looms over the United States. And as the clich goes, whenever the USsneezes, the world catches a cold. This is evident from the way the Indian markets crashed takinga cue from a probable recession in the US and a global economic slowdown.Weakening of the American economy is bad news, not just for India, but for the rest of the worldtoo.

SO WHAT IS A RECESSION?

A recession is a decline in a country's gross domestic product (GDP) growth for two or moreconsecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

WHAT CAUSES IT?

An economy which grows over a period of time tends to slow down the growth as a part of thenormal economic cycle. An economy typically expands for 6-10 years and tends to go into arecession for about six months to 2 years.

A recession normally takes place when consumers loose confidence in the growth of theeconomy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.Investors spend less as they fear stocks values will fall and thus stock markets fall on negativesentiment.

STOCK MARKETS & RECESSION

The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis,

but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in theUS economy. The Sensex crashed by nearly 13 per cent in just two trading sessions in January.The markets bounced back after the US Fed cut interest rates. However, stock prices are now at alow ebb in India with little cheer coming to investors.


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CURRENT CRISIS IN THE US

The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US.

Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes.Major banks have landed in trouble after people could not pay back loans.

The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shakyground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of theeconomy.

PAST RECESSIONS

The US economy has suffered 10 recessions since the end of World War II. The GreatDepression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets inthe 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Productiondeclined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation andsharp correction to overproduction of the previous decade. This was followed by Black Mondayin October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by22.6 per cent affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longestexpansion on record. From March to November 2001, employment dropped by almost 1.7million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.


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The dot-com burst hit the US economy and many developing countries as well. The economyalso suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock

prices crashed.

IMPACT OF AN AMERICAN RECESSION ON INDIA Indian companies have major outsourcing deals from the US. India's exports to the US have alsogrown substantially over the years. The India economy is likely to lose between 1 to 2

percentage points in GDP growth in the next fiscal year. Indian companies with big tickets dealsin the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But expertsnote that the long-term prospects for India are stable. A weak dollar could bring more foreignmoney to Indian markets. Oil may get cheaper brining down inflation. A recession could bring

down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US economy. Even thoughdomestic demand and diversification of trade in the Asian region will partly counter any drop inthe US demand, one simply can't escape a downturn in the world's largest economy. The USeconomy accounts for 30 per cent of the world's GDP.

Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In the globalised world,complete decoupling is impossible. But India may remain relatively less affected by adverseglobal events." In fact, many small and medium companies have already started developing tradeties with China and European countries to ward off big losses.

Manish Sonthalia, head, equity, Motilal Oswal Securities, says if the US economy contractsmuch more than anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent bythe IMF-will contract, and India would be no exception.

The only silver lining is that the recession will happen slowly, probably in six months or so. Asof now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather segments willsuffer losses because of their trade link. Certain sections of commodities could face sharp impact

due to the volatile nature of these sectors. C.J. George, managing director, Geojit FinancialServices, says profits of lots of re-export firms may be affected. Countries like China importcommodities from India, do some value-addition and then export them to the US.

The IT sector will be the worst hit as 75 per cent of its revenues come from the US. Low demandfor services may force most Indian Fortune 500 companies to slash their IT budgets. ZinnovConsulting, a research and offshore advisory, says that besides companies from ITeS and BPO,


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CONSEQUENCES OF US RECESSION ON INDIA JOBMARKET

Worst affected because of US recession will be the service industry of India. Under service

industries come BPO, KPO, IT, ITeS etc. Service industry contributes about 52% to India's GDPgrowth. Now if that is going to get hurt then it will also hurt India's overall growth but veryslightly. India is not going to face a major impact due to US recession. People may say that thereis going to be a huge job loss due to recession. and will cite the example of TCS firing about 500employees but these were employees who didnt perform and for cost cutting one have to reduce

Non performing asset and that exactly what has been done. There is no threat to the skilled people. According to NASSCOM India will have a shortage of about 5 million skilled people inIT/ITeS. So there are lots of opportunities.

Apart from this India's travel, tourism and power industry is going to grow at a better rate. Thisis again a good sign. India has a huge population so a huge consumer base so we dont have toalways depend on US for our growth. India's GDP is expected to grow at the rate of 8.5-8.9 %which is again way above the growth rate of US and only second highest in the world after China.

This recession gives us opportunity to be innovative and to think out of box so that the USdirectly dont affect our robust growth. Due to increasing Rupee exporters are having a hard time

but it has been noted that our exporters are not that efficient and in past they got the benefit of

depreciating rupee. So now its time to be innovative and more effective and increase the over allefficiency and go for systematic cost cutting to balance the rupee effect. Infact there are lots of scope for improvement. In West Africa goods at departmental stores are sold at the rate 5 timesthan Indian price and Indian goods are not exported to several countries in West Africa. Its anexcellent opportunity for our exporters.


8/11

SLOWDOWN AND BPO INDUSTRYThe US financial crisis and the subsequent global slowdown has hit international BPOcompanies hard. Many small and medium ones have ceased to exist and others are

evolving strategies to sail through the slowdown. Business process outsourcing(BPO) in India was having a good time until recently.

In 2007-8, according to NASSCOM, BPO revenues were close to US$ 11 billion,registering agrowth of 30 percent over the previous year. The party seems to have runout of steam after thefinancial crisis hit the shores of the US, the principal market for the Indian BPO companies.Companies working with the US banking and financial sector (BFSI), the major constituent of theIndian BPO business, have been the worst hit. The magnitude of the financial crisis has been soenormous that it engulfed almost all other sectors of the US. Consequently, BPO companiesworking with these other sectors have also started seeing adverse effects. While the big players

like Wipro, Infosys and Genpact retain their optimism for the longer term, they are quietlyworking on strategies to cope with the current slowdown. In contrast, small and medium playershave faced the brunt of it. Many of them have already ceased operations and many others aretrying to survive by resorting to various means. However, they are still finding the going difficult.This piece is an attempt to look into what BPO player s are doing to sail through the currentslowdown.

EFFECTS ON THE BPO SECTOR Companies do not have enough business. They do not have enough money on the balance sheet.They are firing people,says Rajeev, a BPO professional, who has been lucky enough to get a jobafter being laid off by a small BPO company, Cyber Futuristics. He was one among 30 people to

be laid off at the same time. When we cannot survive, how can you people survive? This iswhat the management told them while laying them off. Rajeevs case is not a one-off. Many smalland medium BPO companies have done the same. They are not only seeing their sales goingdown, but they are facing pr essure on their margins as well. They have been forced to cut on their operating costs as their US-based clients are reluctant to pay higher prices like ear lier. Theycannot complain, being aware that many people in the US are out of jobs and really short of money. For instance, Revons IT Solutions, a 15-employee Chennai-based BPO company workingon the publishing works and back-end office operations outsourced from the US, has seen itsvolumes going down considerably. A director working with Revons confirms that revenues of thecompany have gone down significantly. He admits that around 10 employees have been laid off so far to cut costs. The depreciation of the rupee against the dollar has come as some relief inthese tough times. Sales of companies have gone down, but revenues in rupee terms have not, asAijaz Khan, who runs a small BPO company in Lucknow, points out. He says, Earlier we used


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to get anything between Rs 36 and 40 for one dollar. Right now we are getting around Rs 50.Therefore, we have not seen the revenues going down considerably though sales and margins aredown. Bigger players have also faced the heat, but are better equipped to deal with the situationarising out of the slowdown. A for ecast by NASSCOM reveals the possibility of a 3 to 4 percentdecline in growth in this sector in 2009-10. Domestic BPOs like Cameo Corporate Services, aChennai-based company, are in a better position probably a reflection of the fact that the Indianeconomy is not as badly hit by slowdown as the countries in the West and Japan are. But they arealso not expected to grow at rates any better than previous years, which also demonstrate thatIndian companies are treading cautiously, if ambitiously.

MEASURES TO COUNTER THE SLOWDOWN When financial crisis hit the US, BPO players thought it to be another opportunity to increasetheir business. This turned out to be a gross under estimation of the problem as the crisis blewentire investment banks off the US landscape. Ajai Bhatnagar of BPO Consultants, an advisoryfirm for global outsourcing, says, Investment banking is the key to BFSI segment, whichis the bread and butter of both IT and BPO sectors in India. This is in a complete mess in the US.So what can international BPOs do, and what are they doing to ride the slowdown? Once realitystruck BPO companies, as Bhatnagar says, they hurried to find means to cut down on costs.For the BPO sector this was a new situation. Till the slowdown appeared, it was used to a growthrate of around 30 percent year-on-year basis for the last many years. To begin with, thereaction was knee-jerk and the first method most BPOs have adopted is to lay off employees. The

big ones have not resorted to retrenchment, but they have almost frozen new intakes ascompared to before the slowdown. Many BPOs, which include some of the big names, haveincreased their working hours, and frozen pay hikes and other perks. Infosys BPO, one of theaccelerated the process of redeployment of staff in an effort to largest, has, according tonewspaper reports, terminated the services of over 600 contract workers in February. It has also

prune variable costs. BPOs have suddenly become aware of even the most trivial measures to cutcosts. They are asking employees to switch off monitors not in use, to keep optimumlighting at the workplace, reduce expenditure on stationery and food items, and cut down ontravel costs. BPOs working on inter national projects have star ted r educingtheir margins, which used to be as high as 20 percent. They cannot let their clients leave at thisstage, even when they are not ready to pay the higher prices they were paying earlier. With

these BPOs now willing to work on reduced margins, they have suddenly started seeing value inthe domestic market, where the margin is generally between 8 to 10 percent. International BPOslike TCL, Infosys and HCL have already started increasing their exposure in the domestic market.Traditionally, BPOs have been focusing on the US market alone. With the US in crisis, they havewoken up to the reality that there is a world outside it as well. Revons IT, for example, isconcentrating on marketing in Europe and Australia to get new clients, though its efforts have not

paid much dividends yet. Unfortunately, the timing of these efforts seems quite inappropriate.


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Bhatnagar says that they are not going to pay dividends as the whole world has slowed down,including Europe, Japan and Australia. Persistent efforts on this front may only bear results oncethe slowdown is over. Viswanath R. Rao, Executive Vice- President of Operations, HindujaGlobal Solutions, says the company is focusing on consolidation; something even Bhatnagar sayswill be a trend for some time in the BPO sector. Smaller players, especially those cateringspecifically to the BFSI in the US, are showing signs of willingness to be acquired as they knowthat they may perish forever if they stay put. Bigger players like Aegis, Wipro and HCL havealready either acquired or are planning to acquire some of the companies under pressure. BPOsare also trying to deepen relationships with existing clients, rather than looking for new ones,which are anyway nowhere on the horizon. Even smaller players like Aijaz Khans Lucknow-

based BPO have shown a willingness to cooperate with clients over longer payment cycles.Enterprises outsourcing jobs to India are also keen to deepen these relationships.Companies are spreading their footprint in areas like consultative selling. This is, however, easier for bigger companies, than for small and medium-sized BPOs. Bhatnagar of BPO Consultants

says that closures in the small and medium-sized BPOs in recent months have been because of their inherent problems rather than the slowdown as such. People had started these businessesonly in lure of the dollar, with no other commercial will or reason. This downturn will certainlyseparate the wheat from chaff and a lot of consolidation will take place.Domestic BPOs are expected to remain unscathed. However, they are also not likely to add totheir growth rate. Indian companies might not have been as badly hit as their Amer icancounterparts, but they are also looking to cut costs. After all, hardly any sector is showing robustgrowth. In such a scenario BPOs based in smaller towns, semi-urban and rural areas are expectedto make gains. The slowdown, for instance, has brought cheers to rural BPO DesiCrew, as SaloniMalhotra, CEO of the company, says. This outfit, which gets works outsourced from the Indian

mobile, Internet and insurance companies, has seen slightly more positive impact during theslowdown.

..


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FUTURE

The Indian BPO sector has hit a rough patch, and growth rate as expected in 2008-9 will be much below as what was seen in 2007-8. Even big players like Genpact expect its revenue growth to

reduce from 26 percent in 2007-8 to between 10 and 15 percent in 2008-9. EXL Service expectsits growth to slacken from 19.5 percent last year to 5 to 8 percent this year.However, a few factors are still loaded in favor of the BPOs. The rupees marked depreciationagainst dollar has offset loss in sales volumes to some extent, something even Aijaz Khan pointedout. Attrition rate has also started showing signs of slowing down consider ably. Inorganicexpansion is what many big players are looking for at this stage. With many BPOs in bad shape,Bhatnagar says inorganic expansion has become cheaper, a good news for the industry. Nowonder we have been hearing of BPOs with cash in hand on a buying spree despite the slowdown.Costs of raising capital through banks have fallen. With inflation falling to almost zero, rates aregoing to be cut further. This will help the BPOs in the post- slowdown phase, when they will look

to give a real push to their business to cover for lost time. What has hit the BPO industry mostseverely is the fact that nearly one-third of its revenues originate from the BFSI vertical an areaworst affected during the slowdown. This segment is still not showing signs of real improvementsthough governments all over the world are trying to revive it through stimulus packages. Theeconomic situation in the US and other countries are, however, bound to improve sooner or later as effects of so many stimulus packages will ultimately be visible.Smaller and medium-sized BPOs also realize this and are probably counting on it. They are tryingto hang on for as long as possible. Perhaps the best bet for them is to merge with bigger players.And for the bigger players these can prove value- additions at fairly cheaper prices. Bhatnagar says that BPO companies should start working with the international clients to benchmark

processes and become more efficient, something on the lines of Infosys, which is expected tomaintain an impressive 25 per cent year-on-year growth despite the slowdown.

NASSCOM is quite optimistic about the BPO sector in the long run. Accor ding to its recentreport Strategic Review 2009 the sector will rebound from 2010 onwards. The reporthighlights that the BPO industry will ultimately benefit from the short-term cutbacks in spending

by US companies on technology. Bhatnagar also prophesies that BPOs that survive these toughyears and prune themselves to be nimble entities will thrive and grow with a big bang. Perhapsthis is what is inspiring many small and medium BPO player s to hang on by a thread.

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