domestic bpo apsm project jun 10 v6.0

8/6/2019 Domestic BPO APSM Project Jun 10 v6.0

1/26

APSM Project Effective Strategies in Domestic BPO Market

APSM Batch 03 -1- @2010 Indian Institute of Management Calcutta

Advance Program in Strategic Management

Project on

Effective Strategies in Domestic BPO Market

Project Team Members

Mohammad Mohsin

Chakradhar Nalam

Hemant Kewalya

Mohd Anwar Pasha


2/26



Table of Contents

1. ABOUT THE STUDY ------------------------------------------------------------------------------------------------ 3

2. DOMESTIC BPO MARKET OVERVIEW ----------------------------------------------------------------------- 4

FACTORS LEADING TO DOMESTIC BPO GROWTH -------------------------------------------------------------------- 5

CURRENT DRIVERS OF OUTSOURCING -------------------------------------------------------------------------------- 5

INHIBITORS OF DOMESTIC BPO GROWTH IN INDIA------------------------------------------------------------------- 6

3. DEMAND ANALYSIS OF DOMESTIC BPO ------------------------------------------------------------------- 7

VERTICAL SECTOR-WISE ANALYSIS OF DOMESTIC BPO------------------------------------------------------------ 7

HORIZONTAL SERVICE LINE-WISE ANALYSIS OF DOMESTIC BPO ------------------------------------------------- 9

4. EVOLVING BUYERS SIDE - GROWING AWARENESS ------------------------------------------------ 10

VENDOR SELECTION CRITERIA:DOMESTIC BUYERS PERSPECTIVE -------------------------------------------- 10

CHALLENGES FACED BY BUYERS ------------------------------------------------------------------------------------- 11

ROAD AHEAD FOR DOMESTIC BUYERS------------------------------------------------------------------------------- 12

5. THE SUPPLY SIDE - INCREASED CAPABILITY --------------------------------------------------------- 13

DOMESTIC SUPPLIER:CRITICAL SUCCESS FACTORS ------------------------------------------------------------- 13

KEY CHALLENGES FACED BY DOMESTIC SUPPLIERS -------------------------------------------------------------- 15

6. DOMESTIC BPO - MARKET DYNAMICS -------------------------------------------------------------------- 17

DOMESTIC OPERATING MODELS-------------------------------------------------------------------------------------- 17

DOMESTIC PRICING MODELS ------------------------------------------------------------------------------------------ 18

COST STRUCTURE OF THE DOMESTIC BPO MARKET -------------------------------------------------------------- 19

KEY DOMESTIC BPO DEALS ------------------------------------------------------------------------------------------- 20

KEY TRENDS IN DOMESTIC BPOINDUSTRY ------------------------------------------------------------------------ 21

7. STRATEGY FOR A NEW PLAYER ---------------------------------------------------------------------------- 23

ROAD AHEAD :BENEFIT FOR BUYERS &SUPPLIERS -------------------------------------------------------------- 24

KEY ACTION POINTS FOR THE FUTURE GROWTH OF DOMESTIC BPO ----------------------------------------- 24

SWOT ANALYSIS:DOMESTIC BPO MARKET ------------------------------------------------------------------------ 25

8. REFERENCES ------------------------------------------------------------------------------------------------------ 26


3/26



1. About the Study

India is at the forefront of the rapidly evolving Business Process Outsourcing (BPO) market and is

well established as a destination of choice among global outsourcers. Over the past decade, Indian

BPO industry has grown exponentially in size and has significantly matured in export service delivery

capability and footprint. Now, it is at an inflexion point with the unique opportunity to spread into the

rapidly growing domestic market.

The following study outlines the domestic BPO market in India, and provides an insight into the future

outlook for the industry by analyzing current trends and industry practices. Indias impressive

economic growth, resulting in increased consumption, has fueled its growth across various sectors in

India. There is significant headroom in the addressable BPO opportunity for domestic buyers and

providers, and there are sizeable untapped opportunities across a wide spectrum of segments.

Further, the countrys domestic BPO industry is favorably positioned to benefit from its established

delivery capabilities, which exert a considerable influence on buyers decision to opt for outsourcing.

This study is based on research covering the demand and supply side of the domestic BPO market in

India and primary research covering five areas: service-line demand evolution, sector-wise demand

evolution, buyers and suppliers landscape and key future trends. Cross-case analysis.


4/26



2. Domestic BPO Market Overview

A glance at Indias overall BPO industry growth helps put the dynamics of the domestic BPO market

in perspective. BPO services, accounting for over 20% of the Indian IT Industry (including hardware),

is the fastest growing segment across software and services, driven by scale as well as scope. The

Indian BPO industry, currently sustaining an employee pool of over 700,000, can be broadly classified

into Exports and Domestic.

Exports - The exports segment grew from USD3.1 billion in fiscal 2004 to USD11 billion in 2008 and

currently accounts for 37% of the global business process offshoring pie. As per estimates in a

business as usual mode, Indias BPO exports will grow to USD28-30 billion over the next four to five

years. With proactive measures, it has the potential to reach USD50 billion by 2012, with a maximum

addressable opportunity of USD220-280 billion.

Domestic - The domestic BPO market, with a growth rate of 50% over the last five years, grew faster

than the exports market to reach nearly USD1.6 billion in FY2008. At a conservative CAGR of 38%,

the domestic BPO market is slated to reach USD6 billion by 2012. It presents a huge untapped

growth opportunity with addressable market opportunity is in the range of USD1619 billion by 2012.


5/26


6/26



Inhibitors of Domestic BPO growth in India

Lack of Experience with Outsourcing: - Inexperience of potential client organizations withorganized/large scale outsourcing may constrain the growth of the domestic market. This may

be manifested in several ways, such as mistrust regarding sharing of data, inability to identify

appropriate processes and/or vendors in the selection process, drafting of inadequate SLAs,

etc. Any or all of these factors may lead to some bad experiences of client organizations

acting as a deterrent to other client organizations attempting such a move.

Relatively lower cost arbitrage in the domestic business compared to offshore

outsourcing: - The absence of a comparable labor cost advantage in the domestic business

(as compared to that enjoyed by US/UK customers) makes selling these services a little more

difficult.

Absence of third-party service providers with significant scale:- Unlike the export-

oriented vendor landscape where there are several third-party players with a scale ofoperation of over 5,000-6,000 employees, the largest vendors serving the domestic market

still have only

3,000 - 4,000 employees each. For this segment to grow rapidly, the vendor landscape will be

required to develop equally rapidly to keep pace with the forecast demand.

Slow build-up of scale in contracts in the domestic market: - Given that the cost

advantage in the domestic business is relatively lower, this segment is more prone to margin

pressures. As a result, the ability to rapidly achieve scale opportunities is essential for service

providers to make this a viable business opportunity. Although a few recent deals and

announcements indicate sizeable scale of business, a slowdown in large-scale deals could

inhibit growth in the domestic market. Government procurement policies: - There is a concern that restrictive procurement

policies adopted by some government departments, such as insisting on high levels of earnest

money deposits (leading to additional capital costs), may deter some service providers from

bidding for their contracts (this has been observed in the IT services space as well).

Other obstacles that could slow growth in the domestic market:- Lack of interoperability

norms that restrict service providers from offering a national toll free access number, lack of

adequate funding avenues for domestic market players.


7/26



3. Demand Analysis of Domestic BPO

Vertical Sector-wise Analysis of Domestic BPO

It is estimated that the domestic BPO opportunity is spread across a number of key market segments.

Important opportunity areas include banking, insurance, telecommunications and government

verticals.

Emerging SectorsAs per estimates, the telecommunications industry followed by the banking services industry are the

early adopters in the domestic BPO segment. It is also expected that BPO adoption patterns will differ

across industries. For example, the telecom industry is likely to see rapid initial adoption, which is

expected to slow down over time. On the other hand, the BFSI industry may show slower initial

adoption levels, which are likely to accelerate in the future.

Vertical Sector-wise Growth Analysis of Domestic BPO

Short Term 2-3 years Mid Term 3 - 7 yearsTelecom Retail

Banking Healthcare

Insurance Government

Travel & Hospitality Media / Consumer Goods


8/26



Other emerging vertical markets with significant potential for already established service lines such as

Customer Care and Sales and Marketing include aviation, hospitality, retail and media. Moreover,

learning from other sectors, the manufacturing sector, which covers areas such as consumer

durables, packaged consumer goods and automobiles, has started signing discrete outsourcing

contracts. Customer-contact activities for support, loyalty initiatives and promotional campaigns are

the key activities being outsourced in this segment.

Service-line Demand: Value Chain AnalysisThe domestic BPO market is currently driven by the need to offer quality services in areas such as

Customer Care and Sales and Marketing. While Customer Care and Sales and Marketing have been

evolving from basic voice-based (outbound call center) services to high-end quality voice-based

(inbound customer service centers) services, the market has strong potential to grow into non-voice

services, as well as back office and expert services segments.

Domestic market has been evolving from a Tier I and II player-dominated market into a more

consolidated Tier I players market. Customers who earlier banked on Tier II and III players for basic

out-bound voice-based services such as telemarketing and sales are now seeking high-end in-bound

voice-based services such as customer service (including upselling and cross-selling) from more

experienced Tier I players.

The domestic BPO market is evolving along a similar path as the past evolution of the BPO export

market. The BPO export industry has matured over the years while moving up the value chain. The

domestic BPO market offers a similar opportunity to progress up the value chain. An existing supplier

base and emerging new entrants can leverage this opportunity.

Decision

Making

Problem

Solving

Technical

Customer

Support

Back office

Processing

High-end

Customer

Support

Sales and

Marketing

Select

Processing

Services (HR)

BasicCustomer

Support

Sales and

Marketing

BasicServices

High-endSupport

TechnicalSupport

ExpertServices

Current Service Offerings Future Scope of Services


9/26



Horizontal Service Line-wise Analysis of Domestic BPO

Customer Care and Sales and Marketing are the two largest service-line segments and accounted forover 70% of the overall market in 2008. While Customer Care and Sales and Marketing are expected

to grow steadily in the future, there are indications that HR and F&A will also show positive growth in

the next two to three years.

Horizontal Sector-wise Growth Analysis of Domestic BPO

Current Future

Customer Interaction Management Finance & Accounting

Sales & Marketing Human Resources

Back office Processes Knowledge Services

Technical Support Procurement

While key service areas include query handling, sales and marketing support and payroll processing,

the near future is likely to see a growing demand for F&A and knowledge services, which are

expected to exhibit significant activity and growth. As the industry evolves, other processes will be

increasingly outsourced. In India, there are limited discrete outsourcing contracts in specific areas.

However, these are still quite small. Specific examples of activities, in this category include

participant/audience contacts for television game shows, e.g., Kaun Banega Crorepati, Indian Idol,

etc., which are outsourced by the respective channels to specialist service providers such as Dialnet,which manage services such as Interactive Voice Response (IVR) systems for their customers.

Order management: While this 3PL (third-party logistics) service is still at the developmental stage in

India, there are specific instances where logistics vendors are taking up total end-to-end logistics

deals. TCIL formed a JV with Mitsui of Japan in 1999 to set up Transystem Logistics International

(TLI), a unique dedicated automobile logistics service provider to Toyota Kirloskar Motors Ltd. (TKM)

at Bangalore, a pioneer in automotive logistics. The JV handles the entire in-bound and out-bound

logistics of Toyota vehicles in India.

Opportunities await BPO firms to provide specialized services to newly emerging industries such as

retail, fashion apparel or automobile components, e.g., customer relationship management (CRM),

market research, accounting, and inventory and supply chain management. An early adopter,

Dabur, one of the largest fast-moving consumer goods (FMCG) companies in India, signed a 10-year

agreement with Accenture, outsourcing the IT work of its supply chain and secondary sales functions

to Accenture.


10/26



4. Evolving Buyers Side - Growing Awareness

Domestic buyers go through a learning curve on outsourcing. During phase 1, they become aware of

outsourcing through marketing hype. They quickly learn about potential benefits, costs and risks by

talking to current outsourcers, consultants and service providers. Initially, they outsource pilot projects

(basic and non-core in nature) to reduce costs on a few selected activities (phase 2). As they move

up the learning curve, they move to phase 3, when they exploit outsourcing for quality as well as for

cost reasons. In phase 4, mature adopters utilize outsourcing to enable corporate strategies such as

increasing business agility, bringing products to market faster and at a lower cost, financing new

product development, accessing new markets or creating new business. While it takes some

organizations years to move up the learning curve, the pace slows down at the end of phase 1

and throughout phase 2, when many companies are focused on cost benefits and at the same time

are fearful about outsourcing. Currently, the majority of domestic Indian clients are in phase 1 and

phase 2 of the process. However, the domestic market has significant addressable opportunities as

companies move up the learning curve.

Hype andFear

EarlyAdopters

Best andWorst

PracticesEmerge

Focus onCost

Market

Matures

Richer

PracticesEmerge

Focus on

Quality

Institutionalized

Focus on

Value-added

TransformationPhase 1

Phase 2

Phase 4

Phase 3

Time

SizeofMa

rket

Vendor Selection Criteria: Domestic Buyers Perspective

The Domestic Buyers are of the view that the key criteria for vendor selection are as follows:

Existing client credentials for providing voice and non-voice BPO services

Financial and managerial capability of service provider to sustain and grow in line with

increasing demand

Cost and quality efficiency

Existing relationship with service provider


11/26



Vendor

SelectionCriteria

Capability to Scale up

Prior Experience

Existing Relationship

Core Efficiency

Proven Credentials

ManagerialCapability

Large service providers have a greater capability to scale up vis--vis smaller players. This is

resulting in some buyers terminating contracts with smaller players and consolidating their operations

with larger ones. To be successful among a sea of suppliers, service providers need to demonstrate

their financial and managerial capability.

Existing BPO relationships with service providers will not be a key influencer in future BPO vendor

selection decisions. The bulk of the activity will go to a provider with proven capability and credentialsin the voice and non-voice BPO services domain. While contemplating outsourcing for the first time,

companies base their selection on past credentials and reliability information gathered from the

market. Although prior experience in a related field is desired, vertical-specific experience is not a

necessity for all buyers.

Challenges faced by Buyers

The challenges faced by buyers while outsourcing include the following:

Long stabilization time: Currently, outsourced activities/processes take roughly six to eight

months to be successful y integrated, stabilized and functioning efficiently. This long periodposes a challenge for buyers.

Lack of industry experience: While the domestic supply side is capable of successful y

managing activity-based operations, it has not as yet gained recognition for end-to-end

process outsourcing in an industry-specific environment. Certain buyers find it challenging to

collaborate with suppliers who lack such experience.

In-house restructuring: Buyer companies face significant challenges internally. Currently,

employees are averse to outsourcing and incorporating new processes and structures. This


12/26



can be a hurdle for government agencies as they general y have unions and may face

resistance from employees.

Lack of control: In the case of third-party outsourcing, buyers perceive a lack of control over

the outsourced entity from a day-to-day operations standpoint. This makes it even more

challenging to incorporate change and achieve high levels of quality.

Road ahead for Domestic Buyers

While buyers look to continue outsourcing large volumes of non-core processes, core processes are

likely to remain in-house for another two to three years. This is due to lack of confidence in domestic

suppliers. Further, the level of automation within buyer companies will directly impact outsourcing.

Higher levels of automation will facilitate outsourcing in the future.

Outsourcing engagements are currently activity-based. The next two to three years are likely to seethem evolving into end-to-end process-based outsourcing as companies look to avail bundled service

offerings. With the emergence of local and global players in the market, outsourcing may be split up

between new vendors to leverage expertise and existing vendors to move up the value chain.

However, the choice of a vendor will be driven by the cost and transactional benefits achieved; there

is no perceived advantage of associating with global vendors.

New domestic buyers will prefer to adopt the captive shared-services model over outsourcing to third-

party vendors to streamline their activities, thereby paving the way for outsourcing.


13/26



5. The Supply Side - Increased Capability

There are over 700 vendors offering a variety of BPO services to domestic clients. Most of the top

vendors have grown their domestic BPO operations by over 60% over the last one year. The total

number of professionals employed by the domestic BPO market has grown from 141,000 in 2005 to

about 332,000 till date and is likely to increase over time.

The domestic market, which was earlier served by small Tier I vendors, has evolved over the past

three years. Relatively large and experienced Tier I players are now looking to capture the domestic

pie. Further, the domestic market is slated to see rapid consolidation among suppliers as a result of

buyers looking to scale up and have a wider portfolio of services under a single vendor Tier I and II

players are expected to merge with big players to match the various profiles demanded by clients.

Although domestic suppliers offer an entire portfolio of services, as offered to international markets,

the domestic market has limited services currently. A per estimates, 90% of business is voice based

and 10% non-voice based. While most inbound call center processes are serviced by Tier I players,

outbound calls (telesales) are predominantly handled by Tier I and II vendors. Tier II and III players

are preferred for outbound telesales because of their geographic presence and lack of bundled

services offerings. In addition, they offer much more flexibility than larger players.

Key Domestic Players

Pureplay BPO Providers Multi-tower Outsourcing Firms

Intelenet Global Services

Infovision (Serco)

Sparsh

Aegis BPO Services

Hewitt Associates

Andromeda

IBM

Accenture

Wipro

HP

IT Outsourcing New Market Entrants Niche Specialists

MphasiS EDS Firstsource

BillJunction

HTMT

Venture Infotek

Dialnet Communications

Domestic Supplier: Critical Success Factors

The domestic BPO sector requires focused initiatives from the domestic BPO supplier community to

successfully tap the market potential.


14/26



Critical

SuccessFactors

Capital andInfrastructure

Capability

Wide ServicePortfolio

Multi-lingualCapability

Ability toScale-up& Speedof Setup

CommunicateValue

Proposition

GeographicSpread /

NationalPresence

Providers need to communicate their value proposition better, especially due to the lack of

cost arbitrage-driven propositions for domestic BPOs. The absence of a clear value

proposition for domestic buyers is a strong deterrent to the markets growth.

The speed of setting up and training employees within service provider organizations will be

critical for supplier success as domestic BPO buyers look to scale up operations faster, to

compete in a rapidly growing economy. For voice services, service providers will need to have the capability to scale up in terms of

volumes as well as in their ability to provide multi-lingual support.

Operations need to be spread across the Indian geography, for language support and also to

provide near-shore delivery capabilities, if required.

Wide service portfolio: Service providers will need to demonstrate their non-voice BPO

capabilities through their existing credentials in their specific industry and non-voice BPO

service segment. These credentials can be from the service providers global clients. Indian

buyers are more likely to outsource BPO and application outsourcing (AO) or IT infrastructure

outsourcing (ITO) to the same service provider. Service providers should, therefore, consider

bundled service offerings (BPO with AO/ITO) or business-process-unit-type arrangements, to

improve client stickiness in an engagement. Service providers with process transformational capabilities and world-class IT infrastructure

will be better positioned to attract non-voice engagements. They will also need to have a

vertical industry-specific focus to demonstrate the required competency for delivery of non-

voice business processes.


15/26



Key Challenges faced by Domestic Suppliers

SlowAdoption

TechnologyPlatform

Tier II & TierIII Locations

Profitability

Government

owned Banks

and Insurance

Companies which

form a major

chunk of the

Indian BFSI

Segment will be

slow to outsource

due to Union

pressures

Indian Service

Companies in

the Public and

Private Sectors

are

Underinvested

in Technology

on a Per Capita

and Per Sale

basis

To be

Economically

viable,

Companies

need to move

Operations into

Tier II and

Tier III Cities

Pricing in India is

estimated

to be 30-60%

lower than its

Global

Counterpart

BPO firms in India will find the domestic market more challenging than those in developed

countries.

Government Control & Regulation -To begin with, a significant number of Indian companies

in several service industries, including those in the banking and financial services industry

(BFSI) segments, are wholly owned by the government. BFSI companies have been the

biggest opportunity for outsourcing service providers in the markets of the West

Pressure from Internal Staff/ Unions - Although these companies present the best

opportunity for BPO firms, state-owned banks and insurance companies such as the State

Bank of India and the General Insurance Corporation of India are likely to be very slow to start

outsourcing on a large scale, largely because of the immense pressure they will face from

their unions, who do not want to lose their jobs to the private sector. The way it happened in

Jet airways any company outsourcing would need to reallocate or tone down the workforce

Technology Adoption by Domestic Players - Another challenge BPO firms will face in India

is the fact that any organizations decision to outsource its needs is heavily embedded in its

technological architecture. Indian services companies in either the public or the private sectorare heavily underinvested in technology on a per-capita and per-sale basis, as compared to

those in the US and Europe. Indian services companies are far morelabor-intensive and do

not have technology platforms that will facilitate outsourcing, except in the case of financial

services companies such as ICICI or HDFC.

Lack of Standardization - The internal processes of most Indian services companies are

idiosyncratic and are not standardized as in large retail organizations such as Wal-Mart or US


16/26



healthcare companies. For players who are looking at scale, and who have national ambitions

in the domestic BPO market, this means managing a large range of complexities.

Availability of Skilled Manpower Third, for economics to be viable, players will need to move

from larger cities and set up their operations in Tier I and II locations. It is true that the

domestic market does not require that BPO agents be trained by way of their voice, accent

and culture; therefore it is less expensive and easier for service providers to move into smaller

cities. But the challenges posed by less than adequate infrastructure, political challenges,

extortion and the availability of senior management who are willing to relocate to such cities

need to be dealt with effectively. However, these challenges can be overcome by assessing

Tier II and III cities before setting up shop.

Profitability -Thebiggest challenge, however, could bearound profitability. Although

infrastructure, salary and training costs are lower in the domestic market, so is the pricing. In

the India BPO market, pricing is estimated to be anywhere between 30% and 60% less thanin its global counterpart, although more experienced players insist that domestic BPO margins

are comparable with their global businesses or only marginally lower. With the outsourcing

market in India still not mature, readiness to pay for world-class services remains a

challenge.Even in global markets, variations in margins are phenomenal. Therefore, the

success of such ventures actually depends on how effectively vendors are able to deliver by

way of their cost structure, people management and value creation. Managing rapid growth

while maintaining competitive costs and quality will be critical for the growth of BPO service

providers. Building and developing specialized services and solutions that provide greater

value will be a key challenge for vendors, so that they are able to sustain profitable growth in

the long term.


17/26



6. Domestic BPO - Market Dynamics

Domestic Operating Models

Currently, close to 80% of the industry comprises captive shared service centers. The rest of the

industry is highly fragmented. Estimates suggest that 650 to 700 firms constitute the unorganized

sector. As the industry gains in size and stature, a fair bit of consolidation is expected. Third party

service providers, many of whose revenues are growing around 100% a year, are expected to

increase their market share significantly.

Although the captive shared services model is popular among new buyers, the third-party segment of

this market is expected to grow much faster at over 50%, projecting that the third-party share willgrow from 18.5% in FY2008 to 31% in FY2012.


18/26



There are three primary reasons that contribute to the rapid growth of third-party vendors:

With most underlying customer industries growing at between 2070% per annum, there is an

increasing realization of the need to focus on ones core business while partnering with third-

party vendors for non-core operations.

Several large third-party players, with proven delivery experience, a robust and scalable client

infrastructure and a strong reference base, have emerged.

Increasing realization about the attractiveness of the Indian domestic BPO business is

resulting in many large players, who were previously focused on international BPO, turning

their eyes toward the domestic sector.

Domestic Pricing Models

Per Unit Time /Variable Cost

Gain ShareModel

HybridPricing Model

ActivitybasedPricing

Per Seat or FullTime Employee

/ Month

BPOPricingModels

Various pricing models can be differentiated by the parameters used for billing:

Per unit time/variable cost: This is the most common pricing model in the industry with the

client guaranteeing a minimum amount of business. This is billed on a per hour or per seat

basis.

Per seat or full-time employee (FTE) per month: The client guarantees a minimum amount ofbusiness for a number of FTEs on a monthly basis.

Activity-based billing: The client is billed by the volume of activity.

Gain-share models: The client is billed on the quantifiable value delivered, e.g., the success

rate and conversion ratio, based on mutually agreed parameters.

Hybrid pricing models: This is a combination of two or more models, which typically

incorporate a fixed volume rate plus a marginally higher rate for peak load absorption.


19/26



Indian BPO clients are more inclined toward the output-based pricing model. The preferred payment

scheme is payment-per transaction and a shared-risk-and-reward model. Slightly more than three

among five users in India prefer the per-transaction model, and one in five opts for the fixed-fee

model.

Cost structure of the domestic BPO market

Percentage

Year

LEGEND

Depreciation

Indirect Salary

Rent & Utilities

Sales & Marketing

General andAdministrative

Direct Salary

Personnel costs currently account for over 46% of revenues. Wage costs have been

increasing steadily at 10% annually in all the major cities in India. Entry-level salaries for

domestic BPO are between USD136182 per month. However, with most BPOs turning to

Tier I and II cities, wage costs are slated to decrease. Salaries in Tier II and III cities are 50-

60% of those in Tier I cities.

Telecom and connectivity costs account for 8% of total revenues. Over the last few years,

telecom costs have been steadily decreasing. Rent and utilities account for 8% of revenues and are increasing at 5% annually.

Sales and marketing costs account for 8% of revenues.

General and Administrative Costs account for 11% of revenues. These costs are expected to

spiral with an increase in the scale of operations.

Depreciation costs account for about 6% of revenues. This figure may remain at the same

level for some years to come.

A tax rate of 33.99% is applicable for the domestic BPO sector.


20/26



As compared to export-oriented BPO, the annual revenue per full -time employee is 2.5 times in favor

of export BPO. However, the domestic BPO industry is expected to ride on huge size and volume,

and net margins are anticipated to gradually increase to about 12.5% by 2012 from about 9% in

2008. Further, tighter cost control by moving to Tier II and III cities, leveraging economies of scale

and a modest increase in price are likely to boost margins for domestic BPOs; steady state net

income margins of 12.5% can be expected for most established players by 2012. The key difference

in net margins between the export and domestic markets is the result of the tax exemption granted to

global BPOs in India.

Although attrition rates are higher during the initial stages of setting up domestic BPO in Tier II and III

cities, due to difficulties in cultural adaptation and change, in comparison to export BPO, the overall

attrition rate is lower in the domestic industry.

Tthe gross margins in handling international call s is around 35-40%, while it is around 25-30% fordomestic calls. Although international clients pay almost three times of what a domestic client is

prepared to pay, the costs involved in handling domestic calls are also proportionally less. This is

because connectivity charges are borne by domestic clients.

High GDP growth rates are also driving growth. This BPO has over 40 customers in the domestic

business, including a leading global telecom player.

Key domestic BPO deals


21/26



Key Trends in Domestic BPO Industry

Key Trends in

the DomesticBPO Market

Increasing ThirdParty Vendors

Movement into Tier

II and Tier III Cities

Market

ConsolidationEmergence of

Scale Players

Increasing number of third-party vendors: It is a severe drain on the management

bandwidth to continuously recruit, train and monitor back-office staff when their core business

is accelerating steadily. This has resulted in the emergence of and rapid increase in the


22/26



number large third-party players. The third-party model has witnessed considerable activity

over the past few years - a direct consequence of the emergence of world-class service

providers. The preference for this model may be attributed to the shorter payback period

(between six months to a year), lower exit costs and the fact that third-party models hold the

maximum potential for leveraging economies of scale, thereby reducing costs and maximizing

efficiencies. However, the nature of work outsourced is typically non-core and non-critical and

has a perceived lower level of data security.

Emergence of scale players: With client industries growing at 20-70% annually, it is critical

for them to partner with vendors who are capable of growing in similar fashion. The last few

years have seen the emergence of large scale players such as Sparsh, Infovision, Aegis, etc.

It is anticipated that this trend will continue in coming years.

Movement into Tier II and III cities: Almost all the new facilities are coming up in Tier II and

III cities to leverage a ready pool of low-cost resources, which are well-versed in the

vernacular language. In 2007, MphasiS and Idea set up a new BPO facility at Indore. MphasiSwill provide contact center services to Idea Cellular. This is the fourth MphasiS BPO facility in

a Tier II or III city that caters exclusively to the domestic BPO space, the other three being

Ahmedabad, Noida and Pondicherry. Tier I cities offer a cost advantage due to the relatively

lower cost of living in such cities. For instance, according to a BPO major currently considering

setting up operations in Chandigarh, it is 60% more expensive to live in Delhi-NCR, a

traditional BPO hub, as compared to Chandigarh, a Tier II city. The advantage of the strategy

that leverages Tier I cities is that these cities, though low in infrastructure facilities, are

significant contributors to the talent pool. In other words, while infrastructure is concentrated in

Tier I cities, human resource talent is distributed all over India.

Market consolidation: The leading providers of the domestic BPO industry are cash rich,

with high market valuations and are looking to grow. In the near future, you can expect them

to gobble up smaller competitors. Tier II providers are struggling, unable to attain the growth of

global providers and lack the scale of an IBM or MphasiS. As a result, they are likely to

become the acquisition targets of larger providers or private equity firms.


23/26



7. Strategy for a New Player

A new entrant in the Domestic BPO Market can enter the market using either one of the strategies or

it can also enter with a combination of strategies depicted in the diagram below:

Horizontal Services

F&A

Knowledge Services

Vertical Sectors

Telecom

BFSI

Horizontal Services

F&A

Knowledge Services

Vertical Sectors

Government

Retail/ Consumer Goods

Media / Airlines

Horizontal Services

Customer Interaction & Support

HR

Vertical Sectors

Telecom

BFSI

Horizontal Services

Customer Interaction & Support

HR

Vertical Sectors

Government

Retail / Consumer Goods

Media / Airlines

HorizontalServicesSe

gments N

ew

Existing

1

Vertical SectorsExisting New3

2

Path 1: Offer services that are new to the domestic market (similar to services offered to the

export market) to currently dominating sectors in the market, e.g., Telecom and BFSI.

Path 2: Offer currently dominating service offerings in the domestic market, e.g., Customer

Care and Sales and Marketing, to new/growing vertical sectors such as Retail, Media, Airlines

and the Government.

Path 3: Offer services that are new to the domestic market, e.g., F&A and Knowledge

Services, to completely new/ emerging vertical sectors such as retail, media, airlines, etc.

Any new player entering the Domestic BPO market has to consider the following factors

Companys Strategic Position to enter into Domestic BPO

Industry Scope & Potential

Competency in BPO Industry

Experience in handling BPO operations

Vertical & Horizontal Expertise


24/26



Road Ahead : Benefit for Buyers & Suppliers

The rise of the domestic BPO segment will result in benefits for buyers as well as service providers.

The growth of the domestic BPO market will enable the Indian BPO sector to tap into an additional

resource pool of over one million Indians in the country. The export BPO sector is expected to

catalyze the growth of the domestic BPO market, as providers utilize the capabilities gained by

serving international clients, while the insights and learning generated by serving a domestic market

with minimal cost-arbitrage can be ploughed back into higher order value propositions for the export

market.

Additionally, the domestic BPO sector is likely to increase the ability of providers to aggressively tap

Tier II and III cities within India, and also provide a career path for employees as they move from

serving domestic to international clients. Further, increased visibility in service levels and process

metrics will help buyers to identify improvement and innovation opportunities.

Providers that serve the domestic BPO market could potentially use this as a hedge against foreign

exchange risks, while increasing utilization of available facilities. The fact that they do not need to

offshore implies that providers could expand to offer a much wider range of services than is possible

for the export BPO market. For example, it is possible for a supply chain and logistics provider to

expand to cover the complete range of third-party logistics services. The knowledge and capabilities

gained from this expansion can then be ploughed back to offer more comprehensive front- and

middle-office services to the export BPO market. IT BPO firms, looking at servicing the domestic BPO

market, have one more reason to do so. Domestic BPO clients have a higher acceptance of

integrated IT-BPO deals, which implies that they are more likely to outsource both IT and BPO

services to the same service provider.

Key Action Points for the Future Growth of Domestic BPO

The domestic BPO sector requires focused initiatives from stakeholders to achieve its market

potential. Currently, regulatory barriers and perception issues are roadblocks in the uptake of

domestic BPO. Regulatory barriers, such as linking the NFE (Net Foreign Earnings) requirements

with extent of domestic operations that can be delivered from an offshore domestic delivery center.

Hassle of obtaining prior approval for sharing telecom infrastructure between international and

domestic operations, are restricting seat utilization and negatively impacting the margins of providers

serving international and domestic clients. Indian providers have begun serving international clients in

the Capital Markets vertical, but are prevented from providing the complete range of services to

domestic clients in this space due to duplication of costs on account of regulatory requirements.

These regulations need to be made conducive to give an impetus to the growth of domestic BPO.

The absence of a clear value proposition for domestic buyers is another deterrent to the markets

growth. Providers need to communicate their value propositions better, especially due to lack of an

arbitrage-driven proposition for domestic BPO. Increased adoption of outsourcing by the Indian


25/26



government and the development of model contracts are initiatives that can help the domestic BPO

market grow further.

SWOT analysis: Domestic BPO market

Strengths Booming growth across industries in the

domestic market

Rapid growth in the domestic BPO market

(CAGR 50% over the last five years)

Large volume and size of the domestic

market

Huge manpower resource pool of over 1Million

Mature suppliers with extensive operationalexperience

Access to international best practices

Existing Regulatory barriers; no taxbenefits for the domestic market

Lower net margins as compared to the

international domain Domestic companies are underinvested in

technology Adoption rate is low amongst PSU banks

Labour arbitrage is not a significant value

proposition in the domestic market

Weakness

Opportunities

Scope to move up the service value chain Potential for large scale employment

Opportunity to bridge urban rural divide by

developing Tier II and Tier III cities Addressable opportunity of USD15-20

billion

Emergence of nearby off shoredestinations

Shortage of middle management personnel

and sector specific talent High inflation and attrition rates Infrastructure, political and other

challenges posed by Tier II-III cities

Threats


26/26

APSM Project Effective Strategies in Domestic BPO Market8. References

Destination India : An Insight into the Domestic BPO Market (2009) Ernst & Young

Trends in Domestic BPO (December, 2009) ValueNotes

Domestic BPO Growth (2009) - TechMahindra

Indian Domestic BPO Market An Emerging Opportunity (January, 2008) Avendus

Domestic BPO Scope (August, 2008) - NASSCOM

India BPO Study (2008) - NASSCOM & EVEREST

India Domestic BPO Market (2007) IDC

Domestic Services Market Opportunity (2006) - NASSCOM & IDC

domestic bpo apsm project jun 10 v6.0

Documents