[A-List] More on Outsourcing and Offshoring

["Gary Santos" <evs@xxxxxxxxxxxx>]

An article from India is reproduced below.

At face value, these trends appear to equalize wealth distribution by the
exporting of jobs from developed to less developed countries. It effectively
makes for a borderless labor market in a global experiment with the idea of
"comparative advantage". Countries like the Philippines, India and China will be
able to create jobs that otherwise would not be created.

But the way the trend is developing leaves one wondering whether, ultimately,
good will come out of it. Are there alternatives?

Outsourcing (subcontracting) and offshoring (direct hiring) are based on the
principle of cost saving, not increased real productivity. Higher paying jobs
are being replaced with much lower paying positions. While it would appear that
countries like the Philippines will tend to prosper, it does seem apparent that
no new jobs are being created. The two trends are mere transfers of job location
with large corporations handling the process of transfer. Overall, therefore,
wealth is not being distributed. Outsourcing and offshoring serves to
concentrate wealth even more. It is even curious that the two trends are made
possible by a technology that increased productivity by eliminating labor input.

Gary Santos
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Business Process Outsourcing: Is It mere Hype Or Reality?
 http://www.financialexpress.com/fe_full_story.php?content_id=38882
Sibabrata Das

Mumbai, July 26: India is increasingly seen abroad as a low-cost business
process outsourcing (BPO) destination and a major competitive threat. Research
and advisory firm Gartner has estimated the country's revenue from offshore BPO
to grow from $1.2 billion in 2003 to $13.8 billion by 2007. Other analysts also
have been bullish about the country's potential.

But do they have the picture painted too bright? Is the BPO story more a hype
than a reality? "The hype has drawn in several companies to look at exploiting
the business opportunities. Several unrelated players, even from real estate and
industrial houses, have got into the business because of the hype," admits
Gartner vice-president and research director Sujay Chohan.

But, as Mr Chohan says, "BPO is a long-term business opportunity. There is a
strategic shift in the way companies are evolving. It is a highly captive and
long-relationship business."

There is a deep commercial interest among big global companies to explore
offshore BPO from the country. Cost-saving is the biggest driver. One of the
main proponents to outsourcing is General Electric, which had started operations
here in 1997. Why? "GE is saving about $270 million, which is 8-9 per cent of
its IT budget, by outsourcing to India. It plans to increase that to $400
million by 2003," says a JM Morgan Stanley report.

Convergys and several other captive players are aggressively expanding
operations. Third-party and domestic IT services-led BPO companies are also
hotting up the race. Says Transworks CEO Prakash Gurbaxani, "with several
companies moving support to India, the business model is proven."

The new entrants are not only MNCs and captive players but also the domestic IT
services sector players. But in the short-term, Mr Gurbaxani says, the captive
players will grow quicker. Agrees Edelweiss Capital CEO & MD Rashesh Shah,
"several overseas players on the captive centre front will make an entry and the
trend will be on offshoring rather than outsourcing."

The picture is not that rosy. BPO companies are plagued with commodisation,
pressure on billing rates, and narrow margins. "The problem is that the pay-
back in BPO business is over a long period. Many players are realising that,"
says Mr Chohan.

The truth is that BPO business will no longer remain with the VC-funded
start-ups. "Those days are over," says Mr Gurbaxani, adding, "the competitive
landscape is changing. There is need for access to capital as competition is
coming from large established players. Earlier, we had to compete with young
start-ups only."

Mr Gurbaxani should know. Transworks was entirely acquired by Indian Rayon and
Industries, an Aditya Birla Group company, for a total consideration of about
$13 million. "We needed capital to fund our growth," he says. Transworks is
planning to have another centre this year and add 500 seats.

The consolidation phase has arrived. Says a third-party BPO firm, 24/7 Customer'
s CEO PV Kannan, "the weak players are already in the market to be routed out.
We will see a later phase of consolidation amongst the bigger players after
two-three years."

Adds a Daksh spokesperson, "the tier-3 and 4 players are taking a back seat by
either getting subsumed into the larger organisations or doing only commoditised
processes where margins will continue to be under pressure. This will bring them
to the point of whether they can sustain themselves as a stand-alone or not."

Mr Shah shares the view that there will be a second round of investments and
consolidation. "There will be emergence of new areas of focus in the BPO sector
like claims and transaction processing."

The hype has died down to a certain extent. Serious players are entering the
fray. But fierce competition has pulled down rates by 40-50 per cent during the
past 12 months. Deals are being done for $10-12 per agent per seat on an
average. But some crazy deals have also been done at $7-8. For bigger players,
the average billing rates are $11.50-$14. Worse, commodisation in this sector
has happened much earlier than anticipated.

Margins have also fallen. But Mr Kannan does not agree that margins can't be
protected. "The average billing rate, which has fallen by 20 per cent during the
past two years, is because volumes from a single client have gone up. With this,
the cost of running the operation has also fallen for us. We are able to operate
on an average 15-20 per cent margin on annualised basis."

Mphasis BFL believes the challenge is not so much on margins. "There have been
cases where we have walked away from uneconomical pricing. We can afford to do
that as we have a good client base. Our rates continue to remain constant - $12
an hour. It was $13 three quarters back. We anticipate a marginal but not
dramatic fall," says company CFO Ravi Ramu.

Deal sizes are getting bigger. The average deals now are between 100-500 seats,
says Mr Gurbaxani. Earlier, this stood at 25-30 seats. Most of the deals for
24/7 Customer, says Mr Kannan, is $6-10 million per account. "That shows how the
industry has matured," he adds.

BPO companies have to deal with a high rate of attrition, estimated above 50 per
cent. "The industry is trying to get together and decide not to poach,
particularly employees who have not completed at least one year in a company. We
are also stressing on relieving letters," says Mr Kannan.

The threat with MNCs setting up base here is in retention of our employees,
admits Mr Ramu. There are other areas of competition to worry. But Mr Kannan
believes MNCs are focussing mainly on moving their customers from the US to
India. "They are more keen on seeing that their existing customer-base in the US
doesn't come to us. We are trying to attract people who have never outsourced
from India," he says. Daksh feels that MNCs have challenges on the HR front,
despite starting the entire process of back-office work here.

Captive centre players are also posing a deep threat. But a few of them, says Mr
Kannan, are planning to get out. "We are in talks with a credit card company
which has set up its captive centre in India but wants to exit. Perhaps, it
overestimated the amount it would save by going captive. Maybe, it realised this
is not its area of core competency," he adds. His company recently raised $22
million from an American VC fund.

The domestic IT services companies which have expanded into BPO operations have
a long way to go, despite having a distinct advantage over their larger clients.
"They are late entrants. There is a time lag and they have catching up to do.
Third-party operators like us should capitalise on that opportunity," says Mr
Kannan. But Wipro's Spectramind is growing fast. Infosys' Progeon and other IT
services-led BPOs promise to offer an end-to-end solution for their clients.

The trend will be to specialise on specific verticals and build domain
expertise. Says Tracmail chief operating officer Arjun Vaznaik, "companies will
have to quickly move up the value chain by creating niches of specialisation.
This can be in back-office accounting, technology support, claims processing or
asset recovery services. The challenge is to counter the issues of commodisation
and profitability."