An industry that revolutionized global business is distancing itself from its humble beginnings. Alfred Romann investigates the transformation of India’s outsourcing sector from cheap labour provider to strategic knowledge partner
It is ancient history by industry standards, but it was 23 years ago that Texas Instruments put Bangalore on the global business map by setting up an outsourcing centre in the south Indian city.
It was a bold move by Texas Instruments; one that Hewlett-Packard followed in 1989. Today, it would be difficult to find a multinational that doesn’t use India as an outsourcing base in some capacity.
Combine the advantage of low labour costs with possibilities created by new technologies and cheaper telecommunications and the burgeoning business processing industry seems like a natural development. However, business process outsourcers (BPOs), the vast call centres and data processing plants that handle everything from banking queries to customer services on behalf of companies around the world, are almost passé.
In fact, they no longer want to be known as BPOs.
The outsourcing industry is maturing and outsourcers are distancing themselves from their humble – but incredibly successful – beginnings. Simple business services are being supplemented by a growing number of high-end, intelligence-driven products, propelled not merely by lower costs, but by highly developed skills and knowledge.
India’s new breed of outsourcers – the knowledge process outsourcers (KPOs) – handle everything from complex legal tasks and accountancy through to the analysis of consumer trends, early stage pharmaceutical research and engineering (entire parts of jumbo jets are designed and even built on the outskirts of Bangalore). The KPO sector is already thought to be worth more than US$4 billion and is growing at around 25% per year.
Over the next five years, India’s outsourcing-related exports are likely to top US$30 billion per year. Globally, the KPO sector alone could be worth US$17 billion by 2010, says industry-watcher Nasscom, while India is likely to enjoy a 70% market share. According to the US Department of Labour and Forrester Research, some 1.6 million jobs will be off-shored from the US by 2010 and 3.3 million by 2015.
Changing times
In a café not far from where Texas Instruments set up the first global outsourcing centre in Bangalore, CN Kumar talks about the rise and fall of a city.
Speaking of his experience in heading up operations at Texas Instruments, Kumar comments on how the company “had to start from scratch”. Now, he assists new companies and outsourcers through his current venture, Advantage Offshore Knowledge Services. His largest project was setting up the Jack F Welch Technology Centre.
The BPO industry, says Kumar, began in the 1990s with medical transcriptions and call centres. Several converging factors drove the growth of the sector. Most obvious was the increasing availability of bandwidth for transmitting information, cheaper and more efficient telecommunications and, most importantly in India, the availability of people.
Now there is less interest in traditional BPO. There are fewer newcomers and “the political scenario doesn’t look very positive,” Kumar explains. “Initially people came here for the low costs but now that is changing,” he says, quickly adding, “I don’t think the India story is over … I can see a progression to more value-added work.”
“Companies have become more specialized and interconnected,” says Khem Aithani of ITC Infotech, an IT services provider. “Trade has become more global. Processes have become more standardized and information has become ubiquitous,”
“As our clients increasingly recognize the business value of the global delivery model, they are taking a more strategic approach to outsourcing,” says R Chandrasekaran, president and managing director of Cognizant. “They are evolving from a tactical focus to the power of a more strategic partnership.”
As the nature of work changes, so too does the geography. Outsourcers are moving away from Bangalore and Mumbai to second- and third-tier cities. Entire outsourcing centres have emerged in new cities like Pune, Gurgaon and Noida and revitalized ones like Chennai and Hyderabad.
Don’t call me ‘outsourcer’
The outsourcing industry is struggling to define its new identity. While the terms “BPO” and “KPO” have become established business jargon, the industry is rapidly churning out new acronyms to describe the ever-increasing array of services on offer.
The busy human resources director will no doubt be delighted to hear about the latest HRO solutions, while a market researcher need look no further than his nearest MRO. For legal professionals there are LPOs, and engineers are well provided for with an extensive range of EPOs. Scientific researchers in need of assistance can turn to an RPO, unless, of course, they are in the field of clinical research, in which case they would be better advised to visit a CRO.
“BPO, KPO, LPO, IT outsourcing … There are so many possibilities,” says Jitin Talwar, founder of Chandigarhbased patent support company TT Consultants.
Rahul Roy of Avery Publishing Solutions says that despite the drive to invent new terminology, many of the names have little meaning. “Every time I hear a new word, I think something new has come up but [it’s] actually the same old wine with a new label.”
But for others, the current set of definitions is not yet specific enough. “We would further define the LPO space into two kinds of services: BPO-type LPO services and KPO-type LPO services,” says Punet Mohey of Lexadigm.
“BPO gave way to KPO and KPO is giving way to higher [processes],” notes Dr Madhusudan BS, vice president of India operations at Quality Engineering & Software Technology (Quest). His company handles aerospace engineering from its office in Bangalore and recently launched a manufacturing division, enabling it to manufacture components as well as designing them. “Quest is dedicated to purely engineering services,” says Madhusudan. “We are a KPO but also a bit more.”
Some prefer to get rid of the O-word altogether. Sunil Malhotra at Ideafarms describes his company as a “smartsourcing” business. “I personally do not like the connotations of the word ‘outsourcing’ since it has come to represent low-cost, low-value services that are thrown over the wall like crumbs for a factory of bodies to toil away at,” he says.
“Smartsourcing is a different way of providing business value through innovation.”
Yet more impressive terminology is served up by 24/7 Customer, one of the early success stories of the BPO boom. The company describes itself as a “customer lifecycle management provider”.
24/7 Customer is shedding its humble BPO origins and moving up the value chain. Chief marketing officer V Bharathwaj says it’s developing everything from unique processes to intellectual property. But in the lobby of its large office in Bangalore, one finds a pertinent reminder of the company’s roots: Large video screens show footage of call centre employees being coached in various regional accents.
Pushing legal boundaries
A fast-emerging subset of the KPO industry is legal process outsourcing. This often straddles the divide between traditional outsourcing and the new breed of knowledge-driven solutions, encompassing services that range from filing and transcribing through to sophisticated litigation research.
Perhaps the earliest legal process outsourcer was Mindcrest, a Mumbai firm with most of its staff in Pune. The company was in business by 2001 when the only other legal process outsourcer was GE, which had its own captive LPO.
“We were the first to provide outsourcing services to lawyers,” says Rohan Dalal.
Mindcrest started with a team of four people: Two lawyers in Chicago and an IT technician and Dalal in India. It is now a 2,000-plus firm. Its first challenge when dealing with the conservative legal profession was selling the concept. That came before selling the company’s services.
In recent years, LPO has attracted some of the biggest names in the outsourcing business. Integreon has set up an LPO along with planned ventures by Infosys and Wipro. New players like Pangea3 are bringing new processes and more nimble corporate structures, while several of India’s major law firms, notably AZB & Partners, FoxMandal Little and Lex Orbis, have sought to leverage their existing legal expertise to get ahead in the LPO business.
FoxMandal set up its LPO division, Legal Circle, in June 2007. It has its own office next to the law firm and another smaller unit in Bangalore. The firm’s managing partner, Som Mandal, is ambitious about Legal Circle, but the LPO is still in its infancy. The company began with some pilot projects in the US and has developed a feeder system for staff between the law firm and the outsourcing unit. Legal Circle started with two employees and has since expanded to 35. But by outsourcing standards, it is still small.
“In this business, there is huge hard-selling required,” says Mandal. “That is what we lack … Penetrating the market right now is key.”
Another LPO launched by a law firm is Bodhi Global, the brainchild of Mumbai-based AZB & Partners. The idea for the new unit in Pune surfaced in 2006.
The LPO sector provides a good example of specialization. Companies are not only focusing on a single field but, increasingly, in more specific areas within each field.
Clairvolex, a Delhi-based LPO started by intellectual property (IP) law firm Lex Orbis, specializes in the outsourcing of IP services. So too does fellow LPO Lexadigm.
“We envision India’s outsourcing industry to significantly mature in the coming five years. You will see an emergence of more specialized LPOs with core competence in certain service areas,” says Puneet Mohey of Lexadigm. “With the rising infrastructure and labour costs in India, and global economic pressures, you can already see the focus shifting from low-cost services to high-end, value-added outsourced services.”
But not everyone is convinced that claims of specialization are always genuine. “Most companies that call themselves KPOs are producing very little knowledge,” warns Amitabh Chaudry, CEO of Infosys.
A company renowned for its ability to find new niches, Infosys has launched an LPO and moved into the KPO sector in “a very aggressive fashion in the last two or three years”.
“We are looking at each of our companies and asking how can we afford to offer more value,” says Chaudry.
One of the dangers industry players face, he says, is a lack of focus. A group of lawyers starting an LPO, for example, may lose sight that of the fact that process, rather than legal traditions, is the operational basis that can save time and money for clients. That means they cannot offer any value beyond replacing an expensive body in North America with a cheaper one in India.
Sanjay Kamlani of Mumbai-based LPO Pangea3 also has concerns. “The so-called LPO industry has come to include any and all services that can be provided to lawyers … including word processing,” he says. “With such a broad definition, just about every BPO provider in India can and does provide some kind of LPO service, making the term irrelevant.”
Pangea3’s CEO, Lonnie Sapp, is a veteran of Office Tiger, a legendary BPO that grew to more than 10,000 people worldwide before moving up the value chain. His new company is still young, but already has more than 300 staff that service about 50 Fortune 500 corporations and law firms in the US, Europe, Japan and Asia-Pacific.
The company claims that law firms that use its services instead of doing the same work in-house can save their clients up to 50% in fees, leading in-house counsel to push their law firms to outsource as much as possible.
Another well-known LPO is Aphelion Legal Solutions, which focuses on document production, privilege logs and discovery work, database population and legal searches.
“Although Aphelion is not a business process outsourcing company, it strikes us that the best work for which to consider outsourcing is that which requires only a handful of personnel at both the client and the outsourcing company to interact,” says COO Michael Geske.
The majority of reputable LPOs put a great emphasis on quality of service, and above all, the security of their clients’ data. Visitors to the office of Pangea3, for example, will encounter a fingerprint scanner at the door, multiple layers of security and a guard who takes down the serial number of any computer that enters and leaves the building. “We are probably more secure than most US firms,” says Anthony Alex, the company’s vice-president of legal services.
However, not all LPOs operate in this manner and the less reputable outfits risk giving the business as a whole a bad name.
Arihant Patni of Bodhi Global is keenly aware of the importance of separating the good from the bad. As a new sector, LPO is very susceptible to bad news. “It is important that all the players be professional. One bad story could hurt the entire (LPO) industry,” he says.
But in an industry with no licensing system or accreditation, nor an association that can provide a semblance of officialdom in determining the quality of an outsourcer, how should customers choose between providers?
“Each and every company claims big things,” says Raghvendra Raj Singh, a business development executive at Collwell & Salmon Communications (India). “The best way is to go for a pilot phase where you can know whether your run will go on [in] the future. Also, one should try to avoid any middle[men] when contacting any outsourcing company.”
The rules of effective outsourcing
Moving to outsource any part of a business is a big step. It requires a client’s trust and reliability on the part of the vendor.
There are a numerous outsourcing operations in existence but, surprisingly, only a handful of outsourcing advisers; professionals that can help clients navigate the often murky-waters of the industry.
One of them is Tholons, a Bangalore-based company of 35 people created in 2006.
“There was that vacuum in the outsourcing space,” says CEO Avinash Vashistha. “We have been very successful at working with all stakeholders.”
Increasingly, companies are becoming more sophisticated about what can and cannot be outsourced, the advantages and challenges of outsourcing and the realities of offloading a part of a business – the biggest one being the fact that an outsourcing relationship is a long-term strategy. This can help cut costs and, more importantly, predict costs.
The goal, says Vashistha, is to facilitate growth while optimizing growth. This requires careful planning since setting up an outsourcing relationship is not a cheap proposition. If it is done properly, however, “we can immediately impact your bottom line. In four months time we can provide savings.”
“Cutting costs is definitely a major incentive to outsource, and controlling capital expenditures allows businesses to direct their capital into profit centres for the business,” says Abhi Goel, CEO of Axelerant, an IT outsourcing provider. “Hiring and training employees can be costly and outsourcing lets you focus on hiring only those employees that are vital to the business.”
At the same time, outsourcing can help businesses operate more effectively.
“You can get expert and skilled services of high-grade specialized manpower,” echoes Anil Bahkt, chairman of Eastern Software Services. “Your organization will be free to focus on your core business.”
Ironically, the small and medium enterprises that could most benefit from outsourcing have been reluctant to seek its services. Many simply consider the initial expense, which can be substantial, because in the beginning, processes have to be duplicated.
“We advise our clients to outsource any function that is commoditized, has process maturity and is relatively immune to the changes in business environment,” says Rinku Wadhwani, manging director of Cipher Dynamics, which has offices in New York and 20 affiliates in India.
Another approach, dating back to the early days of outsourcing, is to create a wholly owned operation. Better known as “off-shoring”, these companies offer services to a single client that owns them. One example is CESPL, which provides custom content development to Cramster, a US company that develops content for textbooks, web applications and customer support. CESPL has a centre in Delhi and another in Vizag.
“CESPL is a 100% wholly owned subsidiary of Cramster. We have been operating more as a captive BPO, providing services to the parent company only,” says Banhu Mishra of CESPL.
Deciding whether to outsource
Outsourcing is best suited to stable business processes where no immediate market connection is necessary, says Arjun Malhotra of Headstrong Corporation.
“A bond trader is unlikely to see his job outsourced,” he says. Headstrong is a consultant and outsourcer focused on financial services. “As India develops a market for services like investment banking and has the sophistication of instruments that they have, say, on Wall Street – assuming a robust regulatory framework – we will see more jobs that cannot be outsourced today being outsourced.”
The simple idea of letting go of an operational arm is impossible for some. There is, however a step-by-step process to follow to decide whether to take the outsourcing route.
Consultants look at an enterprise and determine what functions can be outsourced. Then the company sets up contracts and determines the level of involvement the outsourcer will have before setting up their systems. It is a long process prior to actual implementation.
Most service providers agree on a number of variables, including identifying the scope of the service provider, understanding the competitive landscape, conducting due diligence and, most of all, testing the water with pilot projects.
In specialized fields, such as pharmaceutical research, the details of the process take on added importance. Mala Srivastava of Clinigene International, a provider of medial research services, says the first step is to prepare a list of clinical research organizations with the capabilities needed to carry out a specific project and sign confidentiality agreements with them before sending out requests for proposals. After the submission of the proposals and discussions with the sponsor, audits of the companies shortlisted can help eliminate future problems. The next steps are to accept their proposal, sign letters of intent and then contracts. That is when the work on the specific project actually begins.
Outsourcing is not a game reserved for multinationals. Dinesh Agarwal, director of Arete Consultants, says “the most suited functions to be outsourced are the ones where management feels that either they don’t have the competence and resources to handle that function or it has become too large or cumbersome to handle it on its own.” Agarwal’s company caters to SMEs around the globe.
Early lessons
The good news is that most of the steps to outsourcing are well-trodden and the lessons have already been learned: “Outsourcing is so rampant and in a matured state as far as India is concerned, the risks are already very well defined and mitigation processes are multiple and in place,” says Rupayan Datta, general manager of Axsys Technologies, a Kolkata-based engineering outsourcer that focuses on marine production.
“Business entities must harp on complete process documentation and validation before starting actual operations,” adds Gaurav Munra of Truworth Infotech, an IT outsourcer. “‘If you didn’t document it you did not do it’ is the golden rule of outsourcing.”
“Don’t view outsourcing as an industry in and of itself, [or] assume that just because a particular company has achieved a brand for outsourcing in a particular domain, that somehow makes them the appropriate service delivery expert in another field,” warns Sanjay Kamlani, co-founder and co-CEO of Pangea3.
Another useful idea, is to ask why peer companies have not outsourced to India, says Michael Geske of Aphelion Legal Solutions. Their reasons may or may not apply.
Problems have, and will continue, to crop up with vendor-client relationships. Whether it is information leakage or poor customer service, there are a stable of problems that can be avoided.
“A common problem that I hear about with new clients is that they didn’t get what they expected from the outsourcing initiative, that their expectation and what was delivered were totally out of line,” says Goel.
It is also important to define what the outsourcer is. Is it a technology firm? Will it be able to do any work that lends itself to repetition and takes advantage of IT to leverage costs? Or is it, in this case, a legal firm, using technology and processes to improve its legal work?
“We do use technology but technology is essentially an enabler,” says Rohan Dalal of Mindcrest.
Hurdles on the horizon
In the eyes of many observers, the most serious challenges facing the outsourcing industry mirror those facing the Indian economy at large.
Hemant Chabria of Remote Infrastructure Management, highlights the colossal recruitment plans of major players. IBM plans to increase its staff in India from 39,000 to 85,000; Dell plans to hire 10,000 professionals over the next few years; Accenture is looking for 30,000 people in India, China and the Philippines; while Capgemini and Kanbay, now merged, plan to create 23,000 jobs in the next four years.
“These figures are merely a random sampling of the kind of news we read almost daily but, curiously enough, India itself is on the brink of a manpower crisis. The education system is unable to produce quality workers,” says Chabria.
India still lacks qualified personnel and is expected to face a shortage of more than one million entry-level graduates by 2012. Furthermore, labour is getting more expensive, with employees demanding annual salary increases of up to 50%.
Recruitment and retention problems are already beginning to bite. Grail Research, which was included in a case study at Harvard Business School, is representative of the new breed of outsourcing providers created by MBA graduates rather than engineers or IT professionals. It offers customized research services and in the words of its head of client services, Kurian Thomas, is a “next generation research firm”.
Grail has offices in India, China and South Africa, and while it hasn’t yet had trouble finding new recruits, it is noticing that retaining good talent is becoming increasing difficult. “It is easy to hire people but it is more difficult to retain them,” says India country head Amit Kumar.
Yet in an industry with a staff turnover of 30-40%, Kumar is happy to note that Grail has kept its own turnover down to just 12%.
Another key challenge is the lack of a regulatory framework for the outsourcing industry. Although initially considered an advantage, the absence of rules and standards is turning into a serious hindrance. “When there is no regulation, you have the freedom to do what you want,” says Manoj Saxena, managing director of Net Edge, a company established in 1992 that handles data mining.
Saxena concedes that this freedom was short-lived. A lack of regulations creates a sense of danger as legal policies begin to emerge. It also makes planning virtually impossible. “I cannot make a five-year plan. I have to make a one-year plan,” Saxena laments.
Rising costs and fluctuating international exchange rates pose additional challenges. As the rupee appreciates, supposedly cost-efficient solutions in India become far less attractive when converted into US dollars. And since the vast majority of India’s outsourcing clients are based in the US, this is a major concern.
One of the most well-established outsource service providers, Integreon, has been forced to find ways of tackling rising costs and a stronger currency. Among the various strategies, says CFO Lokendra Tomar, is to bill in various currencies, particularly in euros, not just in US dollars.
Another problem is that revenues are struggling to grow alongside rising costs.
“With analyst costs continuing to rise, India is no longer proving to be the obvious choice it once was,” says David O’Brien the executive chairman of RocSearch, a UK-based research and analytics company with its delivery operation near Delhi.
“Labour arbitrage alone is insufficient, and the threats of other low cost geographies are creating new pressures for companies in the outsourcing space,” says O’Brien. “To succeed, companies have to strive to offer distinctive service quality and new engagement models to create value for their clients.”
One way to achieve this is by specializing.“Companies have to determine what they excel at,” O’Brien says.
RocSearch took its path to being distinctive by focusing on high-end research and judgment-based analytics. In spite of the challenges created by the slowdown in America, the company reports a surge of interest in its high-end services.
The idea of focusing on value certainly has merit during a time of higher costs. However, Avinash Vashistha, of outsourcing consultancy Tholons is quick to point out that the value of deliverables is rising in tandem with costs.
“What may be happening is that the cost of an employee is going up, but so is productivity,” he says.
The globalization of outsourcing
If Vashistha is wrong, India’s outsourcing industry may have trouble in store. Several big customers are already evaluating alternative locations. Eastern Europe is an obvious choice. Its geographical proximity to Europe and the language skills of its population are appealing factors. For research, China is emerging as an outsourcing powerhouse. The Philippines, with its large English-speaking population is another competitor.
“For the lower value-added work, such as outbound calling, we are seeing the Philippines emerging as a lower cost alternative to India,” says Joel Perlman, president of Copal Partners. Copal provides services to small investments banks, funds and financial houses. It has about 40 clients in the US, UK, Middle East and Hong Kong that engage the company on a long-term basis.
“Off-shoring is a somewhat temporary phenomenon. As countries climb up the development ladder, the very foundation of the off-shoring model – namely low wages – erodes. In the course of development, incomes and eventually wages will rise, putting the offshoring model under pressure,” says Aithani of ITC Infotech.
The erosion of India’s cost advantage combined with increasing competition from other countries has led many outsourcers to look further afield for potential clients. Some are even setting up operations in other parts of the world.
Cognizant, a Nasdaq-listed provider of IT, consulting and BPO services, says 80% of its work comes from the US, with 19% from Europe and a tiny 1% from AsiaPacific. The 1%, however, is growing. Japan, a country whose corporations have been traditionally reluctant to allow access to their businesses, is beginning to look at new ways of achieving corporate efficiency. Australia, a small but significant economy, is also starting to outsource more. Large economies like Germany and France already produce customers.
“This whole outsourcing [story] is not just an Indiacentric story. There are a lot of countries wooing a lot of companies, including us,” says Sunil Mirani, CEO of Ugam Solutions. “It’s about leveraging a global workforce. The globalization of the global workforce has just begun.”
In eight years, Ugam solutions has grown from 15 people into an 800-strong operation with offices in London and the US offering a wide range of analytic projects from surveys and analysis to transactional data processing.
Rahul Gujral, principal at consultant Everest Group, believes the BPO industry is growing horizontally, expanding the services it offers and developing more specialized products. “As far as demand-side opportunity, the sky is the limit,” he says. “There is no shortage of demand. New areas like continental Europe are jumping on board … Suppliers need to look at new geographies.”
Primed for consolidation
There are currently thousands of outsourcers operating in every field imaginable. There may, in fact, be too many of them; an indication that the industry is maturing and prime for consolidation.
In spite of the challenges at home and competition from abroad, the growth of India’s outsourcing industry shows no sign of slowing. Banking, financial services, insurance and technology account for about two thirds of industry profits, while new fields like manufacturing, retail, media, utilities, healthcare and transportation are growing rapidly, says Anil Bakht of Eastern Software Services.
Large companies like Integreon have seen almost implausible rates of growth. In the last three years the company has grown by 80% annually, says CFO Tomar.
Integreon now has 2,000 employees worldwide, 1,500 of whom are in India. The company, which was started in New York in 1998, describes itself as a diversified KPO, providing any services that would be offered to a professional.
According to Tomar, the BPO sector started taking shape around the year 2000, and by 2003, companies were offering more complex services. Around 2005, LPOs started to emerge. Integreon’s LPO is relatively new, with only 500 people or so, but LPO is a compelling business: “The economics are so strong and also the demographics. There are a lot of lawyers.”
This compelling business is bound to get more competitive, forcing smaller operations to fight for their existence amidst the challenges of staffing, rising costs and expectations of specialized competencies.
“As with any industry that witnesses growth, there will also be consolidation,” says Kunoor Chopra, president and CEO of LawScribe, a California-headquartered LPO with operations in India. “This will come in the form of mergers and acquisitions and the entry into the market of larger BPO organizations. Many of the smaller ‘momand-pop’ LPOs will simply disappear over the next five years,”
These mom-and-pop shops, says Gaurav Mundra, director of Truworth Infotech in Jaipur, “have sprung up like mushrooms in every nook and cranny without adequate focus on quality and service orientation.
“[They] will be wiped out,” he says. “In fact this trend has already started in many tier-I cities and will slowly move lower down the rung.”
There are also moves towards consolidation in the BPO sector. Intelenet Global Services is a large provider that recently moved to offer its services domestically, with the acquisition of a controlling stake in Sparsh, a domestic BPO provider that works with more than 40 domestic multinationals.
Intelenet says it is the second largest employer in the BPO sector, with 25,000 employees and support from Blackstone, a private equity player.
In 2010, the tax holiday that all vendors have enjoyed ends. It is then that the process of survival-of-the-fittest will really pick up steam, says Vashistha of Tholons.
“I don’t see how the small and medium guys are going to be able to manage that.”
Sitting in the café in Bangalore, CN Kumar looks out over the busy street. This is a city that is now on the radar of the business world, a city powered by business solutions that have come of age and changed the world.
“The government cannot continually give tax breaks. At some stage, you have to let go of the child’s hand,” he says.
