software outsourcing

A blog related to software development company and offshore software outsourcing

Tuesday, May 17, 2005

Survival Strategies: The BPO route

In a sluggish economy, Indian IT companies played it smart and quickly capitalised on the scotching pace of growth offered by ITES. In the earlier issue of Tattler, AssureConsulting.com had argued that ITES is not IT. ITES players cover a wide range of multiple verticals, constituting banking and insurance telecom, retailing, utilities back roll processing are poised for immense growth. This has little in common with traditional IT constituting software development, testing and maintainance. Dismayed industry observers are crying foul, over the industry's shifting focus from high end products and services. But for IT service companies, whose growth rates were painfully crunched by the downturn; ITES offered a humongous growth opportunity too good to be bypassed. Consider these factoids.

ITES grew at a rate of 73 per cent in 2001-02, as against 14 per cent for the overall IT industry.
The ITES industry is expected to grow to Rs. 81,000 crore in 2008; from Rs. 7,100 crore in 2001-02. The sector is expected to contribute 37 per cent of total software and services exports in 2000.
Forex inflows will increased ten-fold from $6.2 billion in 2001-02 to $60.72 in 2008 (IT plus ITES)
World-class IT infrastructure, idle capacity, flat growth, pricing pressures, tight squeeze on IT budgets and declining profits have accelerated beleaguered IT sector's pace towards ITES. In the last six months, Indian service icons have announced their BPO foray to shore up margins and improve top line growth. Wipro acquired a majority stake in Spectramind, Infosys launched Progeon, Satyam ventured into the BPO space with Nipun, HCL launched E-Serv, Polaris floated Optimus to execute back office operations and Hughes also made a departure from its positioning of high value-added R&D work in the Telecom sector to debut in the BPO space. Certainly considering the success of BFL Mphasis, the strategy appears to be paying at least in the short term. MsourcE, the company's BPO arm was the main driver of growth and pulled in Rs 14.5 crore in revenue and a profit of Rs 2.2 crore. Though the software business remained flat, Mphasis delivered another quarter of growth when most companies registered a decline in quarterly profits. Lessons from the Mphasis story are now being emulated across companies.

Indian IT companies are capitalising on the track record in delivering world class services to global icons and established SEICMM level processes to bag orders. Infosys' one quarter old BPM venture Progeon Limited, has bagged a contract worth approximately $30 million from GreenPoint Mortgage, one of the largest US wholesale mortgage lender. The contract, the second for Progeon, will run through five years. Indian companies are also tapping established marketing networks, as they provide an opportunity for strategic cross selling between the IT and IT enabled businesses. For instance GreenPoint was already an Infosys client before Progeon bagged the order. And pre-established relationships from the IT services era are helping companies to reduce sales cycles in their ITES ventures from 6-9 months to three months. MsourcE, the BPO venture of MphasiS-BFL Ltd currently has 10 active clients, five of whom were MphasiS clients and outsourced work to MsourcE based on their earlier interaction. Two MsourcE clients also became MphasiS clients after they began outsourcing IT projects. Kshema Technologies is another company gearing up for its BPO venture to focus on requirements of existing clients.

The long-term impact of the strategy to move to low-end services is debatable. In a recent report, Gartner compared the ITES scramble to the dotcom boom but later withdrew the report. According to the report the size of the ITES opportunity is grossly overestimated.

"A lot of people are touting the entire global BPO market of $127 billion in 2002 as the potential market for Indian BPO companies. Of this $127 billion, 60 per cent is in the US. As of now the trend for BPO going offshore is evident primarily in the US and of the companies in the US that we surveyed only 5 per cent said they were going offshore for their BPO work. So we estimate that the offshore opportunity that Indian companies can tap into is about $6 billion, and Indian companies are competing for this business with near-shore companies in countries like Mexico and Canada, and offshore companies in the Philippines and Ireland." The report was later withdrawn but many are questioning the hype around IT.

However the Indian IT industry influenced by global market trends is loathe to let go the short term benefits and healthy profits offered by ITES. Also companies such as Spectramind are making strong attempts to expand the scope of services offered by entering the high-end BPM segment. Spectramind is setting a knowledge center for one of its clients and hiring Ph.Ds. If IT companies are to pull it off in the long term, they must quickly ramp up the BPO chain.