BPO

Past
|
Present
|
Future
Capturing the growth of an industry
that has redefined all others
Preface
"We live in a moment of history where change is so speeded up that we begin to see
the present only when it is already disappearing."
This quote by R D Laing best describes the state of the world of business today.
Large deals are being struckcompanies are being acquiredinnovations are
taking placeproducts are being launchedand all this, while you read this line.
'Fast enough' is no longer fast enough.
Organizations that have stayed in the race have had one common string running
through them they have all focused on 'staying ahead of the pack' as a means to
gain an invaluable first-mover advantage. It's what the market pays for innovation
and vision. It's where the big margins are.
This document charts the growth of one such industry that is fast-emerging as a
'business-driver' for the IT industry BPO. Business Process Outsourcing as a
trend and as an industry is here to stay. The game of business, today, is all about
cost competitiveness, process efficiencies, better service and focusing on one's
core competenciesand BPO plays a major role in enabling all of these. It is thus not
too tough to ascertain that the BPO industry will not just thrive; it will perhaps grow
faster than even the most renowned industry analysts predict! It is now entirely up to
its players to innovate and go beyond the obvious to define its fortunes.
BPO
BPO
Contents
Section No.
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2
2.1
2.2
2.3
3
3.1
3.2
3.3
3.4
4
4.1
4.2
4.3
What is Business Process Outsourcing?
The story so far
- Origins
- The initial days
- Growth
The industry today
- Segment-wise break-up
- Region-wise break-up
- Outsourcing hotspots
- Client benefit through integrated offshoring
Future-scope
- Global trends
- Estimated global spends
- KPO The new wave in outsourcing
Contents Page No.
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BPO
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1. What is Business Process Outsourcing?
BPO is the act of transferring some of an
organization' s repeated non-core and core
business processes to an outside provider to
achieve cost reductions while improving service
quality. Because the processes are repeated and
a long-term contract is used, outsourcing goes
far beyond the use of consultants. If done well,
BPO results in increasing shareholder value.
The main difference between BPO and more
traditional IT outsourcing is that BPO offers
companies a way of achieving transformational
outcomes much more quickly. In a typical BPO
contract, a service provider takes over a specific
corporate function. Effective BPO encompasses
much more than just changing who is responsible
for performing the process. In BPO, the outside
provider not only takes on the responsibility to
manage the function or business process, but
also re-engineers the way the process has been
traditionally done.
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2. The story so far
2.1 Origins
It all began when the internet revolution led to the
revelation that work could be moved out of one
place and remotely supported from a different
location in another hemisphere. This was given a
boost by the 'Core Competency Theory' by
C.K. Prahalad and Gary Hamel who introduced
the concept in a 1990 Harvard Business Review
article. This theory spoke about identifying the
core competencies of a large organization, then
focusing on it and getting out of everything else.
Proponents of this theory started looking at ways
and methods to do so. Companies realized that
outsourcing functions which did not add value to
their business would free them to concentrate on
core tasks. These tasks would thus be with
outsourced specialists who could work on them
as well as value-add to the same.
2.2 Initial days
What began with a small captive unit of 30 people
in 1996 is now 553,000 people strong. It all began
when British Airways assigned Raman Roy to set
up a captive call center in Gurgaon. This was
followed by the flagging off of BPO operations by
GECIS, subsidiary of GE. The third major feat
happened when backed by CDC Capi tal ,
Sanjeev Agarwal set up Daksh eServices in
Gur gaon t o pr ovi de e- mai l suppor t t o
international clients.
Between 1996 and 2000, global companies such
as Swissair and American Express set up outfits
in India and gave feet to the nascent ITES
industry. Web support was one of the key areas of
growth. Fueled by the dotcom boom, this sector
grew by leaps and bounds. The basic idea at this
point in time was to utilize the low cost abundant
talent present in India to cut costs and thus
achi eve better profi tabi l i ty. Thereafter, the
industry has moved from being a nascent one to
one with a high degree of maturity.
2.3 Growth
In 2001, the dotcom bust was followed by a never
before seen increase in demand for voice
services. Corporates like Dell, HSBC, AOL and
t he l i kes j umped on t o t he out sour ci ng
bandwagon i n an ef f or t t o cut cost s.
This began by outsourcing non-core activities.
Thi rd-party vendors l i ke Convergys began
operations out of India and landed themselves
big ticket clients. The arena became more
competitive in 2002 with large IT companies like
Wipro, Infosys and Satyam either setting up,
buying out or announcing their intent to set up
third-party BPOs. Private equity firms like
Warburg Pincus, General Atlantic, Oak Hill
Capital, etc. began pumping in millions into this
industry. All this, in order to get a substantial
share of the lucrative Indian BPO market.
2003 was the year of consolidation for the BPO
industry. Mergers and Acquisitions held sway
with major third-party service providers as well
as corporates like the Aditya Birla Group going
ahead with acquisition plans. This momentum
continued through the years 2004-2006 with
companies like GECIS being sold off to PE firms.
From this point, the industry has been growing at
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3. The industry today
3.1 Segment-wise break-up
Rapid growth of internet, new technology and
application development are fueling the growth
of the ITES-BPO industry. India was the leader in
the ITES sector and continues to dominate this
area. With globalization touching an all-time
high, outsourcing continues to grow.
The growth in the BPO sector has been pegged at
nearly 10% in 2007. This was possible as
organizations across the globe have started
seeing offshoring not only as a cost cutting
measure but also as a method of improving the
servi ce del i very and support f or cl i ent s,
customers and employees.
The global BPO spends in 2007 were estimated
at USD 462 billion. These spends were primarily
dr i v en by Logi s t i c s and Pr oc ur ement
Out sour ci ng and Sal es and Mar ket i ng
Outsourcing. Together, they accounted for a
whopping 84% of the market. The rest of it
constituted Customer Management, Finance
and Accounting, Human Resource Outsourcing
and Training Outsourcing.

The biggest grosser in the outsourcing industry,
Logistics and Procurement, grew by a little over
11%. This segment showed maturity by shifting
towards integrated engagements. Sales and
Marketing and Customer Service, the other two
mature service offerings, grew by an estimated
6% and 13% respectively. Clients are now both
well conversed as well as accustomed to the idea
of offshoring this segment of services. There is
also an increased emphasis on achieving the
right mix of off-shore, on-shore, near-shore and
home-shore to be able to compete effectively.
Training constituted the lowest contributor to the
ITES industry growth graph. But interestingly, it
was the highest in terms of growth, clocking in a
20% growth in 2007.
8
224
201
167
157
26
30
19
17 16 14
6 5
USD billion
2006 2007
Logistics and
Procurement
Sales and
Marketing
Customer
Management
Finance and
Accounting
Human
Resources
Training
Segment
Logistics and Procurement
Sales and Marketing
Customer Management
Finance and Accounting
Human Resource Administration
Training
Growth in 2007
11.4%
6.08%
13.05%
13.6%
12.9%
20.0%
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3.2 Region-wise break-up
As in the previous many years, North America
continued to be the biggest contributor to the
BPO growth story. Almost 90% of the contribution
was from America and Europe. The United States
alone accounted for 60% of the total market.
Europe, Middle East and Africa contributed
approximately 18.7% to the world-wide BPO
market clocking an estimated 7% growth.
The Asia Pacific (APAC) region is one of the
fastest growing markets. Though it is still in the
nascent stages of evolution, it has grown at an
estimated rate of 17% in 2007.
But throughout the industry, the trend is moving
towards emulating the success of US in the
outsourcing markets.
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North
America
60%
Europe, Middle
East and Africa
18.7%
Asia Pacific
17%
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3.3 Outsourcing hotspots
From the early days of outsourcing, India has led
the outsourcing market, and is showing no signs
of giving up. But of late a whole new section of
outsourcing is happening from Malaysia, China,
Philippines, Central and Eastern Europe, Mexico
and Brazil. Other aspirants like Bahamas and
Mauritius are also actively deploying resources
to bring the ITES industry into their country.

On the other hand, the Indian IT/ITES companies
have seen the writing on the wall. With costs of
r unni ng of f s hor i ng c ent er s i nc r eas i ng
meteorically in India, Indian firms are looking at
set t i ng shop at ot her l ow- cost cent er s.
The acquisition of Minacs by Transworks, Affina
by HTMT Global, Global Vantedge by Aegis, and
MoneyLine and ICE by Genpact are examples of
the consolidation and the near-shore strategy
bei ng execut ed by BPO or gani zat i ons,
especially in India.
Geographical proximity and cultural similarity
are also helping countries in Latin America to
offer themselves as preferable destinations.
Combined with excellent education systems and
competitive wages, Latin American countries
such as Brazil, Mexico, Chile and Argentina are
emerging as new players. Similarly, Eastern
Europe plays a significant role as a near-shore
outsourcing destination for Western Europe.
Service providers in Eastern Europe enjoy the
benefits of cultural and linguistic similarities
combined with geographical proximity.
Nearer to the giant in outsourcing - India -
Philippines is quickly emerging as a hotspot for
the outsourcing industry. Philippines offers the
tradi ti onal benefi t of l ow cost operati ons
combined with a great workforce. Malaysia also
has a strong presence in the ITES industry while
China is also making its presence felt.
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3.4 Client benefit through integrated offshoring
Key takeaways:
Example of a Life Insurance Company
Substantial benefit to client through
integrated offshoring: A life insurance
company could increase operating profit
by approximately 11% by offshoring the
relevant applications, infrastructure and
business processes together. In contrast,
of f shor i ng busi ness pr ocesses, I T
appl i cat i ons, and I T i nf r ast r uct ur e
separately would increase operating profit
by only 7%
Traditional vs. Integrated Offshoring:
Scope for extending benefits: Similar
benefits can also be extended to clients in
other verticals be developing a thorough
understanding of their business model,
out sour ci ng r equi r ement s and cost
structures
In the traditional piecemeal approach
to offshoring, only partial offshoring of
initial case review and processing and
payments, accounting for around 40%
of total jobs in policy management,
can be offshored
Sui t abl e i nt egr at i on of speci f i c
processes, IT i nfrastructure and
appl i cat i ons i nt o domai ns can,
however, el i mi nat e most of t he
const r ai nt s ar i si ng out of t he
t r adi t i onal pi ecemeal of f shor i ng
model
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4. Future-scope
4.1 Global Trends
Demand for bundled services: ITO contracts
will be signed with increasing amounts of
business and IT consulting, BPO, development
and i nt egr at i on, and ot her ser vi ces, as
organi zati ons more often seek to bundl e
requirements for new projects, innovation and
business performance improvement along with
those for day-to-day operations
Shift up the value chain: Al though cost
reduction is still a top driver, the weighting for
value-added services that provide bottom-line
business impact will increase. Organizations will
continue to demand higher-value services as
they adopt more business focus in their BPO
initiatives
Cr eat i ng t est i ng gr ounds: Mor e l ar ge
corporations will sign BPO deals, but not at the
enterprise level. Individual business units, or
individual enterprise-level support areas, will
create BPO relationships to test the concept
before adopting solutions on an enterprise or
multi-geography level
Flexibility in services: Providers that can offer
end-to-end services, but are willing to start with
less than that, will dominate the market
Adoption of a win-win approach: Providers
and organizations will continue to realign scope
and pricing on established comprehensive and
multi-domain BPO deals to improve results for
the organization and profitability for the provider
Taking the Inorganic Route: Tier II & Tier III
servi ce provi ders wi l l spread thei r gl obal
f oot pri nt by maki ng si gni f i cant overseas
acquisitions
Evolution of new outsourcing models: New
strategic models of outsourcing (such as BOT)
will evolve to reduce risks and maximize benefits
BPO gaining acceptance: As the industry
matures, more and more BPO deals are coming
out into the open, with clients becoming more
transparent in their approach
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4.2 Estimated global spends
Worldwide BPO spends are estimated to grow from USD 462 billion in 2007 to USD 617 billion in 2010.
Logistics and Sales and Marketing Outsourcing will hold the largest share, while Customer Care, Human
Resources and Finance and Accounting Outsourcing will be the other major segments.

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4.3 KPO The next wave in outsourcing
New-age marketing is powered by a confluence
of marketing research, analytics and data
0
mining, giving companies a 360 view of their
customers. Whi l e marketi ng research has
evolved across the past 100 years, analytics and
data mining are recent tools that ride on the new
Business Intelligence (BI) technologies that are
evolving at rapid pace.
Thi s conf l uence i s st at ed t o grow at a
Compounded Annual Growth Rate (CAGR) of
above 45% to touch USD 17 billion globally by
2010. And India stands to gain with its young,
hi ghl y qual i fi ed tal ent pool . The i ndustry
expectation is that by 2010, the Indian KPO
sector will account for a market share of about
70%, hitting export revenues of an estimated
USD 12 billion. This estimated rate of growth is
much higher than the estimated rate of growth of
Indias BPO exports.
40
35
30
25
20
15
10
5
0
2006 2010 (E)
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BPO KPO
6.3
1.2
25
12
The following figure demonstrates the expected growth in Indias BPO & KPO revenues.
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