The health of India’s $18-billion business process outsourcing (BPO) industry, which is battling margin pressure and diminishing cost arbitrage, is set to take a further hit as clients are now pushing for contracts in Indian rupee rather than the US dollar. The trend, if it gains traction, is likely to skew the topline of BPO firms which have been enjoying the benefits of earning in dollars while most of the expenses were in rupee.
In addition, clients are opting for multiple contracts to other geographies, reducing the deal size outsourced to the Indian BPO companies, while wage inflation and increased cost of operation are acting as spoilsport for the sector. “We are now seeing clients going for BPO contracts in rupee so benefit of foreign exchange goes to the clients than the BPO vendors. Average project size has also come down. In the current environment, it is not easy to get bigger projects as clients are outsourcing in smaller chunks and negotiating harder on contract price,” said Sanjoy Sen, senior director at consulting firm Deloitte Touche Tohmatsu India.
Leading pure-play, BPO players in India have indicated a tougher business climate in their largest markets with clients taking longer to finalise spends. The NYSE-listed BPO firm Genpact, which has majority of its employees based in India, lowered its FY13 revenue outlook to $2.12-$2.13 billion from its earlier projection of $2.15-$2.20 billion on account of lower-than-expected revenue, while announcing the September-quarter results last week.
Similarly, the New York-headquartered BPO firm ExlService Holdings, which has a large presence in India, lowered its guidance for 2013 to $473-$478 million from $475-$483 million expected earlier due to the rupee depreciation and its year-to-date results.
Based on current visibility into client spend, BPO major WNS also revised its revenue outlook for FY13 to $464 million and $476 million from $462 million and $478 million, while announcing its July-September earnings.
Pradeep Udhas, partner and head - IT-ITeS, KPMG India, said that he is not surprised with customers opting for rupee contracts as BPO companies have more than 90% of their human resources based in India unlike the IT services firms. The biggest draw of the Indian BPO firms has always been lower costs and could always provide the talent pool. However, these firms realise that they cannot be just an India-centric player and they need to expand globally.
This expansion would entail costs and would be in foreign currency. “For the BPO firms, the rupee depreciation has increased cost incurred outside the country, including developing international centres,” Sen said.
Experts point out that the country’s cost advantage as an offshoring destination, its trump card, has dropped by nearly 30-40%. Quicker response time, better technical/language support and near-shore advantages are driving businesses to other outsourcing destinations. According to estimates, the IT services sector still commands more than two-thirds of India’s overall outsourcing industry, while the BPO segment contributes about a third. In the last four years, the compounded annual growth rate (CAGR) for the BPO sector has been pegged at around 12%.
According to Udhas, Indian IT services companies have an advantage as the necessary technical skills are not available in large numbers in the developed markets so increasing their demand but this is not the case with the BPO segment. Industry analysts point out that commoditisation of services and lack of innovation has dragged down business volumes over the last few years. This has been reflected in the numbers of Wipro, India’s third-largest IT services exporter, whose BPO revenues grew by just 0.4% on a sequential basis during the July-September quarter.
TK Kurien, CEO, Wipro, said, “The BPO business is undergoing a fundamental shift in the way we are looking into it. The commodity type services, I don’t think we will do well in the long term. We will slowly move out of that. Ultimately, the market will move towards a model where we will provide software, hardware and BPO services in one stack.”
Adding to the challenging climate is the high attrition rate. The sector, which used to attract employees in droves, is now finding it difficult to hold on to them due to the absence of a distinct career graph and dipping perks.
A 2012 study by Hackett Group, a global consulting firm, highlighted that offshoring of jobs to India will begin to decline by 2014. The study predicted the traditional model of the US and European companies shifting finance, IT, and other jobs offshore to reach the end of its “lifecycle over the next 8-10 years as these firms run out of jobs suitable for moving to low-cost countries”. According to the research, challenges facing the Indian offshoring market include local wage inflation and increase in competition from other low-cost labour markets.
In the last few years, attrition rate in the BPO sector has peaked to 40-50%, making it the highest amongst all industries.