Top 6 Challenges for BPOs / ITeS in India !!

Dear Readers,

What afflicts BPOs in India ?

Top 6 things which are greater challenges for the ITeS segment are :

1. US economy slowing down - particularly the Banking and Insurance segments
2. Lack of Incentives from the Government - sunset cluase for STPI units
3. Failure to attract and retain top talent at all levels - Executive, Middle and Senior Management
4. Bad media publicity - always showing the ill affects of working
5. Failure by the Companies to project 'careers' instead of 'jobs'
6. Poor perception by the job seekers.

With so many adverse conditions will the BPO industry in India can survive ? Only time will tell what the future holds for this segment.

Here is a good write up on the challenges that are affecting the Indian BPOs and what the Government must be doing to shore up the environment for doing business in ITeS.

Happy Weekend

Raghav
Founder HRinIndia
www.hrinindia.in
raghav@hrinindia.in
9880080321

-----------------------



At a recent breakfast meeting The Economic Times organised in Delhi days after the Budget where the finance minister addressed select CEOs and spoke about his vision for the economy and India Inc., Raman Roy, widely regarded as the father of Indian BPO industry, and the chairman of Quattro BPO raised a question that’s been giving Indian BPO honchos sleepless nights.

The query was about the government’s unwillingness to extend the STPI tax holiday for BPO units beyond 2009. Roy’s contention was that the decision would saw-off India’s competitive advantage in the business. Even before Roy could finish his question, the FM flipped through his yellow Budget booklet and rattled off the numbers to suggest that the BPOs shouldn’t be crying foul just yet. “5525 BPO firms in India paid a tax of Rs 1352.9 crore on earnings of Rs 18391.3 crore at the rate of 7.36%. If you think that’s high, then.., ” the FM trailed off with a characteristic smirk. The BPO companies estimate that the effective rate of tax post the tax exemption era will be in excess of 20% putting their margins under extreme pressure.

After the FM made an exit, the BPO honchos present at the event sounded rather miffed by his response, and many privately exchanged notes about the near unviability of doing business in India. “Other countries like The Philippines are rolling out the red carpet of BPOs providing us world class infrastructure, investing in human resource and offering 10-year tax breaks. Here we grapple with poor infrastructure, produce our own power, spend on transporting people, and now there’s not even the incentive of low taxes. Does it make sense to be in India? Surely not,” railed one high-profile BPO chief.

But that’s just one part of the three pronged attack India’s $11-billion BPO industry is facing. The fears of a prolonged global recession and the particularly messy state the US financial services sector—the lifeblood of BPOs—is currently in, the notso-friendly domestic policy environment , the rising Rupee and worsening infrastructure pose a serious threat to Nasscom’s prediction about the industry growing five fold to $50 billion by 2012. Did you say the pigs might fly?

“The Indian BPO industry is at an inflection point. The challenge for them is how to move from the tried and tested labour arbitrage model to value added services. The larger players seem to have understood that, but there’s a lot of pain in store for the smaller ones,” says TJ Singh, research director, Gartner.

On a day when JP Morgan was set to acquire investment banking giant Bear Sterns in a basement bargain deal worth $270 million, Raman Roy is busy exchanging near-panic BlackBerry emails with colleagues in the US, investment banker friends and prospective clients. Despite joking that his company could have put in a bid for Bear Sterns at that going rate, Roy is concerned about the lack of new business coming out of the US, at least in the short term. “Bear Sterns was this huge iconic client for all BPOs in India. If you had them in your clientele, it was a cause for celebration and would give you massive bragging rights. The cat is among the pigeons now. If it can happen to Bear Sterns, there could be several other casualties. Most senior managers who take the decision to outsource aren’t sure if they’ll have a job,” says Roy. His follow up calls to most prospective clients in the US yield answers such as this one: “The business is yours for sure, if I manage to save my job.”


Sitting in his glass cabin strewn with cricket and football trophies his company teams have won, Pramod Bhasin, the CEO of the largest India based BPO firm Genpact bristles at the stifling conditions he has to operate in. “The amount of additional costs I have to bear to do business in India is massive. In The Philippines I don’t have to spend a dime on transporting employees—a luxury I can’t afford in India . The government there spends $100 million exclusively to train people specific to BPOs’ requirements and we get a tenyear tax break. I won’t say we can completely shift operations somewhere else in the near future , but it is a definite Plan B,” says Bhasin. Genpact’s Philippines centre currently employs 800 people and there are plans afoot for a significant ramp up.

Back on the taxation front, while the larger companies are already planning setting up of SEZs on their own, it is the smaller and mid sized STP Units which will have to cough up tax from the financial year Many small and medium STP Units were planning to move into SEZs to avail tax holiday after 2008-09. They now claim the Budget proposals have dealt a body blow to this plan by amending Section 10AA to provide tax holiday only for new units to be set up, under the SEZ scheme.

Thus, STPs planning to move into SEZs for tax holiday purposes, say they would no longer find this option logical. “Of course we will go to SEZs in the future, but it [the proposal] significantly restricts the number of tier-2 and tier-3 cities with a reasonable talent pool such as Dehradun or Roorkee, we could go to,” adds Bhasin.

According to Roy, the BPO model that Indian entrepreneurs have created will be offered on a platter to other countries to replicate because of lopsided policy measures. “We are saying a 30% growth looks great on paper, but imagine how much better it could have been. India will continue to remain the epicentre of BPO business, but only by default,” he says.

Demographics and the sheer size of the admittedly stagnating talent pool tilts the balance in India’s favour. Scalability of business has proved very difficult in markets other than India. Many companies such as Delta Airlines, which shifted some of its voice processes from India to The Philippines, have found it difficult to ramp up the business due to the lack of agents as well as middle management talent.

“The BPO business witnessed a phenomenal boom in India largely because of the level playing field. Startups or the big guys like Infosys or Wipro could play by the same set of rules. When the 10A-10 B clauses go, smaller players will be forced to move into SEZs where there’s no talent pool and take up huge office spaces. Costa Rica, Tunisia or The Philippines offer cost competitiveness for voice and email based processes.

Even if we reconcile with the so-called low end processes moving overseas, by 2013 there won’t as a result be enough absorptive capacity in the BPO industry to take in 300 million people between the age of 18 and 25 entering the job market. And how much of the business will be high-end services or KPO? Let’s be realistic,” cautions Vineet Mittal, MD, Stream International Services, a BPO in the ISP and telecom space.

With customers expecting to pare their costs on outsourced processes by at least a third if not more, and the cost of operations going up in India, Mittal says the margin for BPOs could dip to low single digits.

“India’s attractiveness has certainly diminished. And if you take away tax sops, it will get even tougher. That being the case, the growth projections certainly look optimistic . It is forcing us to look at places like The Philippines and Srilanka more seriously,” agrees Rohit Kapoor, president and CEO, EXL Services, another Nasdaq listed, India Centric BPO player. EXL employs already has a 900 strong workforce in The Philippines.

Neeraj Bhargava, one of the co-founders and CEO of WNS Global Services agrees that demographics puts India on top despite a plethora of infrastructure bottlenecks and increasing wages. “Also, the cost arbitrage story is still very much alive. That’s one of the reasons why the Indian players have demonstrated considerable resilience during the mortgage crisis, and with a sharply rising Rupee,” says Bhargava.

Bhasin too concedes that growth rates will come down making Nasscom’s $50-billion target difficult to achieve in the current scenario, but is sure the industry is a long way away from being in trouble. “The long-term demand for outsourcing is not a problem. At $8-9 billion, remember, we are still under penetrated in the $300-billion global outsourcing sweepstakes.”

But the industry is putting up a brave face and is hopeful that once the dust settles down in the US, things can only get better. “In the Q1 this year we’ve had more client visits and outsourcing interest than ever before. Nearly 45% of our business comes from insurance. Although the margins for US insurers is coming down, outsourcing has become even more of a priority for them. Telecom, transportation, and utilities sectors are also witnessing a heightened level of outsourcing activity,” says Kapoor.

Gartner’s TJ Singh also feels that in the next three quarters outsourcing will again become priority for US companies . “There is no doubt a slowdown of IT budgets. But in a recent poll we found that nearly half the companies wanted to increase the scope of their outsourcing relationship on mortgage while only a tenth said it would go down. BPOs now need to think how can I help my clients to increase their toplines and bottomlines, and not just enable them to cut costs. They have to shift gears,” he says. Whether they actually can, is the $50-billion question.

Source : ET