Mumbai: According to the National Association of Software and Service Companies (Nasscom), employment in the relatively new, IT-enabled, offshored, business process outsourcing (BPO) services sector in India was 171,500 in March 2003, up from 106,000 in March 2002 (Nasscom-McKinsey Report, 2002).

This Nasscom-McKinsey report estimates that such BPO operations will employ, at the very least, 1 million persons and generate revenues of $17 billion by 2008. This assumes a compound rate of growth of approximately 45 per cent per year for the next five years, an assumption that is likely to be validated and perhaps exceeded. In fact, Nasscom''s revenue estimate has recently been revised to $24 billion for 2008.

Currently, this booming sector employs more than 1,80,000 professionals. The investment has crossed $1.2 billion and it has established over 110,000 smart-desks in almost 8-million square feet of plush office space. The revenue generated in 2002-03 has already crossed $2.3 billion. In comparison, the entire software industry in India generated $7.2 billion in 2002-03 as compared to $150 million in 19991-92. The estimate for software exports in 2008 is $30 billion, by which time BPO services will have crossed $24 billion or even exceeded $30 billion.

The winners
This phenomenal growth is churning out a few world-class winners. These companies did everything right and are grabbing larger and larger slices of the third-party BPO market. At least 12 Indian companies are likely to cross $100 million each, in revenues, by 2005, based on their ongoing business contracts.

The stock market is booming again. The economy could grow at a healthy 5.4 per cent and the 3000-million strong middle-class is growing more affluent. India is certainly gaining new-found respect as a booming market for all types of products and services, including luxury products. This is one of the very few markets in the world that sailed through a global recession of monumental proportions and shows no signs of slowing down.

Foreign workers in India
One of the most telling signs of this success is the fact that Indian BPO companies now employ more than 100 foreign workers who have opted to work in India at rupee salaries (which are usually 25 per cent of their European or American salaries). Another 100 or so are employed in their own countries but working there for Indian BPO companies. This trend is expected to grow as such employees bring with them foreign language skills (French, German, Dutch), destination knowledge and the mastery of local cultural nuances that local employees cannot match.

This is particularly important in the travel and tourism BPO segment. Today, an India-based employment advertisement in a European country attracts over 100 serious responses for every 10 positions. It is to our credit that India-based BPO experience is now considered a big plus point in an European employee''s CV. Who would have imagined, even a year ago, that Europeans would gladly want to work in India in entry and mid-level positions? But one should remember that the European BPO market will cross $65 billion by 2005 and India-based BPO experience will boost their careers back home, in future.

Globally, offshore BPO is forecast to become a $62-billion market by 2008 from $25.4 billion in 2001. This demand will mainly originate from the US and Europe. By encouraging and nurturing this trend, India''s most innovative and enlightened BPO companies are aiming for a substantial slice of this huge market, targeting between $24 billion and $30 billion by 2008.

The backlash
That''s the exciting part. The downside is that all this sudden success in India has created a protectionist backlash in the US, with politicians in many states trying to cash in (so far, unsuccessfully) on the fear of American white-collar jobs being permanently lost to other countries, and get anti-outsourcing legislation passed at the state level.

Says Ron Hira (representing the Center for Science, Policy and Outcomes, Columbia University, USA) in his testimony to the US Congress in June 2003: : "The most important economic and strategic driver behind global outsourcing is the ready availability of substantial numbers of skilled professionals in other countries who are willing and able to work for much less than their counterparts in the US." (Hira has since taken up another key advisory position as Assistant Professor of Public Policy, Rochester Institute of Technology, USA.) In his testimony Hira further estimates that the US will export to other countries, including India, over 1,56,000 such jobs by 2005 and an astonishing 1.4 million jobs by 2015.

Half a million IT jobs — roughly 1 in 20 — will go abroad in the next 18 months, according to Gartner, a respected US research firm. Nearly 5 per cent of American human resources (HR) jobs have moved offshore in the past year, and by 2007 that number will climb to at least 15 per cent, says Jay Whitehead, publisher of HRO Today magazine, which tracks outsourcing.

The big boys are coming
This fundamental truth has attracted the attention of the world''s biggest third-party BPO corporations (like EDS, Convergys Corp, Computer Sciences Corporation [CSC], Exult Inc and Accenture), some of whom are already setting up shop in India. But the bulk of the 400-odd start-ups are third-party BPOs heading towards oblivion. Ultimately, the top 10 will control approximately 90 per cent of the market. Currently, WiproSpectramind has achieved revenues of over $40 million, with approximately 5,000 employees.

It costs up to $8,000 per seat, as upfront expenses to set up or expand a BPO centre. This means that WiproSpectramind has already invested between $30 million and $40 million to set up its infrastructure, albeit spread over the last few years. HCLT BPO has already contracted assured revenues of $35 million a year over the next five years from just one client, British Telecom (BT), from its portfolio of over 25 third-party clients. Other major BPO players are captive units like General Electric (GE), British Airways, American Express and Citibank.

It is the capital-intensive nature of this industry that calls for a turnover of at least $100 million for each player to generate the sustainable mass to carry it forward into the big league in competition against the big guns and also attract larger and larger contracts. At that level, they will also attract safer and more lucrative non-voice business like transactions-processing, research, analysis, content-creation, HR and consulting. Such business is also inherently long-term and hence safer.

Voice contracts call for a minimum revenue of around $9 per hour but smaller and downright desperate firms in India are quoting at unviable rates of $8 per hour and even lower. Non-voice business requires different skill-sets and brings in higher margins though the hourly rates are 20 per cent to 30 per cent lower. Usually, big clients prefer to see the infrastructure in place before releasing substantial contracts.

At the same time, even the biggest BPO companies prefer to consolidate their business among a few clients. Typically, a 10,000-person set-up should restrict itself to not more than 25 clients, so that top and middle management is not stretched too thin and quality does not suffer. Another critical ability is to be able to scale up operations rapidly, once a big contract has been signed. This is where the big operators, with their deep pockets, score.

For example, Convergys Corp, which is half as big as India''s entire BPO industry with a turnover of $1.33 billion, entered India in November 2001. Less than two years later it has 5,000 employees and is adding a new one every single day. The $21.8-billion behemoth, EDS, with 25 per cent of its revenues from BPO, has already established a beachhead in Mumbai. The $11.3-billion CSC already employs over 1,000 persons in India.

Once these giants gather steam they will routinely bag contracts bigger than $100 million. A single contract could be bigger than the entire yearly turnover of one of the top 10 IT companies in India. Just one of these giants could bring more business into India than all the existing IT players put together. This means that the hundreds of smaller competitors simply cannot survive. They will either close down or, if they are lucky, be merged with the top 20 operators.

Says Sandeep Aggarwal, chief marketing officer, Intelenet: "Ninety per cent of the BPO ventures in India are not based on strong fundamentals. Some had existing space which they converted into call centres. Others are funded by venture capitalists. VC-funded ventures are inherently always on the block, ready for a takeover or merger. However, takeovers make sense to VCs only if the price is at a multiple of the revenues currently being generated by the target company.

"But nowadays, BPO companies are valued at barely the same value as their turnover, so it will not be a profitable deal for VCs to sell out at this stage. At the same time there are so many struggling BPO companies available in the market that valuations cannot go up for a long time. It''s a truly difficult situation for such companies which rushed into this sector."

Intelenet is one of the successful pioneers of BPO in India with an illustrious lineage. Formed as a joint venture between Tata Consultancy Services (TCS) and HDFC, it has set up a state-of-the-art 3,000-seat BPO facility in Mumbai and is well within the reach of a Rs 200-crore turnover by end 2003.

The silver lining
There is however, in this sector, the proverbial silver lining. Away from the glare of publicity generated by the BPO companies that cater to the overseas market a small but determined tribe of BPO companies is focusing only on the domestic market, with surprisingly positive and stable results.

Delhi-based paging company Microwave is credited as one of the pioneers of this breakthrough. Two years ago, with its paging business declining by almost 50 per cent it was faced with a bleak future and destined for closure when it suddenly reinvented its core business. Armed with functioning and interconnected call centres in 10 cities throughout India, Microwave started approaching companies that wanted to outsource their local business processes.

They hit pay dirt with over 100 clients, including Hindustan Lever, ICICI Bank, BSES and Hutchison Max. With a turnover exceeding Rs 40 crore and domestic BPO services contributing over 50 per cent, Microwave is solidly upbeat about its long-term future. With 1,500 personnel handling over 10 million calls a month it hopes to grow by up to 50 per cent this year and add another 350 seats.

Another winner is Dialnet with customers like Star, Airtel, UTI, American Express, and HSBC. Strangely, Nasscom doesn''t even track such companies. But over 80 BPO companies now successfully service only domestic clients. The domestic market could be as large as 12 per cent of the international BPO business currently flowing into India (around US $ 1.7 billion). That makes it almost Rs 1,000 crore, which could rise to Rs 1,500 crore by 2004.

The potential scope for domestic BPO services could be even bigger. Domestic companies typically outsource under 10 per cent of their business processes but this is likely to shoot up to 50 per cent within the next five years. That means that the domestic BPO market could be as big as Rs 7,500 crore by 2008.

Will it benefit the US economy?
A recent study by the McKinsey Global Institute USA, the think-tank of the renowned global consulting firm McKinsey & Co, offers a different take on why outsourced jobs won''t return to the US. According to MGI, when an American company outsources a $60-an-hour software job to a $6-an-hour software programmer in India, the immediate benefit goes to the Indian programmer. But, the McKinsey study emphasises, the US economy receives at least two-thirds of the benefit from offshore outsourcing, compared with the third gained by the lower-wage country receiving the job.

Further, estimates MGI, of the $1.45-1.47 of the value created globally from every dollar that an American company chooses to divert abroad, the US captures $1.12-1.14 while the receiving country captures on average only 33 cents. In other words, the US captures 78 per cent of the total value. American firms and consumers thereby enjoy reduced costs. Larger profits can be reinvested in more innovative businesses at home. New and expanding subcontractors abroad also create new markets for US products. And, at least theoretically, displaced US workers will find new jobs in more dynamic industries.

That did happen when the US outsourced thousands of blue-collar jobs in mass-employment sectors like garments, shoes, consumer electronics and toys. Auto-component jobs are also now flowing to India from the US, in a big way. The same should hold good for BPO jobs, even if the jobs currently being outsourced are mainly white-collar jobs.

The US economy always manages to migrate to the next higher level of technology and innovation and global domination in specific sectors, even if the path taken is through the ''creative destruction'' of unviable domestic industries or jobs.