Realising that low-end services mean low margins and low barriers to entry, many Indian BPO players are scrambling on the value-added bandwagon by offering niche, high margin services. Srikanth R P has the details

Think of the Indian call centre industry and what immediately comes to mind are young graduates working odd hours in plush offices—handling hundreds of mundane calls. While call centres pay excellent salaries, as compared to other job opportunities that college graduates have access too, it’s also a fact that most call centre jobs are really mundane, low-end stuff. Providing services at a low cost has been one of the USPs of the Indian Business Process Outsourcing (BPO)/IT-Enabled Services (ITES) industry.

But a new set of players are out to change this stereotype and position themselves as ‘value-added’ service players. The new mantra is the ‘niche’ word and almost every player is trying to create a value-added differentiation by moving into the high-end space where competition is scarce and margins more lucrative.

For instance, take Spectramind, one of the fastest growing call centres in these parts. In addition to basic services like e-mail management, inbound and outbound voice processes and customer relationship management, the company also provides a service called ‘Knowledge Acquisition’. Under this service, the company provides high-end consulting services in areas like biotechnology. Unlike the past where companies simply picked up people and then trained them in specific skill sets, the current areas of interest, such as biotechnology, have meant that new employees have to be equipped with adequate expertise in particular domains. For the biotechnology foray, Spectramind has hired scientists holding PhDs in molecular biology and genomics.

Says Nilanjana Paul, VP, business development and relationships, Spectramind, “While we are a broadbased service provider, at the end of every six months, we take a strategic overview of our services and look at potential business segments. For instance, knowledge and information tools have become critical to research in many areas like molecular biology. One of our current processes in this high tech arena uses our associates who are PhDs in microbiology to help scientists across the world access a knowledge base that will reduce the time spent in hypothesising, collecting data, and then validating findings. Besides this, our Indian scientists have also been involved in establishing quality control processes for our clients’ knowledge management system.”

Spectramind is also involved in establishing a ‘Knowledge Centre’ in India for a US-based company, which will research and verify developments in the areas of biochemistry and genetics. The aim being to provide a common shared representation of biology that is understandable to scientists and interpretable by computers. The centre is also responsible for creating, maintaining and verifying a database of all developments and research published worldwide in this area. Industry analysts say that the company could make a profit of over $10 million in three years time—and this from the biotechnology foray alone.

Spectramind is not the only one trying to walk a different road. HCL eServe plans to focus on different niche verticals like accounting and GIS. For instance, India has high quality accountants who can be trained in US GAAP accounting practices. Using the Indian accountants, the company plans to handle the entire accounting process of global companies. Industry analysts say that the ITES industry has quickly learnt the lessons that its software cousins learnt the hard way when the effects of the slowdown started to appear. The strategy is to enter an account as a low cost service provider and then scale up the value chain.

Agrees Milind Chalisgaonkar, CEO, MsourcE, “Our business relationships with our Fortune 500 clients are getting broader with the same client asking us to handle multiple activities and allowing us to do value-added jobs.” For instance, MsourcE started a relationship with one large financial institution by handling inbound customer service calls for debit cards. Now the company also handles claims investigation, which requires accounting skills and an intimate knowledge of financial systems. In another instance, MsourcE has developed a software to provide information on ATM locations to customers, based upon their current location. Clearly, Indian players are moving way beyond the call centre operations.

Milind Chalisgaonkar of MsourcE says clients are increasingly asking them to handle multiple activities and value-added jobs

Current scenario
To be honest, industry analysts have also always argued that there is no reason for India to vacate the large volume (albeit low profitability) business and give it on a platter to some other competitor. Secondly, from the point of employment, low-end business provides employment to a large section of graduates who would otherwise be rendered unemployed.

While there is nothing wrong in exploiting the low end of the call centre industry, there is also a clear view emerging amongst major players that India cannot continue to play the ‘cost’ advantage forever as competitors like China and the Philippines are threatening to take away business, thanks to greater cost advantages. Nasscom also agrees that if we continue to sell our services on the basis of cost alone, we could find businesses migrating to other countries where costs are as low or lower. Industry analysts also acknowledge the fact that in several instances, business has been termed as ‘overflow’ work from overseas clients or by acting as the offshore backend for international BPO vendors.

Present trends in the Indian ITES/BPO industry show that most services are limited to transaction intensive services. Thus, services like data capture, data processing, back-office operations and transcription services make the highest contribution in the sector’s revenues. For the Indian BPO/ITES industry to move up the value chain, the need is to develop process and business expertise. If Indian BPO service providers have to make their presence felt in global markets, and achieve a target of $21 billion in revenues by 2008, there’s no option but to move up the value chain.

Says Ravindra Datar, senior Analyst-IT services and BPO, Gartner India research and advisory services, “One can simultaneously see various stages of evolution in India on the BPO front. I believe we are in the transition phase where the focus of major service providers is shifting to create non-cost differentiators. While cost savings could be a part of the offering, the real differentiators would be in terms of the level of value-added quality services.”

The need for moving up the value chain
Value-added services are clearly the key advantage that Indian BPO players have over other similar players in a highly competitive market. Industry analysts feel that the Indian BPO/ITES industry is looking at exploiting the business opportunity in the same way the software industry had done five years ago. For instance, Indian software firms pounced on the Y2K opportunity and then leveraged their cost advantage to bag bigger projects.

Subsequently, the focus on quality processes like the SEI CMM model saw Indian firms becoming prime contenders for international projects. Industry analysts feel that in a similar way, the Indian ITES/BPO industry is looking at moving up the value chain. This trend is seen by the fact that companies that started outsourcing non-core functions to Indian players have now started outsourcing complete processes like accounting and HR.

Adds Sanjay Aggarwal, CEO, Daksh eServices, “The current BPO industry is in a very nascent stage and based on the labour intensive end of the value chain. But the value proposition offered by Indian companies is so compelling that outsourcers are willing to try it out by running a pilot to make sure it is a viable option and then scale up.” Aggarwal believes that the need of the hour is to develop process and business expertise in addition to technical and operational expertise. For creating a niche in a highly competitive market, Daksh is focussing on three key verticals: BFSI (banking, finance and insurance), telecom and high technology.

Almost all the top players are looking to create domain expertise in distinct verticals. For example, World Network Services (WNS), which was set up by British Airways concentrates on the airline segment. Says Siraj Irani, senior vice president, WNS, “We currently handle complex processes that involve a high level of decision making while executing processes here. While we will continue to build our expertise in airlines, we would also focus on key verticals like insurance, banking, healthcare and retail.” Industry analysts believe each of these processes have the capability to create a market worth $1 billion by the year 2008.

Adds Prakash Gurbaxani, CEO, TransWorks Information Services, “Our strategy is to concentrate on key verticals to add value to our clients. For instance, we have a team in place with significant expertise in the insurance segment. This allows us to provide services such as post sales processing and claims processing in addition to providing regular call centre support services.”

But scaling up operations to reach global size is not so easy. Explains Sunil Kakodker, vice president, marketing, Tracmail, “There are good opportunities for Indian companies at the high-end of the value chain like insurance and pharmaceuticals. But the challenge for Indian players is to develop a track record of success in operations, process implementation and service delivery that develops customer trust to outsource more complex processes.”

Adds T S Hariharan, vice president, 247customer.com, “One profitable sector, besides finance and telecom, is HR outsourcing. This sector is changing from the traditional cost-plus and fixed price model to value-based pricing and gain sharing. But there are challenges for Indian vendors like application localisation, high switching costs and global security policies.” Indian vendors have to get around such issues to be able to scale up the value chain.

Nilanjana Paul of Spectramind says the firm is looking at knowledge and information tools as business segments

Software parallels
The Carnegie Mellon University’s (CMU) new framework called the eServices Capability Model aims at enabling BPO/ITES providers to establish processes that will enable them to develop and improve their capabilities, and thereby move up the service value chain faster. The framework provides direction on measuring and improving the value of outsourcing relationships by way of enhanced productivity, reduced cycle time, decreased transaction costs, and improved time to market. Further, the certification program from CMU provides a seal of assurance about a BPO/ITES providers’ capabilities and performance. By using this certification, Indian BPO/ITES vendors can take the same high ground that the software services sector did with SEI-CMM.

And just as in the software industry, there are clear categories emerging among BPO vendors too. This is substantiated by an Edelweiss Capital Report on business process outsourcing with respect to the Indian context.

It states: “We are now observing a clear differentiation developing among Indian BPO vendors. While select companies have emerged as Tier-I companies (companies that have achieved adequate and stable business traction and quality client profile), others (Tier-II and Tier-III companies) continue to face scale-up problems. This is especially observed in CRM and healthcare BPO segments. Also, so far BPO vendors have focused on business development and building delivery capabilities and have grown organically. However, in the medium-to-long term, as Tier-I companies seek to scale up rapidly, we expect consolidation to occur either by way of Tier-I companies acquiring attractive Tier-II/Tier-III companies or mergers among Tier-II/Tier-III companies.”

Also, while currently most Indian BPO vendors do not offer specialised services or multi-process solutions, analysts expect Indian BPO vendors to build expertise in multiple processes or segments. Looking at their software cousins, the ITES players have also learnt that dependence on a single client or a single vertical is very risky. At present the client concentration of BPO vendors is very high—the top five clients usually account for around 80 percent of the revenues. Hence, there is also an increasing trend among players to reduce client concentration and offer services across multiple processes or segments.

Though all the top players recognise the importance of moving up the value chain, most of them agree that the way forward is to find a balance between the mass segment and the niche segment as there are business opportunities in both. One instance of this strategy can be seen with respect to HCL eServe. The company has adopted a matrix business model that combines industry transparent horizontal services like telemarketing and help desks with industry specific verticals like financial services, pharmaceuticals and IT.

Says a official spokesperson of HCL eServe, “Our targeting logic is dimensioned by three factors: a) industries with a high potential for outsourcing, b) HCL Technologies’s client presence in strategic verticals such as IT, telecom, retail, banking and insurance and c) availability of appropriate domain and vertical expertise.” In the first phase of operations, the company’s objective is to leverage the parent’s brand image and target clients within the parent’s verticals. This move could pay off for HCL eServe as these verticals account for approximately 25-30 percent of the global BPO market of $200 billion. While volumes can give the companies better revenue visibility and stable revenues, niche segments can give the companies the much-needed higher margins. Going forward, this could well be the mantra for Indian ITES players—akin to what Indian software companies are following for their consulting strategy.