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Outsourcing
November 2004


The Economics Of Indian Call Center Models

By Ranjit Shastri, PSi, Inc.

Setting up a call center in India can seem quite challenging for those who are not familiar with the country. PSi’s research indicates that there are many paths to success, including setting up a full-fledged, wholly owned subsidiary, forming a joint venture, outsourcing the infrastructure (i.e., only hiring the people), and subcontracting. One increasingly popular option is the concept of setting up a “virtual subsidiary” on a build-operate-transfer basis. PSi has studied the pros and cons of each option and has prepared case studies on the various models by documenting the activities of GE, American Express, TeleTech, Convergys, etc. We have also examined the economics of each model.

Over the past decade, entry barriers have gone down and productivity has improved. India has moved up the learning curve.

India is a major and growing factor in the global call center industry. While there has been considerable political debate about call center jobs shifting to India, the controversy has had little effect on the rate of growth of the Indian call center industry. Indeed, the Indian call center industry actually grew faster this year than last, driven in large part by the expansion of U.S. companies such as Convergys, TeleTech, IBM, Accenture, GE Capital, American Express and HP. Some U.S. companies are being particularly aggressive in expanding their operations in India. For example, earlier this year IBM bought one of India’s leading call center companies. Convergys and GE Capital have each been hiring hundreds of call center agents every month at annual salaries ranging from $1,600 to $4,000, depending on experience and qualifications. Clearly, the Indian call center phenomenon is here to stay.

Now that the large players have established the viability of setting up operations in India, many smaller companies are beginning to investigate India as a location. These late entrants have an advantage over the pioneers because the challenges of operating in India are now better understood. The cost of bandwidth and telecom equipment has fallen, there is a larger pool of experienced call center operators, and regulatory issues such as transfer pricing have been worked out. Unlike the large early entrants, however, the new entrants are less familiar with India. Companies such as GE and American Express, which have large non-call center operations in India, understand the challenges of doing business in a country with different laws governing labor, tax, intellectual property and corporate governance.
While setting up a call center in India can be daunting for those companies that are not familiar with the country, PSi’s research has shown that there are many paths to success, and we outline the pros and cons of the various options below.

Setting Up A Full-Fledged, Wholly Owned Subsidiary
Some of the early pioneers in the Indian call center business were large multinational companies that already had sizeable operations in India. For these companies, setting up a back office for their U.S. operation was relatively easy, as they already had a legal entity, full-time employees and an office infrastructure. GE Capital already had a wholly owned Indian subsidiary when it began call center operations in 1996. Some of GE Capital’s Indian managers traveled to the U.S. and stayed for as long as two years to learn processes and become part of the U.S.-based “sending team.”

Initially, GE Capital sent work to India, not as a result of a strategic plan but simply to get work done at a lower cost. GE’s senior management supported the idea of developing a center that leveraged GE’s training programs in India; they felt that trained Indian employees could serve GE entities outside of India. The first attempts at offshoring work were in areas of simple, early stage collections calls and customer care calls. GE also experimented with finance and accounting functions, initially to serve certain accounts payable functions.

Because of its pioneering role in the Indian call center business, GE’s initial cost structure was much higher than it is today. Telecommunication costs, for example, were extremely high when GE began call center operations. The annual cost of an E1 telecom line in 1996 was more than $900,000, versus less than $150,000 today. In order to minimize latency, GE was forced to invest in expensive earth stations that transmitted to a satellite linked with a downlink site in the UK. From there, GE’s voice and data traffic traveled via ocean cable to the U.S. Because only one satellite “hop” was involved, latency was reduced to about 500 milliseconds. Today, there are many communications alternatives in India. In fact, setting up a wholly owned call center in India today can be done very cost effectively because fully furnished facilities are now available on a turnkey basis (see under “Outsourcing”).

GE Capital’s outsourcing division, which was started in India in 1993, now employs 18,000 people, of which 13,000 are in India and another 5,000 are located in Hungary, Mexico and China. The division reported $400 million in revenue in 2003 and is the largest business processing operation in India by a foreign company. In order to achieve further efficiencies and flexibility, GE Capital is now considering spinning off its outsourcing division, and it is in discussions with a number of potential buyers, including the Texas Pacific Group, Warburg Pincus and Wipro (one of India’s leading software companies).

Forming A Joint Venture
Several call centers in India are the result of a joint venture between an international player and a local business group. For example, TeleTech entered into a joint venture with one of India’s leading telecom companies, Bharti Telecom. The advantage of such an arrangement is that one can leverage a partner’s existing infrastructure. In the case of TeleTech, the existing infrastructure of Bharti’s facilities, fiber optic network and organization provided the company a way to ramp up quickly. Bharti, which is funded by Singapore Telecom and Warburg Pincus, was able to guide TeleTech through the process of setting up operations.
Most of the major call center players in India have avoided joint ventures for the simple reason that finding a joint venture partner is not easy, nor is managing the on-going partnership. Furthermore, now that there are so many call centers in operation in India, there is an abundant supply of experienced managers who are available to guide a new entrant through the process of setting up operations.

Virtual Subsidiary
Some international companies have chosen to create a “virtual subsidiary” in India. Rather than set up their own legal entity in India, they have engaged a local company to hire people and set up a facility on a “build-operate-transfer” basis. The Indian staff think of themselves as employees of the foreign company, but they receive their pay from the local subcontractor. This option is particularly attractive for companies that wish to transfer specialized skills to their Indian employees without having to incur the cost and time to set up their own operations in India. It enables them to avoid the problem of dealing with the Indian bureaucracy and issues of transfer pricing.

The virtual subsidiary is meant to be a short-term arrangement, but several of PSi’s clients continue to employ this model several years after launching operations in India. Some U.S. companies that have set up virtual subsidiaries in India have noted that after some time, their agents begin to question why their U.S. employer doesn’t have its own legal entity in India. However, such concerns are relatively minor. In PSi’s experience, employee satisfaction and attrition levels within virtual subsidiaries are no different than those in wholly owned subsidiaries or joint ventures.

Outsourcing
There are various degrees of outsourcing, ranging from outsourcing the facility or people, to completely offloading responsibility to another company. The main benefit of outsourcing is that it enables companies to take advantage of specialized vendors that have the scale and skills to achieve better performance and lower costs. It also simplifies the organizational and regulatory issues associated with setting up a facility in India. Some U.S. call centers have subcontracted work to call centers on the condition that if the U.S. company sets up its own call center in India, the Indian vendor will transfer selected employees to the new entity (similar to a build-operate-transfer arrangement).

Some companies choose to completely outsource their call center operations in India. This can be done in two ways: by subcontracting to a major global company, such as IBM or Accenture, which in turn has subcontractors or operations in India. Alternatively, it is possible to subcontract the work directly to an Indian supplier, such as Spectramind, Progeon or HCL.

Some Indian call centers are available on rent. Companies such as American Express staff the facilities with their own people but rent the facility, computers and telecom infrastructure. Such facilities can be obtained for as little as $1.60 per square foot per month, not including personal computers and bandwidth. Some companies prefer to set up a facility but engage a recruiting firm to staff the facility.

PSi’s research shows that the Indian call center has evolved considerably since GE Capital and American Express pioneered the concept almost a decade ago. At that time, the idea was one of simple labor arbitrage and the only option that existed was to set up a wholly owned, captive call center. Over the past decade, entry barriers have gone down and productivity has improved. India has moved up the learning curve.

Going forward, the Indian call center game will be more about productivity and quality. Now that so many U.S. companies operate call centers in India, the simple labor arbitrage model no longer applies; Indian call centers now must compete against other Indian call centers. The business models have also evolved from simply captive units to a multiplicity of options, including joint ventures, outsourcing and virtual outsourcing. Given the expanded choice of business models, some of the early pioneers in India’s call center industry are now beginning to re-evaluate their original approach. Some (like IBM) are moving aggressively to acquire capacity, while others are likely to spin off their captive units to achieve greater levels of flexibility and efficiency.

Ranjit Shastri, managing director of PSi, Inc., can be reached at ranjit_shastri@psi-world.com. Ranjit advises clients in developing corporate strategies, forging cross-border alliances and improving competitiveness. He spent several years as a management consultant with McKinsey and Bain. He holds an M.B.A. from Wharton, and a B.Sc. from Yale University.

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