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Survey: Business In India: If in doubt, farm it out(The Economist Via Thomson Dialog NewsEdge)But outsourcing firms are having increasing trouble finding suitable workers IN A survey of India two years ago, this newspaper wrote about OfficeTiger, an outsourcing firm with most of its operations in Chennai. At the time it had a staff of about 1,500. What has happened to the company since then is also the story of the successful parts of India's BPO industry. OfficeTiger has expanded hugely, to about 6,000 staff now, and broadened the range of services it offers clients. It has attracted investment from private-equity firms, made acquisitions and expanded internationally, with operations in Sri Lanka and the Philippines as well as Britain and America. Most recently it has itself been bought, by RR Donnelley, an American printing giant, and is in the process of absorbing the outsourcing business of another Donnelley subsidiary, Astron. In its newly built office block in Chennai, staff are squeezed into every available corner and computer terminals are used for an average of 2.2 shifts a day. In one room, software is being used to change the colours of the clothes worn by models in the glossy catalogues of American retailers--much cheaper than paying the model to change while the photographer kicks his heels. Elsewhere in the building, display advertisements are being designed for shops and pizzerias to put in their local American yellow pages. On another floor, a proof-reader, formerly with a big London law firm, is training staff to read legal jargon "for sense". There is a big business in "litigation support" for American multinationals such as DuPont. This might involve, for example, scrutinising thousands of documents and e-mails for relevance to a particular case. A "research and analysis" division acts as the back office for, among others, MortgageRamp, an American financial-outsourcing firm catering to the commercial-property market which OfficeTiger acquired last year. The analytical work performed in Chennai includes massively complicated cashflow projections to support the securitisation of a mortgage. For many people in America and Britain, outsourcing to India is synonymous with telemarketing and call-centres that try their patience. Sujay Chohan, in Mumbai, formerly with Gartner, a consultancy, describes overhearing an exasperated Texan in cowboy boots at an American airport trying to book theatre tickets on his mobile phone, through a call-centre in India that thought he wanted a hotel room. "Voice-based" services remain an important part of the Indian BPO industry, but the processes being outsourced are becoming ever more sophisticated, and include what some have taken to describing as "knowledge process outsourcing" (KPO). Some analysts argue that this is qualitatively different from BPO, involving real judgment and analysis from the Indian workers, rather than the mechanical application of preset processes. But Joe Sigelman, one of OfficeTiger's founders and chief executives, whose firm also specialises in such "judgment-based" outsourcing, recoils at both sets of initials, preferring "professional services". "If we want to sound sophisticated, why don't we say it in French?" he asks. Ananda Mukerji, who heads ICICI OneSource, one of the bigger BPO firms with some 7,500 staff, also sees a continuum between lower- and higher-end processes. In all of them, says Sanjeev Sinha, a "business transformation officer" at the firm, customers have come to take cost-savings for granted. So BPO firms are wowing them by improving the processes outsourced to them. Mr Sinha says that ICICI OneSource proposed a change in dealing with a store-based credit card that saved a British retailer 1.5m ($2.7m) in a year. For another customer, a British mobile-phone service, the firm found out why many low-billing customers were switching to another provider. They wanted a payment plan that was self-limiting, so that it did not allow them to spend more than a given amount a month. The customer changed its charging structure and saw its churn rate fall by 30% in the first month. Mr Chohan identifies this as one of the issues the industry is only beginning to tackle: as it matures, the Indian firms may develop a better understanding of the outsourced processes than their clients have. The firms may do more than they are being paid for, even creating intellectual property. For now, they are using such innovations to preserve margins and win further business from satisfied clients. In future, they may have to find a way of charging for them. Pramod Bhasin, boss of the biggest BPO firm, Genpact, agrees there is a "tremendous amount of innovation", but argues that, with margins of 25-30%, his firm is not undercharging. Demand-led For the time being, however, this seems a side issue. The bigger question is how the industry can cope with expected demand. The NASSCOM-McKinsey study forecasts that Indian BPO export revenues will grow from $5.2 billion in 2005 to about $25 billion in 2010, a compound annual growth rate of 37%. There are two big trends. The first is demographic: despite the fears about "exporting jobs", labour shortages in white-collar jobs are emerging in America and other rich countries. Second, the idea of the sort of work susceptible to outsourcing seems to expand every month. Genpact, for example, in March announced a joint venture with NDTV, a television channel, to offer services such as digitisation, video-editing and captioning. The biggest opportunities, however, are still in the banking and insurance industries, already the industry's largest clients. There is also great potential in the finance and personnel divisions of other big companies, and in law and pharmaceuticals, where India has particular strengths. The law illustrates just how much more work might come India's way. Worldwide spending on legal services amounts to about $250 billion a year, some two-thirds of it in America. As yet, only a tiny proportion goes offshore. Mr Sigelman says that the remorseless rise in law-firms' fees is now under scrutiny from his company's clients. India, with its English-language skills and common-law tradition, is well placed to secure a big share of the outsourced market in, for example, drafting patent filings and contract and loan documentation. Forrester, a research firm, forecasts this will involve 35,000 jobs by 2010. In pharmaceuticals, the market in outsourced clinical trials, for example, is expected to reach $1 billion annually by 2010. Vasudeo Ginde, of iGATE Clinical Research, one of several dozen firms competing for a share of this cake, says that India has always had three essentials: doctors versed in Western ways, good (in places) hospital facilities, and huge numbers of patients. In addition, since the beginning of last year there has also been stronger patent protection for foreign medicines, so foreign firms are less nervous that conducting research in India will jeopardise their intellectual property. As in other outsourced businesses, speed is as important as cost: if 500 diabetics are needed, they can be found much more quickly in India. And there are more inoperable cancers, because fewer are detected at earlier stages. The expected growth in BPO of all sorts is spurring consolidation. Evalueserve, a KPO and consultancy, reckons that of the 400 or so Indian firms, the top 15 already account for 60-70% of total business. As the size and complexity of outsourced processes grows, larger firms with a presence in several countries have an advantage. As Genpact's Mr Bhasin puts it, clients like to know they can sue. Yet the independent "third-party" BPO firms are still, by global standards, small companies. Genpact, a subsidiary of General Electric (GE) until 60% of it was sold to two private-equity firms in 2004, generated only $490m in revenue last year (though it hopes to pass $1 billion in 2008); but even that modest amount was more than double the revenue of any other third-party BPO in India. A big chunk of the BPO business, especially in financial services, remains with "captive" offshore operations. GE's divestment of Genpact was partly aimed at allowing the firm to develop non-GE business. Mr Bhasin says it has already acquired ten to 12 "strategic" customers who, he hopes, will contribute some 25% of revenues this year. Genpact is offering clients such as Wachovia, a big American bank, what it calls a "virtual captive"--a unit in India that will "look and feel like Wachovia" and where it will have a greater say over things like hiring and firing than in the usual outsourcing arrangement. Genpact is trying to offer the best of both worlds--the control offered by a captive operation and the cost savings third-party outsourcing is believed to offer. Captives, argues Wachovia's Sanjay Gupta, face a particular difficulty in retaining and motivating staff without losing cost competitiveness. This is the biggest headache of all for the Indian industry as a whole: debilitating rates of attrition and difficulty with finding qualified staff. At the top end, Pipal Research, a KPO subsidiary of ICICI OneSource that provides research and analytic work for financial-services and health-care firms, says it can expand its business only as fast as it can hire. At the bottom end, life is even tougher. Mr Nilekani of Infosys tells of the boss of an ice-cream parlour desperate for English-speaking staff to man his counter in Bangalore, so he sent his backroom workers on English courses. No sooner had they learned enough to sell ice creams than they found jobs in call-centres. The biggest reason for India's success in the IT and BPO markets is its wealth of suitably qualified people. According to the NASSCOM-McKinsey study, it has 28% of the available supply in low-cost countries--and they are still remarkably cheap. According to Boston Consulting Group, a typical annual salary for an Indian IT engineer is $5,000 and for a graduate with a masters degree in business $7,500--about one-tenth of their American equivalents. The missing half-million NASSCOM-McKinsey, however, also forecasts a shortfall, on current trends, of nearly 500,000 capable graduates by 2010, with BPO much worse affected than IT. Already managers complain about the quality of education of many "freshers". The problem is masked by the industry's rapid expansion. At present, many BPO firms face staff-attrition rates of 50% or more. According to Evalueserve, the churn rate for the industry as a whole is 30%--ie, every year one in three BPO workers embarks on a new career altogether. Mr Bhasin says that the investment firms have to make in remedial training, and the higher wages they have to pay to retain staff, are currently offset by lower communications and other infrastructure costs, but will make themselves felt in two or three years' time. Genpact is training 6,000 to 8,000 people a year. BPO's staffing problems are more acute than IT's because the "business is real-time. It touches clients every day. So any slippage in quality shows up immediately." India produces 441,000 technical graduates, nearly 2.3m other graduates and more than 300,000 postgraduates every year. So why the shortfall? NASSCOM's Mr Karnik blames the varying standards of tertiary education concealed by these figures: one-fifth world-class, one-fifth passable and three-fifths lamentable. Also, he thinks that Indian education is bad at teaching two skills of particular importance for both IT and BPO: teamwork, which in colleges tends to be seen as cheating, and communication. He jokes that oral skills are only really needed on entering education (kindergartens interview three-year-olds) and on leaving it (a doctorate might require a viva). Mr Bhasin says the college curriculum bears no relation to real work, and new graduates lack even the discipline to turn up at work on time. He wants the government to give colleges much greater freedom to adapt their courses. NASSCOM has done its bit by introducing a national test--an "assessment of competence" for BPO workers. This may also reduce the risk of crooks entering the profession. One danger for India is that a security scandal could stoke protectionist fires. The NASSCOM test is also a market opportunity for private training institutes, of the sort that have already sprung up to teach IT skills, so it fits in with the industry's past independence of government policy. It is not just IT and BPO firms, however, that grumble about the public education system. The shortage of suitable people worries manufacturers, too. SOURCE: The Economist |