High Hopes

HP, Accenture and IBM are still the big names in the business process outsourcing (BPO) market, but there are plenty of others who want a piece of the action. The growing maturity of BPO and the rising pressure on corporations to cut cost means companies are handing over more varied processes to third parties, and service providers in India are competing hard for a piece of that market.

BPO has spread to encompass human resources, finance and accounting. In the last seven years, for instance, there have been 180 multi-process HR outsourcing deals by big companies, including benefits, HR administration and payroll services, as well as a large part of transactional F&A work. There is still a tendency for clients to engage in BPO for short-term savings rather than long-term transformational value, which gives service providers in lower cost locations – including India – an advantage for the time being.

‘There has been a change in attitude. As markets evolve there is usually more push from suppliers, but BPO has traditionally sprung up through deals that are largely not transformative, but more focused on quick cost savings from cheaper offshore labour,’ says Philip Fersht, Research Director of BPO, offshoring and IT services for AMR Research.

‘The problem is that in most deals companies are doing things in the same way, but with offshore staff. It soon becomes clear that this does not work. The early experiences of many companies that adopted this mentality have not been fruitful, so there is a need to change the way things are done.’

Service providers, sensing that clients’ attitudes are maturing, are looking to develop more sophisticated offerings, while also pursuing greater standardisation of processes. If there is too high a degree of customisation then it becomes difficult for service providers to scale up their operations and combine high quality with significant savings.

There is far greater knowledge and capability among service providers today, including those in India, as they increasingly understand the kind of value that their clients seek. Now, there is a significant push by the leading vendors to show the value of a single business applications vendor. It could be that this is a response to the growing challenge from rapidly growing Indian service providers, which are increasingly able to take on processes like accounting, finance, tax filing and payroll as part of their BPO offering.

‘This gives service providers ownership of the general ledger. They can offer more standardisation around applications like SAP and Oracle and they can add knowledge-based services like analytics and Sarbanes-Oxley compliance. They increasingly understand their clients’ requirements and the industries in which they work, so they see an opportunity to enhance their services,’ Fersht observes.

For him, the emergence of Indian vendors is the real game-changer.

India’s appetite for BPO

Growth in India’s BPO market has matched its impressive economic progress, and leading service providers have become more significant players (see box, overleaf). A recent study suggests that revenues generated by India’s BPO companies could treble by 2012.

‘We know that in BPO companies are struggling with captives, and they see more sense in going to third parties. They need to combat attrition, and they rely on the skills of vendors to achieve that,’ notes Fersht.

Companies in India such as Genpact, Infosys and Wipro are among the world’s most highly rated outsourcing service providers, have invested heavily in new operations, and their centres are now spreading to the countries secondary cities.

Furthermore, the focus of many of India’s leading BPO providers is widening as they target larger deals and a range of value-added services.

‘Indian companies are developing their abilities to transform finance and accounting, HR and procurement processes. TCS [Tata Consultancy Services], for instance, is aggressively targeting payroll capabilities to develop new client opportunities. Indian service providers are keen to move up the value chain and they are moving into other knowledge-based services – for example legal services and investment research – which require more specialist skills.’

Tata Consultancy Services (TCS) has also made a move into market research. Media research firm Nielsen has a team of 1,100 people doing outsourced back office work in India. It is currently working with TCS on a ten-year, $1.2 billion deal for a portion of its worldwide IT and operations functions, which will involve finance and HR processes executed on a new BPO platform developed by TCS. TCS will bring Nielsen’s processes and systems onto a single platform, which will enable improvements in performance monitoring and reporting functions. Running on the platform will be end-to-end financial services for accounts receivable, accounts payable, billing, credit and collections, general accounting, and HR processes, including workforce administration, global reporting and payroll services.

This is proof that India’s top service providers have quickly created a presence in the HR outsourcing market, just as they are increasingly vying with global leaders for hybrid IT-BPO deals.

‘This is what happened in IT – Indian companies went after the big boys’ business. The big three Indian service providers are going for high value deals, too. And the smaller Indian companies are eager to get into BPO, so there is also likely to be a lot of merger activity,’ Fersht notes.

Competing on value, quality and scale, India’s BPO providers are preparing to take a seat at the top table, as trends that we have already seen in the IT outsourcing market play out in a similar way in BPO.

IT, particularly application outsourcing, is a red hot sector at the moment, where highly mature service providers are developing a more sophisticated model for service delivery. Best practices are starting to emerge, and they will be relevant for the BPO market, which at ten years old is a relative youngster. ‘BPO is on a similar path, though it is more complex. For one thing, vendors and clients need to work together more to improve governance. I sense a change will come from the senior IT people who know the value of outsourcing because they have been doing it for years,’ remarks Fersht.

The growing demand for BPO globally, from which Indian companies sense they can carve out a larger market share, seems to reflect a subtle yet powerful change in mindset among business leaders. In the boardroom, BPO is seen as one of many means to a single end – expanding the global reach of the business.

‘CEOs don’t see BPO so much as outsourcing, they now see it as part of globalisation. They are looking for regional coverage, as well as access to technology and skills. Outsourcing is just a tool to achieve that, the onus is on service providers to provide the tools that enable companies to change, transform and integrate globally,’ says Fersht. ‘We are also seeing that the people who manage global ERP deployments are business process experts, as opposed to IT people. They are the ones driving change. BPO is now coming as a result of IT outsourcing engagements.’

Build for the future

Fersht sees Indian companies such as Genpact as likely to pursue mid-market clients, which may be less sophisticated but have a need to rationalise costs, as they move up the value chain to target high-value deals and vie with the established BPO market leaders.

There has been a lot of movement among Indian service providers to combine services to round out their portfolios. They have been scaling up through partnerships, such as Genpact’s alliance with ICG Commerce, which will enable them to target combined finance and procurement deals. Genpact blazed a trail into F&A BPO, while ICGC has similarly won many blue-chip clients from larger competitors in the procurement space.

The drive to offer a broader portfolio of solutions is driven by the fact that many discussions on the topic of BPO now centre on the idea of bundling it together with IT outsourcing.

Service providers such as Capgemini, Infosys, TCS and Wipro have all responded to this trend, and HP’s acquisition of EDS is motivated by the same need to offer a wider range of services. All are trying to make sure they are scaling up and bundling services to compete with Accenture and IBM at the top end of the market.

Hybrid offerings, it seems, are the way forward. ‘The combination of IT and BPO is a big change because it increases scalability,’ Fersht remarks. ‘In the future we will increasingly see IT, HRO, FAO and BPO bundled together.’

Another key growth market is knowledge process outsourcing (KPO) - seen by some as the next phase in the development of BPO. It represents the transfer to third parties of processes with a higher value, and which demand skilled resources. Analytics, legal contracts, marketing, front-office finance and research are among the processes already starting to pass into the hands of external service providers.

In KPO, the trend is for short-term contracts, as buyers test the water, but the market is expected to grow quickly, giving providers below the top tier a further opportunity to move up the ladder by establishing a presence in a high-growth market. Indeed, Fersht is sure that Indian companies will attract much more sophisticated processes, notably legal process outsourcing (LPO) and complex research.

‘We are likely to see more things go there, like clinical trials. Pharmaceutical companies, for instance, also spend hundreds of millions of dollars every year on things like litigation and document filing, which could be outsourced,’ he says. There are already signs of the up-tick in LPO contracts with more US companies outsourcing legal work as a result of the credit crisis and India, with over 200 LPO companies, is where much of it is going. Much of the work is in the usual LPO context of bankruptcy filing and claims handling, but a growing proportion is legal analytics, litigation support and document drafting.

Fersht, however, reminds us that BPO and all its offshoots are still young markets, and a lot could change in the next few years. ‘India will make a big difference. The Indian economy is dependent on IT services, but we have to remember that the difference between the vision and the reality is still huge.’

The world’s top 20 outsourcing providers

1. Accenture
2. IBM
3. Infosys Technologies
4. Sodexo
5. Capgemini
6. Tata Consultancy Services
7. Wipro Technologies
8. Hewlett-Packard
9. Genpact
10. Tech Mahindra
11. HCL Technologies
12. EDS
13. ACS
14. CGI Group
15. HOV Services
16. Mastek
17. SPi
18. Colliers International
19. WNS Global Services
20. hiSoft Technology International

Source: International Association of Outsourcing Professionals (IAOP): 2008 Global Outsourcing 100