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TECH TALK: India’s Software Industry: The Next New Thing

February 14th, 2002 · No Comments

The biggest set of opportunities seen by software companies, venture capitalists and entrepreneurs is in the area of BPO – Business Process Outsourcing (the less glamourous phrase for this being IT-enabled services). The same outsourcing concepts which have worked with software are now being extended to other business processes – from call centre functions like answering phones and emails to accounting and HR processing. Why pay double the money hiring people locally (in the US, for example) when people in India can do they at less than half the cost – so goes the logic. The last two years has seen many startups in the BPO/ITES space. The software companies too are expanding their range of activities – after all, they have the advantage of the client base and execution skills. BPO is the Next Big Thing in India.

Elaborates a recent report on BPO by Birla Sun Life Securities:

BPO refers to the delegation of a company’s IT intensive business processes to an outside agency to help increase value. The external vendor, combining his technology skill sets and domain expertise, adds new dimensions to the process to attain better efficiency and cost management.

The growing tendency amongst organizations to manage costs and focus on core competency (read: revenue generating activity) is leading them to outsource processes such as HR, finance and accounting, logistics, administration, sales and planning. Within broad areas lie certain niche pockets like risk management, tax planning and US GAAP accounting.

The key drivers for growth in BPO shall be positioning by the external service providers to portray themselves as partners in their clients’ fortunes and not just entities raising bills.

Take a look at some of the recent activities on the BPO front:

  • Infosys has added on its website BPO to the list of services that it will provide. (Business World)
  • A few months ago, Wipro picked up a 17% stake for USD 10 million in Spectramind, which is a third-party outsourcing firm.
  • HCL Technologies has invested USD 15 million in its call centre subsidiary (HCL E Serve) and plans to invest up to USD 40 million in the next two years. It also announced the formation of a 90:10 JV with British Telecom to run a 400-seat call centre in Belfast. (Business World, Business Today)
  • WestBridge Capital led a USD 15 million investment round for First Ring a few months ago.

Business Today (November 25, 2001) explains the lucrative economics. (As a comparison, software companies charge about USD 25-30 per hour for offshore development and about USD 55-60 for onsite development).

The typical Indian call centre charges customers USD 8-12 an hour (per seat) for providing email services, USD 15-18 for real-time chat, USD 25-35 for voice-based services, and above USD 35 for technical help. The last includes value-added BPO activities such as processing insurance claims, mining customer databases for information and maintaining books of account. Operating margins vary from as less as 15% for low-end email contact centres to 60% for BPO-centres. Ergo, the only way a company wanting to succeed at the low-end of the business can do so is by building up its volumes.

Therein lies the catch; it takes between USD 16,000-20,000 per seat to put up a call centre focused on the international market. That works out to around USD 2 million for a 100-seater, and that amount doesn’t include the operational costs.

Not a game for companies with small pockets, anymore! Expect to read more of BPO activities in the coming months. Says Phaneesh Murthy, Infosys’ director and head of sales and marketing, “BPO will be the industry of this decade as IT services was of the nineties.”

Tags: Tech Talk

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