India is at the forefront of the rapidly evolving Business Process Offshoring (BPO1) market and is well established as a ‘destination of choice’. Having grown manifold in size and matured in terms of service delivery capability and footprint over the past decade, the Indian BPO industry is now at an inflexion point – and faces a unique opportunity to enhance its role as a full-service, value-adding partner. There is significant headroom in the addressable BPO opportunity for buyers and providers, and there are sizeable untapped opportunities across a wide spectrum of segments. Also, Indian BPO industry is favorably positioned to benefit from its established delivery capabilities, which bear a key influence on buyers’ decision to expand their global sourcing exposure. Over the next five years, the right choices by stakeholders of the Indian BPO industry could effect a fivefold growth. The aspired target is aggressive, but it is achievable, and will bring huge payoffs to India’s economy, employment and role in the global marketplace.
The Indian BPO industry’s growth and increasing maturity is reflected across multiple dimensions. In just over a decade, the industry has grown to reach nearly US$ 11 billion in export revenues, employs more than 700,000 people, and accounts for more than 35 percent of the worldwide BPO market. Growing at more than 35 percent over the past three years, BPO is the fastest growing segment of the overall offshore market, and is currently estimated at US$ 26-29 billion. This growth has been driven by 1) accelerated adoption by buyers of different sizes, from across industry verticals and geographies, and 2) rapidly evolving supply-side maturity across service segments. This is reflected in widening service portfolio, increased scope of services, greater penetration across vertical and geographic markets served, evolution of business and engagement models, and development of global delivery capabilities by the Indian BPO industry.
Future market opportunity
The achievements to date of Indian BPO industry are impressive. However, there is significant headroom to tap the addressable market opportunity from exports and from serving the domestic market. A bottom-up analysis shows a total export BPO market opportunity of US$ 220-280 billion by 2012. The domestic Business Process Outsourcing market provides an additional US$ 15-20 billion opportunity for the industry by 2012. The Banking & Capital Markets, Insurance and Manufacturing verticals together constitute almost 70 percent (US$ 160-190 billion) of the total US$ 220-280 billion export market opportunity over the next five years. However, emerging verticals such as Technology, Telecom and Travel & Transportation verticals also provide opportunities in excess US$ 10 billion by 2012.
Over the next five years, vertical-specific BPO services provide larger market opportunity (60 percent; US$ 145-175 billion) compared to horizontal BPO services. Horizontal BPO services, which currently account for a greater share of services offshored to India, also provide a significant addressable market opportunity — a total of US$ 75-105 billion spread across traditionally mature areas like CIS and F&A as well as emerging segments like HR, Knowledge Services, and Procurement Services.
There is significant BPO opportunity for buyers and providers across geographic markets. While North America is expected to contribute roughly 70 percent of the total market opportunity for the Indian BPO industry, both providers and buyers should increasingly look at exploiting opportunities in the UK, Continental Europe and Asia Pacific. English-language based business processes from these geographies represent a huge market opportunity of US$ 45-75 billion by 2012. Furthermore, domestic Business Process Outsourcing market (in verticals such as, Banking, Retail, Insurance, Media, Telecom, and Government) provides an additional US$ 15-20 billion opportunity for the industry.
Considerations for future growth
Efforts being undertaken by the Indian BPO industry will enable it to grow rapidly in the future. Continuing on current growth momentum could help the Indian BPO industry reach about US$ 30 billion in export revenues by 2012. However, comparing past growth trends with the significant future market opportunity, the Indian BPO industry can set itself a stretch target of US$ 50 billion (that is, approximately five times its present size) in export revenues by 2012. A fivefold growth in the Indian BPO market will add nearly 2.5 percent directly to India’s GDP from exports earnings and provide direct employment to about 2 million people. This will also spur growth in smaller Tier - 2/3 cities to enable the sixfold growth in the number of delivery centers that will be required to support the stretch target for the industry. Also, it is important to note that secondary impact of the Indian BPO industry’s growth on employment in related service industries and consumer spending is likely to be multiple times as compared to the direct impact.
In order to capture a significant part of the available opportunity, various stakeholders will need to manage multiple internal and external considerations: 1) supply-side constraints such as talent and infrastructure, 2) emerging competition from other offshore destinations, 3) threat to sustainability of Indian BPO industry’s cost advantage and economic value proposition, and 4) evolving buyer expectations that require up-shifting of providers’ value propositions. Further, fulfilling these expectations will require providers to make specific choices and trade-offs in terms of capabilities and investments.
The future growth of the Indian BPO industry will put significant constraints on the supply side. From a people perspective, capturing a fivefold growth will put pressure on talent availability at all levels. While the number of people required to support impending growth are available, unless the current focus on ‘ready-to-eat’ talent is altered, the future growth may lead to a shortage of 0.8-1.2 million entry-level graduates by 2012. This shortage may become further accentuated on account of competition for resources from domestic industries such as Retail, Insurance, Telecom, and Banking, as well as from additional requirements to support growth in domestic BPO business. Middle-management personnel with domain experience, largely sourced from the domestic industry, will also be in short supply. Sector-specific skill shortages (specialized skill categories for vertical-specific processes such as actuaries for Insurance BPO) are also likely to emerge. Additionally, a significant part of the fresh, entry-level pool is difficult to access, due to geographic distribution of employable talent. Tier - 2/3 cities in India will have to meet approximately 50 percent of the additional talent requirements. This will necessitate creation of physical and social infrastructure in these cities, which needs to be facilitated by various stakeholders.
While India is best equipped to capitalize on the available opportunities, these opportunities are not lost to other offshore destinations. A number of offshore / nearshore BPO destinations are emerging as viable options for BPO delivery centers (e.g., Philippines, Eastern Europe, Latin America, and China), and could pose a threat to India’s continued dominance of the space. These locations also offer lower cost than source geographies, provide sizeable pools of talent, and offer valuable leverage points to buyers. Further, these competing destinations are continuing to reshape their fiscal and regulatory incentive structures to attract buyers as well as providers of BPO services.
The economic model behind India’s BPO industry is constantly changing. Historically, providers have been able to tap into relative wage differentials across geographies to build a strong value proposition for offshoring. While cost-arbitrage continues to be a significant driver of global sourcing for most buyers, the associated benefits will diminish over time with changes in underlying factors. Adverse currency movements and wage inflation in India are putting pressure on operating margins of providers. Compared to the US dollar, the Indian currency appreciated significantly since 2002 — a trend that is likely to continue in the near term and even in the medium to long-term. Inflationary pressures on operating cost are unlikely to ease, due to resource scarcity and overall economic growth. Scenarios on potential momentum indicate that cost-arbitrage can diminish in the medium-term. As a result, reliance on a cost-savings-driven value proposition alone will not be in the best long-term interest of the Indian BPO industry.
Given this environment, two broad priorities emerge for the industry: a) optimize the current environment in order to continue the cost-arbitrage-led proposition, and b) innovate to continue building new, higher-value propositions for buyers.
Evolving buyer expectations also drive the necessity to deliver additional value beyond labour arbitrage. With increasing maturity, buyers are looking for impact beyond costs and efficiency. Mature buyers are adopting optimization and transformation-focused objectives. Evolving buyer expectations are also reflected in buyers’ third-party vendor selection criteria — in addition to cost- and quality-related criteria, process expertise, industry expertise, and strategic impact today figure as key vendor selection criteria for mature buyers. Similarly, captives are also facing growing expectations from their parent companies, with more than 70 percent of parent companies expecting captive operations to deliver value beyond cost savings.
Fulfilling these expectations will require that providers make specific choices and trade-offs in terms of capabilities and investments. Providers will need to develop value-add approaches in terms of the type of work (move from providing simple rules-based work to complex judgment-based work), type of capability (develop standards and centers of excellence) and accountability for outcome (move from ownership of task to ownership of process and business outcome). There is early evidence of providers stepping-up to deliver such initiatives and value-add results to buyers.
Successful outcomes will be reflected in terms of broad adoption of future-state provider models and changes in the way buyers pursue global sourcing opportunities. Increasingly, buyers will need to approach global sourcing issues with a transformational mindset while deciding on a) sourcing models, b) engagement and governance approaches with providers, and c) developing output-based pricing / performance metrics.
As providers step up, arbitrage-centric, sub-scale operations will come under pressure. Most players will need to invest in highly specialized offerings or diversify to build scale. Industry dynamics suggest four kinds of end-state models for third-party vendors:
1. Global leader – large integrated, full-service BPO player offering end-to-end service delivery in multiple segments (across multiple key verticals and most horizontals). These vendors will have global delivery capabilities including a fairly large onshore delivery presence and will deliver true transformational services to large and mid-size buyers, and will act as value-adding innovation partners.
2. BPO specialist - provide best-in-class BPO services for priority verticals and horizontals. These vendors will have distinctive offerings based on domain expertise and superior transition capabilities. They will service transformation-focused as well as optimization-focused buyers that are willing to offshore core as well as non-core processes.
3. Diversified BPO player - provider of large number of undifferentiated BPO services for priority verticals and horizontals. These vendors will provide end-to-end services for a small number of key domains and be ‘strategically opportunistic’ in service delivery across other domains.
4. Segment specialist - provide end-to-end services for 1-2 key domains (verticals or horizontals). These vendors will develop as large specialized players with significant global expertise in select domains and will service specific core skills not addressed by other providers.
