BPO units of IT firms growing twice as fast as standalone ones
For the first time in many years, the business process outsourcing (BPO)
units of top Indian software companies such as Tata Consultancy
Services Ltd (TCS) have grown revenue twice as fast as companies such as
Genpact Ltd and WNS (Holdings) Ltd that only provide back-office
services, an indication that clients want bundled technology services
that only the larger firms can provide.
Back-office units of TCS, Infosys Ltd and other top-tier technology firms are growing revenues twice as fast as Genpact, EXL and WNS. In the three months ended September, TCS’s BPO revenues grew 27% from a year earlier, while Infosys BPO’s revenues rose 19%, compared with Genpact’s 8.9% growth, EXL’s 9% and WNS’s 8.8%.
The Indian BPO industry is currently estimated to be worth well over $15 billion (around ` 93,000 crore), according to industry lobby Nasscom. Before the 2008 global financial crisis, BPOs posted strong double-digit growth on a par with and sometimes even marginally faster than the larger software exporters.
They are snatching market share from BPOs because of their ability to offer a variety of additional services such as systems integration, industry experts say.
“Currently, the most pressing difference is likely to be the scope of a vendor’s BPO portfolio, that is, if they have invested in industries that are still strongly using BPO,” said Cathy Tornbohm, research vice-president at Gartner Inc., a technology researcher.
Lower manpower cost alone can no longer be a critical differentiator for BPO firms.
“The value proposition for most of them (BPOs) was just labour arbitrage,” said Sudin Apte, founder of outsourcing advisory firm Offshore Insights. “Whereas most IT services firms had built platforms that gave them the ability to deliver technology upgrades and process optimization.”
BPO services mostly include tasks such as voice-based customer care, finance and accounting, including insurance claims and basic human resource functions.
The success of these companies prompted larger firms to establish their own operations. For the better part of the last decade, BPO firms recorded faster growth. However, in the past five years, top-tier IT companies caught up and eventually overtook the BPO-only concerns.
“Over the last 4-5 years, large IT firms have invested in domain competencies, so their ability to offer transformational process services is also very high,” Apte said. “Also, BPOs have very limited SI (system integration) capabilities. Tier-1 IT services firms score better on that.”
Genpact and EXL declined comment on their growth strategies.
“For BPOs to grow now, they have to ensure that the value delivered to customer is beyond just transaction processing and involves transformation,” said Abid Ali Neemuchwala, global head of BPO services at TCS.
WNS did not comment on growth rates of larger IT firms but said it expected to see strong expansion in the future.
“Our pipeline of deals has never been better and is larger, more complex and more global in nature than we have ever seen, and is very broad-based across all our key verticals,” chief executive Keshav Murugesh said in an emailed reply.
Back-office units of TCS, Infosys Ltd and other top-tier technology firms are growing revenues twice as fast as Genpact, EXL and WNS. In the three months ended September, TCS’s BPO revenues grew 27% from a year earlier, while Infosys BPO’s revenues rose 19%, compared with Genpact’s 8.9% growth, EXL’s 9% and WNS’s 8.8%.
The Indian BPO industry is currently estimated to be worth well over $15 billion (around ` 93,000 crore), according to industry lobby Nasscom. Before the 2008 global financial crisis, BPOs posted strong double-digit growth on a par with and sometimes even marginally faster than the larger software exporters.
They are snatching market share from BPOs because of their ability to offer a variety of additional services such as systems integration, industry experts say.
“Currently, the most pressing difference is likely to be the scope of a vendor’s BPO portfolio, that is, if they have invested in industries that are still strongly using BPO,” said Cathy Tornbohm, research vice-president at Gartner Inc., a technology researcher.
Lower manpower cost alone can no longer be a critical differentiator for BPO firms.
“The value proposition for most of them (BPOs) was just labour arbitrage,” said Sudin Apte, founder of outsourcing advisory firm Offshore Insights. “Whereas most IT services firms had built platforms that gave them the ability to deliver technology upgrades and process optimization.”
BPO services mostly include tasks such as voice-based customer care, finance and accounting, including insurance claims and basic human resource functions.
The success of these companies prompted larger firms to establish their own operations. For the better part of the last decade, BPO firms recorded faster growth. However, in the past five years, top-tier IT companies caught up and eventually overtook the BPO-only concerns.
“Over the last 4-5 years, large IT firms have invested in domain competencies, so their ability to offer transformational process services is also very high,” Apte said. “Also, BPOs have very limited SI (system integration) capabilities. Tier-1 IT services firms score better on that.”
Genpact and EXL declined comment on their growth strategies.
“For BPOs to grow now, they have to ensure that the value delivered to customer is beyond just transaction processing and involves transformation,” said Abid Ali Neemuchwala, global head of BPO services at TCS.
WNS did not comment on growth rates of larger IT firms but said it expected to see strong expansion in the future.
“Our pipeline of deals has never been better and is larger, more complex and more global in nature than we have ever seen, and is very broad-based across all our key verticals,” chief executive Keshav Murugesh said in an emailed reply.
The future success and survival of pure-play BPO firms will
largely depend on how they invest in increasing service offerings,
experts said.
“We expect transactions for offshore players in this space will be opportunistic and more of an integrated nature (IT+BPO) than pure-play,” analysts Pankaj Kapoor and Abhishek Kumar of Standard Chartered Equity Research said in a note to clients in September.
Timely acquisitions also helped larger firms such as Infosys and TCS, which notably bought the captive BPO arm of Citigroup Inc. for $505 million in October 2008 in what was one of the largest acquisitions in the Indian IT sector. The deal also opened the way for TCS to strike up a 10-year, $2.5 billion outsourcing contract with Citigroup, which counted as one of its top three customers.
“If you look at TCS, it is entirely Citi-driven,” said Sandeep Muthangi, vice-president at IIFL Capital, a brokerage. “Acquisitions have had a lot to do with the recent success of top-tier IT firms.”
Significant market
The potential for growth in the relatively underpenetrated BPO market remains attractive, with larger firms looking for newer ways to increase revenue productivity through automation technology to take care of low-end IT jobs. Companies such as Infosys and Cognizant Technology Solutions Corp. have already signed revenue-sharing agreements with US-based automation firm IPsoft Inc.
At stake is a market over $20 billion for pure-play BPO firms and top-tier IT companies, according to the September report by Standard Chartered Equity Research.
TCS chief executive N. Chandrasekaran and US-based Cognizant’s president Gordon Coburn have indicated in recent interviews to Mint that BPO will drive significant growth for both firms.
“From a service line perspective, BPO, infrastructure and consulting now are critical mass, so we can participate in much larger deals which creates substantial growth opportunities,” Coburn said in an interview last week.
In September, TCS set up a new all-women back-office operation in Saudi Arabia and said it sees a multi-billion dollar opportunity in West Asia.
Standard Chartered estimates the BPO deal market to be worth some $20 billion in the five years to 2018.
To be sure, pure-play BPO firms are reporting high singledigit growth rates. But by not being able to bundle other technology services with their existing offerings, these companies stand to lose out on large outsourcing deals from clients who are increasingly structuring deals that include all services.
“Many large customers are in the process of building out their captives and moving them up the value chain,” said Peter Schumacher, founder of Germany-based Value Leadership Group that advises companies on their Europe strategy. “This trend may be cutting deeper into the business of some of the specialized BPO players.”
To ensure survival, the likes of Genpact, EXL and WNS will have to invest in newer capabilities and make even make strategic acquisitions.
“IT and BPO will have to go together,” IIFL’s Muthangi said. “Whoever has developed platforms for different segments will have a better chance.”
ALOK KUMAR
PGDM 3rd sem
“We expect transactions for offshore players in this space will be opportunistic and more of an integrated nature (IT+BPO) than pure-play,” analysts Pankaj Kapoor and Abhishek Kumar of Standard Chartered Equity Research said in a note to clients in September.
Timely acquisitions also helped larger firms such as Infosys and TCS, which notably bought the captive BPO arm of Citigroup Inc. for $505 million in October 2008 in what was one of the largest acquisitions in the Indian IT sector. The deal also opened the way for TCS to strike up a 10-year, $2.5 billion outsourcing contract with Citigroup, which counted as one of its top three customers.
“If you look at TCS, it is entirely Citi-driven,” said Sandeep Muthangi, vice-president at IIFL Capital, a brokerage. “Acquisitions have had a lot to do with the recent success of top-tier IT firms.”
Significant market
The potential for growth in the relatively underpenetrated BPO market remains attractive, with larger firms looking for newer ways to increase revenue productivity through automation technology to take care of low-end IT jobs. Companies such as Infosys and Cognizant Technology Solutions Corp. have already signed revenue-sharing agreements with US-based automation firm IPsoft Inc.
At stake is a market over $20 billion for pure-play BPO firms and top-tier IT companies, according to the September report by Standard Chartered Equity Research.
TCS chief executive N. Chandrasekaran and US-based Cognizant’s president Gordon Coburn have indicated in recent interviews to Mint that BPO will drive significant growth for both firms.
“From a service line perspective, BPO, infrastructure and consulting now are critical mass, so we can participate in much larger deals which creates substantial growth opportunities,” Coburn said in an interview last week.
In September, TCS set up a new all-women back-office operation in Saudi Arabia and said it sees a multi-billion dollar opportunity in West Asia.
Standard Chartered estimates the BPO deal market to be worth some $20 billion in the five years to 2018.
To be sure, pure-play BPO firms are reporting high singledigit growth rates. But by not being able to bundle other technology services with their existing offerings, these companies stand to lose out on large outsourcing deals from clients who are increasingly structuring deals that include all services.
“Many large customers are in the process of building out their captives and moving them up the value chain,” said Peter Schumacher, founder of Germany-based Value Leadership Group that advises companies on their Europe strategy. “This trend may be cutting deeper into the business of some of the specialized BPO players.”
To ensure survival, the likes of Genpact, EXL and WNS will have to invest in newer capabilities and make even make strategic acquisitions.
“IT and BPO will have to go together,” IIFL’s Muthangi said. “Whoever has developed platforms for different segments will have a better chance.”
ALOK KUMAR
PGDM 3rd sem
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