BPO: Revolutionising Service Sector

By

Neeta Lal
Research Associate, Finance
ICFAI National College
Hyderabad
 

An introduction to BPO:-

BPO is stands for Business Process Outsourcing and is "the delegation of an intensive business process to an outside service provider who owns administers and manages it according to a defined set of metrics". BPO is generally for back-end administrative functions that are necessary to run a business but are not a part of the core business.

Business Process Outsourcing is the transfer of direct managerial responsibility but not accountability to an unaffiliated, third party service provider who performs services previously delivered by internal staff and management.

Globalization, competitive markets and mergers and acquisitions are the primary stimuli for BPO.

BPO companies are now increasingly outsourcing their Finance and Accounting functions followed by Human Resource (HR) outsourcing. The evolution if IT services outsourcing in the Indian Banks started from the basic level of annual maintenance contracts (AMCs) around 10-12 years ago and from there the IT services outsourcing curve in the banking system and has grown mainly due to the business of catering towards services to foreign clients mainly based in USA and Europe. But with the recession setting the world over, the profitability margins have decreased tremendously, thus causing consolidation in the industry. Since a client out sources more than one service, it makes sound business sense to offshore it from a single concern. Thus the players in the industry are versatile, offering a gamut of services to their clients.

Evolution of BPO in India:-

India became a prominent destination for outsourcing in the services sector in 1990's.

Outsourcing to India started, which has responded to the changing market requirements by increasing the scale of operations and capable to handle complexity. BPO in India has grown rapidly as compared to software services as the advantages offered by the country (low cost and abundant talent pool) were well known and tested in IT outsourcing.

With the BPO industry of India entering into a phase of maturity, a change in the nature of opportunities and challenges is being witnessed.

BPO – a survival need in the financial services industry:-

BPO is one of the most important cost control weapons in the management armoury, says Raju Bhatnagar. BPO providers are able to bring powers in areas of re- engineering, process improvements as well as technologies, thereby eliminating unnecessary operating costs.

Financial service institutions generally seen as victims of historical thought process are witnessing cataclysmic changes. Everybody is on the lookout for improving their operations to become more efficient and focusing on customers by providing them with convenient, innovative and cutting edge services. But the sad part  is that any effort in this direction, directly increases pressure on bottom- line profitability. To compound the discomfiture, there is an exponential increase in competition, never and hitherto unknown players, entering the market and customers are becoming more mercenary and consequently less loyal.

The current global mantra to overcome this apparent impasse appears to be through the medium of Business Process Outsourcing (BPO).

In some respects, BPO can be viewed as am amalgamation of Business Process Re – engineering (the great management obsession of the nineties) and outsourcing. The intent is to enable an organization to access best practices for a set of business process. E.g accounting, customer management.etc by using a specialist provider who has acquired world class skills

Many companies, including a significant portion in the financial services sector, tried their hand at Business Process Re- engineering in the nineties. Only a few emerged successfully, having achieved the objectives they had set for themselves. Most found that their initiatives floundered mid-way, possibly because they either lacked unwavering commitment at the board / senior management level or the essential leading-edge technical skills were inadequate or more often did not have the sheer management energy to push through intensive process-improvement projects. However, BPO offers business improvement without tears or, at least, it can do so if a sensible approach is adopted.

The BPO space is likely to witness an explosive growth in the medium-term. Quantitatively, Gartner estimates that BPO business aggregated $208 billion in 1999 would grow to $543 billion by 2004. However, if contract manufacturing were to be excluded, since it is not relevant for an analysis of financial services, the consolidated volume in 1999 was $106 billion and is expected to grow at nearly 23% annually to approximately $301 billion over the same period.

At present, most of the customers (84%) for BPO are in North America and Europe. This share of the pie is likely to remain unchanged in the foreseeable future by 2004, 54% of BPO contracts will be in the US and 31% in Europe, roughly the same proportion as today. These statistics, however, do not imply that the BPO work will actually be performed in the US and Europe. Current trends make it evident that one is likely to see a strong movement in BPO outsourcing Eastwards, notably to India, over the next couple of years. Estimates indicate that by 2004, although customers based in Asia / Pacific using BPO will account for less than 5% of global revenues, BPO service providers in the region will be performing a much higher proportion of the work.

BPO scenario in India: -

Information technology is already tearing down barriers to remote working before the arrival of the Internet. This has only served to accelerate the pace, especially as more and more applications become Web-enabled. As a result, today there are few real barriers to accessing the full potential of a world-labour market. And that is important at a time when many financial services companies especially in the city of London are experiencing skill shortages that act as a drag on growth

Small wonder, then, that more firms are unbundling processes and outsourcing them to areas and locations where skills are not in short supply. In fact, outsourcing work to a remote location in another part of the world is now certainly a realistic option for any labour-intensive back-office operation. During the nineties Ireland became the outsourcing "capital" of the world. However, this leadership did not last very long. Other countries like Israel, Australia, UK, Philippines and India have emerged on the scene as credible outsourcing service providers. Among these countries, India is beginning to emerge as a front-runner and is likely to maintain this position in the medium term.

Economists have already noted and commented upon the silent revolution that is taking place in the Indian society the emergence of a well-educated, English-speaking workforce, tuned into new technology. This is reshaping the demographics of India and by all indications the Indian "middle class" will outnumber the population of Europe by the end of the decade. In a climate where leading-edge financial services companies are looking to drive down their costs by as much as 10% a year, India offers a real chance to square that lower-costs-better-service circle and effectively reconcile the contradictions mentioned earlier via BPO.

BPO in Financial Service Sector:-

Global Scenario:-

Financial Institutions Will Spend $4 Billion on Payments BPO Services by 2010

According to IDC and Financial Insights

According to a recently released IDC and Financial Insights study, financial institutions are increasingly looking to third parties to manage entire payment functions, rather than the process alone.

IDC estimates that U.S. spending on payments BPO services reached $3.3 billion in 2005 and will grow at a five-year compound annual growth rate (CAGR) of 4.2% to reach $4 billion by 2010. This increasing trend of payments outsourcing presents new opportunities and challenges for financial institutions and payments processing vendors.

"Financial services institutions have been pioneering adopters of the BPO model. Payments outsourcing, an increasingly visible and gaining segment of the global business process outsourcing market, is the latest reflection of this industry's comfort with outsourced business processes," said Shruti Yadav, analyst, BPO Services at IDC. "IDC observes healthy growth in deal activity and market spending accompanied by a shift from back-office to strategic objectives and deal drivers." According to Aaron McPherson, co-author of the report and research director for Payments at Financial Insights, an IDC Company, "The accelerating rate of change in the payments industry, particularly in checks and cards, has many financial institutions looking at outsourcing as a way to manage their technology and market risk. While the largest institutions have the scale to actually in source their payment processing, mid-tier institutions are going to want to band together to achieve similar economies of scale. This may take the form of payment utilities, which manage a particular payment method for multiple institutions."

The study reveals that while cost and efficiency considerations remain central to payments outsourcing decisions, customers are increasingly looking to impact strategic areas such as customer service, compliance, process integration, and competitiveness.

IDC and Financial Insights highlight the following key trends in the payments BPO market in 2006:

In sourcing among larger banks, as banks continue to move from large-scale contracts to more targeted initiatives

Small and medium-sized banks will drive outsourcing demand as they embrace outsourcing as a way to grow and compete with larger banks

International expansion and global integration as banks focus on business development and emerging growth opportunities

The emerging role of offshore, which is already pervading virtually all segments of the larger business outsourcing market.

Indian Scenario:-

In line with the global trend, the services sector in India is growing rapidly and the share of services in India's GDP increased to 54.2% in 2000-01 from 51.5% in 1998-99. Business Process Outsourcing (BPO) and IT services', will contribute seven per cent to India's gross domestic product (GDP) by 2008. During the 1990s the Indian service sector grew at more than 17 percent per annum compared to the world average growth rate of 5.6%. Most of the rapid growth has been in the information technology and business process outsourcing services. However the telecommunications, financial sector and the tourism & travel industry have also shown an encouraging growth curve. Considering that services accounted for 5 per cent of the world trade at USD 1.54 trillion (in 2002), the services sector play an increasingly significant role in India's economic development. While India's share in global merchandise trade is around 0.8 per cent, the share of Indian services exports is slightly higher at 1.3 per cent of the total world trade in services. India shall also receive a large share of the off-shore financial services estimated to be about $ 350 billion (2010). The WTO statistics show that India has emerged as one of the dynamic suppliers of services in the world and is ranked 21stin export of services and is 27 the in service imports. The increasing specialization of India's export of services in certain select sub sectors also reflects the changing composition of its exports. Between 1995 and 2002, the share of software exports increased from 19 to 34 percent and in dollar terms the sector has expanded from USD 1.8 billion (1998) to over USD 7 billion (2002) i.e. average annual rate of more than 45 percent. On the other hand the relative share of travel and transportation services fell from 31 and 19 percent to 14 and 10 percent respectively. However transportation and travel services constitute around 30% each of the total services imports in the US, EU and Japan and others, including business and financial services, constitute some 40%. There is thus great potential for export of these services by India.

Opportunities and Challenges to Indian Services:-

It is widely believed that efficient services not only provide a direct benefit to consumers but also influence the overall economic performance. A positive correlation between higher FDI flows, higher growth in services and exports also cannot be negated. Research studies indicate that foreign investment in China accounts for 45% of its export in goods and 68% of the trade between mainland China and Hong Kong is associated to the FDI related ventures. However the inflow of foreign direct investment (FDI) in India has not been uniform across all service sectors. The three fastest growing service sectors namely, Business services (Financial and Telecom), Professional services (IT related) and the Tourism industry have been receiving higher FDI inflows, have witnessed faster growth and have created larger employment opportunities for the domestic economy. However certain sectors like retail distribution, legal services, air transport, real estate, postal services etc. have not been subject to domestic and foreign competition and have therefore not grown at a pace similar to others. India's 10^th Plan report suggests that the FDI inflows need to increase from the present level of 1 percent of GDP to 2.5 percent of GDP so as to achieve the overall growth rate of 8 percent in the 2002-07 Plan periods. Notwithstanding the slow FDI inflows, access to growing external markets for services and gradual liberalization of the domestic economy has played a crucial role in creating a dynamic services sector in India. Presence of a highly skilled technical manpower, a relative lower wage structure (according to NASSCOM the wages of Indian software professional are 15% of the US wages), a large English speaking population and a compatible time zone with the US and EU has also helped in building a competitive service edge and achieving a larger share of the Professional services sub sector. The Indian Export Import Policy has also included all the 161 trade able services (listed under the GATS agreement), where payment is received in free foreign exchange, under the definition of 'Services' and extended all the benefits available to the merchandise sector to this sector also. In addition some other benefits like exemption on payment of service tax on exportable services have also been extended. However in order to consolidate its position in the Services sector, India must attempt to address some of the issues (highlighted below) which are impacting its growth potential.

Major BPO Players in the Financial Sector:-

1. Carretek, LLC.
2. GTL Limited.
3. HCL Technologies Limited.
4. WNS Global Services Pvt. Ltd.

The philosophy behind BPO is specific. "DO what you do best and leave everything else to business process outsourcers". BPO saves precious management time and resources and allows focus while building upon core competencies. Using business process outsourcing helps financial services firms to refocus on their core competencies. This, in turn, provides managements with an environment where among others, cost reduction and improvement in service quality can happen simultaneously.
 

Neeta Lal
Research Associate, Finance
ICFAI National College
Hyderabad
 

Source: E-mail July 20, 2006

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