I was recently asked by a journalist about what I thought stood in the way of the Indian BPO industry and greater market share and what would it take to create a great BPO company. It was a good question and my first reaction was that – is this not what every CEO of every BPO company spends days and nights agonizing about and how do you really expect me to answer this in a single sentence ?
But as with all these things, the truth is both a lot simpler and a lot more complicated. It is a lot simpler because in reality there is indeed a quick answer “ the perception of risk”. It is a lot more complicated because in that one phrase – “perception of risk” lie a whole myriad of issues that go towards the composite feeling of comfort in the mind of a BPO customer, which is a precondition to greater market share for the Indian BPO industry.
Perception of Risk – The Demand Side of the Equation
Lets start with the BPO buyer – not the company, but the individual spearheading the offshoring decision. He (or she) is a very senior corporate executive, who has earned his corporate stripes over many years and is now leading his company (a reluctant and apprehensive collective body) into the glorious world of offshore processing. More often than not, he is risking his own personal reputation and future career growth on making the offshoring project work. His work colleagues (process owners) are not on his side. They intellectually recognise the need to save costs but viscerally hate the thought of losing control to an unknown entity in India and potentially jeopardising their own jobs. This is not a situation that is set up for success. From a personal perspective of the key people who will take the outsourcing decision, this is a high risk career move.
There are major risks in every aspect of offshoring and these questions abound in every buyer’s mind. Will this be a good partnership? Will this REALLY reduce costs? What if the reality of offshoring is different from the sales pitch that I am getting? Will the process run at same quality in India? How do I convince user groups within the company to move work offshore? Its all very well for Citigroup and GE but we are a very different company – will it work for us? Will our data and networks remain secure ? Can I really trust people I don’t control to do a good job for me?
Despite all these questions, we see more and more people flying down to India to look at offshoring opportunities The fact is that the BPO buyers recognise the risks, recognise the internal battles that will follow but also recognise the larger corporate need to restructure their companies to be more competitive in a changing world. In short, they recognise that doing nothing is not an option. Which is why they press ahead, not regardless of risk but with a mindset of managing it.
If this is the buyer mindset in BPO, then the seller’s main focus HAS to be to convince the buyer that the risk associated with offshoring can be managed. At the end of it all, there is only one thing that will help make the deal and that is the supplier’s ability to mitigate the perception of risk in the mind of the customer.
Risk – The Supply Side
So if risk is all that important to a buyer, how does a supplier define, manage and mitigate it? This is where the complexity begins. The perception of risk is really a composite judgement – it include financial risk (will this company be around 10 years from now?), operational risk (will the processes work as well in India?), knowledge risk (will we lose our corporate experience and abilities related to this process?), information security risk (will our customer data be secure, will privacy standards be adhered to?), regulatory risk (will we be able to demonstrate compliance with all requirements?), people risk (what if trained people leave the engagement?) …. and so on. The subject of risk management is hardly a simple one.
Most BPO companies understand this quite well. They deal with this in a variety of ways – the investment in infrastructure, quality of people, financial strength of the company, training resources and a hundred other things go towards creating the final package that the customer sees. But there are finite limits to the extent one company can do this in a short period of time. Many aspects (size, experience, quality) can take years to achieve.
Risk – The Driver for Industry Consolidation
So if an individual BPO company cannot change its ability to mitigate the perception of risk in the short run by actions organic to itself, what does it do to deal with this life threatening problem ? The answer is somewhat counter intuitive – and if you reflect upon it for a moment, it is evident that this is precisely the logic that is acting as a powerful driver for consolidation in the Indian BPO industry today. Let me explain.
Firstly, BPO by its very nature, is a pretty capital intensive business requiring significant investment in infrastructure, IT systems, telecom and people. This means that in order for the investment to generate sufficient returns, economic size and scale of operations are very important.
Secondly, as we have discussed earlier, from a risk mitigation perspective you need very significant investment to be able to address the risk issues effectively. Do we really expect customers to feel as comfortable with a 400 seater facility as with a 65 acre campus ? Do we expect a customer to place his entire back office with a company that is funded only for the next 6 months or with one with much more substantial cash reserves ? These questions may sound rhetorical, but this is indeed reality.
Both these factors – the need for scale on the supply side and the need to mitigate risk on the demand side naturally play to the advantages of size. Without size and scale, you cannot address the BPO buyer’s perception of risk and if you cannot do that, you jeopardise your entire business. This is again, something that is well understood by most companies that focus on true BPO and not just contact centre work.
So if you cannot achieve scale organically (or like BPO subsidiaries of IT companies, have the ability to leverage the parent), then the only way is to either find some other company to buy or get bought out by someone else in order to be a part of something larger. This is the only way to address the Risk issue in an inorganic way and this is exactly why Spectramind sold out to WIPRO, Daksh to IBM, Transworks to the Birla group, Customer Asset and First Ring both to ICICI Onesource, Tracmail merged with Webvan … all of them in the recent 18 month period.
Is this good news all around ? Well, mostly. With greater industry consolidation, the BPO clients will be able to deal with more solid companies who will emphasise value and long term relationships rather than cut price at the drop of a hat; the large BPO companies will begin to carve out their own niches and cause the Indian BPO industry to mature much more rapidly than before; the smaller BPO companies will have an opportunity to be bought over by larger names; people working in the industry will see a better career path with greater continuity and so on. The only kind of players who may not come out of this alive are the very small players who are simply not worth buying (for example, it is cheaper and simpler to build a 50-100 person business from scratch than to buy an existing one).
Conclusion
The BPO business is all about managing risk – the suppliers need to be good at this and the buyers need to feel comfortable with the supplier’s ability to do it. Inability to manage this perception of risk in the mind of the customer is a fatal problem for a BPO supplier. This realisation is driving consolidation in the industry and while this is a positive trend it underscores the fact that BPO is a slow, deliberate and long term business. It needs big players with deep pockets and while there may be small companies around today, in the medium term there is no such thing as a small BPO company.
The industry would do well to pay due heed to this. BPO is not a business for quick bucks. It is as different from the Internet boom as can be, despite its growth rates. We would all serve the industry better by taking the hype out of it and getting back to the basics and building the one thing that will create long term customer relationships – Trust. Perhaps then we will progress to BPO being a five letter word !
This article appeared in two parts in Economic Times, June 4 and 11, 2004 under the title BPO is a four letter word – Parts I and II
