MS 403

Case Study 2

Dhruv Chokshi, Jainil Parekh

VIABILITY OF CALL-CENTER/BPO BUSINESSES IN INDIA

Current status: At present 80% of out-sourced call centers of US companies are in India. The primary reasons are i) US labor cost is higher than in India and ii) Indians can communicate in English with US customers. Nevertheless, it has not been established that i) outsourced call center service is better, ii) there are not enough unemployed and capable people in US to provide such service and iii) other countries may be equally suitable for call center outsourcing service. Therefore, there are ongoing re-evaluations by US companies whether to continue to use outsourced Indian call centers. In fact these jobs are more or less routine customer service or back-end clerical tasks. Cost advantage time dependent phenomenon: Please use the following cost assumptions to compute possible cost convergence. It is also assumed that productivity (output/person-year) due to differences in culture, accent, and tax/accounting issues is small but not negligible and service quality is identical. Item Wages (Rs/yr) Inflation (%) Wages increase (%/yr) $/Rs Exchange rate change (%/yr) Productivity difference USA 1.500,000 2% 4% 2% 10% India 500,000 8% 12% -2% -10%

Evaluation of starting a Call-center/BPO company as a service provider: For the last 30 years India has had an outstanding track-record of setting up companies that have excelled in this field and has established a dominant market share and an outstanding reputation as a global leader. Following in the footsteps of TCS, Infosys and others is very tempting. Using connections with an NRI businessman a 2-founder based in Ahmadabad, Gujrat has started a Quickbooks software based small accounting BPO in 2010. This one account has been serviced by the founders and it has provided the founders enough cash flow to support their financial needs. They are now exploring if they should expand the business and if they do what the implementation plan should be.

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Case Study 2

Dhruv Chokshi, Jainil Parekh

Questions: a) Based on the financial trends in the two countries (assumed above) how long can these entrepreneurs expect the existing business model to be viable? b) If outsourcing accounting service is a viable business model for US companies can it be viable for larger Indian companies? Please explain your answer. c) If cost advantage of outsourcing in India continues for long enough a period, for this company to grow with the existing business model and then change to some other business model what would you propose the founders do?

Case Treatment & Analysis Background

Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations of specific business functions (or processes) to a thirdparty service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments of its supply chain1. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as call center services. BPO that is contracted outside a company's country is called offshore outsourcing. BPO that is contracted to a company's neighboring (or nearby) country is called nearshore outsourcing. Often the business processes are information technology-based, and are referred to as ITES-BPO, where ITES stands for Information Technology Enabled Service. Knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are some of the sub-segments of business process outsourcing industry. In the early 1980s several European airlines started using Delhi as a base for back office operations, British Airways being one among them. In the second half of the 1980s, American Express consolidated its JAPAC (Japan and Asia Pacific) back office operations into New Delhi and NCR region. In the 1990s Jack Welch was influenced by K.P. Singh, (a Delhi based realtor) to look at Gurgaon in the NCR region as a base for back office operations of General Electric. By 2002, all major Indian software organizations were into ITES-BPO including Infosys, HCL, Satyam, Wipro and Patni. Then service arms of companies such as Accenture, IBM, Hewlett Packard and Dell also showed up in India.

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Case Study 2

Dhruv Chokshi, Jainil Parekh

As of 2012, around 2.8 million people work in outsourcing sector2. Annual revenues are around $11 billion, around 1% of GDP. Wages are rising by 10-15 percent as a result of skill shortage2. Despite the industry growing at 35% in India, its offshore share is expected to decline, while other locations such as Philippines and South Africa have emerged to take a share out of the market. In 2010, Philippines has surpassed India as the largest business process outsourcing industry in the world3, 4.

Part (a)
Based on the financial trends in the two countries presented in the case information, the decision whether the business model described in the case is viable or not, depends basically on a specific metric, and whether the cost of running the BPO is satisfactorily covered by the total revenue the BPO earns. The metric mentioned has been chosen as Cost per unit Productivity. This metric reflects the absolute amount of money being paid as wages. As soon as the value of this metric for India crosses that for USA, the present business model is not viable, as outsourcing work to India will be more expensive that getting it done in USA itself. If at any point of time before that, the cost incurred by the BPO exceeds the revenue earned by it, the business model will become unviable. The cost convergence has been estimated in accordance with the following assumptions: 1. The present time instant is beginning of 2013, with the first payment in end 2013. 2. The wages are paid in USD in USA, and in INR in India. 3. The wage growth rates [SalGro(I), SalGro(U)] are nominal growth rates, which are reflective of the absolute increase in the salary amounts. 4. Productivity in India [Productivity(I)] is 1 unit, while that in USA [Productivity(U)] is 1.1 units. 5. Inflation and salary growth data is as shown in Table 1. 6. The annual operational cost per employee of the average Indian BPO is approximately Rs. 4220005. Assumption (2) necessitates the adjustment of currency exchange rates in order to carry out a comparison on a common base, which is INR. The effective growth factor at each stage (year) is thus:
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Case Study 2

Dhruv Chokshi, Jainil Parekh

( (

) ) 8% 2% 1.0 1.1 12% 4% 2%

Inflation (I) Inflation (U) Productivity (I) Productivity (U) SalGro (I) SalGro (U) (USD/INR) Growth
Table 1: Data

End of year Cost (India) (INR) Cost (USA) (INR) Cost/Productivity (I) (INR) Cost/Productivity (U) (INR)

2013 2014 2015 2016 2017 500000 560000 627200 702464 786760 1500000 1590000 1685400 1786524 1893715 500000 560000 627200 702464 786760 1363636 1445455 1532182 1624113 1721559 2022 1386539 2534218 1386539 2303835 2030 3433020 4039159 3433020 3671963 2023 1552924 2686272 1552924 2442065 2031 3844983 4281509 3844983 3892281 2024 1739275 2847448 1739275 2588589 2032 4306381 4538399 4306381 4125818 2025 1947988 3018295 1947988 2743904 2033 4823147 4810703 4823147 4373367

2018 2019 2020 2021 881171 986911 1105341 1237982 2007338 2127779 2255445 2390772 881171 986911 1105341 1237982 1824853 1934344 2050405 2173429 2026 2181747 3199392 2181747 2908539 2027 2443556 3391356 2443556 3083051 2028 2736783 3594837 2736783 3268034 2029 3065197 3810528 3065197 3464116

As can be observed from the Table 2a-2b-2c, the Cost per unit Productivity for India steadily rises and crosses that for USA in year 2032. It can therefore be concluded that jobs would no more be outsourced to India, as against USA and the business model described in the case will not be viable beyond 2031. The cells corresponding to the period in which the business model is potentially viable have been highlighted for clarity. As pointed out previously, the annual operating cost per employee of an average Indian BPO is Rs. 422000 while the revenue per employee is Rs. 500000 which is more than the cost value. The revenue grows at 12% while the operating cost grows at 8% (inflation rate). These trends imply that the cost will always be covered by the revenue,
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should the rates remain the same. This conclusion along with the previous results implies that the business model described will be viable for 19 years (until 2031).

Part (b)
Finance and accounting (F&A) outsourcing refers to the practice of outsourcing the back office tasks of finance and accounts management to service providers specializing in it. India has become a popular destination for F&A offshore outsourcing from the western countries, having as much as 55% of the market share. The F&A outsourcing is expected to grow due to the late adopters, encouraged by the success of the model. A major trend among the F&A service providers is that of incorporating technology augmentation to the solutions offered, making the services offered increasingly lucrative6. Despite the one major pitfall of outsourcing accounting, i.e., the security risks associated with privacy and data protection concerns of accounting, the prime reasons for the BPO model being viable for US companies are the following: 1. There is a sizable saving in terms of cost of manpower for the services. 2. There is an increase in the companys flexibility, business process speeds are increased and response times for major environmental changes are reduced. 3. The company can focus more on its core competencies, which is a potential reason for higher earnings (by virtue of better products and services). 4. The company can grow faster as it will be less constrained by large capital expenditure for people and equipment that take years for amortization. However, the major difference for an Indian company considering the BPO model to outsource its processes (say accounting/book keeping) is that there is no notable cost advantage, as its own employees would also be majorly Indian. The security risks would also be valid for Indian companies. However, owing to the huge cost advantage that US companies have they can spend a little more money to improve the security of the services and reduce probabilities of data loss/security breach. On the other hand, if Indian companies know that they can focus more on their core competencies and produce higher earnings such that the opportunity cost of getting business processes done in house is more than the cost of hiring a BPO, then the BPO model would be suitable for such Indian companies. Thus, the BPO model can be viable for large Indian companies in certain situations, as described above, given that such companies are ready to trade off some security for the higher earnings.

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Case Study 2

Dhruv Chokshi, Jainil Parekh

Part (c)
The cost advantage of outsourcing to India is threatened by the presence of the following conspicuous factors: 1. Low threat threshold: Because of the simple nature of the work, it is easy for competition to develop and threaten current business. Some of the threats are development of rural BPOs, rise of sufficiently skilled but cheaper labor in underdeveloped countries. 2. High attrition rates: Due to the high attrition rates in the BPO industry, the number highly experienced workers in the workforce remains low. This not only adds the cost of training new recruits but means that the company at any point of time is comprised of relatively unskilled labor, making it difficult for the company to change its strategy and adopt newer business plans. These are the primary problems that, if solved effectively by the company, can help maintain its competitive advantage in the market. Some strategies to address these are: 1. Technology Augmentation: This will help address both the problems. By adding technological enhancements to the business process, the company gains an expertise and quality of service that is more difficult to match by emerging competitors. It also means that the employees would get more specialized and efficient, justifying a higher salary and thus ameliorating the problem of attrition. On the short term, this solution will cost money in terms of R&D/licensing costs, but will help retain value in the longer run, making the business more sustainable. 2. Improve Pricing Models: Currently most BPOs charge on the basis of FTEs (Full time equivalents), that does not factor in the quality of service (QoS) very well. This can be changed into something that better defines the actual service delivered rather than just raw amount of time. This would be more lucrative to business as well as improve the service value in the market by raising quality. 3. Acquire and retain Intellectual Property (IP): Innovation in the execution of the business process can not only improve the QoS, but also presents the opportunity to acquire IP, which translates to potential licensing revenues in the future. This would also foster a culture of innovation in the company, enabling it to acquire and retain better skilled employees. On the other hand, a gradual transition to new business models is recommended for BPO contractors. This transition should be initiated well ahead of time so as to give the BPO contractor a competitive advantage at the time the existing business models start

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to become unviable. A few of the recommended changes in business model are described below: 1. Target niche, evolving business processes: There are many specialized processes that are evolving every day. The new model focuses on developing early expertise and bringing new/niche services to businesses rather than waiting to obtain contracts for standard services. Specific instances of such emerging services include market research in emerging markets, mobile application development or niche services like energy management. 2. Offer business process consulting: As the company matures over the viability period, it can seek to develop expertise in the execution of the business process and then turn itself into a consulting service, offering very specialized high level services, similar to the business model followed by law firms presently. 3. Create custom IT products: These specialized software solutions can be loosely based on the service experience of the company. These products draw from both the past reputation and experience of the company, boosting the chances of its success. This transforms the service business into a solutions business. 4. Enable self-employed people working from home: This is radically different business model, and can prove to be effective if, for some reason the company cannot develop expertise, or capture any of advantages as above. What a tier 3 BPO has is a workforce skilled in communications and facilitating work. This can prove to be particularly effective in enabling self-employed people to reach out to business, or freelance workers to work remotely with a company, by streamlining the communications process.

References

1. Tas, J. & Sunder, S. 2004, Financial Services Business Process Outscourcing, Communications of the ACM, Vol 47, No. 5. 2. The Financial Express: http://www.financialexpress.com/news/indiasoutsourcing-revenue-to-hit-50-bn/26666. 3. Balana, Cynthia D. and Lawrence de Guzman. (December 5, 2010): http://www.inquirer.net/specialfeatures/thegoodnews/view.php?db=1&article=201 01204-306912. 4. http://www.gmanetwork.com/news/story/63053/economy/companies/philippinesstill-top-bpo-destination-consulting-firm. 5. Evolution of BPO in India Price Waterhouse Coopers. 6. Smriti Sharma, What's Driving the FAO Market? http://archive.globalservicesmedia.com/BPO/F-and-A-Outsourcing/What%27sDriving-the-FAO-Market/23/8/0/GS110428189545
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7. The Changing Face of Indian BPO Industry http://www.siliconindia.com/magazine_articles/The_Changing_Face_of_Indian_B PO_Industry-FWKC48463032.html