Will India lose position in BPO space?
Increasingly reducing cost arbitrage enjoyed by
organisations:
Ajith Dandeniya
Over the last decade, India has enjoyed the mantle of being the
leading offshoring destination in the world. Increasingly, this is being
fiercely challenged by other neighbouring South Asian Countries.
High competition for Indian BPO sector now |
A combination of cost arbitrage, a knowledgeable workforce,
government support to the BPO sector, quality of outputs, a wide choice
of reputable suppliers, good telecommunication and other infrastructures
and attractive BPO City locations available within India have all helped
propel India to 'pole' position in the BPO space.
But today, most of these factors are being increasingly challenged.
All major outsourcing suppliers today have Indian presence, which has
been essentially strategic. But with an increasing number of suppliers
comes the opportunity for a "best of breed" BPO workforce who demand
higher salaries.
This is increasingly reducing the cost arbitrage enjoyed by the
organisations in the past.
The year-on-year salary increase of approximately 8 to 10 percent
will erode the level of cost arbitrage over time, and it will no longer
be a key factor in the offshoring decision-making process.
Another worrying factor facing the suppliers is attrition levels,
which are rising alarmingly.
A 40 to 50 percent attrition rate amongst suppliers is not uncommon.
To overcome this, suppliers today carry higher amounts of "bench staff"
which adds to their cost base.
It is also not uncommon to see BPO staff moving jobs for a matter of
few thousand rupees, which is adding to the woes of BPO suppliers.
With an ever-increasing presence of BPO suppliers in India comes
another key challenge - suitable locations to house them. The tier one
cities such as Bangalore, Mumbai and Hyderabad are becoming saturated
and real-estate costs are on the increase.
Therefore there is now growth in the tier two cities such as Pune and
Noida increasingly being selected as BPO locations. It will simply be a
matter of time before these follow a similar fate of their predecessors.
Outside these cities, the infrastructure in terms of
telecommunications, roads and suitable real estate to house BPO centres
are yet to fully develop.
With the need to output a significant number of BPO staff
year-on-year to meet the demand comes the challenge of quality of staff.
The international organisations that offshore their business
processes are increasingly demanding other European languages from
suppliers within India.
The availability of such language proficient BPO staff in India is
few and far between.
Alternatively, BPO suppliers in India are offering Eastern European
locations to cater for such demands, but it does not quite work,
especially if the numbers of FTE's required with such language expertise
are not so huge to warrant a separate team in another country location.
There are two key factors here:
(a) Team dynamics may suffer by breaking the language proficient team
into another country location.
(b) The reduction of cost arbitrage saving will be reduced by
deploying the Eastern European location strategy.
Organisations that offshore their business processes are more
sophisticated now in terms of their strategies than a decade ago.
They are increasingly looking for multi-location, multi-supplier and
multi-country strategies to spread their business risks.
With the multi-country strategy, it becomes apparent for
organisations to easily compare the qualities of outputs produced and
accordingly shift their processes between countries at new contractual
negotiation times.
Another factor that may weigh against choosing India as an
outsourcing location is this - the original BPO contracts that were
signed for duration's of five to seven years with suppliers will now be
due for renewal.
With the Indian cost arbitrage gained originally eroding, there will
be other countries waiting in the wings to take over.
Over, the next few years, we will start to see transitioning of
business processes from one supplier to another as a common occurrence -
as opposed to transitioning processes from organisations to suppliers.
In fact, the new suppliers who will take such processes on will offer
organisations a cost free transition to make it an attractive
proposition.
Finally, organisations also look for cultural similarities - but not
just as a company itself but as a country. Unfortunately, India in the
latter regard does not match-up to the Western Nations.
Up to now, this has not been a core issue - but the moment other
Asian countries citing a "better fit" come into the equation - this will
start to become a significant factor.
So given all these factors, who will be there to challenge the Indian
Superpower from the "pole" position of BPO space?
Philippines
Entering the grand-prix of BPO space is India's neighbour, the
Philippines. Today, there are over 450,000 BPO workers operating in the
Philippines. Many global BPO suppliers already have a presence in the
Philippines and those who don't are quickly moving in before it's too
late.
In addition, many multi-nationals have already set up their own
captive centres.
Telecommunications and other infrastructures in the Philippines are
comparatively cheaper and more advanced compared to other offshoring
destinations.
In fact, the Philippines was the first nation in Asia to de-regulate
the telecommunication sector and appear to present a more stable, robust
and a highly scalable telecoms infrastructure due to numerous fibre
optic landings in the country.
In terms of cost arbitrage, Philippines is presenting an extremely
competitive cost strategy. The starting salary for a graduate in the
Philippines is within the range of 180 - 240 pounds per month.
This compared to India, is 40 percent cheaper. This cost
competitiveness is not just limited to salaries. It appears to apply to
all other business expenses such as real estate, utilities, office
supplies and other third party services.
In fact today, organisations that offshore business processes to the
Philippines have been able to enjoy cost arbitrage savings in the range
of 50 to 70 percent (compared to 40 to 50 percent and continually
eroding in India).
This appears to be a phenomenal advantage for the Philippines.
Besides the cost arbitrage savings and infrastructure there are
multiple other factors that appear to be swinging the pendulum towards
the Philippines.
English speakers make up 75 percent of the Philippines population and
as a former American and Spanish colony it appears to be steeped in
Western culture.
For Western organisations that offshore business processes, Filipino
accents are easier to work with compared to India - and that instantly
provides a head start in the Contact Centre space, which continues to be
an ongoing challenge within Indian based Contact Centres.
The Philippines appear to have found answers for staff with other
European languages too.
In addition, the Philippines government has put various incentive
programs in place to attract foreign organisations and also significant
work has been done by the government to create BPO specific cities and
parks around metro Manila and in other locations around the country.
Just consider some of the recent comments by various research
establishments around the globe: "Cebu City ranks first among Top 50
emerging outsourcing cities" (Global Services, 2008)
"Manila ranks second among Top 10 Outsourcing Cities in Asia" (IDC)
"The Philippines has established a strong presence in voice-based BPO
sectors such as call centers, and there are also signs of growth
potential in other offshore services, such as finance and accounting,
medical transcription and animation" (IMF, March 2007) "Philippines
awarded Off-shoring Destination for 2007" (National Outsourcing
Association (UK), October 2007) "The Philippines has become a
destination for call Centre and back-office finance and accounting
operations; rates highly in cost, labour quality and language and
cultural compatibility" (Gartner, Dec 2007)
"We think that the Philippines have grown into the No. 2 outsourcing
base after India in call centre - based BPO fields" (Nomura Securities,
November 2007)
"The Philippines is now the third largest destination geography for
BPO services" (Everest Consulting, April 2008)
"The Philippines is among seven key markets that are "above the rest"
and are the "most critical to achieving corporate growth and
outperforming the competition in 2008 and beyond" (Frontier Strategy
Group, September 2007) "Philippines awarded Off-shoring Destination for
2009" (National Outsourcing Association (UK), October 2009).
(Ajith Dandeniya is a freelance BPO Consultant with over seven years
of BPO experience that includes setting-up BPO operations in Sri Lanka
as well as currently working in the UK on advising large global
organisations of outsourcing strategies.
He was the Vice President of IT and Projects, was part of the
management team who set-up WNS's operations in Sri Lanka in 2004 and
currently responsible for transitioning RSA's Insurance processes to
India via leading global supplier Accenture. He is a first class honours
graduate in computer engineering with MBA from Bristol Business School
in the UK.)
|