Losing cost advantage, BPO cos stare at slipping growth

India's $16-billion business process outsourcing (BPO) industry is going through a rough phase with increasing pressure on margins and diminishing cost arbitrage. India's cost advantage as an offshoring destination, its trump card, has dropped by 30-40%.

Quicker response time, better technical support and near-shore advantages are driving businesses to other outsourcing destinations, say experts. In addition, wage inflation over the years, forex losses and poor hedging strategies have impacted the margins of BPO companies further.

Despite the aggregate revenue for FY12 expected to cross the $100-billion mark, industry watchers feel the sector is facing an acute identity crisis, with the lack of vision and innovation dragging down business volumes. Adding to the challenging climate is the high attrition rate. The sector, which used to attract employees in droves, is now finding it difficult to hold on to them due to the absence of a distinct career graph and dipping perks.

"The margins are extremely under pressure and it will continue with rising labour costs. BPO is a very operation-intense game and today there is not much of differentiation among service providers. The conventional BPO service has become extremely commoditised," says Canaan Partners, India, MD Alok Mittal. The California-based venture capital firm focuses on technology and BPO firms.

Genpact's senior VP Shantanu Ghosh feels margins in case of call centre business will face continuous squeeze. "BPOs with just customer service offerings will definitely have margin challenges. In our case, percentage of customer service is only in single digit," he says, adding that most big players are moving up the value chain to boost up margin. "However, from the pricing perspective, it is difficult to generate big margins. Pricing has been under pressure due to increasing competition," says Ghosh.

In the last four years (2008-2012), the compound annual growth rate (CAGR) for the sector has been sluggish a 12.47% against India's IT services exports, which posted a 17.23% growth during the same period. Even in FY13, a challenging year with foggy visibility in client spend, Nasscom predicted IT services to grow by at least 11%.

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