Friday, February 6, 2009

IT, BPO market in for ‘slowest’ growth

New, innovative services to drive Phase 2 growth: IDC.

exports, there seems to be bad news in store for the domestic IT and BPO market.
According to market intelligence firm, IDC India, the local IT and BPO market is expected to grow at 13.4 per cent in 2009, the slowest since 2003. This will come largely on the back of slower IT consumption in some key verticals including retail and financial services.
In fact, the Indian domestic IT and BPO market is slated to see 16.4 per cent CAGR in the coming five years leading to 2013, compared with 24.3 per cent growth recorded between 2003 and 2008.
The forecast also suggests that key structural changes taking place on the back of a global economic slowdown would propel a new ‘market order’ in the domestic IT and BPO industry.
Phase 2
IDC said that the next phase of growth would be different from the earlier phase, in which the domestic market had witnessed unprecedented growth, nearly tripling the market size from Rs 34,000 crore in 2003 to Rs 1,01,031 crore in 2008, a CAGR of over 24 per cent.
The new growth Phase (2.0), expected to evolve from 2009 onwards, will be built on the back of new and innovative services sought by consumers and enterprises alike. The technology behind these services — infrastructure, applications and connectivity — would need to orchestrate and re-orient completely in order to support their mass adoption.
IDC said that the combined domestic IT and ITeS market grew by 17.3 per cent in 2008. The IT market grew at 15.4 per cent in 2008 to Rs 94,185 crore; and the BPO market grew 53.2 per cent in 2008 to report revenues of Rs 6,846 crore.
Revenue growth
However, the overall IT and ITeS revenue is expected to grow at a slower 13.4 per cent in 2009 to Rs 1,14,574 crore. While the IT market is projected to grow at 11.4 per cent, the BPO market is likely to notch 40.8 per cent growth.
“The issues in the short run, more pronounced throughout 2009, will be productivity, cost savings and customer retention. This would eventually pave way for innovative services (for both consumers as well as enterprises) by leveraging the existing infrastructure built so as to align with emerging opportunities,” Mr Kapil Dev Singh, Country Manager, IDC India, said.
product categories
The major product categories expected to grow at a rate higher than the industry average include collaborative applications (23 per cent), storage software (19 per cent), system and network management software (19 per cent).
Within the ambit of IT services, segments reporting higher than average growth include desktop management (22 per cent), information systems outsourcing (32 per cent), network management (23 per cent) and application management (20 per cent).
Within the IT solution categories, the faster growing ones would be virtualisation (28 per cent), unified communications (25 per cent) and business continuity services (20 per cent). All these categories point towards the need for better management of IT infrastructure for their most optimal deployment and use in achieving enterprise business goals, it said.
It’s a bumpy ride for BPO cos
Players in BFSI space have to contend with thinner margins, lower billing rates.

‘Cost reduction’ and ‘productivity improvement’ were two most commonly heard words in BPO circles this year.

The ride just got bumpier for Indian BPO companies in 2008. However, the smarter ones took this opportunity to diversify and tweak their business models.
The Indian BPO sector generates majority revenues from the banking and financial services space, which has been badly impacted courtesy the worldwide liquidity crunch.
In the last 10 months, several major financial services giants in the US, namely Bear Stearns, Lehman Brothers, Washington Mutual, filed for bankruptcy protection due to credit losses related to the US sub-prime mortgage crisis
As a result, there has been a slowdown in BPO spending globally, according to Mr Navin Joshua, Executive Director, vCustomer Corporation. New deals in the banking and financial services space are being put on the back burner for the time being. “There have been a delay in contract renewals and a temporary freeze in awarding new contracts,” said Mr Joshua.
Players in this space now have to contend with thinner margins and lower billing rates. “We have not seen any impact on existing contracts but rates of future contracts may be impacted,” said Mr Susir Kumar, CEO of Intelenet Global Services.
Telemarketing biz
Within the BFSI space itself, the telemarketing business – which involves telephonic marketing of credit cards and other financial products – has been impacted the most.
Recently, the city-based ITeS firm Silverline Technologies had said that it would put its Canada-based BPO outfit (which specialises in outbound calls) on the block as the business of outsourcing to this unit has been impacted.
However, companies that invested in innovative billing models such as ‘outcome-based pricing’ or ‘pay per transaction’ witnessed a spike in revenues.
High customer anxiety (due to the sub-prime crisis) leads to an increase in the customers’ telephonic interaction with the bank, thereby increasing call volumes. And this spike in volumes benefits companies that bill on ‘per transaction’ basis.
In spite of the turmoil in the BFSI space, Indian companies seemed to be keen to increase their overall exposure to this sector through inorganic growth play.
In October 2008, TCS acquired 96.3 per cent stake in Citigroup’sBPO outfit (Citigroup Global Services Ltd) for $505 million in cash. This deal also ensured the company of assured business of $2.5 billion from Citigroup over a nine-and-a-half-year period. In order to ensure that its $2.5-billion deal is protected given the international financial situation, TCS protected itself contractually.
“If somebody buys Citigroup, it will be binding on them to pursue our contracts,” Mr N Chandrasekaran, Chief Operating Officer & Executive Director, TCS, had told Business Line.
In July 2008, WNS (Holdings) Ltd acquired the UK insurance major Aviva’s BPO business Aviva Global Services (AGS) for around $228 million (Rs 980 crore).
‘Cost reduction’ and ‘productivity improvement’ were two most commonly heard words in BPO circles this year.
As Mr Pawan Sharma, President, KPIT Cummins Global Business Solutions, says: “If my turnaround time was 24 hours before, focus now is whether I can make my turnaround time 22 hours. If one employee used to process 10 invoices in day, then can he process 12 invoices?”
Thankfully, the financial crisis has not yet impacted BPO players in the Indian domestic market. Genpact announced its foray into this space early this year. “The rural areas present a dynamic scope for growth and the intelligent BPO companies will be amongst the pioneers in settling bases in the remotest corners of the country,” said Mr Kumar of Intelenet.
Attrition rate
Moreover, all companies in this space have reported a fall in attrition levels because of the uncertain economic environment. For WNS, attrition rate in 2008 reduced by 10 per cent, said Mr Neeraj Bhargava, Group Chief Executive Officer, WNS Global Services. Intelenet`s attrition rate has dropped to 37 per cent in the second quarter of the current fiscal from 45 per cent in the third quarter of fiscal 2008.
Healthcare, telecom and legal outsourcing are some of the sectors that have not been impacted by the current slowdown. In fact, all legal process outsourcing firms have witnessed at least 50 per cent growth in the second half of the calendar year, due to increased outsourcing of legal work related to the M&A activity in the US. Recessions and depressions reduce the tolerance for high legal fees which means more business for other markets, according to Mr Bhaskar Bagchi – Country Head of LPO firm CPA India.
Global law firms with more than 25 per cent of their lawyers based oversees have suffered less because their international presence is more diversified, he said.
Mr Bhargava said that WNS’s LPO business has grown by over 50 per cent year on year, in terms of headcount. In the last 5 months (July till date), CPA has added 156 employees and expects to employ about 2,000 people by 2010.

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