CASE STUDY

CASE STUDY Indian BPOs—Waking Up to the Philippines Opportunity? Since the mid-1990s, Business Process OutsourcingHuman Computer Interaction (BPO) fimms have been one of the largest job creators in India, redefining pay scales and the work environment for many young Indians. The sector witnessed a fury of activity in 2004-05, with m y nultirational companies (MNCs) and Indian companies increasing operations and therefore their hiring members. A member of mergers and acquisitions within the sector also signified matunity and consolidation for the industry. The member of captive and thurd party service providers added up to about 400 companies in the Indian BPO sector According to industry experts, an educated young and English speaking population and the cheaper bandwidth were the key factors behind this growth In addition to India, outsourcing companies were looking at Singapore, China, the Philippines, and Malaysia as outsourcing destinations. In the mid-2000s the Philippines emerged as a promising outsourcing destination for the westem world. Indian companies too started establishing operations in the country. By 2008, companies such as Sitel. Genpact, and Citibank had already set up offices there, and were even shifting local talent from India to fill up senior and middle level management positions in the Philippines. In 2008, the BPO industry had been in India for about a decade In these ten years, it had shown tremendous growth and was no longer limited to being an activity of global MNCS. Leading Indian information technology (FT) software and service organizations had also contributed to the growth of the BPO industry in India Indian companies offered a bouquet of outsourced services like customer care, medical transcription medical billing payroll management, and tax processing. On the strength of this growth the government identified the information technology enabled services (ITES) BPO sector as a key-contributor to economic growth, and offered them benefits like tax holidays, previously enjoyed by the software industry. In 1999, after the deregulation of the telecom industry, national long distance and international connectivity also became open to competition India's success as an outsourcing destination was attributed to these reasons—an abundant. skilled and English speaking manpower, high-end telecom and infrastructure strong quality ori- entation within the industry, India's location on the map wtuch allowed it to leverage on time zone differences, a positive policy environment that encouraged investment in the industry, and an attractive and friendly tax structure. NASSCOM surveys showed that Indian companies were more focused on maintaining quality and performance standards. For overseas companies, outsourcing to India offered significant improvements in quality and productivity on crucial parameters such as member of correct transactions, mimber of total transactions, total satisfaction factor, mumber of transactions hot, and the average speed of answers. Indian comparues adhered to metrics much better than the peers in some other countries. The Indian ITES/BPO industry also recorded a growth rate of over 50 percent in the year 2002-03.- All these were viewed by experts as an indication of the success and the growth that the industry would enjoy in the future. According to research firm IDC India, India's exports of ITES/BPO services in 2005 were estimated at Rs. 311.91 billion. This was expected to grow at a compound annual growth rate of 26 percent through 2010 to Rs. 1101.75 billion by 2010. Despite the growth story and promises of a rosy future, industry experts felt that the Indian BPO industry was losing its sheen. There were many reasons for this, the strength of the rupee and the weakening dollar being among the main ones. With the US economy slowing down and market forecasts also being glum, the industry was beginning to feel the heat. Quite simply with the dollar weakening the ripees per dollar received went down affecting the profitability of all intemational players. To add to their woes, the Indian govemment was twilling to extend the STPI (Software Technology Park of India) tax holiday for BPO units beyond 2009. The estimate was that the effective tax rate would be 20 percent once the exemption was removed as opposed to about 7 percent (approximately) with the tax holiday, and this would put BPO margins tunder tremendous pressure. The growing infrastructure and transportation costs were also putting more pressure on the margins. The Indian industry faced issues like poor infrastructure, high spending on transporting people, and above all, no incentive of low taxes. In contrast, countries like the Philippines had world class infrastructure and ten-year tax breaks, and were culturally a better fit owing to 50 years of colonial influence. They had a young educated workforce, and a hustory of close ties with the US. Their culture was much more Amenicanized The wage structure also was higher than that in India, but the affinity to Westem culture and the conversational American-style English that Philippine BPOs offered mattered more to most Westem companies. The good basic infrastructure, good language skills, and lower taxation rates were ultimately what made companies favour the Philippines vis-a-vis India. According to research firm IDC, Philippines' capital Manila has already emerged as the #2 among outsourcing destinations in the Asia-Pacific, behind Bangalore. The statement of Pramod Bhasin, CEO of Genpact, sums up the feeling of major BPO operators in India: “The amount of additional costs I have to bear to do business in India is massive. In The Philippines I don't have to spend a dime on transporting employees a hury I can't afford in India. The government there spends $100 million exclusively to train people specific to BPOs' requirements and we get a ten-year tax break. I won't say we can completely shuift operations somewhere else in the near future, but it is a definite Plan B.