A study prepared for Deutsche Gesellschaft für Internationale Zusammenarbeit GIZ

Transcription

1 A study prepared for Deutsche Gesellschaft für Internationale Zusammenarbeit GIZ SEPTEMBER 2011

2 Project Team The report is prepared under overall guidance and supervision of Dr. Bandi Ram Prasad Research and Report Written by Shilpa Puri Coordination for Consultations Ketul Contractor Design Yogesh Kale India has emerged as a benchmark for global outsourcing industry. From being a choice of cost option to transfer voice based and research business, India has matured into a major market that accounts for a significant chunk of the global outsourcing and the pace and intensity is still continuing. This report briefly captures the journey of India in global outsourcing with particular reference to the advances the country has made in emerging as the nerve centre for financial outsourcing. The study commissioned by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) as a part of Sino-German Tianjin Modern Financial System Development Project in Tianjin presents important aspects of the financial outsourcing.

3 About this Report Financial Centres are the new engines of growth that accelerate the pace of economic and financial system development of the nations. Every major nation is positioning one or a few of its major centres to emerge as international or regional financial centres in accordance with policy and priorities. The Sino-German Tianjin Modern Financial System Development Project implemented by Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ) GmbH, Germany has laid thrust and focus on the development of financial markets in the Tianjin municipality in the Republic of China. Tianjin is one of the premier centres of economic growth in China that had a long history of financial market development. The current project will endeavour to create new synergies that could enable Tianjin to emerge as a major regional financial centre. FTKMC has been involved in this project to share experience and expertise from an emerging market perspective from India. A series of engagements completed in this last three years included; designing and conducting study tours for the senior officials of the Tianjin municipality and financial markets in Mumbai and Dubai, organizing workshops on Indian experience of development of financial markets, sharing of experience of Mumbai as an international financial centre etc., This report is an extension of this engagement in terms of providing perspectives of India s experience and emergence globally as an important centre for business process outsourcing. This experience could be relevant in designing the ecosystem and the financial architecture for the Tianjin that will enable continued growth and strength of the region. Business process outsourcing enjoys the distinction of a fast growing business activity globally, in which India has acquired commendable presence as also reputation. From the early days of beginning of the new millennium when Y2K pressures brought in first traces of outsourcing work to India, this activity later developed into an important economic activity having contributed significantly to jobs, incomes, national production and also as a key competitive factor that helped India to surge ahead as a leading player in the global economy. Business Process Outsourcing can also be a very useful and effective complement to the growth of the financial centre in a manner that it immensely helps in building a conducive ecosystem that could ensure stronger and sustainable growth. This report briefly capture the evolution of the outsourcing industry, key successful factors, opportunities and challenges and some insights from the experience that would be relevant and useful in Tianjin s efforts and endeavours to develop financial processing and outsourcing. We are extremely grateful to GIZ and authorities from the Tianjin financial markets for engaging the services of FTKMC in preparation of this study. We hope the report presents pertinent points relevant for understanding the underlining factors governing the growth of the business process outsourcing industry its contribution to the economy and the financial sector. For any comments, please write to us at knowledgeformarkets@ftkmc.com Dr. Bandi Ram Prasad

4 Contents Executive Summary Outsourcing Services Domestic Outsourcing Size and Significance Structure of the Outsourcing Industry Financial Services Outsourcing Global Customers Process and People Management Policy Support Benchmarks and Standards India Advantage Emerging Centres Delivery Models 17 Outsourcing Pain Points 22 The New Normal Prospects for Tianjin Going Forward Appendix 52 Glossary BOX item Various Verticals in ITES Industry This is How it All Began Positioned as a Knowledge Services Powerhouse Legal Process Outsourcing Empowering Human Capital Mumbai and Bangalore as Major Outsourcing Centers Emerging Destinations Vendor Selection China: Outsourcing Industry Landscape 4

5 Acknowledgements Organizations that supported the Study Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ) GmbH German Development Cooperation, New Delhi Tianjin Municipal People s Goverment Tianjin Financial Affairs Office Tianjin Commission of Commerce Officials of GIZ Thorsten Giehler Luigina Blaich Lan Qi Dang Changjing IT and Outsourcing Companies that assisted us with useful insights and inputs in understanding the evolution and growth and current priorities of the outsourcing industry Mumbai Chief Operating Officer, Intelenet Global Services Pvt Ltd President Contract Center Company & Global Head Marketing & Strategy, Aegis Ltd Global Practice Head, Syntel Ltd Bengaluru Senior Director, National Association of Software & Service Companies VP, Fidelity Business Services India Pvt Ltd Associate Professor (Information Systems), Indian Institute of Management Marketing Head, TPI India Associate Vice President & Senior Delivery Manager - Banking and Capital Markets, Infosys Technologies Ltd A CLOSE LOOK OF THE DEVELOPEMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 5

6 Executive Summary Being an industry pioneer India has developed as the Destination of Choice in the BPO space. It has leveraged it s brand equity in IT to spawn an industry that has been for the past few years synonymous with India. It has managed to retain its dominance in the IT-BPO arena, thus carving a niche as the global outsourcing hub. The past couple of years have witnessed a transition of the sector from offering nascent BPO services to that of rendering high end analytical and knowledge services to global clients. The Indian BPO service portfolio comprises both breadth and depth built over the years. The knowledge services outsourcing industry has been the fastest growing segment within the bouquet of services offered by service providers registering growth rates of 19 percent CAGR between 2007 and The industry has contributed significantly to the national GDP. As a proportion of GDP the IT-BPO sector revenues have grown from 1.2 percent in FY98 to an estimated 6.4 percent in FY2011. The export revenue of IT-BPO segment in India in FY2011 was close to $60 billion with US alone accounting for $37 billion. In India, scale of outsourcing for BFSI BPO continues to grow at 20 percent, with growth expanding to Tier 2 and 3 cities for mature services in banking and insurance. BFSI export revenue accounts for over 50 percent of the total BPO exports of India. This robust growth is supported by among other aspects, a robust education system that produces more than 7.5 lakh postgraduates and over 2 million English-speaking graduates annually. The IT-BPO industry is a means of livelihood to not only the 2.5 million direct employee workforce but also the 8.2 million strong support staff. The BPO industry itself provides employment to 4.5 million young Indians in the age group of A majority of the employees are from Tier 2 and 3 cities, leading to high remittance flows and therefore consumer spending leading onward to the increase in overall welfare of many more cities in India. The average revenue per employee in the BPO segment works a shade over $14000 per year while for knowledge services offered, where billing rates are higher, the revenue per employee works to be $30000 per annum. A number of new outsourcing destinations are attempting to emulate India s success. Many have achieved a certain degree of success. It is inevitable that going forward challenges to the Indian industry will emerge. Already rising costs and saturated infrastructure is rearing its head as is protectionism in key markets. Meeting changing client expectations on delivery and IP security will also be increasingly important to address. The bane of the labour intensive IT-BPO industry is the high attrition 6

7 rates, which in turn lead to higher recruitment costs and higher budgets for retention programmes. Going ahead the Indian advantage hinges on India s ability to retain its core strengths and address the challenges. NASSCOM is confident of a percent growth rate of the country s IT industry in FY12, with the sector slated to bring in about $68-70 billion in revenue. Further it expects the Indian BPO industry to register a CAGR of percent in the next few years. All in all the recent growth suggests that there is a lot of life left in the party and that it is far from over. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 7

8 Outsourcing Services Since the FY07 boom phase, the subsequent uncertain times in FY08 and FY09 and the revival of sorts in FY10 and FY11 the BPO segment has demonstrated a CAGR of 20 percent surpassing overall industry growth rate. 1990s onwards Knowledge Process Outsourcing IT Outsourcing IT BPO Lifecycle 1998 onwards BPO Transaction Processing 2003 onwards BPO Verticals BPO Contact Centre 1998 onwards The Current Scenario India is a leading BPO destination, accounting for over 37 percent of the total global sourcing BPO revenues. Outsourcing industry in India is also very extensive, serving over 65 countries in 35 languages. In the last decade, it has grown 18 times to reach $16.9 billion in (FY11).The Indian BPO industry has witnessed a CAGR of over 30 percent with revenues growing from $1.6 billion in FY02. The BPO market (domestic + exports) accounts for a little less than one-fifth (19%) of the total IT-BPO industry whose revenues total an estimated $88 billion in FY11 (IT services accounts for 60% of the revenue with the rest being engineering services). Since the FY07 boom phase, the subsequent uncertain times in FY08 and FY09 and the revival of sorts in FY10 and FY11 it has demonstrated a CAGR of 20 percent surpassing overall industry growth rate. The global economic downturn in 2008 was the inflection point for the BPO sector in India and enabled the industry to move towards 8

9 a transformative service delivery building a team of knowledge workers. The BPO industry, as unlike IT, depends largely on the nondiscretionary spends of clients where day-to day functions and actual processing work continues even during a slowdown. Therefore it has not been much affected by the uncertainty created by global crisis. What the crisis has done for the industry is that some adjustment have been made by both parties and now the service providers and the clients are working together and different pricing models are being explored. Exports account for a little over two third of the total IT-BPO industry revenue. Exports of the segment were $60 billion with IT services accounting for $33.5 billion ($26 billion in FY2009), and BPO exports another $14.1 billion ($11.7 billion in FY2009). IT services exports was the fastest growing segment growing by 23 percent over FY2010 accounting for 57 percent of the total export revenue of the industry. With exports of $14.1 billion and $2.8 billion in domestic revenue, BPO industry is as export centric as the Indian IT sector. In FY11 exports growing by 17 percent year on year accounted for 83 percent of overall BPO revenue. Vertical wise BFSI accounts for 50 percent of the Indian BPO exports and about 40 percent ($24 billion) of the IT-BPO export revenue. More than 75 percent of the Fortune 500 companies are now engaged with Indian IT-BPO sector. The top 20 BPO companies account for 40 percent of the total revenues. Genpact India, Tata Consultancy Services BPO, WNS Global Solutions, Aegis and Wipro have emerged top BPO exporters in India. Some of the others that figure prominently are Firstsource Solutions, Infosys BPO, Aditya Birla Minacs Worldwide, EXL Service, Hinduja Global Solutions, Intelenet Global Services, HCL business services, HOV Services, 3i Infotech and Mphasis. Being an industry pioneer, the Indian BPO service portfolio comprises both breadth and depth built over the years that other locations are yet to offer. This is being supported by a robust education system that produces more than 7.5 lakh postgraduates and over 2 million Englishspeaking graduates annually. India s ready-tohire human talent pool substantially exceeds that of other countries, making it a formidable player in the market. It used to employ only 1.5 lakh human capital, now it does 12 lakh. Average revenue per employee per year for the BPO industry works out to be a little over $14000 per annum while the IT-BPO segment as a whole earns over $35000 per annum. Still further, its cost competitive infrastructure, with occupancy costs in Tier I and II cities almost one-third that for prime cities worldwide is also reinforcing the India advantage. These are positioning India as a hub, with other emerging locations being Philippines, Latin America and East Europe. The Indian industry experts, market participants and NASSCOM expect the Indian BPO industry to register a CAGR of percent in the next few years which will create a new dynamics in the IT-BPO industry with the BPO industry significantly outpacing the seven percent growth of the $60 billion IT sector, although the BPO segment operates from a smaller base. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 9

10 Various Verticals in ITES Industry BPO Contracting of operations and responsibilities of specific business functions to third party (external) service providers is what business process outsourcing involves. This can be typically categorized into back office process outsourcing which includes functions like HR, Finance accounting and front office process outsourcing that includes customer related and contact services like voice interactions typically carried out from call centres. Outsourcing within the same country, that is, to organizations based out of the same country is namely categorized as onshore outsourcing while work contracted to agencies based abroad are classified as offshoring. Recently a new term has been coined keeping in mind the preference of clients near shore outsourcing, which refers to process outsourced to agencies based in neighbouring countries or countries within the same region that fall within the same time zone. Outsourcing trend has gained momentum in the recent past because of the potential for cost reduction, skilled labour availability, value creation, etc. Financial Services BPO Financial Services BPO are business processing operators specializing exclusively in providing services to financial institutions in the various streams of finance. This could include banking, securities markets, commodities and currencies markets on the exchange platform, equity research, insurance, etc. This vertical or segment of the BPO industry is perhaps the largest segment of the industry. It is a highly specialized sourcing strategy used by financial institutions for business acquisitions (cards, banking and insurance accounts, brokerage accounts, consumer lending, etc), account servicing of existing clients (contact centres responding to customer queries, document management, etc), back office transaction processing (custody services, card and loan portfolios, analytics, etc). These service providers usually offer their services through multi-year SLAs. HRO Outsourcing of those corporate functions that involve payroll, recruitment, benefit processing, applicant background check, attendance management etc fall under the vertical of Human Resource Outsourcing. These vendors 10

11 service providers work in tandem with the clients HR division to effectively manage the clients HR functions. ITES (Information Technology Enabled Services) BPO is largely enabled and supported by IT and therefore the services provided are clubbed as IT Enabled Services. IT plays an active and critical role in providing these services and therefore BPO industry is synonymous with ITES vertical. IT outsourcing In order to streamline the management of the various IT applications used by the company this function is outsourced to a dedicated IT service provider who apart from managing your applications, will also suggest applications best suited for your organization. The scope of work usually involves testing, modernization, migration, reengineering and maintenance of IT systems. The service provider will provide end to end transformation services and preferred IT architecture. KPO Outsourcing business process that require certain degree of advanced analytical and technical skills by the agent and is comparatively more critical in nature to the client forming part of the clients core business process. Services could include all kinds of research equity research, intellectual property, market and business research, legal and medical research, training, consultancy, etc. LPO Legal firms seek to outsource get support services from external legal firms to derive benefits of outsourcing. Traditionally the services offered to clients in this field are document review, legal research and writing, drafting of briefs, etc. This vertical of KPO is at a nascent stage of development but is fast outpacing growth of outsourcing in other fields due to the high potential to derive cost advantages. Voice & Non voice Services Business processes outsourced to service providers that require voice or telephonic contact with the customer end user of the client are categorized as voice based services that are typically provided by call centres. These outfits are in direct contact with their clients customers and assist their clients in managing their customers. All other outsourced activities that do not require the service provider to directly contact clients customers and are more analytical, back office oriented are clubbed under the non-voice services umbrella. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 11

12 This is How it All Began India s offshoring industry took root in low end IT functions in early 1990s and has since moved to back office processing such as call centres and transaction processing. In the late 1990s, India s abundant well qualified software engineering talent combined with the massive demand for the Y2K problem helped India move up the value chain to attract large scale software development projects. It drove the emergence of software development and application maintenance companies. Some of the world s largest IT companies established R&D centres in India. Consequently India emerged as an offshoring destination for global IT giants HP, IBM, Intel, AMD, Microsoft, Oracle, Cisco, SAP and many others. Development Path of the IT-BPO Industry in India Competitive compulsions and global climate drive trend to outsource non critical business functionalities. BPO verticals clearly defined Indian service providers mature bouquet of services to offer value added end-to-end services. Industry progresses to next level with KPOs Federal policy incentives - both fiscal and for infrastructure development. Call centres established Powerful industry lobby that took Brand India to a global platform IT outsourcing and Y2K wave. IT cluster at Bangalore Strong engineering science graduate student base Pre onwards 2008 onwards 12

13 This spawned an IT-BPO hub -- Bangalored and created a cluster around which many more IT related services could be developed. The captives were the first movers in the BPO space, setting up centres in India three decades ago with Texas Instruments setting up the first ever R&D captive in While the BPO industry kicked off with predominantly transaction and voice based activities, servicing Fortune 500 BFSI and telecom clients based out of US and UK, over the past few years it has made substantial inroads into knowledge / core services. The initial jobs to be outsourced / off-shored were non core functions especially transaction based business or data integrated jobs like customer support which did not require customer contact. In this kind of work the agent did not decide anything but just executed what the system decided based on predetermined set rules. This job was essentially a post call work process. There was no customer connect. A decade ago this model led to many Mom and Pop shops in India doing simple back office functions. Then came voice based Customer interaction services, now one of the most mature BPO segments. Around percent of the employees in the BPO space today work in contact centres and transaction processing jobs form the rest. Call centres contribute around 43 percent or a lion s share of the industry s revenue, non voice revenue accounting for the rest. The latter segment can however be further bifurcated to high volume, low value data processing / transaction processing work which accounts for 45 percent of the total BPO revenues and high value information / knowledge work that accounts for another 12 percent. Most horizontal BPO services have matured and F&A alone account for 22 percent of the export revenues. Other horizontal services experiencing dynamic growth are HR, CRM, and Procurement domains. Non English speaking revenue has increased to over 15 percent. BPO companies typically service their clients almost entirely from low-cost destinations such as India and the Philippines while having sales offices in various countries. Now with certain level of maturity, Indian BPO firms are looking at both organic and inorganic routes to continue to be ahead of the curve. Most of the top BPO firms are looking to acquire potential targets (BPO companies) in geographies like US and Europe (near shore) and at Philippines, East Europe and Latin America (low cost offshore destinations). Many of these Indian companies are receiving a bulk of their revenue from dedicated centres outside India in near shore destinations although a majority of their employees are based out of India or Philippines as services out of near shore delivery centres are typically high end. However following a onshore model at a larger scale has squeezed margins to percent as against margins in the range of percent for a totally offshore delivery model. However bending / adapting to customer demands Indian providers are attempting to be shore proof and therefore are adopting a blend model that is earn high profits from some locations to offset low profits of other centres. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 13

14 Domestic Outsourcing Local language capability and customized offerings at low cost are some of the strategies deployed by service providers to grow the domestic outsourcing pie. Outsourcing Trends 2010 (%) Domestic BPO Spend (Rs bn) (2010) Telecom Retail BFSI Manufacturing Healthcare Logistics Media Automotive In-house Outsourced CIS F&A Knowledge Services HR Procurement Vertical Wise Spend on BPO (2010) (%) Energy 13% IT BPO 1% Others 2% Auto 1% Manufacturing 16% BFSI 33% Government 15% Telecom 18% Logistics 1% The domestic market s first phase of growth was kick started by outsourcing deals from the telecom and banking sector between The value and complexity of the deals demonstrated the untapped potential of the Indian markets. The second phase commenced from 2009 built on the back of innovative services sought by consumers. Having developed end to end capabilities in the export sector, large BPO companies are now actively targeting the domestic market. Service providers are providing India specific solutions with solutions exclusively structured for Indian clients. 14

15 Local language capability and customized offerings at low cost are some of the strategies deployed by service providers to grow the outsourcing pie. Domestic BPO market touched $2.8 billion in FY11, registering a growth of 22 percent over FY09. It continues to be the fastest growing segment on account of significant voice business from BFSI and telecom. BFSI and telecom account for 50 percent of the domestic revenues and are key drivers of growth as mobile penetration and mobile banking services increase. While the BFSI, retail and telecom verticals are high on the IT maturity curve, manufacturing, healthcare and government are likely to increase their outsourcing component. The maturity level has remained low with majority of outsourcing being voice based customer support. However, going forward, share of non-voice business and knowledge services is likely to increase gradually. Already HRO, LPO and high end analytics have started to gain market share. Further, greater spending by the Indian government is also fuelling demand for IT-BPO services. e-governance initiatives aimed at enabling faster access to services is proving the growth driver. IT spend of the government is expected to grow from $3.1 billion in FY09 to $5.1 billion in FY11. Indian companies are increasingly looking to outsourcing and leveraging IT for improved competitiveness and operational efficiency, better time to market, productivity gains and adopting global best practices. IT spend of Indian corporate has increased from 1.1 percent to 1.7 percent for the Top 100 companies by market cap. With growing competition from MNCs within the domestic market and increased sophistication of India consumer needs, IT adoption of Indian corporates is scaling. Need for domestic outsourcing vary from the need for global sourcing. Improved efficiency and greater innovation are primary drivers. There is a huge focus on Tier 2 and 3 delivery centres specifically in case of BPO operations as nationwide presence, multilingual capability, ability to scale quickly is imperative for domestic service providers. Growth in total number of deals and annual contract value has also grown over the last decade. Growth in number of deals has been more than 200 percent in the last couple of years with annual contract value growing by more than 20 percent. Service provider s landscape is a highly fragmented market. Tier 1 includes MNCs and major Indian providers with full suite services. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 15

16 Size and Significance The industry has played a key role in enhancing the brand image of India. Further, it has generated direct employment for 2.5 million, and indirect employment for another 8.2 million by FY11E. The BPO industry has emerged as the most significant growth catalyst for the Indian economy and has a widespread impact. The IT-BPO industry in India has had a dream run over the past decade, creating new growth opportunities. Contribution to Indian Economy As a proportion of national GDP the IT- BPO sector revenues have grown from 1.2 percent in FY98 to an estimated 6.4 percent in FY2011. The BPO segment itself contributed to 1.5 percent of India incremental GDP in the last decade. The industry has also played an important role in the growth of the Indian services sector. Between FY02 and FY10, the contribution of the IT-BPO industry to the services segment of GDP witnessed an incremental growth of 10 percent. The industry and employees contribute about $4.2 billion annually to the exchequer by way of taxes. The sector s share in total Indian exports increased from less than four percent in 1998 to 26 percent in FY2011. The BPO industry accounted for seven percent of the total Indian exports in FY10 and 25 percent of the total IT-BPO exports ($12.5 bn). It has created 50 million square feet of office space in over 50 towns and led to infrastructure creation. Further the development of IT-BPO sector has required significant capex for furnishing, technology infrastructure, land, etc and added to the overall development of the cities. Driving Balanced Regional Growth The IT-BPO industry accounts for over 14 percent of the state GDP in the industry intensive states. IT-BPO intensive states have 100 percent higher broadband penetration and 50 percent higher tele-density than the India average, and also account for 75 percent of SEZs. With Tier 2 and 3 cities developing as new destinations to leverage cost arbitrage more cities are benefitting from the growth of the industry. A majority of the employees (60%) are from Tier 2 and 3 cities, leading to high remittance flows and therefore consumer spending leading onward to the increase in overall welfare of many more cities in India. 16

17 It has ensured inclusive growth and created huge employment opportunities therefore empowering people. Branding India The industry has played a key role in enhancing the brand image of India, by accounting for over 10 percent of total FDI in the last decade and for over 200 cross border acquisitions between FY05- FY10 It has established India as a global hub for R&D Indian companies, on their part are now emerging as global MNCs through acquisition of onshore/ near-shore centres and through cross border acquisitions. The world recognizes India for its talent pool and appreciates its delivery standards. As a result, more than 75 percent of the Fortune 500 companies are engaged with Indian IT-BPO sector. Empowering human assets The IT-BPO industry has generated direct industry employment of 2.5 million, and indirect employment of 8.2 million by FY11E. 58 percent of total employees are originally from Tier 2 and 3 cities.. Positioned as a Knowledge Services Powerhouse The knowledge services outsourcing industry in India is estimated to have generated revenues of $two billion in FY2010 accounting for 70 percent of the global pie. It has been the fastest growing segment within the bouquet of services offered by service providers registering growth rates of 19 percent CAGR between Its share in the Indian BPO industry increased to 12 percent in FY11 from 8 percent in FY07. The growth of the knowledge services industry has been instrumental in broadening the scope of BPO services, with providers now able to offer a complete bouquet of services including activities classified as core by customers. Scale is not the key driver for knowledge based services delivery. The knowledge services outsourcing industry comprises market research, business research, data management, data analytics and legal services. The industry employs a diverse and skilled talent pool of engineers, statisticians, lawyers, doctors, arts, commerce and science graduates, post graduates, and diploma holders, in addition to offering clients access to a multitude of skill sets. It has generated employment for over people in over 100 firms. The average revenue per employee in the BPO segment works a shade over $14000 per year while for knowledge services offered, where billing rates are higher, the revenue per employee works to be $30000 per annum. Over , the industry is expected to register a CAGR of 22 percent to touch revenues of $5.6 billion. Business research would continue to be the most widely adopted service line with a 39.4 percent share, representing a $2.2 billion opportunity. Share of data analytics, is expected to increase from 18.5 percent to 20.6 percent ($1.15 billion) over the same period. LPO is also expected to record robust growth of $1.3 billion. In terms of verticals, financial services would continue to be the largest contributor with a 32 percent market share ($1.4 billion). A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 17

18 Structure of Industry Large integrated players offer a full spectrum of services IT services, BPO, and engineering R&D and undertake complex transformational deals. The Indian BPO sector consists of over 4000 companies. This can be viewed through two lenses by size and offerings, and by ownership. Over the last decade the BPO sector has matured towards a more healthy structure of integrated, pure play and captive outfits depending on the requirements of the clients. Large integrated players offer a full spectrum of services IT services, BPO, and engineering R&D and undertake complex transformational deals. Pure play BPOs will offer a wide range of services in number of verticals and service lines. Category % of Export Revenue % of total Employes Work Focus Integrated 35-40% 25-30% Relatively late entrants into the BPO industry Have benefited from their ability to handle large bundled deals Offer full spectrum (IT services, BPO and engineering & R&D services) and complex transformation deals Have increasingly ramped up over the years Pure-play 25-30% 30-32% Companies provide a wide range of services for a number of verticals. They are a key driver of BPO not only in India but in other emerging locations. Companies expanding service delivery across the world Emerging/ Niche 15% 25% New organizations and smaller players focussing on providing services to certain select verticals, geographies and service lines. 18

19 Captive Industry trends Captive centres in India are evolving to become the Program Management Office (PMO) for both captives and third party vendors Captive centre are also starting to focus towards developing multi-lingual capabilities to increase their competitiveness Captives are starting to explore hybrid models to augment capabilities and hence adding greater value to the parent organisation Captive transformation from cost centres to profit centres is a rising phenomenon in the off shoring landscape in India A few of the captive centres in India have now moved up the value chain to become Centre of Excellence (COE) for specific areas for many companies The captives industry currently employ over 3.9 lakh employees, accounting for over 21 percent total employee base Incremental captive centres have declined over the last couple of years. IT-BPO captive industry size was estimated at $10.6 billion FY09, accounting for 23 percent of overall services exports revenues Over the last couple of years a number of IT captives have been monetized A large part (over 30 percent) of captives in India are focused on delivering high-end services such as research, analytics, consulting and legal processing services More than two thirds of the captives originate in the US Captives are dominated by BFSI segment. Most of the top banks have a large BPO both voice and non-voice presence in India providing support services to parent organizations. Many have multiple companies in India with each servicing a different group parent A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 19

20 Financial Services Outsourcing In India, the BFSI segment has the early mover advantage. Within the BFSI BPO segment banking BPOs account for nearly 50 percent of the overall scale of sourcing. Sales Customer acquisition Cross- Selling Balance transfers Customer- focused selling MAIN TRANSACTION PROCESSING and CALL CENTRE BANKING & FINANCIAL SERVICES OFFERED Customer Care General enquiries Account management Card activation Card replacement Loan servicing Customer retention Sales Customer Collections Pre-charge off / early stage collections Post-charge off recovery Over limit cards Collections BANKING & FINANCIAL SERVICES OFFERED Care Technical Technical Support Internal help desk Access requests Software and hardware support Laptop and desktop support Office Support Back Office Transcription Captioning support Chat support Back Outbound Outbound Lead generation Telesales Fraud management CSAT survey management 20

21 BFSI pioneered the outsourcing industry and continues to be the largest adopter of global IT- BPO services. BFSI and manufacturing segments account for over 45 percent of the worldwide spend on software products. BFSI ITO Infusion of large deals with total contract value > $25 million post-recession. AO and IT maintenance is the preferred product for BFSI ITO transactions. North American banks signed fewer but larger deals compared to European banks post recession. Close to 60 percent of active BFSI AO deals are comprised of large-sized contracts valued upwards of $25 million. While mid-sized banks dominate the signing of large AO contracts, retail banking remains to be the most active AO user as compared to other banking lines such as cards, lending and commercial banking. Significant banking AO renewal activity is expected in the next five years. Accenture, Cognizant, IBM, Infosys and TCS collectively account for 70 percent of annualized contract value (ACV) of large banking AO deals. Prominent emerging players included Hexaware, ITC Infotech, L&T Infotech, Luxoft, MindTree, Ness and Softtek. IT-BPO Exports by Vertical ($bn) BFSI BPO Global sourcing of BPO in the financial services sector is a $16-18 billion market. It has the potential to grow nearly 15 times its current market size to reach $250 billion Financial services institutions are reevaluating their operations with fresh lenses. This is driven in part, by the need to survive amongst increasingly fierce competition. Within the BFSI BPO segment banking BPOs account for nearly 50 percent of the overall scale of sourcing. Global sourcing of BPO in the capital markets segment represents the fastest growth area (40% y-on-y growth in FY2010), driven by the emergence of high end decision and recommendation making work and analytics. Insurance BPO demand is being fuelled by a greater need for analytics and Solvency II implementation in the European Union. BPO adoption in the banking sector is led by the US firms that are increasing global sourcing to meet performance pressures as well as address BPO Exports by Vertical ($bn) Other Media & Entertainment Const. & Utilities Transportation Healthcare Retail Manufacturing Telecom BFSI FY2010E FY Other MPE Const.& Utilities T&T Healthcare Retail Manufacturing Telecom BFSI FY2010E FY A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 21

22 the lack of opportunity in new account acquisitions offset by loan modification servicing needs. Third-party outsourcing in BFSI BPO is growing over 20 percent annually. India and Philippines are mature locations for BFSI BPO, while Eastern Europe, Central and South America are witnessing significant growth. BPO emerged as the key growth driver in 2010 third party financial services outsourcing market with nearly split between ITO and BPO contracts as opposed to a split in FY09. BFSI BPO Geographies In India, scale of outsourcing for BFSI BPO continues to grow at 20 percent, with growth expanding to Tier 2 and 3 cities for mature services in banking and insurance. According to Everest Group study service providers with the strongest outsourcing capabilities are Genpact, HP and TCS for banking BPO; Infosys BPO, TCS, and Wipro for capital markets BPO; and Accenture, EXL Services, and WNS for insurance BPO. Vertical wise IT-BPO Revenues 22.3% 23.5% 24.0% 15.4% 15.8% 15.6% 21.5% 20.2% 18.7% 40.8% 40.5% 40.8% FY2006 FY2010 FY2011E Emerging Verticals (Retail, Healthcare, Media, Utilities, Transport) Manufacturing Telecom BFSI BFSI Sub-Segment Outsourcing In India, the BFSI segment has the early mover advantage. Services offered have evolved from basic voice, transaction processing to high end analytics BFSI export revenue accounts for over 50 percent of the total BPO exports of India, followed by telecom which contributes another 22 percent. Growth of new verticals of retail, healthcare and utilities has also increased gradually. CIS processes exhibit the strongest industry maturity levels within the banking industry. However, F&A, and HR services also are nearing maturity. Business acquisitions, account servicing and control and compliance are strong. Application processing and customer on boarding activities for retail banks as well as loan and mortgage clients exhibit highest maturity. Providers are also increasing offerings aimed at helping banks improve their control and compliance function. Services provided now include supporting KYC compliance, credit bureau management, preliminary investigations, claims management and fraud management particularly in the credit card sub segment. Legal Process Outsourcing LPO or legal process outsourcing is the second fastest growing segment in global outsourcing landscape. LPO is the emerging segment in India with cost arbitrage being the key driver. It is estimated that cost of employing a lawyer in India is one tenth of hiring a legal associate in the US. 22

23 Global Customers The export revenue of IT-BPO segment in India in FY2011 was close to $60 billion with US alone accounting for $37 billion. Geographic Spread of Indian Exports of IT-BPO Industry 8.4% 9.8% 9.4% 12.1% 9.7% 11.6% 15.3% 17.9% 17.2% 66.5% 60.6% 61.5% FY2006 FY2010 FY2011E US UK Europe Emerging (APAC, RoW) Markets US and Western Europe account for over 80 percent of the IT services spend and for over 90 percent of the total BPO spend. The US and UK are primary geographies for the Indian IT-BPO sector. Indian vendors are also actively developing the Asia Pacific region. Japan and ME offer significant untapped potential, that the industry could leverage to broad base and de-risk its client base. The export revenue of IT-BPO segment in India in FY2011 was close to $60 billion with US alone accounting for $37 billion. Over and above the large base, US s spend is growing at a handsome 20 percent. Emerging Asia and Rest of the World are the fastest growing markets increasingly accounting for a larger pie. UK and US contribute over 81 percent of the BPO sector s export revenue. US alone accounts for $8.5 billion and UK another $2.5 billion. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 23

24 Process and People Management The BPO segment itself has a seat strength of over a million. Growth in employment has been a healthy 25 percent per annum over the last decade. Empowering Human Capital Empowering the youth The industry employees a relatively young workforce compared to other Indian industries About 74 percent of employees are in the age group years of which about 30 percent belong to the age group years. The industry average age is 27 years About 70 percent of the employees have work experience of 0-5 years About 56 percent of IT-BPO employees are the primary bread earners Bridging the gender divide About 31 percent of employees in the industry are women. By 2020 it is estimated that close to 5 million women will be employed by the industry. Promoting diversified regional development and transformation About 55 percent of the IT-BPO workforce is from non-tier-i cities leading to growth at regional economic level, as the employees send back a sizeable amount of their earnings to their families. However, over 90 percent of the employment is centered around seven leading locations Mumbai, Bengaluru, NCR, Hyderabad, Pune, Chennai and Kolkata. Indirect Employment The direct to indirect employment ratio is 1:3. Therefore the IT-BPO industry is a means of livelihood to not only the 2.5 million direct employee workforce but also the 8.2 million strong support staff, lots of whom include those with limited academic qualification like vehicle drivers, security guards, caterers etc. The BPO industry itself provides direct and indirect employment to 4.5 million Indians. Providing employment to foreigners With the adoption of near shore and even at a lower level the any shore or best shore delivery model, an emerging trend is Indian IT-BPO service providers retaining foreign and host country nationals to scale up operations and increase customer satisfaction indices Enabling wealth creation Average annual salary is over $10,000 which is relatively higher than other sectors Over 12 percent of salary is variable-components such as ESOPs, performance rewards 24

25 PAST DECADE Largely domestic workforce Indian policies and processes Tier 1 delivery focus Generalist skill set Talent pool focused on delivery FUTURE DECADE Global workforce percent foreign origin Global policies and processes Tier 2/3 and rural opportunities Multiple, specialized domain expertise Domain-specific business knowledge India provides one of the largest platforms for low cost English speaking highly educated and scientifically and technically skilled work force. The IT-BPO sector has reached out to different sections of society. It has led to the changing aspirations of the Indian youth. It has played a significant and vital role in providing employment to the youth and is emerging as one of the favoured employment options. The BPO segment itself has a seat strength of over a million. Growth in employment has been a healthy 25 percent per annum over the last decade. On a conservative estimate of 15 percent growth in the current decade the industry will generate direct employment opportunity for close to eight million by 2020 (4.1 million in Tier 1 locations and 3.8 million in Tier 2/3 cities), and indirect employment to over 18 million. The bane of the labour intensive IT-BPO industry is the high attrition rates, that in turn lead to higher recruitment costs and higher budgets for retention programmes. The industry also has huge training spends to improve skill sets. The focus of the industry is more on tenure yield that is, productivity of the associate during the tenure with the company. Hiring costs are high due to high attrition rates however this controls overall operational costs as new recruits have lower starting salaries than experienced professionals. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 25

26 Direct Employment in FY 2010 BPO-Direct Employment: Number of Seats IT Services Exports BPO Exports IT-BPO Domestic Market 155 FY2002 FY2010 Incentives to Talent PF and Gratuity: Both are extended as per statutory guidelines where employees contribute a percentage of their basic salary to a common fund. The employer also contributes to this fund. Group Mediclaim Insurance: This scheme is to provide adequate insurance cover to the employees for expenses related to hospitalization. Dependent family members are also included. Subsidized Food & Transportation: the employer provides both transportation facility from office to home and back and meals at subsidized rates. Recreation, cafeteria, concierge facilities: Recreation facilities include pool tables, chess tables, coffee bars, well equipped gyms with personal trainers. All regular bills (such as credit card payments, electricity, mobile and land line telephone bills) can be paid to the concierge who will do the needful. Corporate Credit Card: This enables the timely and efficient payment of official expenses while employees undertake travel for official purposes. Loans: Many BPO companies provide loan facility for occasions like medical emergency, weddings and for relocation of out of town employees Educational Benefits: BPO companies have this policy to develop the personality and knowledge level of their employees and reimburse the tuition, examination fees for MBA students Performance based Benefits: BPO companies have performance based incentive schemes to increase productivity, speed and accuracy. The variable pay component can be as high as 20 percent of salary. Regular get-togethers and cultural programmes: Regular cultural programmes are organized to display talent in singing, dancing, dramatics, acting. Sports programmes are also held. 26

27 Employee Referral Scheme: This is implemented to encourage employees to recommend their friends and relatives. This serves the dual purpose of employing the right personnel and ensuring first level background check. ESOPs, Maternity leave, etc. One of the primary criteria for assessment of employees is the result of customer satisfaction captured at the end of each call. This also forms a key bargaining criteria while bidding for new contracts. Knowledge Workers The industry has made significant investment in enhancing the employability of the workforce with over two percent of the revenues being spent on training. The industry is heavily invested in manpower development with an average training period of 3-4 months for fresh recruits (involving 40 percent of the fresher s salary) and additional training spread over the entire employee life cycle. The focus on hand holding of the employees to improve skill sets leads to development of personalized career plans for each, comprehensive in-house training programmes, grants/loans/ subsidies for higher studies in business management (large outfits have arrangements with reputed management institutions to design and execute special part time programmes for their associates that are relevant for their organization). There are numerous avenues for more training, learning and communication through town halls, reward and recognition programs focus group and employee relation cells and employee summits to increase motivation and retention. India Talent Out-turn, FY2011E Attrition 11% Arts 38.0% 30.4% 34.4% 37.6% 40.9% 42.6% 12% 15% 45% Commerce Science Engineering 18.5% 20.0% 20.1% 19.9% 13.3% 15.4% Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Other Graduates IT Services BPO 17% A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 27

28 INTERVENTIONS Policy Support Policy continues to be aligned with industry needs. STPI scheme providing 100 percent exemption from income tax on export profit pushed the growth of the IT-BPO industry. GOVERNMENT INDUSTRY IT (Amendment) Act 2008 underpins the thrust to creating an environment conducive to the security of information in business transaction Conducive fiscal framework Removal of the SEZ Act anomalies Permitted 100 percent FDI into this segment Allows ITES/BPO companies duty-free import of capital goods The Data Security Council of India regularly conducts survey of organizations to assess the level of controls for information security. INTERVENTIONS NASSCOM Industry Association Successfully lobbied for inclusion of call centres in the Business Auxiliary Services segment, thereby ensuring exception from service tax Provides Quality certification NASSCOM Assessment of Competence (NAC) Runs Skill Upgradation programme NASSCOM Faculty Development Programme (FDP) Runs NAC-Tech (Competitive Assessment Test) to measure employability Launched a National Skills Registry in an attempt to further strengthen security in the IT industry. It is a global first and is a centralized database of information about employees s professional and educational background. Working with industry and HR consultants to determine the best method to improve retention rates. Under the aegis of the NASSCOM s Executive Development Programme, NASSCOM and QAI, a leading quality consultancy in India, has unveiled a Certification Programme for Frontline Management for the IT-BPO sector. 28

29 The Wonder Years: Key policy actions that have aided IT- BPO growth Pre-1990 Early investment in educational infrastructure - IITs/ IIMs, science and R&D - CSIR infrastructure sets the foundation for India s talent advantage : STPI set up to promote software exports proving a powerful catalyst in establishing an India as an IT hub onwards: Telecom sector deregulation encouraged private enterprise to build required capacities in telecom infrastructure Progressive reform continues; review and easing of fiscal / procedural issues (e.g. tax, duty exemption, gradual removal of restrictions on overseas investment, etc.) helps industry growth SEZ Act introduced with special provisions for IT BPO 2007 Policy continues to be aligned with industry needs. Aggressive investment by the Government in improving overall infrastructure scaled down cost of operations. Further, government have substantially increased IT spend Onwards STPI scheme which provides 100% exemption from income tax on export profit expired in early Going forward, this will lead to some consolidation as small players will find it difficult. Larger service providers will ramp up revenue and acquire small players. Going Forward: Public Private Partnerships Concerted action by all stakeholders is required to capture the opportunities and mitigate future risks. They will need to work together on critical issues such as labour laws; reducing business visa and work permit requirements and rules; taxation policies; easing rules for repatriation of profits for companies and data security. The government should make it top-most priority to improve the quality and scale of tertiary education with support from NASSCOM. The government should continue to reform policies to support the industry and ensure parity with other emerging nations. For example, fiscal incentives can be extended to SMEs in the segment so that new players can avail of the incentives the current established players enjoyed for a decade. On the domestic front, it can increase spending through budget allocations for e-governance and provide incentives for technology adoption by domestic companies. The government can push towards building a conducive business environment through improved infrastructure, public services, corporate governance and build a strong global image. The already dynamic and very proactive industry association NASSCOM can assist in exploring entry into new verticals and geographies by expanding its mandate. It can increase awareness within the industry on emerging markets through partnerships with other associations and industry delegations. It can also expand its global network and reach (through local chapters, affiliations) and support capability building (through advisory cells, research, etc.). It can scale up its skill upgradation and quality certification programmes that will address demand and supply side challenges. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 29

30 Benchmarks & Standards The industry has aligned its internal processes and practices to international standards and has built robust quality processes that deliver benefits such as increased productivity and efficiency. Layers of controls in place based on logical structure to mitigate risk Risk Controls Physical Security Access management and access rights to avoid unauthorized access to restricted/confidential information and office space Server room security Asset protection and control on usage. Controls aimed at identification, capture, recording, safeguarding tangible and intangible assets so as not to loose critical data. Network Security Access control to servers Wireless network security Encryption Domain password controls Data auditing Voice communication and systems compliance with information security standards Delivery Related Risk Assessment Testing Alternate site Management to avoid disruptions due to man made / natural disasters Tightly defining performance matrix People and People Continuity Compliance Background screening of employees Confidentiality and integrity agreements Investing in employees to control attrition Meeting regulatory requirements of the host country 30

31 The IT-BPO industry is involved in critical applications for its customers and is part of the global integrated value chain. Expansion to various delivery centres across geographies, complexity of work being outsourced, strong linkages to business outcome and tighter SLAs, compliance to complex regulatory framework of home and host country, data security and asset protection at each delivery centre are some of the key reasons for the industry s focus on managing risk. supplemented with relevant additional control to mitigate additional offshore risk Besides vendors periodically conduct third party reviews of their internal controls to ensure the highest level of security standards. Any control failure found are quickly remedied. Every quarter the VSA results are made available to the customer to provide full transparency on the effectiveness of the offshore risk management programme. The industry has been a front runner in maintaining high quality standards which has helped position the country as a trusted business partner. The industry has aligned its internal processes and practices to international standards and has built robust quality processes that deliver benefits such as increased productivity and efficiency. The industry has been enhancing the comprehensive framework to manage risk and provide seamless delivery experience to clients. There are separate compliance division in service companies looking after this aspect and putting in place programmes to identify and mitigate risk. Indian vendors are replicating customers control at its work locations, An increasing number of BPO companies also work in an ISO (for Information Security) environment. Over the last couple of years there has been a 20 percent increase in number of BPO companies acquiring quality certifications, 30 percent increase in number of companies with performance certifications, and 20 percent increase in companies with security certifications. The high proportion of IT-BPO companies in the S&P ESG India index (second only to Manufacturing companies) indicates the industry s focus on following good corporate policies. The S&P ESG India Index evaluates companies on transparency and disclosure on corporate governance, environment and social parameters. Some global certification that Indian providers have acquired and adopted Quality Certification Security Certification Performance Certification CMMI Data Protection Act Certification PCMM (People) Six Sigma Payment Card Industry Data esourcing Capability Model Security Standard European Foundation for Quality Management ISO Customer Operations Performance Centre CMMI Level 5: Companies are assessed on the maturity of their organizational business process. Level 5 is the highest level of maturity. As many as close to half the BPO are registered with CMMI Level 5. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 31

32 India Advantage The industry has aligned its internal processes and practices to international standards and has built robust quality processes that deliver benefits such as increased productivity and efficiency. Client connect and engagement India has developed as the Destination of Choice. It continues to leverage its brand equity in IT to spawn an industry that has been for the past few years synonymous with India. It has managed to retain its dominance in the IT-BPO arena, thus carving a niche as the global outsourcing hub. The past couple of years have witnessed a transition of the sector from offering nascent BPO services to that of rendering high end analytical and knowledge services to global clients. Operating Cost Differentials $000s/per annum % Savings US Tier 2 Sao Paulo Prague Budapest Bucharest Shanghai Kuala Lumpur Manila Bangalore % Savings

33 Key Success Factors of India s Value Proposition Low cost of delivery India offers the lowest cost of delivery as compared to other offshore locations, with Tier I locations offering savings of between percent over source locations. Follower or Aspirant locations within India (Tier 2/3 cities) have also emerged as cheaper alternatives. State governments seeking to develop these locations could leverage and adopt the strategies of leader locations to jump start their growth. As the cost proposition has decreased in Tier 1 centres vendors themselves have adopted the strategy to expand in follower locations to retain cost competitiveness. High calibre human capital Availability of skilled English speaking talent at cost effective rates has been India s foremost attraction. India s graduate outturn has more than doubled in the past decade. With a young demographic profile and over 3.5 million graduates and postgraduates that are added annually to the talent base, no other country offers a similar mix and scale of human resources. India s strong education framework ensures ample supply of deep technical and non-technical talent. While some gaps in talent suitability exist, they are being addressed through strong provider level initiatives and industry led programmes. Robust process delivery The industry is extremely quality focused, with India based centres accounting for the largest number of quality certifications achieved by any country. The industry has set global standards and leads in customer satisfaction. Indian BPO industry has established an excellent reputation for process improvement which has given it a real edge. Business environment and infrastructure & Supportive regulatory policies Timely government policies (a 12 year tax holiday on export income) and increased public private participation have played a key role in developing an enabling business environment. The establishment of Software Technology Parks of India (STPI), and later SEZs provided an enabling ecosystem for the industry to flourish. Infrastructure development has been addressed by both public and private sector, leading to the development of world class facilities in select cities Global footprint Increased focus on global delivery has required the industry to enhance its global footprint, which has in turn helped the industry reach out to new customer segments and offer new services. Over the last two years, there has been a 32 percent increase in the number of global delivery centres with outreach expanding to 12 new countries. The new service global delivery model adopted ( any shore delivery ) with centres in other locations such as US, Philippines, Latin America, East Europe, China to complement services offered in India has helped in retaining the competitive advantage A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 33

34 Developed Clusters, First mover advantage and Herd mentality India s reputation in this segment precedes it. Bangalored is the first connect made during strategy brainstorming sessions at client level considering outsourcing. Brand India recall is also significantly high among outsourcing consultants. This has been built on an existing infrastructure of IT capabilities that have been extended to IT related services. A very strong support from IT architecture is an absolute essential for the industry to multiply. Further, the setting up of shop by some of the larger global IT firms in India set off a chain reaction and more were induced to join the cluster. The industry has strived to feel the pulse of the market, kept atuned to emerging themes to retain their first mover advantage. Client Engagement Customers are driven by speed to market model and they now partner with vendors to ensure success. Indian vendors have broken out of the traditional mould that limited it to successfully completing the assignment and signing off the SLAs and have moved up the value chain to the level / stature that they partner clients. They have thus in turn outsourced to other new geographies the low hanging fruit. The industry has been enhancing its abilities to transform client businesses. The industry has moved from an offshore delivery-centric model to a customer-centric, domain focused and solutions oriented model offering end-to-end transformative solutions across multiple functions and services. Ensuring customer experience is of the highest satisfaction levels is the key differentiator in the market and Indian vendors are ensuring that. Value proposition Companies are now making a conscious effort to increase their value propositions in the form of integrated service offerings across diversified verticals through unified platforms. There is an increased maturity in service delivery to partner clients in core functions and increased focus on domain. The industry has built high capability talent pool with relevant subject matter expertise across geographies, verticals and services. 34

35 Mumbai and Bangalore as Major Outsourcing Centers IT and outsourcing is widely spread in India across various cities that among others include, Mumbai, Bangalore, Chennai, Gurgaon, Delhi, Hyderabad etc, Mumbai and Bangalore emerged as more visible in terms of the leadership these two cities have in regard to finance and technology respectively. Mumbai has traditionally been a leading financial center in India even prior to the nation s Independence from the British Rule. Mumbai has been the headquarters for numerous institutions in the financial sector. India s central bank, securities regulator, commodities market regulator, three of the national stock exchanges, three of the national commodities derivatives exchanges, top banks in the public, private and foreign sector, asset management companies, insurance companies, foreign institutional investors etc are all largely located in Mumbai and some of these institutions such as Bombay Stock Exchange are nearly 135 years old. Economic and financial liberalization in the early 1990s, led to further rise in the financial sector with the choice of most of the institutions being Mumbai in view of its locational advantages as also the skills and expertise in a cross section of functions and leadership positions that are relatively easy to find. Mumbai thus continued to hold its preeminent position in regard to the Indian financial sector. Naturally, the first choice for financial outsourcing hub has been Mumbai. Bangalore, which quite often is compared to the silicon valley of the United States, has a much more laid back approach being one of the most favored cities for the cool climate and close proximity to major cities in South India such as Chennai and Hyderabad. For the technology entrepreneurs and international companies Bangalore became the first choice for its very conducive climate and the proactive initiatives of the Government in developing Bangalore as a major destination for the Information technology processing. Moreover first generation IT leaders such as Infosys and Wipro based out of Bangalore acted as pull factors for Bangalore emerging as a favored IT destination. Bangalore is in fact among the top 10 preferred entrepreneurial start up locations worldwide and also has the largest resident population of expatriates in India. In addition, the large number of engineering colleges that began to be established in the Southern states of Andhra Pradesh, Karnataka and Tamil Nadu provided ample supply of skilled engineers at a very relatively low cost. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 35

36 Good climate, proactive approach of the government, skills and lower wages have played an important role in evolving Bangalore as a critical node for Information technology. As Indian economy began to expand and India s prowess and potential in information technology began to get more articulate, companies globally looking for locations that will save costs and result in better output began to find India as an important destination. Mumbai and Bangalore being the front runners in leadership in finance and technology respectively naturally attracted the first wave of interest. The success of Bangalore as an IT city has induced other states to come up with numerous incentives and benefits for setting up of IT related ventures by which emerged new cities like Hyderabad, Chennai, Gurgaon, Pune etc. As economic growth in India began to disperse beyond the four traditional metropolitan centers that became largely due to the legacy of the British rule, newer centers and cities began to assume importance and significance though cities like Mumbai and Bangalore have continued their dominance in financial markets and information technology respectively. These two centers have established a wide network of interfaces with key stakeholders in the respective industries. For instance, the financial markets industry has strong influence in making of policy and regulation, much of it may emanate from the Government based in New Delhi. Various committees set by up the regulatory authorities on banking, capital markets and commodity derivatives operate from Mumbai through the members for these committees may be drawn from diverse range of representation. Also major part of the consultation papers and consultations on strategic aspects of the financial markets growth and development also originate from Mumbai reflecting its predominance and influence in matters on finance. Similarly Bangalore exerts sizeable and significant influence in shaping the policy on India s information technology and outsourcing industry. National Association of Software and Services Companies (NASSCOM), the industry body representing the interests of the information technology industry in India is also located in Bangalore with a large part of the policy influence and industry standards emanating from there. Governments at the Central and federal level in India take both these seriously in regard to perspectives and points of view in regard to the respective industries. These ecosystem support conditions have ensured that both the information technology and the financial services industry develop around Bangalore and Mumbai cluster. 36

37 Emerging Centres New entrants into the BPO space are playing to their strengths and positioning themselves as niche service providers. They are focusing on developing specialists skills to enhance speed, project delivery for high end IT projects. Emerging Destinations Philippines: It is the third leading outsourcing destination after India and Canada. The industry has grown in size from $1 billion in revenues in 2004 to $9.1 billion in 2010 and an expected revenue of $11.6 billion in It earns more than half its revenues from voice BPO ($5.7 billion in 2010). Owing to low labour and telecom costs, coupled with strong English language skills the country has evolved as a hub of inbound and outbound contact centres. Europe: West Europe, especially Germany is increasingly outsourcing to Poland, Romania, Czech while France is looking to North Africa to leverage time and language affinity. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 37

38 38 The enormous windfall gains both direct and indirect emerging from the success of the IT-BPO industry in India was expected to spur other economies to join the bandwagon sooner rather than later. A number of new outsourcing destinations are attempting to emulate India s success. Many have achieved a certain degree of success. Talent pool, emergence of capabilities, in new geographic regions, as well as national governments providing strong thrust and focus are driving growth of global delivery locations in Asia Pacific, Latin America and East Europe. Markets New entrants into the BPO space are playing to their strengths and positioning themselves as niche service providers. They are focusing on developing specialists skills to enhance speed, project delivery for high end IT projects. They are ramping up their capability in specific service offerings. Philippines is banking on its English speaking population, offering contact-centre services. Egypt and Morocco with their multilingual capability are positioning themselves as options for low-cost European language locations, while China, making use of its huge manufacturing industry, is emerging as an R&D services outsourcing location, in addition to a base for providing outsourced services to Japan. East Europe and Latin America made their move into the outsourcing space by penetrating areas in which they have developed skills like software development and IT service outsourcing. East Europe is positioning itself as an attractive IT and software development offshore and near shore outsourcing destination. Incentives For their countries to emerge as attractive sourcing destinations, countries led by their governments are offering a plethora of incentives to reduce the cost of doing business/ operating costs and also incentivize corporate spend in enhancing employability. Certain fiscal measures include reduced or exempted corporate tax rates, reduced individual income tax rates or income tax holidays, reduced tariffs and import tax exemption on capital equipment. For developing skill sets, governments are offering, training subsidies, grants, concessional loans, state funded training programmes, faculty programmes etc. India vs Others While each of these locations have their strengths India continues to be the leading offshoring destination. It leads in cost competitiveness even with rapidly rising operating costs. China and Philippines are its closest competitors in cost arbitrage and even then they are higher by percent. Further, India continues to enlarge its footprint on the back of an ever growing rich talent pool that is ensuring business scalability. Providers are supporting large budgets for training to improve employability and countering high attritions by innovative employee benefit schemes. Meanwhile as risk issues persist and continue to haunt India to the advantage of East Europe it continues to be a concern across geographies. On four key globally sourced services -- IT, Voice, Data and Knowledge India continues to be the most favoured destination. As per a McKinsey survey, 80 percent of the top companies that are sourcing from global locations have a centre in India or a contract with an Indian provider.

39 Strength India Philippines East Europe Latin America Canada Services offshored Markets Drivers Large Bouquet: End to end delivery - Product Development, Testing, LPO, BPO, KPO US, Europe, Asia to small extent Abundant skilled English speaking human capital, end to end delivery model, IT base Voice based BPO. Niche segments: Animation, HR, F&A Exclusively US US cultural affinity and fit, cost effective structures, English speaking population Business Intelligence, Engineering & R&D, F&A, Testing, CIS, HR Primarily West Europe Near shore delivery to Europe, infrastructure, European lineage and language Artificial Intelligence R&D, Product Development, Testing, BPO US Near shore to US CIS, F&A, Testing US Near shore to US Cost Advantage 60-70% 50-60% 20-25% % 20-30% Strength Cost Talent Infrastructure Risk Environment Vendor Maturity Scalability Going Forward Will continue to stay attractive Will grow stronger in voice BPO than any other destination Will suffer labour shortage therefore cost will rise Will suffer labour shortage and IP risk will continue to be a concern Will not be cost competitive Very strong, key driver Strong driver Need to strengthen this aspect Need to strengthen this aspect on priority A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 39

40 Delivery Models Over the last few years and going forward IT-BPO sector is ceasing to be a competitor and is emerging as an enabler for industry growth in host countries. Service providers are developing a network of global delivery centres to provide best shore solutions. Trends Captive or Third party: No single approach will be isolated. Decision to choose a vendor will be subject to requirements. Captives will emerge as project management centres undertaking key core sensitive processes and provide resilience to the operations. Management: A more integrated global delivery model will be actively encouraged so as to draw value. Financial services customers will consolidate supplier relationships for effective management. Knowledge based services: Increasingly core functions and knowledge oriented processes will be outsourced with both vendor and client maturity. Vendors will become strategic advisors to onshore businesses. There will be a shift from outsourcing simple processes to increasingly complex transactions. Service providers will become increasingly more sensitive towards compliance and regulatory framework of host countries and acquire domain expertise. Technology: IT Applications and outsourcing operations will increasingly get co-located with a single vendor emerging as a one stop shop to the client. Vendors will realign their operations to incorporate full IT solutions so that client can leverage technology to the maximum. Split operations model: Global delivery centres will be developed to provide best shore solutions in a multilingual model. Operations will be split among centres across geographies. This dispersed location model will control concentration risk. Enabler Model: IT-BPO segment is ceasing to be a competitor and is now becoming an enabler for industry growth in host countries. 40

41 Transaction based: Initially contracts awarded were for each individual process, primarily non core voice based and transaction specific contracts. Traditional service lines were F&A, CIS. Therefore vendors are increasing delivery capabilities. Earlier there was adherence to Service Level Agreements (SLAs). This model has now been re-tooled into more of a cocreation model. A time and cost model catering to low end processes has matured a more managed service model. High margin: Earlier with the first mover advantage BPO vendors were able to make a profit margin that was over 30 percent. Over time as volumes increased and clients matured the margins have been under pressure. Level of profitability of an outfit depends on among other parameters seat utilization, forex, attrition and resource management, pricing. End to end Solutions: Offshoring is now all about collaboration, of multiple teams across geographies with capability of transferring resources across centres. Clients now seek end to end solutions preferably from an integrated solution provider with IT capabilities as well as outsourcing provider. Larger BPO providers are making significant investments and acquisitions to ramp up IT capabilities, business intelligence softwares, platform solutions, advanced automation and application development support. Pure play BPO will continue but will become increasingly niche players. Vendors are looking beyond current contracts to proactively seek out additional services that they can provide to their clients that can not only increase depth of relationship with clients but all offer more value and impact. They are ramping up domain capabilities, creating centres of excellence in both vertical and horizontal areas to service clients and partner with them in enhancing value, reducing time to market and ensuring business processes. Contracts will need to be designed to capture more of the collaborative partnership spirit. Companies will understand they cannot do it alone and need the skill and expertise of their providers to survive. Lower margins Third Party Captives Sales 15% Sales 2% Employee Costs 60% Employee Cost 70% Operating Expenses 8% Operating Expenses 15% Margins 14% Margins 10% A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 41

42 Offshore delivery centre: Initially the objective was primarily to exploit the cost and labour arbitrage offered by offshore delivery locations. Now gaining value from outsourcing has become the mantra. Voice based services: Customer care voice based services continue to be at the forefront of process outsourcing. However, outsourcing has outgrown this trend moving beyond, to increased transaction processing and knowledge services. Best Shore delivery model: Global sourcing risk management is creating a push for global delivery network. A more client driven model where both client and provider determine the best location that will add value to the delivery by ensuring cost arbitrage as also best knowledge capability. It will also take care of the geographic risk for the client. Driven by clients demand for more choice in delivery centres over the last couple of years there has been over 35 percent increase in delivery centres with outreach expanding to over 12 new countries. There are now 500 delivery centres in over 200 cities in over 60 countries. Increased competition among vendors is also leading to Indian providers offshoring non core functions to their outfits in new delivery centres. Within India too Tier 2 cities have developed albeit being adolescents. Several third party and captive BPOs will increasingly acquire small size companies to ramp up revenue, acquire clients and expand business segments and geographical reach. Many BPOs now derive a large portion of their revenues from providing services out of India. Although multi location delivery model is offered to clients, a single contract price is quoted to clients which takes all centres into account. Knowledge Services: Scope of outsourcing has significantly expanded. Clients are starting to view outsourcing as a real strategic advantage and not a means to cut costs.. The initial success of the BPO providers with voice and transaction based services has prompted companies to experiment outsourcing high end core critical knowledge based services like analytics and market research to India. The current drive is to outsource strategically relevant functions. Indian providers have meanwhile acquired client domain expertise, adopted global standards in data security and best processes. 42

43 Captive: Captive model is driven by data security concerns, regulatory compliance, trust and integrity issues. Captives will continue to perform very key critical core specialist functions and will manage outsourcing of activities for the parent company. Captive outfits enjoy a 30 percent cost arbitrage over source nations. Third Party: If the objective of offshoring is cost and factory scale then third party model would work. Enjoy cost arbitrage of percent over source nations. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 43

44 Vendor Selection Outsourcing of processes is a very critical strategic decision that involves high costs, uncertain returns / financial benefit and sharing of critical propriety knowledge. Further, it comes along with its own set of risks. Prior to vendor selection clients should be clear of the business objective for outsourcing be it reduction in costs, concentration on core businesses, improving speed to market, increasing organizational flexibility, enhancing efficiency, etc. On the basis of these objectives the client should match vendor abilities. Therefore it is also very important for the client to conduct a comprehensive due diligence prior to selection of vendor. Some Key Outsourcing Steps are: Retaining a Consultant: Consultancy services required to advise on whether outsourcing will add value to the business. The consultant will advise whether to outsource or offshore or to use both opportunities, they will design a strategic framework for outsourcing model, conduct feasibility studies, design contracts, determine costs of outsourcing, periodically review the model. The framework will introduce focus to outsourcing to ensure it aligns with corporate objective. Typically for IT outsourcing clients CTO floats RFP and then vendors respond. However lots of preliminary events lead upto this, in which space Indian vendors do not have any visibility. Tendering Vendor Selection depending on the business objective of the corporate matches with the vendor capability Contract Creation detailing risk mitigation, IP rights, timelines, delivery standards, control framework etc Service Delivery Management Risks are Time spent on negotiating complex agreements Litigation when SLAs is breached and failure to meet SLAs IP infringement and data security related issues Business continuity model of the vendor Scalability of the vendor does the provider have adequate and correct skill set to enhance scale Geographic risk Culture failure of the vendor to adopt to client culture Hidden Costs: Locational study, Cost of benchmarking and analysis to determine if outsourcing is right choice, Cost of investigating and selection of vendor, Cost of transition of work and knowledge to the vendor and back again, Cost of monitoring the project, Legal and consultancy fees 44

45 Vendor Selection Criteria: Clients evaluate BPO vendors / service providers on some of these capabilities: Business process knowledge: Vendor must adequately build domain expertise in several verticals so as to deliver value. Day to day operational expertise: Vendor must invest in automation so as to ensure smooth operations Offshore delivery capability: Vendor should offer the client option to choose from multiple delivery centres across geographies so as to add value and de-risk operations. Ability to add business value: Vendor should be able to provide significant value beyond cost and labour arbitrage. Business scalability: Vendors should demonstrate an ability to scale up operations and grow and prevent unnecessary business interruptions. Having a critical mass is very important for the vendor and the client. A vendor who takes customer satisfaction seriously will chalk out and have in place a risk mitigation plan to identify any exigencies that may emerge during the contract life cycle, address and manage it, resolve and monitor it. They should have disaster mitigation plans in place. Data Privacy and Security: Criticality of data is absolute essential. Vendor should have very comprehensive systems and control framework for ensuring data security and integrity. Vendors should have various levels of quality control to ensure no data breach. Vendor should be able to satisfy client concerns by ensuring data privacy, infrastructure security (firewalls, access controls, data encryption) and background checks on personnel. Compliance with statutory laws: Vendor should conform to statutory laws of the country in which it is located. Proven track record of on time delivery without cost escalations or arbitration issues. Matching Business Objectives: The criteria for which the client is outsourcing should be met by the prospective vendor. Audit Results: Vendor should have frequently conducted both internal and external audit of IT infrastructure and security framework Location Studies: Clients usually conduct location studies prior to setting up captives and identifying third party delivery centres (eg Gurgaon is a very strong base for call centres while Bengaluru with its deep technical and IT skill set is preferred destination for high end IT outsourcing and for transaction processing). The end user experience is going to be the only real differentiator for customer retention, brand loyalty and increased customer lifetime value. Providers have to enhance customer experience by anticipating in advance what the clients would need to enhance value and provide it. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 45

46 Outsourcing Pain Points It is inevitable that going forward challenges will emerge. Already rising costs, saturated infrastructure and talent shortfall is rearing its head as is protectionism in key markets. Meeting changing client expectations on delivery and IP security will also be increasingly important to address. Protectionism Rising Costs Competition CHALLENGES Talent Shortfall Client Expectation Infrastructure Constraints Rising cost Wage inflation at percent for the next few years Infrastructure development cost especially in Tier 1 cities Talent Shortfall India has ample supply of human capital. However, it is largely trainable in nature, not employable. Suitability stands at a low 25 percent for engineers and percent for non-engineers High attrition rates of over 40 percent leads up to incremental spend on training, retention incentives and recruitment plans Need to build domain specific skill sets. Saturated Infrastructure The industry is concentrated in 6-7 Tier-I cities which are near peak capacities. There is limited development in Tier 2 & 3 cities at present although they offer a percent reduction in operating costs. The eco-system should include physical (international connectivity, mass-transport system, telecom connectivity, power, housing) as well as social infrastructure (healthcare, education, entertainment, security, hotels, etc) Protectionism in key markets & Regulatory changes It is inevitable that high unemployment levels in the US will increase the rhetoric against offshoring. 46

47 Host governments will increasingly demand creation of local jobs by establishment of onshore outfits. Rise of protectionist sentiments in parent markets could lead to increased onshore or at best close to home delivery locations. This trend has already translated to more stringent visa and work permit laws to hamper movement of employees. In vendor markets frequent changes in fiscal policy (discontinuation of tax incentives) could prove a challenge for many business models Regulatory compliance for clients will drive up costs of frequent audit ratings of vendors. Competition India continues to be the nerve centre of the outsourcing industry. However, many new geographies such as Philippines (exclusively catering to voice demands of US markets), Egypt, China, East Europe (offering time and language advantage to service European clients) are seeking to emulate the Indian model. These new service delivery geographies could emerge with niche capabilities. In a strategy to de-risk operations clients, could going forward employ multi-location global sourcing networks. Client Expectation: Clients could re-evaluate their contracts to improve efficiency and costs. There is already pressure from clients demand more for less to derive full advantage. The service providers will have to innovate to stay ahead of the curve and ensure buyer interest. Lack of ability to address the business needs of the clients especially of the smaller players. Litigation over SLAs SLAs that are entered into do not pass complete liability onto the service provider. There is limited liability clause and not unlimited liability for the vendor. However clients ensure that there is nonperformance penalties, time and cost escalation safeguards that would create risk for the vendor. To protect against this vendors take on insurance cover for every major contract and for every client. The service providers have taken care that at every step there are internal controls in place so that they do not take a hit from any exigencies that may arise that will entail arbitration or litigation. IP Protection Indian service providers have taken significant initiatives to strengthen security and data privacy in the industry and have in place controls including internal and external audits, quality controls, constant review of environment, data protection firewalls etc. Vendors conduct quarterly business reviews to ensure no data breach. Technology and business audits and due diligence are done periodically and results are shared with clients. Clients on their parts also undertake audit and visit service provider facilities to satisfy themselves on data security. Vendors maintain a score card for performance measurement of employees and run background checks on all employees at the time of recruitment. However the perception persists among clients that IP protection is not very strong in India and continues to be a concern. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 47

48 The New Normal Emerging Business Themes Best Shore Delivery Cross Border Participation Global Employee Base Service Delivery Geographies No One Preferred Model Vendor Consolidation Beyond Voice Cost Arbitrage is Secondary Smaller Margins Longer Contract Life-cycle Increased Acceptance Client Billing IP Concern New Markets Domestic Market Development of Tier 2/3 cities Clients want offered a combination of onshore, near shore and offshore locations Service providers in India are looking to invest in mid market domestic provider firms in US and Europe units Indian BPO companies to become global employers Governments will make a push to position themselves as new sourcing destinations Delivery models will be a mix of captive and third party vendors Mom & pop shops will remain with limited scope Major service providers are adding business intelligence capabilities Enhanced value proposition will determine relationships between providers and clients Margins which were earlier in the range of over 30% will continue to decline Clients will have service contracts of longer duration As a management practice, outsourcing will be more acceptable Increased leaning towards bidding and billing for projects irrespective of employees Vendors will have to strengthen further their safety firewalls Asian companies will increasingly look to reap the benefits of the outsourcing model Enhance focus on domestic market to take advantage of the increasing spend Companies will mitigate and expand to Tier 2 locations 48

49 The Indian BPO industry has been reinventing itself to stay ahead of the curve. It is moving away from traditional business practices. Traditionally, BPOs were engaged only for niche services. Later outsourcing was integrated with IT processes. Over the past couple of years there has been a fundamental shift in business practices in the Indian BPO space. Best Shore Delivery: Federal governments of host nations will drive growth of onshore centres in a bid to stimulate local job growth. Indian vendors themselves will farm out noncore processes to new delivery centres and increasingly undertake core high end processes in India. Indian outfits are therefore expanding to centres in new emerging markets to offer / retain customers and enhance customer satisfaction. Indian outfits will continue to gain multi-location delivery capabilities and are ramping up delivery centres. On their part clients in an attempt at risk mitigation are adopting sourcing models that entail sourcing from multi-shores including domestically. Clients want offered a choice of a combination of onshore, near shore and offshore locations. However many near shore locations will achieve maturity to the point that they no longer meet the requirements to qualify as a true near shore locations because costs would reach parity with major markets. A case in point is Canada. Cross Border Participation: Cash rich service providers in India are looking to invest in mid market domestic provider firms in US and Europe to offer multi-country experience. Conversely, more US service players will look to consolidate on Indian shores. Global Employee Base: The global delivery model is turning Indian BPO companies to be global employers. As governments of host countries demand creation of local jobs and as new markets and services necessitate local knowledge the workforce will widen to include non-indian employees with multilingual capabilities. This will not only be limited to front line sales roles but will also extend to strategic leadership and core delivery roles. New Service Delivery Geographies: Traditionally India and Philippines account for 40 percent of the new delivery centres set up globally. More governments will make a push to position themselves as new /alternate sourcing destinations. East Europe will develop as a service provider to Europe sharing the same cultural and language affinity and compatibility. Although English will be a predominant language, other language outsourcing will also pick up. Companies will shop for their outsourcing services depending on what they are looking for cost arbitrage, service, business value, partnerships, etc. There will be increased specialization in provider landscapes. While newer geographies emerge smart outsourcers will choose destinations that provide most value, therefore there ideal mix will be matching right delivery destination to right knowledge set available. While service delivery goes global, India will emerge as hub of the network and the primary delivery centre and new geographies will serve as other delivery bases. No one preferred model: No one delivery model will be preferred. Delivery models will be a mix of captive and third party vendors. The industry can expect many more different sourcing arrangements than in the past. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 49

50 Vendor Consolidation: Companies will outsource multiple functions to fewer vendors. Companies will combine multiple processes in their outsourcing initiatives rather than outsourcing single processes on stand alone basis. The new client requirement to associate with few vendors for effective management will ensure that mom & pop shops will remain only very niche players. The clients demand of more for less will not be able to be fulfilled by small outfits. Going forward, there will be increasing mergers and acquisitions with providers wanting to be able to meet all customer needs. Larger vendors will offer bulk standard services leveraging scale and volume to offer relatively lower prices, boutiques will offer differentiated industry solutions. Captive outfits will emerge as project and vendor management centres. Increased consolidation of offshore providers will also be driven by thinning margins. The BPO provider landscape will be rearranged. Beyond Voice: Vendors are widening their product basket to include knowledge based services or analytics. All major service providers are adding business intelligence capabilities to the BPO capabilities. This is making them move up the value chain, providing more value to the customer and enhancing customer experience. The convergence of process technology and analytics will, going ahead, produce exponential savings for the clients. Service lines will evolve for providers resulting in increased focus on higher end offerings such as systems integration, consulting, business intelligence, knowledge services and vertical specific BPO services. Cost and labour arbitrage is secondary: The industry has spawned primarily due to the cost arbitrage it offers to the host country. Not denying that cost advantage will continue to be a biggest underlying driver for taking a decision to outsource and offshore, going forward, enhanced value proposition will determine relationships between providers and clients. Vendors will not be able to play on the cost arbitrage card alone. They will have moved beyond time and cost model of simple back office processes into consulting business transforming the way clients do business. Smaller Margins: Clients will continue to demand more for less and margins which were earlier in the range of over 30 percent will continue to decline. They are presently in the range of 15 percent. Going forward the providers will see increased pressure on maintaining these margins. However the increased scale of business will ensure profitability. Contract Life-cycle: Cost of investigating and selecting a vendor and consequently cost of shifting vendors is large and therefore going forward clients will have service contracts of longer duration with favourable terms embedded to alter volume of service without reopening contract negotiations. This will reinforce the client vendor partnership in growth model. Increased acceptance for outsourcing: Initially only non-core functions were outsourced to providers. With increasing vendor maturity and programmes for engaging clients further, clients are increasingly 50

51 outsourcing and offshoring core functions. As a management practice, outsourcing will be more acceptable, with clients working jointly with providers. Outsourcing will continue to be viewed as a powerful tool available to build better companies and better economies. More verticals will emerge especially in retail, logistics, media and entertainment and healthcare with increased outsourcing. The scope of outsourcing will continue to widen. Client Billing: The conventional pricing models involved revenues directly linked to head count. Clients were billed per seat utilization or on per head basis. Now they have evolved into rewards proportionate to the gains they provide clients, that is outcome based pricing or hybrid pricing which is a mix of fixed transaction fee, time and material billing and payments linked to business outcomes. This has higher margins. In India 40 percent of the contract value is based on fixed price deals irrespective of the number of man hours spent and 10 percent on outcome based pricing deals. Going forward, there will be increased leaning towards bidding and billing for projects irrespective of employees. Further, although any shore model will be employed with global and Indian employees, biding and billing for projects will follow one price global delivery model, rather than delivery centre billing. IP Concerns: Outsourcing involves sharing and transferring sensitive propriety information to the vendor. This raises concern for IP protection and increases risk of financial fraud and data piracy. Going forward, vendors will have to strengthen further their safety firewalls as it will be a growing concern for clients. New Markets: The Indian IT-BPO industry will increasingly look to explore new markets and move beyond existing traditional core markets of US and Europe. Asian companies culturally are not oriented to outsourcing even non-core functions. Their approach is more towards providing holistic services. However this is changing and Asian companies will increasingly look to reap the benefits of the outsourcing model. Indian BPO vendors need to explore these untapped markets that offer potential. These new markets need to be leveraged to broaden client base and de-risk operations. Domestic Market: Following the global trend, in the Indian market space BFSI outsourcing voice based services dominates the client landscape. Going forward, with increasing technology spend, government, manufacturing, retail and healthcare will also emerge as powerful strong verticals in the domestic market. The Indian service providers will enhance focus on domestic market to take advantage of the increasing spend. Development of Tier 2 and 3 cities: On the lines of development of new global delivery centres, going forward IT-BPO delivery centres will spread to Tier 2 and 3 centres. As Tier 1 cities reach saturation point in terms of infrastructure, companies will look to leverage new talent pools and reduce operating costs by mitigating and expanding to Tier 2 locations. Increased Scrutiny of Outsourcing Activities by Regulators: This new trend will lead to enhanced level of support for regulatory compliance leading to increased costs. Vendors will need to understand and fully appreciate the operating environment of BFSI clients and will have to increase sensitivity towards compliance. A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 51

52 Prospects for Tianjin China: Outsourcing Industry Landscape China currently occupies a small fraction of the outsourcing pie. However it has a growing presence in the industry landscape with growth of a smart 30 percent over the last couple of years. According to a study by KPMG, China s outsourcing market could touch $44 billion by Its growing presence in global outsourcing industry is influenced by strong infrastructure, huge talent pool and government support. In August last year, the government announced a business tax exemption of five percent that will extend till 2013 for outsourcing companies based out of 21 cities. China is the most preferred destination by companies in the Asia Pacific region. Japanese companies have been outsourcing to companies based in Dalian. China will need to overcome a few pain points to achieve growth namely language barriers, cultural fit only to Japan, restrictive internet usage, no government regulation on IP rights. Financial Outsourcing Relevance for Tianjin Financial Markets Financial markets growth and development offer numerous opportunities for emerging financial centers. Financial outsourcing could be one of the major streams of activities that potential financial centers could opt for nurturing and development. Tianjin Financial Centre is endowed with several advantages that among others include: Close proximity to Beijing, which is the location of the world s biggest banks Close access to one of the major sea ports A long history of financial markets presence New financial infrastructure in terms of Tianjin Financial Assets Exchange Special bilateral programmes currently under implementation for financial markets development and related infrastructure Presence of big export processing zones as also well developed infrastructure for transport, communication and financial services Located in one of the strongest growth nodes in China Skilled manpower and human resources Plans for developing Tianjin as a major centre for private equity activity These advantages equip Tianjin to develop financial outsourcing as an important activity that could enable it to emerge as a leading centre in terms of financial activity. A few important aspects relevant in this regard may include: China may not replicate the experience of other countries where financial outsourcing emerged from demand from institutions outside the country. Tianjin has enough potential to develop and tap outsourcing activity from domestic institutions. 52

53 Outsourcing models specific to the business of financial institutions in China covering various streams and segments could be planned. Cost economization could be the major driver underpinning the identification of activities and scope of the business. Availability of well-developed infrastructure could make it easier for the business to stabilize within a relatively short time. Positioning Tianjin as a potential centre for outsourcing with specific plans for its continued development that could attract financial institutions of various types and diversities. From the experience of India and other countries with extensive financial outsourcing activity, certain aspects that Tianjin should examine and look into closely in terms of policy and other incentives designed to develop this activity could include the following: extant laws and regulations. Explore partnerships with institutions and agencies in promoting better standards in outsourcing. Liaise with Government, central banks and regulatory authorities for getting clear guidelines on the scope of outsourcing for financial institutions coming under respective regulatory regimes. For a region / city to aspire to emerge as an IT-BPO hub and to establish a strong industry it must clearly position itself, play to its advantage and ramp up the talent pool. With proper policy, regulation and operational guidelines, financial outsourcing could be developed as a supporting and sustainable activity for an emerging regional or international financial centre. Identify segments suitable for financial outsourcing. It is important to first focus on those segments which have scope for growth and relevance for the location. Suitable segments that could develop in the context of Tianjin may include, banking, asset management services, private equity etc. Set up infrastructure for training of people and human resource development. Work on issues such as data security, data transfer, client liability in accordance with the A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 53

54 Going Forward NASSCOM is confident of a percent growth rate of the country s IT industry in FY12, with the sector slated to bring in about $68-70 billion in revenue. 54 In spite of rising competition from other developing countries such as Philippines, China, Brazil, Mexico and Ireland, the Indian ITeS and BPO industry has maintained its leadership position and grown consistently over the past few years. The BPO sector has gained significant headway over other destinations, with over a decade s experience and maturity in the delivery. NASSCOM is confident of a percent growth rate of the country s IT industry in FY12, with the sector slated to bring in about $68-70 billion in revenue. Growth in the domestic market is estimated at percent, with revenues of about $19-20 billion. Going forward, the principal growth driver would continue to be cost arbitrage coupled with the underpenetrated nature of the business. The emergence of newer verticals like healthcare and higher-end services like analytics and legal services will also expand boundaries. Further, significant opportunities exist in core verticals of BFSI and it is poised to grow more than other less mature segments. Diversification and expansion of service lines has been a dominant theme, and this trend is expected to gain further momentum in the coming year. North America would continue to be the dominant sourcing destination, given its longer experience with services outsourcing. Its rising adoption across Europe and the Middle East regions will also support the industry. While the global macro-economic situation continues to be uncertain, the industry in India has been rapidly transforming itself to offer endto-end services to its customers. Over the past few years to establish a global footprint, a host of acquisition deals have been inked by Indian providers. This trend is expected to gather momentum going forward. Several third party and captive BPO units are expected to increasingly acquire small size companies to ramp up revenue, acquire clients, and expand business segments and geographical reach. Consolidation will also be driven by international M&A deals, propelled by robustness of the Indian players and lower valuation expectations in the US and the UK. Larger players will also eye the smaller service providers as the latter may find it difficult to operate in the new tax regime. Going ahead the Indian advantage hinges on India s ability to retain its core strengths and address the challenges. All in all the recent growth suggests that there is a lot of life left in the party and that it is far from over.

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56 Appendix IT INDUSTRY IT Services ITES BPO Hardware Packaged Software Engineering & Research & Development IT Outsourcing Horizontal Services System, Storage & Servers Application Software Project Based Services F&A Networking Equipment System Infrastructure Software Support and Training Customer Management PCs & Peripherals Application Development & Deployment Software Procurement HR Knowledge Based Services Worldwide Software Vertical Spend ($bn) * 2012* 2013* BFSI Manufacturing Retail Services Healthcare Transportation Communication and Media Utilities & Construction Government Others Total * Projections 56

57 Worldwide IT Services Spend ($bn) * 2012* 2013* Project based Outsourcing Application Management Hosted Application Management IT Outsourcing Network and Desktop Outsourcing Hosting Infrastructure Service Support and Training Total * Projections Worldwide BPO Spend ($bn) * 2012* 2013* Customer Care Finance and Accounting Human Resources Procurement Training Total * Projections Direct Employment ('000) IT Services Exports BPO Exports IT-BPO Domestic Market Total A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 57

58 Top 20 BPO Companies by Export Revenues Rank FY11 Company Revenue ($ mn) Growth (%) 1 Genpact TCS BPO Aegis BPO Wipro BPO Firstsource Solutions WNS Global Services Infosys BPO Aditya Birla Minacs Accenture India IBM Global Process Services Exl Service Cognizant BPO Hinduja Global Solutions Xchanging India Convergys India Intelenet Global HCL BSERV /7 Customer i Infotech MphasiS BPO IT-BPO Revenue Growth BPO Exports by Service Line FY2010E 5.0% 4.3% 5.5% 10.3% 5.3% 3.9% 3.4% 1.4% 3.0% 17.9% 43.3% Customer Interaction Services Finance and Accounting Knowledge Services HR Administration Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar % 22.7% Procurement and Logistics Other Horizontals Vertical-specific BPO services 58

59 Glossary AM BFSI CAGR CIS CRM CSAT CTO ESOPs F&A HR IP KYC LPO M&A NASSCOM NCR RFP S&P ESG India Index SLA STPI Application Management Banking, Financial Services and Insurance Compound Annual Growth Rate Customer Information System Customer Relationship Management Customer Satisfaction Chief Technology Officer Employee Share Ownership Plan Finance and Accounting Human Resources Intellectual Property Know Your Customer Legal Process Outsourcing Mergers and Acquisitions National Association of Software & Service Companies National Capital Region (region around New Delhi) Request for Proposal Includes 50 stocks measured by Environmental, Social and Governance parameters Service Level Agreement Software Technology Parks of India A CLOSE LOOK OF THE DEVELOPMENT OF FINANCIAL SERVICES OUTSOURCING INDUSTRY IN INDIA 59

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