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Asia-PacificMarch 7 2005

India’s IT outsourcers

Despite concerns over data fraud, communication problems and a backlash from western countries, India is still a prime destination for banks to outsource their business processes, writes Kala Rao.
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At the annual Indian IT industry conference, NASSCOM, held in Mumbai in early February, the buzz was around business process outsourcing (BPO), the new star on the horizon. HSBC CEO Stephen Green said, in his keynote address, that India has a “compelling competitive advantage” in business process outsourcing because it has the second-highest number of English-speaking graduates in the world, with 24 million university-educated persons.

HSBC was “delighted to capitalise” on these strengths, he added. Of the 12,500 employees the bank has here in India, two-thirds work at its global processing or software development centres and the bank is moving a part of its financial research work to India.

Growing list of banks

The pioneers in moving back offices offshore to India are Citigroup American Express and General Electric, joined by a growing list of global banks.

JPMorgan and HSBC are among those that set up shared service shops for their global operations; some banks outsource to independent Indian BPO vendors; others, such as Citigroup, do both.

The past year also saw banks pick up equity stakes in their preferred BPO vendor, an indication of the growing importance of outsourcing in their business strategy. Barclays bought 50% of Intelnet, a Mumbai-based BPO service provider, while insurer Aviva bought a small stake in another vendor eXL.

Meanwhile, pioneer Citi last year de-listed its local shared services arm, eServe, through equity purchase (some years back, it spun off its Indian software services arm, i-flex, now a listed company).

In contrast GE sold a 60% stake in Gecis Global, the largest BPO provider in India, last December to two private equity investors for $500m. Sanjay Nayyar, Citigroup CEO in India, says the bank spent $160m to take full ownership of eServe, and de-list if from the Indian stock market so that it could protect proprietory processes. Gecis has gained enormous expertise in business processes by serving GE’s disparate businesses worldwide and, according to president and CEO Pramod Bhasin, competitive pressure and good valuation for the business prompted GE to reduce its stake. Gecis has since taken on six non-GE clients.

Where processes are outsourced to an independent vendor that also services the competition, the customer takes a call on what it considers as proprietory processes and what is non-proprietory. “If you do business with Pepsi, Coke is not likely to show up,” is how Mr Bhasin puts it, adding that such conflicts are offset by segregating physical processes, while delivering to the customer the advantages of process expertise.

Far-flung employees

Gecis has more than 24,000 employees, a quarter of which work outside India in its BPO centres in China, Hungary and Mexico. India serves the English speaking world in North America and Europe, China is the base to serve the Korean and Japanese markets, while Mexico serves the Spanish-speaking parts of the Americas.

Starting from call centre services for customer support, helpdesk or telemarketing, BPO vendors in India now process complex, global trade and treasury transactions, chase debt collections on credit cards, process mortgage payments, process insurance claims, and mine financial data for their clients. More recently, major Wall Street banks such as JPMorgan and Morgan Stanley have started outsourcing equity and fixed income research, analytics and business intelligence to India.

“The case for outsourcing analytical work is more compelling because the saving in costs is higher,” says Rohit Kapur, chief financial officer at EXL, a BPO vendor that serves the banking and financial services industry including Norwich Union, its largest client. According to an industry review by NASSCOM, the IT industry lobby group, rates charged by offshore Indian vendors for such knowledge process outsourcing are $30-$45 an hour, or around three times higher than rates charged for customer care, finance and administration services.

Western backlash

“The only cloud on the horizon is perhaps the speed at which it [outsourcing to India] has grown, a triumph for India, but which has led to an unwelcome backlash in Europe and North America,” HSBC’s Mr Green pointed out in his keynote speech. This backlash gathered force in the US, a market that accounts for two-thirds of the $5bn Indian exports of outsourced services, during the run-up to the presidential elections last year. In May, just months before the election, IBM Global Services acquired Daksh eServices, a leading Indian provider of call centre services, for $150m, reaffirming India’s position as a preferred destination for offshore outsourcing.

Since the re-election of President Bush and his administration’s endorsement of outsourcing, the din has calmed down. Some European companies that outsource from offshore still prefer to keep a low profile.

Legal worries

The BPO industry in India is taking data privacy and security very seriously, not least because they might be used as non-tariff barriers to offshore outsourcing. In the past few months, banking regulators from the UK have been visiting BPO sites in India to assess the risk that organised fraud could enter the operations of global banks from processes that are outsourced offshore.

Inadequate protection under Indian law is the other concern. Gecis, for instance, is headquartered in Luxembourg. Ananda Mukherji, managing director of ICICI OneSource, the BPO vendor, says: “We contractually bind ourselves to the data privacy law of the country our client operates in. Our legal liability is sometimes out of proportion to the size of the transaction we process.” Customer data is never moved to India but accessed from offshore, he adds.

Certification by an independent agency on data privacy protection or security audits help build confidence, adds Rohit Kapur of EXL Service. The company has filed a prospectus for an initial public offering on Nasdaq, a move it hopes will enhance the company’s brand in the US.

Management challenge

There are also challenges at home. Dennis Callahan, MD of Guardian Life Insurance, the fourth largest life insurance company in the US, says while outsourcing to Indian vendors such as Patni Computers has saved the company $14m annually, it had initially to deal with communication issues.

“You have to make sure your success is as important to your vendor as it is to you. Shadowing key resources [employees] so that there is no break in continuity of service is important,” says Mr Callahan. The attrition rate is around 50%, and employee costs are rising by around 12% each year. “Managing our talent pool is the biggest challenge before the industry,” says Mr Bhasin.

Yet strong growth in the past year despite these challenges suggests that the industry is maturing. NASSCOM reckons the industry will grow 44% in the year to March 2005 with revenues of $5.7m, and contribute about

30% of India’s IT-BPO exports. It expects around 140,000 jobs will be created this year, or double the 73,000 created in the previous year. The cloud on the horizon may have a silver lining after all.

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