Business process outsourcing bound for Bangalore, India

By John Ribeiro, IDG News Service

BANGALORE, INDIA -- Seeking to cut costs in today's sluggish economy, U.S. and European companies are capitalizing on the latest buzzword in India: business process outsourcing. Starting with call centers and other customer relationship management (CRM) services, companies are either setting up their own business process outsourcing centers or outsourcing to a growing number of Indian companies a variety of internal processes, ranging from finance and accounting to human resources functions such as payroll management and transaction processing.

Similar to India's software services business, business process outsourcing opportunities are predicated on the availability of low-cost, English-speaking manpower in India.

"To the extent that software services are about 50% cheaper [than in the U.S.], it is likely that business process outsourcing would benefit at around the same order of cost savings," said Roland Wee, a fund manager at ING Investment Management in The Hague.

Business process outsourcing services are less expensive to carry out in India. "We estimate the current capital cost per seat in India to be between $7,000 and $17,000, depending on the nature of the business process outsourcing services offered," said Prasad Baji, assistant vice president at Edelweiss Capital, a Mumbai, India-based investment bank. "The cost of a similar facility in the U.S. can be about two to three times this amount."

Back office in Bangalore
Before Indian companies saw an opportunity in offering business process outsourcing services to U.S. and European companies, multinational companies set up captive back-end processing centers in India.

One pioneer was Stamford, Conn.-based General Electric Capital Corp., a subsidiary of General Electric Co., which operates centers in India in Hyderabad and Gurgaon, near New Delhi. In addition to running call centers, GE performs back-office processing tasks for other GE companies worldwide. GE Capital has also set up a joint venture in Hyderabad, called iProcess, which offers IT-enabled business process outsourcing to both GE and other customers. By December, GE had a staff of 10,000 doing business process outsourcing and CRM functions.

Hewlett-Packard Co. is moving key accounting functions to Bangalore-based Global e-Business Operations, a wholly owned subsidiary of Hewlett-Packard Europe. Several foreign airlines and banks have also set up business processing operations in India.

A clear objective for multinationals setting up captive business process outsourcing operations in India is cost savings, primarily from the lower cost of labor in India. Doing HP accounts in India costs one-sixth of the cost in the U.S. -- without sacrificing quality, according to Vivek Nagarkatti, president of Global eBusiness Operations.

Whereas U.S. and European companies first turned to India as a place to host their own business processes, a growing number are outsourcing such operations to independent Indian companies.

Challenges abound
Getting business from customers abroad isn't easy for Indian companies. "The business process outsourcing industry in India is in a very nascent stage, and the concerns expressed by potential customers can range from concerns about the partner's lack of experience to the reliability and scalability of his service and his financial stability," said Prakash Gurbaxani, CEO of TransWorks Information Services, a Mumbai-based CRM services company that recently began to offer business process outsourcing services.

"However, the value proposition offered by Indian companies is so compelling that companies are willing to try it out by running a pilot to make sure it is a viable option and then scaling it up," Gurbaxani added.

Companies that contract with Indian business process outsourcing firms are still wary of being named. None of the service providers would reveal a single customer reference. "The names of Fortune 500 companies can ... be misused by start-up companies who still have to prove their ability to deliver and their long-term sustainability," Gurbaxani said.

The decision to set up captive centers rather than outsource to local business process outsourcing companies is based on the need to keep a tight control on operations.

"By a combination of process re-engineering consultancy and the processing in India, we can achieve a cost takeout anywhere from 25% to 75%, depending on the process," said Kishore Mirchandani, CEO of New York-based itAccounts, a finance and accounts outsourcing spin-off from MLZ Partners, a New York-based accounting company.

Trust issues
ItAccounts operates a processing center in Bangalore and won't outsource processing to other companies in India. "It has to be run by us because of the control and security issues and confidentiality involved," said itAccounts CEO Kishore Mirchandani. "I think that our clients would have a problem if we were to use third-party infrastructure."

But the cost structure of captive operations tends to be higher than outsourcing because of their cost-center orientation, according to Baji. Since the execution responsibility is with the multinational company, it has to find suitable management and staff, as well as make investments in infrastructure, Baji added.

Outsourcing can take place only if the multinational company trusts an Indian partner, because the Indian partner would get access to sensitive areas of the business, according to Wee. Some multinationals are using a mix of captive and outsourced services, with some of the more sensitive and complex processes done in-house.

India's business process outsourcing future
Indian business process outsourcing companies are on a roll. India's business process outsourcing, both captive and third-party, is estimated to grow by 107% to $583 million in revenues and employ 35,000 people in the fiscal year ending March 31, according to the New Delhi-based National Association of Software and Service Companies. That contrasts with about 30% growth in software services exports for the same period, it said.

But a lot could go wrong. The market is likely to get overcrowded, as happened in the call center business. Customers in the U.S. and Europe are still testing the waters and are increasingly apprehensive about border tensions between India and Pakistan. Furthermore, many new entrants are rushing in to provide business process outsourcing services with an eye to making a quick buck, while offering little in the way of infrastructure or processes.

"India has all the ingredients to become a major hub for outsourced services," Gurbaxani said. "A long-term threat would be India's failure to provide high quality, reliable and scalable service."