Push for contracts in Indian rupee add to pressure on $18-billion BPO industry

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Clients of BPO firms are now pushing for contracts in Indian rupee rather than the US dollar. Clients of BPO firms are now pushing for contracts in Indian rupee rather than the US dollar.
SummaryBPO industry, battling margin pressure and diminishing cost arbitrage, is set to take a further hit.

BPO firms, the rupee depreciation has increased cost incurred outside the country, including developing international centres,” Sen said.

Experts point out that the country’s cost advantage as an offshoring destination, its trump card, has dropped by nearly 30-40%. Quicker response time, better technical/language support and near-shore advantages are driving businesses to other outsourcing destinations. According to estimates, the IT services sector still commands more than two-thirds of India’s overall outsourcing industry, while the BPO segment contributes about a third. In the last four years, the compounded annual growth rate (CAGR) for the BPO sector has been pegged at around 12%.

According to Udhas, Indian IT services companies have an advantage as the necessary technical skills are not available in large numbers in the developed markets so increasing their demand but this is not the case with the BPO segment. Industry analysts point out that commoditisation of services and lack of innovation has dragged down business volumes over the last few years. This has been reflected in the numbers of Wipro, India’s third-largest IT services exporter, whose BPO revenues grew by just 0.4% on a sequential basis during the July-September quarter.

TK Kurien, CEO, Wipro, said, “The BPO business is undergoing a fundamental shift in the way we are looking into it. The commodity type services, I don’t think we will do well in the long term. We will slowly move out of that. Ultimately, the market will move towards a model where we will provide software, hardware and BPO services in one stack.”

Adding to the challenging climate is the high attrition rate. The sector, which used to attract employees in droves, is now finding it difficult to hold on to them due to the absence of a distinct career graph and dipping perks.

A 2012 study by Hackett Group, a global consulting firm, highlighted that offshoring of jobs to India will begin to decline by 2014. The study predicted the traditional model of the US and European companies shifting finance, IT, and other jobs offshore to reach the end of its “lifecycle over the next 8-10 years as these firms run out of jobs suitable for moving to low-cost countries”. According to the research, challenges facing the Indian offshoring market include local wage inflation and increase in competition from other low-cost labour markets.

In the last few years, attrition rate in the BPO sector has peaked to 40-50%, making it the highest amongst all industries.

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