Back offices return home

Updated: Apr 29 2006, 05:30am hrs
The relationship between Indian software service houses and their back office operations has been tentative. The biggies were almost forced into work like tech support and telemarketingseen low valuefive years ago after demand for business process outsourcing services and pressure from customers became too large to be ignored.

Infosys Technologies hatched its BPO business in a separate company, Progeon, roping $20 million from Citicorp Investments. Satyam Computer did the same with its Nipuna subsidiary sharing stake with Olympus Capital and Intel Capital. HCL Technologies also kept its back office business in a separate entity. Wipro bought out Spectramind to scale up and Tata Consultancy Services bootstrapped divisions internally.

Such arms-length structures are being broken down today and India's top software houses are bringing their BPO businesses back into the folda la global bigwigs IBM Global Services, Electronic Data Systems and Accentureand are changing the profile of their offerings. IBM, for instance, acquired Daksh eServices in 2004 to rapidly build up an integrated IT-BPO offering in India.

Look at the examples: Infosys announced last week it would buy out Citicorp from Progeon for a not-cheap price tag: $115 million. HCL Technologies this March completed merging its BPO arm into itself. As part of a reorganisation, TCS is bringing its BPO operations under a new unit. Wipro, struggling with attrition at its call centres, is refocusing on changing its services mix. And, sources say, Satyam is working on bringing Nipuna within itself.

But why this sudden change of heart towards BPO Companies like Infosys, says advisory firm TPIs India partner Sid Pai, did not want to take on the risk of seeding a BPO firm on their own. But BPO has now become mainstream business along with IT services. Companies have realised that they can give an integrated offering of IT and BPO, and thus get better revenues, he says.

An integrated IT-BPO offering makes sense for the large customers India's top software houses deal with. A mid-sized company outsourcing its software work to India will need to offshore BPO work as well, says Sridhar Mitta, managing director of tech investment holding firm e4e Labs.

Integrated Deals
TCS-Pearl
Progeon-Ingram Micro
HCL-DSG
IBM-JP Morgan Chase
Experts say such wing-to-wing deals increase profitability by 1%-2% of revenues by integrating IT services management, which affords better margins, with the low-margin but high-volume BPO business. The client is engaged at three levels: IT, infrastructure management and BPO, explains N Ranjit, who heads HCL's BPO services. It increases the size of the deal and most significantly increases customer lock-in periods. Integrated deals currently span three to five years but are may lengthen in the years to come.

Details of integrated IT-BPO deals are hard to come by. Yet, sources say, HCLs deals with German electrical retailer DSG International and a semiconductor company for which it does $1.5 billion procurement processing a year apart from software servicing, TCS engagement with UK insurer Pearl Group and a recent Infosys deal with Ingram Micro are examples. Recent Covansys-Fidelity and IBM-JP Morgan Chase deals also were integrated deals.

Another reason for companies integrating IT with BPO offerings is the ease for customers to deal with a single vendor across the services it outsources. Clients are increasingly pressuring multiple vendors to come under one roofeither by banding themselves into a group or having a single vendor taking the lead in projectsto streamline processes.

But if integrated deals are going to be the rule of the day, will standalone third-party BPO firms such as Genpact, WNS, 24/7 Customer, among others, survive Yes, but as specialists and providers of large volume services like telecalling and customer support. Pure play BPOs will win business on account of domain expertise in areas such as banking, retail, insurance etc., says Mitta.

Other services like transaction processing will increasingly be garnered by those service providers who have strong IT offerings. Wipro is a case in point. It has announced its aim to increase its non-voice transaction processing to 50% from the current 15%. Progeon already is sitting pretty with nearly 85% work being transaction related.

Market size is also driving this shift. Says Sabyasachi Satyaprasad, research director at outsourcing consultant neoIT: Worldwide only 5%-7% work outsourced is voice-based. Non-voice work generates more revenue per employee and lowers attrition rate. It makes the customer more sticky. The captive centres of large companies such as Dell are keeping high-end non-voice work and outsourcing voice-based business to third party providers.

Integrated IT-BPO deals will increase in the coming quarters and will force software firms without a back office presence to beef up.