Bad Q3 numbers make IT cos try new models

Written by Diksha Dutta | Diksha Dutta | New Delhi | Updated: Feb 18 2012, 08:39am hrs
Poor third-quarter numbers of BPO arms coupled with declining IT-BPO bundled deals has forced HCL Technologies, Infosys and Wipro BPO, among other information technology companies, to focus on new business models to drive growth.

Accumulated revenues from the BPO businesses of HCL, Infosys and Wipro did not even cross $500 million in 2011, while revenues of standalone BPO firms such as Genpact clocked $1.5 billion.

The BPO business of HCL, which is about $200 million in revenue, is in a transformation phase for the last one year. It experienced a loss of $4.5 million in the last quarter. Wipros BPO business had a negative growth on a quarter-on-quarter basis in the third quarter. Wipros BPO business contributes around 8.5% to the companys total IT services revenue of over $5 billion. Infosys BPO business, too, was down 1.6% in the quarter ended December. Compared to this, TCSs BPO business clocked a 14% growth (on a year-on-year basis) and contributed around 11% to the companys revenues.

Overall, the BPO sector has shown a growth rate of 12-14% in fiscal 2012 so far. However, this is not the case with BPO businesses for technology majors which has grown at only around 1.5-2% on a year-on-year basis, experts said.

According to one analyst tracking the sector, HCL-BPO business has de-grown by around 6% in the third quarter of fiscal 2012 compared to the same period a year ago.

However, HCL is hopeful its BPO business to break-even before the end of this fiscal riding on innovative business models and less dependence on voice-driven business. The BPO business will break-even in the January-March quarter this year (2012). We have been investing in new business models in this space, which relies more on non-voice services, Vineet Nayar, CEO, HCL Technologies, said.

Even Infosys BPO is hopeful of ending the fiscal on a positive note. Swami Swaminathan, CEO and MD, Infosys BPO, said, Infosys BPO closed revenues at $427 million last year and we expect to close $490 million this year.

However, experts say on a comparative scale, pure-play BPOs, like WNS Global Services worth $616 million and Aegis worth $700 million, are far ahead of IT-BPO businesses.

When asked as to why the BPO arms of IT firms are struggling when the pure-play BPO companies are doing well, Mohit Thukral, senior VP (BFSI), Genpact, said, Pure-play BPOs have an edge as they can always merge skills like analytics in the deal, which might not be easy for a company whose core is IT. We still feel that the core back office work is given to companies like us and IT companies do lesser BPO work.

However, Raman Roy, CMD, Quattro BPO, has a different take on the matter.

In 2008, margins of IT companies were under pressure and the BPOs looked attractive to them. Though the margins are low in the BPO business, you keep getting projects both during good and bad times. However, IT companies need to keep pace with the changing nature of work in the BPO space, Roy said.

The idea behind IT companies entering into BPO business was to grab the opportunity in the IT-BPO combined deals. This helped them bring their IT customers to extended BPO services. But the trend did not pick up as expected.

The number of deals in the integrated IT-BPO space have been decreasing for the past two years. The story did not really pick up. However, the BPO space still seems attractive to the IT players. While the size and scale of the pure-play BPO players remains higher, IT companies are concentrating on this segment to be in the race, Amneet Singh, vice-president, Everest Consulting Group, said.

As per Everest Group, the number of integrated ITO and BPO deals are 3% of the total deals signed in the outsourcing space. The deals decreased by 13% over the last two years.