Big is better when it comes to running a BPO business today. But for HCL Technologies, this situation still seems distant. Apart from being questioned on having the least margins amongst the top four, the next challenge for HCL Technologies is its BPO business. Company vice-chairman and CEO Vineet Nayar has publicly announced in the past that the BPO revenues will break even in January-February-March (JFM) quarter this year. We step back and look that what went wrong, how did HCL start restructuring its BPO arm and what analysts feel about the companys BPO business.
First the fact sheet: HCL BPO, which is about $200 million in revenue and 11,000 employees, is in a transformation phase for the last one year. It experienced a loss of $4.5 million in the last quarter ended December 2011. According to a Kotak Institutional Equities report, HCL-BPO business has de-grown by around 6% in the third quarter of fiscal 2012 compared to the same period a year ago. BPO business currently contributes 5% to HCLs total revenue.
When it comes to expectations from this quarterly result, another report by Kotak mentions, HCL Technologies expects growth to be led equally by application services and infrastructure management services. Expect BPO to have another muted quarter, in line with the companys guidance. Though the company revenues are shooting and are expected to grow 2.4% sequentially in dollar terms, building in nearly 40 bps of cross-currency uplift is seen. The same is not the case with BPO performance.
Analysts are clear about what went wrong with HCLs BPO arm. Too much dependence on voice business while others were looking at high value services and newer verticals. It could never reach a higher scale in the likes of Infosys and Wipro BPO which are touching $500 million and TCS BPO which has already crossed a billion dollar in revenue. The right kind of investment was not going into technology platforms and marquee deals were not being won. But the last one year has got shades of good news for the company.
Salil Dani, research directorglobal sourcing, Everest Group says, Last quarter some sort of activity did pick up for HCL BPO as they got business from Latin America and Eastern Europe. Though the deal sizes are not that big, but this is representing a good departure from their failure. I expect they would break even in the near future.
Last mid year, the contribution of voice business decreased from 90% to 50% for HCL BPO. It was also looking at significant investment in sales expenditure, department platforms and creation in markets, which was estimated to be around $35-40 million last year. And just when the business was not doing well for a few quarters with both revenue and headcount constantly declining. The BPO arm was last year rechristened and the strategy seemed to be working for it. Of the 11 deals it won in JFM quarter of 2011, three were in the BPO segment and range from $20 million to $100 million. The three deals in BPO were inked in the logistics, media and banking verticals and one of them was worth $100 million while the other two range between $20-50 million.
In an earlier interaction, Vineet Nayar had remarked: With a BPO coming up in every single corner of the country, it is obvious that the contact centre business had become commoditised and the differentiation was becoming necessary. We had to differentiate and thought we can combine BPO plus application and create a new division called business services.
Analysts say that HCL is now concentrating on the near shore model rather than the offshoring model. It is serving the European market from Eastern Europe and US from Latin America.
Agrees Subrat Chakravarty, VP and HR head, Business Services, HCL Technologies, We are concentrating on end-to-end services and an integrated global delivery model which involves onsite and offsite for BPO. We are building different platforms and believe that this is a distinct transition in the whole BPO model. For instance, we have really evolved in the media and publishing vertical. We believe that by 2015, one out of the four college books are going to be digital. This is the kind of investment which is going in such verticals.
Chakravarty further elaborates that HCL BPO started concentrating on the next generation BPO model two years back and wanted to tap this opportunity. We are also investing in technology platforms. Most of our verticals are reducing their manual intervention.
Usually, the BPO sector does not have big deals now as the pie is going to some other countries as well. 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. But Chakravaty is optimistic, We were the first BPO to sign a voice based $100 million deal. The industry is now clearly divided into two models- voice and transaction based FTE deals. And we are focusing on both.
It remains to be seen whether HCL can get its act together and break into the league of BPO biggies soon.