Niche battleground

Written by Diksha Dutta | Diksha Dutta | Updated: Feb 20 2012, 05:34am hrs
Buyouts which happened last year in Indias business process outsourcing (BPO) sector, are now showing their after effects. BFSI vertical now means more competition, fewer specialist players and high revenues for them. The countrys two BPO biggiesGenpact and EXL Servicewho did two acquisitions in this space last year and are still bullish on the BFSI domain,

believe that this will be an exciting space to perform for them. Of course, they face stiff competition from the BPO arm of the countrys largest software exporter, Tata Consultancy Services (TCS).

While Genpact acquired Headstrong for $550 million, EXL Service acquired Outsource Partners International (OPI) for $91 million. The BFSI vertical now contributes more than 50% revenues to both these companies, which was not the case

previously. The game for TCS BPO too has changed after the acquisition of Citigroups back office operations in 2008 for $505 million. The purchase has made it a very strong player in the BFSI space and it now contributes more than 50% of the revenues.

On the deals front, the BPO community signed 183 deals in the BFSI segment last year, of the total 653 deals. It gives 38% revenues to the BPO exports at present.

Analysts feel that this vertical is becoming highly competitive in which the top three playersGenpact, TCS BPO and EXL Serviceare competing neck and neck. Analytics has stepped in, acquisitions are on track and pricing is becoming a sensitive issue.After effects of acquiring The biggest acquisition last year was when the countrys largest BPO, Genpact acquired Headstrong to enter the capital market domain. In less than a year, BFSI as a vertical has crossed 50% of total revenues from approximately 45% before acquiring Headstrong, says Genpact senior vice-president and global leader (BFSI) Mohit Thukral. Of the 53,000 employees at Genpact, approximately 26,000 cater to the BFSI vertical.

Thukral informs that the BPO is now also concentrating on the Australian and European markets, apart from North America for the financial services vertical. Two years ago, 90% of our business used to come from the US. It has now reached 80% as Europe and Australia are also growing. In the next 12-18 months, the ratio should be 70% from the US and rest from Australia and Europe,

he mentions.

The capital market has become a big chunk for Genpact in the financial services space, which was earlier not very strong. It is the second biggest after commercial lending and leasing, followed by retail banking and mortgages, notes Thukral.

Similar is the case with EXL Service, the countrys fourth largest pure play BPO. The finance and accounting domain which used to give us 15% revenue before the OPI acquisition, now gives us 35% revenues. If I also

include insurance, the total BFSI contribution would exceed 50%. Insurance for us is the biggest vertical for us, says Rohit kapoor, CEO and president at EXL Service.

Last year, EXL Service did two acquisitions in the same domain. It acquired Outsource Partners International, a provider of finance and accounting outsourcing services for $91 million. This added 3,700 employees in the United States, Asia and Europe serving roughly 80 clients.

Another acquisition was Trumbull Services, a market leader in subrogation services for property and casualty insurers, from the Hartford Financial Services Group. But Kapoor is still ambitious, We have $80 million cash and I am still looking at acquisitions this year. The space that we are keen to acquire would be in the insurance or the banking and financial vertical. It could just also be a BPO platform in this space.

The competitive picture With action by top players, there has also emerged high competition in this space. Salil Dani, research director, Everest Group says, The contribution of the BFSI vertical in terms of revenues has decreased from 50% in 2008 to 38% now. This is because of new verticals like travel, utilities coming in. But at the same time, the BPO sector has seen specialisation in BFSI. There are a few top players that have concentrated a lot on this vertical and are getting good business. It has become a specialised space with well defined strategies. Some players have really focused on reaping the benefits in this space.

Kapoor from EXL believes that analytics is becoming very important for all verticals and especially BFSI. The company might just acquire only a BPO platform in insurance

domain in the near future. On similar lines, Genpacts Thukral says, The pricing pressure is still very high and we have to concentrate on newer business models like analytics to succeed in this space.

But the deal duration or cycle in BFSI space has increased to 12 months from six months earlier for many players. Analysts attribute this to the slow decision-making process among customers because of the macro-economic conditions. At the same time, the deal sizes have reduced as customers do not want to risk everything at one go. Even overall, the BPO industry has seen a shrink in the deal sizes. The average contract value (ACV) of BPO deals has declined by 23% from 2009 to 2011, whereas IT deals have witnessed a marginal increase in the same period, a recent report by Everest Group reveals.

Overall, seasoned industry watchers feel that this year too will see more acquisitions in the BFSI domain and there will be cut-throat competition. Innovation and newer business models will be the key to succeed, perhaps with a flavour of strategic pricing being offered to customers!