Thursday, January 3

BPO sector gears up for more M&A activity (Business Line interview with President and COO of EXL Service Holdings)

With an action-packed 2007 behind it, the Indian BPO industry is now gearing-up for another blockbuster year, one that holds the promise of a hectic M&A phase, a possible acceleration in sale of captive BPOs, and the coming of age of third-party BPOs.

Moreover, as the Indian ITeS-BPO industry moves towards its FY08 target of 30 per cent growth to clock exports of $10.5-11 billion, it faces daunting challenges such as strengthening of the rupee, and the prevailing uncertainty over the extension of tax sops under STPI scheme beyond 2009. Business Line caught up with Mr Rohit Kapoor, President and Chief Operating Officer of Nasdaq-listed Exl Service Holdings, to get a sense of the industry outlook for the busy year ahead.

Do you foresee significant changes in the Indian BPO landscape during 2008?

One of the things that we are seeing is that the BPO industry has been maturing over the last few years.

However, in 2008, we will see a sharp differentiation between leaders and also in the ranks. 2007 was a difficult environment for the BPO industry given the fact that there was an unexpected and sharp appreciation of the rupee, an impact on the industry because of slowdown in the US and the sub-prime mess, and also because clients were becoming demanding about the kind of services they expected. You will now find that some of the stronger players will take the lead and some others who have been competing for business that do not make the cut, will fall behind.

I also expect 2008 to bring much heavier amount of consolidation and so there will be large M&A activity.

Companies which have not been able to do public listing or find an exit for their investors, will look for alternate avenues such as combining with a stronger player or looking at new businesses.

One thing I’d love to see for the BPO industry is clarity from the Government on the tax holiday status.

It is an overhang on the industry because the tax holiday goes away in March 2009, and therefore all investors are currently focused on it.

It will be great to have a clarity and certainty around how that plays out because it will allow players in the industry to make long-term plans and take decisions pertaining to business such as growth, new facilities, infrastructure and locations — all of that is currently up in air because of the uncertainty.

I do think the attrition rates in better-managed BPO companies will continue to come down because formation of new captive operations is slowing down — which, in the past, was the biggest source of weaning away employees from existing BPO providers. It was generally seen that captives would land up paying higher level of compensation and take away talent.

We do not think that the rupee will appreciate the 14 per cent it did in 2007 but there is a potential for the rupee to appreciate 3-5 per cent in 2008.

Going forward, how will large deals pan out between the pure-play BPO vendors and integrated services-cum-BPO players. What kind of clients will tend to prefer third party BPO players over IT services-cum-BPO providers?

What has clearly happened is that the pure-play BPO companies have been able to provide process and domain expertise in a manner that an IT-cum-BPO player has not been able to offer. That’s what provides an edge.

Also, so far you have seen IT companies making a foray into BPO and getting into BPO as an extension of their core operations. Going forward, you will see BPO companies start to demonstrate their ability to use technology and move the other way around, so you will see business operations driving the use of technology, which is the right way of driving change in an organisation. In terms of large deals, you will see large structured transaction taking place.

Where do you see the rupee heading in the next one year? How are you gearing up towards that end from your company’s point of view?

One thing which is clear is that India as an investment destination is becoming more and more attractive, the growth in India is extremely strong and we are likely to see a decoupling of the Indian economic market from the rest of the world.

If that happens the pressure for rupee to appreciate will be high, and therefore our expectation is for a moderate rupee appreciation in 2008.

So, as indicated earlier, we see the rupee appreciating 3-5 per cent in 2008. With that perspective, the strategy that companies need to deploy, will include effective use of hedging, ensuring customer contracts are structured such that they provide for a change in pricing if the exchange rate goes outside of a band, and much higher level of diversification of customer geographies and service delivery centres.

For the industry, is attrition issue going to be any better? What do you see companies in the BPO business doing to stem attrition?

If you take a look at the third quarter results of the three companies that are public in the pure-play BPO space — all three reported a decline in attrition rates in the third-quarter and you will continue to see that going forward in 2008. As pure-play BPO companies mature, they are getting a better grip on what kind of changes are required to be made to the work environment, to the compensation and benefits programme, and development of talent, in order to retain it. That will drive down attrition.

Second, both clients and service providers are getting more and more focused on improving the shift utilisation. As they succeed in it and as we do more work in the India daytime hours, it will result in lower level of attrition. One area where probably attrition will spike up is the KPO business — those businesses are seeing a heightened level of activity and the demand for experienced talent in KPOs is higher than the current supply. That part of the business is also less mature than the traditional core BPO business that the industry is more used to. So you will see a substantial demand for resources on research and analytics and higher skill-sets.

What is your wish-list for the Union Budget?

The top one is about the tax holiday and its extension for BPOs, as the industry is only five years old and it needs a few more years to be able to develop and become a dominant force for the Indian economy. We also need a much better clarity on the availability of SEZs, and clarity around policies to enable companies to do long-term planning.

The third focus area is around the fringe benefit tax (FBT). Companies in our industry end-up paying huge amount of FBT and both the method of payment and the quantum of payment are issues, as BPO is one industry where a fair amount of travel takes place to serve our clients. Because of that international travel, there is a large amount of FBT generated. It is also an industry that gives out stock options, which again has a huge amount of FBT associated with it, and collecting it from employees is a challenge.

(The Hindu Business Line)

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