One could clearly see a sudden increase in the number of M&As in the Indian BPO industry over the last year. What is it that is actually prompting players to go for a kill? by Ashutosh Harbola
But then there are contrarians who feel that these M&As have nothing to add on to the growth story of Indian BPOs. As per them, it’s actually a fight for survival. Though, at present there are over 110 BPO captives operating out of India, the number is expected to reduce to just half in the next five years. “M&As in the BPO industry, particularly in the voice vertical, are an outcome of the US sub-prime mortgage crisis. It’s the crisis that has made the survival of small players really hard. These players are now allowing bigger players to acquire them as they can no more take the pressure on their balance sheets,” says Anuj Gupta, Angel Trade.
Further, there are many who feel that with time India has lost its price competitiveness that tempted multinationals to offshore their business to India. While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago as compared to their US counterparts, the difference today is becoming marginal year by year. The major contributor to this rising cost has been the wage inflation, which was hovering over 8% in 2009 and is expected to touch 10.9% by the end of 2010. “With time, India’s price advantage has diminished; it now needs to find a niche and to reinvent the business models, services and enabling technologies,” says Vishal Deep Dhillon, Regional Director-Asia, CSC, to B&E.
That countries like China, Vietnam and Philippines too are emerging as a big threat to India’s dominance in global offshoring industry, is actually old news. But now, as Gartner analyst Diptarup Chakraborty tells B&E, “Destinations like Philippines, Israel are almost coming neck-to-neck with India as they are offering cheaper rates to the outsourcers.” Then there is the slated withdrawal of STPI scheme in FY2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20% for a BPO at present. This is expected to go up to 33% if the scheme is withdrawn.
Considering the fact that there have been many domestic entrepreneurial ventures, not particularly backed by large scale IT organisations, that ventured into setting up BPO outfits in an attempt to become bigger simply on the basis of the boom that was, in case the government withdraws tax-holiday sops or increases the tax rates, that surely would put these newbie BPOs on the selloff block, if not immediately bankruptcy. Worse would be the case with Indian BPOs that, hoping for a sudden revival in the US economy (which accounts for clost to 60% of all global BPO projects), have attempted to invest in buying out American BPO units to leverage their physical US presence to get more BPO projects. Deeply submerged on loans and funding from financial institutions, such BPOs will have no option but to themselves be sold off to large scale buyers.
The lessons from all this is that it is inevitable that M&As in the Indian BPO sector would continue to rise; but what would also happen is that the likes of CSC, Infosys, Convergys, Accenture, Genpact, would only go on to become much larger entities than they are now.
But then there are contrarians who feel that these M&As have nothing to add on to the growth story of Indian BPOs. As per them, it’s actually a fight for survival. Though, at present there are over 110 BPO captives operating out of India, the number is expected to reduce to just half in the next five years. “M&As in the BPO industry, particularly in the voice vertical, are an outcome of the US sub-prime mortgage crisis. It’s the crisis that has made the survival of small players really hard. These players are now allowing bigger players to acquire them as they can no more take the pressure on their balance sheets,” says Anuj Gupta, Angel Trade.
Further, there are many who feel that with time India has lost its price competitiveness that tempted multinationals to offshore their business to India. While Indian BPOs could complete an assignment at one-tenth of the compensation a few years ago as compared to their US counterparts, the difference today is becoming marginal year by year. The major contributor to this rising cost has been the wage inflation, which was hovering over 8% in 2009 and is expected to touch 10.9% by the end of 2010. “With time, India’s price advantage has diminished; it now needs to find a niche and to reinvent the business models, services and enabling technologies,” says Vishal Deep Dhillon, Regional Director-Asia, CSC, to B&E.
That countries like China, Vietnam and Philippines too are emerging as a big threat to India’s dominance in global offshoring industry, is actually old news. But now, as Gartner analyst Diptarup Chakraborty tells B&E, “Destinations like Philippines, Israel are almost coming neck-to-neck with India as they are offering cheaper rates to the outsourcers.” Then there is the slated withdrawal of STPI scheme in FY2011. The sunset clause u/s 10A and 10B of the Income Tax Act gives a tax holiday to IT-BPO companies operating under an STPI, where the tax rate works out to be 20% for a BPO at present. This is expected to go up to 33% if the scheme is withdrawn.
Considering the fact that there have been many domestic entrepreneurial ventures, not particularly backed by large scale IT organisations, that ventured into setting up BPO outfits in an attempt to become bigger simply on the basis of the boom that was, in case the government withdraws tax-holiday sops or increases the tax rates, that surely would put these newbie BPOs on the selloff block, if not immediately bankruptcy. Worse would be the case with Indian BPOs that, hoping for a sudden revival in the US economy (which accounts for clost to 60% of all global BPO projects), have attempted to invest in buying out American BPO units to leverage their physical US presence to get more BPO projects. Deeply submerged on loans and funding from financial institutions, such BPOs will have no option but to themselves be sold off to large scale buyers.
The lessons from all this is that it is inevitable that M&As in the Indian BPO sector would continue to rise; but what would also happen is that the likes of CSC, Infosys, Convergys, Accenture, Genpact, would only go on to become much larger entities than they are now.
Ashutosh Harbola
For more articles, Click on IIPM Article.Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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