(Authored by Harikumar P, Senior Associate – Transactions & Consulting)

India has been, by far, one of the most popular outsourcing destinations for corporates in the OECD for about to two decades now. While most of these large corporations have had multifold benefits in optimizing their cost structures, they were also able to focus on their core offering and innovate in tough markets. The latter is essentially the key take for businesses in this era of cut throat competition. Large corporations continue their patronage to outsource more non-core processes to India. 

With this mega trend, outsourcing in India is now a $150 Bn industry; contributing to about 22.63% of IT services export revenue.

The thrust now, is in extending these shared benefits to the next tier of organizations in Europe and North America – the SMEs. We believe that some of these companies, especially across core service sectors like BFSI, retail, healthcare, logistics etc., who migrate to outsourcing early on, will reap large benefits in the long run.

Advantage India – a Macro Perspective

Over the years, Business Process Outsourcing (BPO), as it used to be called, has matured to the status of being called as Business Process Management (BPM). The advent of Knowledge Process Outsourcing (KPO), by which technology development, data science and analytics, and research processes started making way to Indian companies, marked a significant milestone in the evolution of this industry. This shift is a significant leap for India, with its growing talent base and improved infrastructure outreach. European SMEs can leverage on the following core aspects by outsourcing to India.

Talent Advantage

Leadership and Experience: 

Outsourcing of non-core activities is a process driven approach. With nearly two decades of experience with foreign and domestic corporations, Indian BPM solution providers have mastered the art of mapping, designing and executing processes and workflow. This learning comes handy for SMEs who are less exposed in restructuring of work. 

Skilled Talent: 

Certain job functions require skill. India has a large pool of engineers; and a growing pool of data scientists. Every year, close to 1 Mn engineers graduate in India. Most of them join preferred IT outsourcing companies in their early years.

Training: 

It would be dishonest to say that people employed in BPMs enjoy their work. The churn rate is among the highest in the BPM industry. This is largely on account of repeated task based work even as paychecks are handsome. The average age of employee is between the mid-twenties and late twenties. Even as churn rates are high, there is more addition to the talent pool every year, thanks to India’s demographic dividend. This calls for increased training and skill development initiatives. The training and skill development industry has developed over the years to $1 Bn market in itself. However, training costs continue to be about only 1 to 2% of employee costs, as compared to ~10% in the US. Indian firms are able to provide cutting edge training solutions without shedding out more from their wallets.

Language Advantage: 

Indian firms continue to take advantage over other competing SE Asian firms as they have an edge over command for English and other major European languages like French, Deutsch, Dutch, Spanish and Italian. 

Infrastructure Advantage

Digital Infrastructure: 

Digital connectivity and infrastructure has improved significantly in India. High speed broadband reaches to across 600 corridors connecting top 100 cities and towns. Indian BPM firms take advantage of low cost high speed leased lines for service delivery and operations. Indian ITES majors are spreading to Tier 2 and 3 towns and cities as digital infrastructure has outpaced growth of physical infrastructure. By this strategic move, firms are able to keep their overheads low while also adding value in terms of bringing about equitable growth and opportunities for all.

Physical Infrastructure: 

India is reported to add 1.73 Bn sq. ft. of commercial office spaces in the coming years. Even as the commercial real estate is worth $121 Bn, office rentals continue to be relatively economical. As quoted, with new IT parks being developed in smaller towns and cities, overheads are expected to come down further.

Cost Advantage: 

Talent and resource costs are one-third to one-fifth in India, at about $15/ hour for the same jobs that costs anywhere around $ 40 to $80 an hour. Indian BPM firms have shown meticulous efforts to keep cost structures optimized and lean. They also take advantage of favourable government policies like SEZs etc. As competition continues to fierce up, most of these benefits are expected to be passed over to customers to win business. Indian firms would rather want to build volumes than improve margins.

Sectors and Functions

Outsourcing opens up a wide range of options for clients across industries. While for this time however, as stated, outsourcing options were limited only to large corporations who had the will and zeal to adopt such strategies (apart from a few successful case studies for smaller companies). These companies operated in large consumer service sectors like banking and financial services, insurance, healthcare, and retail. Thanks to the advent of data science, manufacturing corporations have leveraged off late analytics and knowledge support in various functions. By and large, most outsourcing functions can be classified in two as tech and non-tech. The former needs a skilled talent force while the other is done by semi-skilled workforce. The tech processes range up anywhere from software development and maintenance, data and analytics around customer engagement, procurement intelligence, supply chain optimization, transaction fraud, etc. Non tech processes include audits and controls, reconciliation, revenue cycle management, accounts receivables and payables management, et al.

Models

Even as contractual outsourcing continues to be a hotspot, new innovative models are shaping up in the recent past.

India’s growing talent has enabled Indian firms to design and execute proprietary processes of some of world’s largest corporations and financial institutions. As processes relating to technology development and maintenance, data and analytics, market intelligence etc. are being outsourced, foreign companies are evolving structures to protect information privacy and enhance security. Thanks to a more open policy, foreign companies are either entering into Joint Ventures with Indian BPM service providers or looking at establishing Captive Centres for back office operations. These strategies do not technically qualify to being termed as “outsourcing”. However these models operate like any other contractual outsourcing vendor.

Opening wholly owned Captive Centres work well for companies capable of making large ticket investments upfront towards building infrastructure and team. On the flip side, it is hard to let go the opportunity of outsourcing non-core business activities to reap the larger benefits. Under these circumstances a JV structure comes handy. The advantages of having a JV structure by far outweigh any challenges that may arise. The JV partner in India shall allocate managerial support, resources and talent. Here, unlike contractual vendors, the JV enters into a business contract with the parent under specific terms as defined by the JV partners.

All three models have their own relevance, advantages and limitations. A contractual arrangement with an Indian vendor will work well in case of less proprietary processes. It also enables the companies to get the best cost structure through competitive bidding mechanisms. On the other side, for more proprietary processes, a JV or a Captive Centre strategy needs to be designed.

Long Term Perspective

Technology

Radical transformations in technology will have a significant bearing on outsourcing opportunities. With new technologies like artificial intelligence, machine learning and natural language processing making practical inroads in the way we do business, most of these processes may become redundant. But, this shift will take its own time and shape on businesses at different levels. 

Businesses migrated from people to processes, thereby opening a variety of tasks and jobs that could be outsourced. We are now developing technologies whereby machines will analyze and learn the patterns of these tasks and jobs being performed over years. Regardless, it is important to understand that processes need to be designed and put forth for machines to understand and learn. This transition may take time for even large organizations.

For SMEs, process re-engineering will play a key role in migrating to a more automated environment. Indian BPM companies can add significant value in this phase of development at the best possible way.

Socio-Political Landscape

The global socio-political environment needs to be open to enable businesses to reap the benefits of outsourcing. The recent political shifts in major economic powerhouses may lead to some degree of turmoil. However, in the longer run, we expect the impact of these shifts as only temporary, and foresee a more liberal socio-political climate empowering businesses to transact across the globe. 

These expectations lay the ground clear for small and medium scale businesses to evaluate potential outsourcing options. India is best positioned to welcome and deliver on such opportunities as illustrated shortly in this whitepaper.