Moving to the Other Side of BPO – When the Destination Becomes a Source | Sherpas in Blue Shirts

Posted On August 5, 2011

Until recently, my discussions with clients about the Asia Pacific region or Latin America countries were, by default, around leveraging them to provide cost-efficient BPO services to the western markets. However, with a growing number of organizations looking to enter or expand in these rapidly growing economies, they are starting to emerge as notable source geographies for BPO services. Hence, it is becoming increasingly important to pre-qualify statements related to these regions to specify the context – i.e., BPO source geography or BPO service delivery geography. With that, let’s take a closer look at these regions from a source geography perspective.

Interestingly, traditional offshore service delivery strongholds such as India, China, and Brazil are also among the most prominent new frontiers of the BPO buyer market. Everest Group’s recent study on the non-voice Indian BPO market clearly shows that the domestic Indian market, although on a smaller base, grew by more than 85 percent in the last two years.

From a functional perspective, the BPO adoption is broad-based in these markets and increasingly includes non-voice transactional services beyond call center work. Some of the key segments that are showing rapid growth include Finance and Accounting Outsourcing (FAO), Procurement Outsourcing (PO), Human Resources Outsourcing (HRO), and  industry-specific outsourcing. Also, while buyers primarily outsourced one functional area to start off with, we are now seeing large multi-tower deals as well. The recent multi-tower BPO deal between Brazilian conglomerate Algar and Capgemini illustrates the growing adoption and increasing market maturity.

So, what is driving the adoption in these countries? While cost savings is important, our research shows that the BPO value proposition here is driven more by the need to manage rapid growth and realize operational effectiveness. With the GDP growing by at least 7 percent in recent times in these countries, companies are increasingly evaluating BPO to capitalize on service providers’ existing scale of operations and the resultant flexibility to support growth. Other key consideration include improving operational effectiveness via best practices in business process management and process improvement opportunities through standardization and automation. The fact that buyers in these markets are more aware of the outsourcing concept – due to the vibrant offshoring market – compared to other newer markets is also helping accelerate adoption.

However, serving these markets is not easy. There is a near absence of labor arbitrage, and price points are low compared to the western markets. Hence, service providers need to put in place a different strategy and operational structure. For example:

  • Different margin expectations. Providers can’t expect to realize the same level of profit margins as with their North American and European businesses because of the reasons cited above. Their margin consideration should reflect the practical realities of these markets. 
  • A long-term consideration. Providers will have to take a long-term view tied to the future growth and the potential of these markets. Providers with short-term profit mind sets will be disappointed here. 
  • A low-cost operating model. Service providers will need to apply multiple levers to achieve a low-cost operating model, including rational investments in infrastructure (lower spend on office infrastructure, facilities, IT, telecommunications, etc.) compared to the infrastructure spend for global client. Further, they will have to expand their delivery network beyond Tier-1 cities to include Tier-2 and -3 cities that offer a much lower operating cost. Additionally, a standardized one-to-many model where people and technology resources can be shared across customers will be important to fully realize the economies of scale benefits.
  • Innovative pricing structures. Beyond a simple FTE-based pricing structure, providers could get into innovative pricing structures such as gain sharing, e.g., tying their fee to the clients’ business growth (which could very well work with organizations in high-growth industries). There are already some success stories in the more mature IT outsourcing space in these markets such as the Bharti-IBM IT outsourcing deal in India.

Clearly, these new BPO markets represent significant potential. With a focused and differentiated strategy, coupled with robust execution, it is possible to realize the potential.

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