Process Improvement, not Cost Savings, Drives India's Domestic BPO Biz


Earlier this year, I wrote about India's burgeoning domestic market for outsourcing. The demand for BPO appears especially strong, as I wrote last August.


Although the forecasts I cited in these posts were optimistic, they now look downright conservative in light of more recent statistics included in this Knowledge@Wharton India article.


The domestic BPO market was worth $1.1 billion in 2007, up from $100 million in 2002, and is now estimated at $1.6 billion to $1.8 billion, notes the article. According to a report by The Everest Group and India's National Association of Software and Services Companies (Nasscom), the market could be worth up to $20 billion over the next five years.


BPO providers do face challenges in serving the domestic market. For one, says outsourcing expert Ravi Aron, a senior fellow at Wharton's Mack Center for Technological Innovation, banking and other industries normally served by BPO providers are heavily unionized in India, and will thus face resistance. Last March, I wrote about a threatened strike by state-owned bank workers if the prime minister refused to disallow outsourcing.


Like Europe, India is also filled with a diverse collection of regional languages and cultures. Also, unlike their U.S. counterparts, many potential Indian BPO clients lack the kinds of sophisticated technology platforms that facilitate outsourcing. Their processes are labor-intensive and "idiosyncratic," says Aron, and thus difficult for BPO providers to replicate on a mass scale.


Process improvement is exactly what most Indian companies are seeking from BPO providers. Not as cost-focused as their Western counterparts, domestic companies want to step up their capabilities in hopes of expanding their businesses into markets outside India.


Expected to be especially popular, according to Aron and other experts, are vertical services such as mortgage loan processing and property and casualty insurance. Says Aron:

Many of these specialized services companies have the money, but not the managerial capacity or bandwidth to automate their processes and extract efficiencies.

Since margins are lower in domestic BPO deals, providers must figure out ways to cut their cost structures. Establishing operations in tier-2 and tier-3 cities is expected to be a common tactic. This should become easier, thanks to ambitious government efforts to improve the infrastructure in these areas, which I wrote about last week.