Wednesday, December 15, 2004

Mid-life crisis in infancy

The Indian BPO industry is facing a crisis. What crisis? Demand is greater than supply, multinationals are setting up call centers - almost one every day -, existing centers are ramping up staff strength, every analyst and 'offshore consultant' advises leading Fortune 500 companies to offshore BPO to India, demand for real estate is sizzling hot, hotel rooms in every single large city in India are full for the next quarter, and the recruitment pages of newspapers are full of advertisements from almost every BPO company in India. Crisis?

In my opinion, yes, it is a crisis. For every boom creates the seeds of a bust precisely when it reaches full-blown proportions.

Even elementary analysis of industry structure points to an inexorable decline in margins. More importantly, the underlying trends, worryingly point to a high probability of a life-threatening incident that could affect the rapid growth, if not the very existence, of this nascent industry.

First, the industry has no bargaining power with customers. Almost every customers retains consultants (McKinsey, TPI, Gartner, et al) to negotiate deals with vendors in India. These intermediaries, armed with the most granular cost data of different firms, conduct reverse auctions to negotiate prices and insert extremely stringent clauses (performance, exit et al) in contracts. These contracts are being blindly signed by our leading BPO vendors (Indian and multinational), and of course, they pay steep insurance premia to cover their risk of non-performance.

Second, the industry has no bargaining power with suppliers, especially recruitment agencies, that provide manpower to this industry. There are literally hundreds of anecdotes about how there is rampant 'poaching' of employees, continuous upward spiral in salaries, 'not-the-best-of-breed' people practices, and growing attrition rates. Most large vendors interview literally hundreds of candidates every day and bemoan the fact that there are very few 'good men and women' around who are willing to work in this industry.

Third, the levels of competition are extremely high. This is unnatural in a nascent industry. which is nascent and yet emerging.


Blogger Rashmi Bansal said...

You write well - should blog more often!

4:59 AM  
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We may own, take position and sell any securities mentioned at any time. Any statements that express or involve discussions with respect
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Forward,|ooking statements in this action may be identified through the use of words such as: "projects", "foresee", "expects". in compliance with Se'ction 17. {b), we disclose the holding of EGTY shares prior to the publication of this report. Be aware of an inherent conflict of interest resulting from such holdings due to our intent to profit from the liquidation of these shares. Shares may be sold at any time, even after positive statements have been made regarding the above company. Since we own shares, there is an inherent conflict of interest in our statements and opinions. Readers of this publication are cautioned not to place undue reliance on forward,looking statements, which are based on certain assumptions and expectations involving various risks and uncertainties that could cause results to
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6:32 PM  

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