The BPO bandwagon

It may not be the most glamorous of sectors, but India is quietly going about carving an indispensible niche for itself as the leading provider of back-office services to most of the world's biggest and most successful companies.

The country is rapidly establishing itself as ?the world's back-office?, providing business process outsourcing (BPO) and IT-enabled services (ITES) to companies attempting to maximise their efficiency by concentrating solely on their key operations. Dell, Sun Microsystems, Ford, General Electric, HSBC, American Express and British Airways are among the leading multinationals to have set up back-office and customer service centres in the country. The sector is already rapidly growing, with revenue for 2002 likely to top $1.6bn against $966m in 2001.

The trend brings with it the kind of opportunity that venture capital firms find difficult to ignore. VC firms are targeting India as a growth area in an otherwise largely depressed global market. In 2001 Indian companies received in excess of $840m. This year the figure is expected to top $1bn, with as much as 60 per cent heading to the IT-enabled services industry. The Economic Times of India recently published figures suggesting that, ?of the 40-odd VCs present in India today, most have invested in at least two or three deals in the last six to twelve months and almost all are either in the BPO, IT or IT-enabled services space.?

Warburg Pincus, which has invested $650m in India to date, recently paid an undisclosed sum, thought to be in the region of $15m, to acquire a 70 per cent stake in World Network Services, the former BPO subsidiary of British Airways. Warburg Pincus is drawn to the ?exciting growth prospects? for WNS, and has set aside up to $200m in order to turn the company into one of the world's leading outsourcing businesses. In July, WNS made its first purchase, acquiring UK insurance claims processing business Town & Country Assistance.

Ray Marshall, managing director of WNS, believes the attraction of BPO is unequivocal: ?Clients are very enthusiastic because India has the largest, most inexpensive, highly-skilled English-speaking labour force in the world.? Industry officials say Indian companies can offer outsourcing services 30 to 40 per cent cheaper than their competitors elsewhere. From an Indian business perspective, billing rates for BPO are comparable with those received for software development projects. Speaking at a recent venture capital seminar in Mumbai, Pramod Bhasin, president of GE Capital Services India, which controls the largest outsourcing business in India, employing 10,000 people, said, ?I think there is no better or more promising area for India. It plays to India's sweet spot.?

Investors will have also taken heart from the first major exit, achieved in July when Indian software services firm Wipro acquired a 66 per cent stake in Spectramind from Chrysalis Capital and management for $83m. ChrysCapital associate Gulpreet Kohli, who co-ordinates the firm's BPO activity in India, described the return on the firm's $10.2m investment as ?very profitable?. Reports in India put the multiple at around four times. ?There have been other, smaller exits, but this was by far the largest. We have since made two further investments in BPO in India and believe there is still great potential in the sector.?

The National Association of Software and Services Companies (Nasscom) has forecast India's revenues from IT-enabled services to rise more than 20 times to $16.94bn by 2008. The global market for BPO in 1999 was $208bn. It is expected to grow to $543bn by 2004, a compounded annual growth rate of 21.2 per cent, according to data published by Gartner Group. Pulak Prasad, director at Warburg Pincus who led the WNS acquisition for the firm, endorses the figures, adding that the industry was also likely to produce very high levels of profitability. ?Already we are seeing serious capital market interest. Most analysts have started covering BPO even though there is only one listed company.? eServe came to the Indian stock market last year, and given the popularity of the sector, is likely to be only the first of many.