In a recent interview, Rajesh Subramaniam, deputy MD and CFO of Firstsource, discussed the headwinds facing the Indian BPO industry elaborately. Nevertheless, he also predicts investor interest returning to the sector, going ahead. Excerpts.
Run us through the headwinds the BPO industry is currently facing in India
There are issues both on the demand side and on the supply side. The demand side headwinds are around customer and behaviour, market forces and changes, the currency's rapid movements and overall geo-political equations. On the supply side, there are challenges around manpower, infrastructure, and government policies.
Explain the changes in market forces
In the US, I do a lot of third party collections. The key to third party collections is charged off debt. The key is build up of the debt inventory. The charged off debt inventory used to be $900 billion in 2008-09. It has now shrunk to less than $700 billion as of December last year. My business is suffering. I am getting less business and revenues. People in the US are spending with cash and debit cards. People are using credit cards as a last option - they don't want to incur debt. However, employees I have for this business are domain guys. You need a combination of skills which includes analytics to identify somebody and assess whether the person is going to pay or not. These skillsets builds up over a period of time. But now, do I let go of these employees or do I keep them? If I let go and the market turns, it takes 12-18 months to get somebody to that level of efficiency. My costs have now become fixed costs.
We have seen voice migrating to the Philippines. In terms of operating costs, how does India compare?
My manpower cost is higher in the Philippines - about 5-7%. But my other operating costs are low. If I consider the infrastructure cost and all the productivity I get for a voice process, Philippines is better than India. This wasn't true 5-6 years back. The country has worked hard on creating infrastructure and supply chain. On the other hand, the level of redundancy that I need to maintain in India - the power infrastructure, the social infrastructure - all of these are challenges. For one telecom link, I need to have one more for failures.
If the Indian government gets the infrastructure bit and tax policies in place, can the industry grow faster than it is right now?
Absolutely. It will get back the momentum that has been lost at least on the voice side. India is doing well in platform-based BPO services - intermixing of people, process and tech are ubiquitous. If I get more incentives, my ability to invest in the business, to drive voice on platform, which is expensive, will grow.
What is your sense of investor interest in BPO? It has waned …
From a long-term horizon, it is still an attractive industry to invest. My customer contracts are annuity. I don't have uncertainty of revenue. IT services has to hunt and kill more frequently than BPO which is like a feast that goes on. This is not a 40 per cent return on equity business. But can I generate 20 per cent going forward? Yes. Can I grow at 20 per cent CAGR over the next 5 years if I get all my ducks aligned? Yes. The lack of investor interest has gone too far to the left. In 2005, it was two far to the right. The interest should come back.