India moves up the outsourcing ladder

BANGALORE, INDIA - India's business process outsourcing (BPO) companies are looking at the opportunity to get into new high-margin business, as major multinationals are increasingly moving higher-end, analytic business processes to the country.

India has for long been a favored outsourcing location for major multinational companies like General Electric  in Fairfield, Connecticut, and Citigroup in New York, which have outsourced to the country activities such as software development, call centers and back office functions in an effort to tap into a skilled workforce with lower salary demands. But now, companies' outsourcing strategies are gaining variety and sophistication as they explore outsourcing functions like equity analysis, market research and even patent filings.

While many of these outsourcing efforts are operated by the multinationals themselves, Indian BPO companies are seeking to take advantage of the trend.

"Indian vendors are making a conscious effort to move up the value curve and target new service lines for better price realization and higher stickiness of the relationship with the customers," said Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM) in Delhi. "Several under-the-radar opportunities exist such as engineering design, clinical trials, market research, and equity research that are being increasingly tapped by Indian vendors." In the year to March 31, 2003, India's BPO industry grew by 59 percent to $2.3 billion, according to NASSCOM.

The new wave of outsourcing is also still driven primarily by multinationals setting up captive, wholly-owned subsidiaries in India. J.P. Morgan Chase & Co., a large financial services company in New York, is for example setting up a research team of 40 analysts in Mumbai. Starting with outsourcing back office processing work to India in 1999, Frost & Sullivan (F&S), a Silicon Valley, California-based market research and consultancy firm, set up an analyst team at its Global Innovation Center in Chennai in 2000. The center currently has about 160 staff of which half are analysts working in the various industry practices of F&S, while the other half work on back-office processing.

Firms outsourcing research and analysis to India are typically reluctant to discuss their plans because of protests in the U.S. and Europe against the moving of jobs out of those regions. However U.S. banks, brokerage firms, insurance companies, mutual funds and other financial services firms are planning to relocate more than 500,000 jobs offshore -- representing eight percent of their workforce -- over the next five years, according to a study conducted by the financial services practice of management consulting firm A.T. Kearney in Plano, Texas.

If until recently offshore job transfers have primarily focused on back-office functions such as data entry, transaction processing, and account reconciliation, the new relocations will involve a wider range of high-end internal functions including financial analysis, research, regulatory reporting, accounting, human resources and graphic design, according to the A.T. Kearney study. The relocations are expected to reduce annual operating costs by more than $30 billion. A.T. Kearney already does some of its own research work from India.

It may take some time before the new opportunities in research go to India's large number of BPO companies. Some BPO companies prefer to consolidate first in their mainstream back office and call center business, before getting into the higher-end analytics business.