Industry Overview

Customer Relationship Management (CRM) and Business Process

Outsourcing (BPO) Services Market
CRM and BPO services are sufficiently broad terms referring to the outsourcing
of an entire corporate function or distinct independent processes of a corporate
function to an external provider to improve performance in a particular area of the
business. BPO entails the responsibility, the administration, operations, and
management of a customer’s business process(es). An organization’s business
processes, which are amenable to outsourcing, excluding manufacturing, can
broadly be classified into six broad areas as shown in Exhibit 1 below.
Exhibit 1: The six broad areas of BPO (including CRM services) – cover
typically substantial part of the BPO market

Source: Gartner/Dataquest, ACS, GS Research

These business processes have the following attributes, amongst others, that
make them suitable for outsourcing:

? Standardized processes
? Easily measured service levels
? Relatively centralized processes, and
? High volume functions
Centralized organization functions such as Finance & Accounting, Administration,
Sales, Marketing & Customer Care, Human Resources and Payment Services
are easier to outsource and therefore are immediately attractive BPO
opportunities.

Market Opportunity – Large and High Growth

The global BPO (including CRM) services market is estimated by Gartner /
Dataquest to be approximately USD 107 billion in 1999 in annual revenues and
growing to approximately USD 301 billion by 2004 (see Exhibit 2). The implied
five-year CAGR is approximately 23%, making this one of the fastest growing
areas of technology services and at more than twice the rate projected for total IT
services spending. In comparison the worldwide IT services spending , as
estimated by IDC, is estimated to grow from USD 349 billion in 1999 to USD 430
billion by 2004. CRM and BPO services therefore have the potential to almost
double the size of the technology services market (including both BPO and IT
services market).

Exhibit 2: Worldwide BPO (including CRM) market forecasts 1999-2004

Source: Gartner/Dataquest

Addressable Market Opportunity for Indian Service Providers

Nasscom - McKinsey has done an India specific study. While the classification
parameters are not the same as adopted by Gartner/Dataquest, the aggregate
market projections are comparable. McKinsey & Company (Mckinsey) predicts
the global IT-enabled services market addressable by the Indian service
providers to grow from USD 10 billion in 1998 to USD 142 billion in 2008 (see
Exhibit 3). IT-enabled services include, amongst others, CRM and BPO services.
McKinsey has determined the addressable market at USD 142 billion by
translating the current cost of business processes with outsourcing potential
(USD 532 billion) and attributing cost-savings on outsourcing. The global
opportunity of IT-enabled services market of USD 532 billion (which translates
into an Indian addressable market of USD 142 billion) by 2008 compares with the
global BPO services (including CRM services) market estimated by
Gartner/Dataquest of USD 301 billion by 2004.

The Nasscom - Mckinsey report estimates that Indian IT enabled service

providers can generate USD 17.5 billion in annual revenue by 2008, up from
USD 250 million generated in 1998-99.

Exhibit 3: Global market for IT-enabled services 1998-2008

USD billions

Source: NASSCOM McKinsey Study – India IT strategies

Key Growth Drivers

The growth of the CRM and BPO services market is driven by the following
factors:

Global drivers

? Increasing willingness of corporations for outsourcing –

Corporations are becoming increasingly comfortable in outsourcing certain
processes after having understood the traditional IT outsourcing in the nineties.
Outsourcing also helps corporations’ lower costs by eliminating costly fixed
overheads and shifting to a more variable pricing model. The responsibility for
hiring people and building systems shifts to a third party, who becomes the single
point of accountability.
? Technological adoption by corporations – Some areas of BPO have been
around for a while in the US as represented by companies such as ADP, First
Data and Paychex. The critical difference is the adoption of technology
enablers that have removed important obstacles that is paving the rapid
growth of this industry in this decade. The corporate adoption of internet/
intranet technologies and ERP systems is making it easier to deliver many
other functions remotely and more efficiently.

India drivers

In this large CRM and BPO market opportunity, India is expected to play a
leading role for following reasons:

? Technological and telecom advancements: The successful delivery of

CRM and BPO services, which include certain critical business functions,
requires world-class infrastructure for high quality delivery. The
advancements in technology and telecom such as evolution of Internet,
browser-based applications and availability of bandwidth allow faster access
and process delivery from remote locations.
? Availability of requisite skill-set: India has a large base of English speaking
educated work force that can cater to this market. There are a large number
(approximately 900,000 annually) of students graduating from English medium
universities out of which a significant proportion would have the required skill set
to work in CRM and BPO services.
? Visibility of India Inc: As “India Inc” has established its brand equity in
traditional IT services outsourcing; global corporations especially in the US
are likely to consider India as a key destination for CRM and BPO services
outsourcing work. As Indian offshore delivery is well understood by global
corporations, thanks to several years of IT services outsourcing, CRM and
BPO service providers benefit from more realistic expectations on the part of
both buyer and seller.
Critical success factors

? Quality
Quality is critical around three areas – people, process and infrastructure /
technology. .Call center specific Certifications like COPC ( customer operations
performance center- www.copc.com) helps in proving process strengths.
? Human Resources
Sound Human resources practices help the company to scale up quickly and
retain talent and retrain based on customer’s needs. Typical employee turnover
ranges between 20-25% annually in the current call center companies.
? Training
Training includes common training as well as specialized training on CRM
specific to the customer. Accent and voice culture is another area of focus.
? Infrastructure & Technology
The key focus is area is to build state of the a rt facilities with high levels of
redundancy on power. A robust communication infrastructure is another key to
successful operations.

Key Revenue drivers

? Number of production associates: Large annuity contracts are the key

requirement for this driver. The assumption here is that given the market
size it should be possible to meet the same . A typical contract would be
at least USD 1 million and the team size would vary from 50 to 100
production associates depending on the business mix and number of
shifts. The business also requires a significant number of supervisory
managers who ensure quality delivery and scalability of operations.

? Billing rates: The billing rates given the competitive scenarios are likely
to remain same during a cycle of 4- 5 years. The average rates for voice
based services would USD 24000 per annum and USD 18000 for non-
voice based services. Moving to high end value add areas can however
improve the billing rates.

? Business mix – Voice and non-voice based services: The initial period
of 2 years over a 5 year business cycle would see the ratio towards 80:
20 which is expected to shift 60:40 which will ensure optimal utilization of
infrastructure.
Key cost drivers

? Employee cost: This includes salary costs, hiring costs, training costs
and others like rewards and incentives. The expected employee costs
ranges between 36% to 32% of sales revenue. This is based on current
available data.
? Telecom & Technology cost: Each voice channel utilizes 8KB of
bandwidth on the IPLC link on the current available technology.
International private leased circuits are available in multiples of 64K up to
E-1(2MB) today. Taking multiple E-1 links would give economies of scale.
For non voice applications the estimated bandwidth required per user
would be 10 KB per user. Based on this the expected telecom costs as a
percentage of sales revenue would be in the range of 30% to 15%. It is
expected that during the initial period the capacity utilization on links would
be low (<60%) and is expected to reach optimal stage over 3 years ( >
80%).
Though the primary costs would be on the telecom infrastructure the costs
towards AMC’s need to be added to this. This would depend on the
warranty terms at the time of purchase of infrastructure. It is reasonable to
assume 1% of sales towards this.

? Facility cost: Would primarily depend upon whether the premises are on
lease rentals or owned. The cost includes other utilities expenses like
Electricity, power etc... In case of owned facility the cost could be around
5% of sales revenue where as in case of lease rentals it would be around
12%.
? Selling, General and Administrative cost: The costs would be high
during the initial period of time due to expenses on business development
and would reach a steady state over a 2-3 year period as the volume
increases. The initial cost towards this is likely to be in the range of 23% of
sale stabilizing to 7 -8%.