Constitutional laws in India

The Bpo Strategy - New Mantra For Corporate Efficiency

Written By: Harsh Mishra Company Secretary (ACS 14822) Ahmedabad
Outsourcing Laws in India
Legal Service
  • Gone are the days when service functions were developed by the corporates in-house for captive use. Today, corporates benefit significantly from outsourcing of business processes almost everywhere on the planet. This article is a quest into the boom and backlash to the BPO activity in India.

    Business Process Outsourcing (BPO) is a buzzword among the corporates in the world today. Gone are the days when service functions were developed by the corporate's in-house for captive use. Today, corporates benefit significantly from outsourcing of business processes almost everywhere on the planet. Looking to the growth and government's support to it, BPO is being recognized as a specialised sector in India. In this article, the outsourcing of business processes has been discussed in India from various standpoints.

    BPO In India

    Over the last few years, outsourcing of business processes has been gaining popularity driven by the fact that US firms have been enjoying much success from adopting this business strategy. European organizations have increasingly been focussing on what they identify as their core competencies and have been looking to reduce costs while maintaining high levels of quality for non-core activities and processes. To this end, two broad approaches had developed. One, to centralise the non-core processes into an in-house shared service functions to derive benefits of centralisation through an in-house process or through a wholly owned subsidiary. Two, to identify an acceptable third party service provider who will handle the processing work. The current economic climate has encouraged the latter trend as the organizations continue to look for more innovative ways to improve efficiency and cut costs in order to survive the turbulent marketplace. Hence, the business process outsourcing.

    In India, as far outsourcing of business processes is concerned, the outsourcing of legal services (LEGAL SERVICE IS NOT A CORE COMPETENCY FOR A TYPICAL COMPANY - IN OTHER WORDS, IT IS NOT A RESOURCE WHICH WILL BE USED BY A COMPANY TO BUILD OTHER PRODUCTS)comes on the first count. In other areas also (discussed later in this article), BPO is quite in vouge in India. Nowadays, more and more companies are announcing BPO and call centre projects in India. As per estimates, India is set to become the most popular destination for BPO operations. A large number of multinational companies are outsourcing their business processes offshore to Indian BPO companies. BPO has got impetus with the technological breakthrough with Internet for communication across the globe which has been the largest advantage for the success of the BPO business.

    More importantly, India has a pool of talent and has the second-largest English-speaking population with computer knowledge in the world after US. Also, costs are lower in India compared to other countries for outsourcing. The technology in India is state-of-the-art and the country is rightly located in terms of the geographical position, and the policies of Govt. of India are also favourable for software and BPO sector.

    Major Areas of BPO Sector

    The non-core business process areas are the core areas of BPO business. Simply speaking, outsourcing of non-core business processes is popular among the corporates today. These non-core business processes areas may inter alia include IT enabled services (ITES), e-logistics, management of facility & operations and legal services. Of these, outsourcing in ITES e.g. software & call centres is amazingly popular across the globe.

    Government's Support to the BPO Sector in India

    Recognizing the growing importance of the business process outsourcing, the Government of India has introduced various policy concessions and initiatives to accelerate the growth of the IT-enabled outsourcing market. Spearheaded by associations such as National Association of Software and Service Companies (NASSCOM), the Indian software and services industry has also taken various steps to ensure that India becomes the global hub for IT-enabled outsourcing in the future. Some of the steps take by the Government and industry for the ITES/BPO sectors are as follows:
    # In May 2002, the Government of India has accepted the recommendations of NASSCOM and removed certain procedural bottlenecks that were hampering the growth of the Indian call center industry.

    # The Government of India (Central Board of Direct Taxes - CBDT) has allowed total income tax exemption on the export of IT enabled outsourcing services under Sections 10A/10B of the Income Tax Act, 1961. These IT enabled products or services are:
    i. Back-office Operations
    ii. Call Centres
    iii. Content Development or Animation
    iv. Data Processing
    v. Engineering & Design services
    vi. Geographic Information System Services
    vii. Human Resource Services
    viii. Insurance Claim Processing
    ix. Legal Database
    x. Medical Transcription
    xi. Payroll
    xii. Remote Maintenance
    xiii. Revenue Accounting
    xiv. Support Centres; and 
    xv. Web-site services
    # Foreign Direct Investment (FDI) for 100 percent of the equity has been permitted in BPO companies.
    # Permission of duty-free imports of capital goods (under the Export Promotion of Capital Goods scheme) for BPO companies.
    # The Government has promoted several Software Technology Parks (STPs) which provide ready-to-plug IT and telecom infrastructure. STPs also allow single-window clearance for all regulatory compliance issues. Currently, several STPs have been established across India covering most of the major towns/cities.

    Contribution of BPO To The National Economy

    As per the NASSCOM-McKinsey Report, 2002, the revenue from BPO will reach $24 billion by 2008 and the IT-enabled services (ITES) sector will contribute 37 per cent to the total IT software and services export market. Thus, BPO is likely to contribute up to 3 per cent to India's gross domestic product (GDP).
    The BPO sector is expected to provide employment to 1.1 million people by 2008 as per a report by the NASSCOM.

    Threats To The BPO Sector

    Despite the boom and support that BPO sector has fetched, there are certain grass-root level setbacks too. These setbacks are strongly propagated to be threats resulting into backlash to the BPO activity in India. These are as under :
    # Lack of maturity in service line, increasing competition among e-logistics providers and management resistance are the main deterrents to the outsourcing in the logistics sector.

    # Discretionary cuts in budgets, low growth due to industry maturity and decentralised nature of facilities management are the main deterrents to the outsourcing in the facility & operations management sector
    # Privacy concerns and technical nature of subject matter are the main deterrents to the outsourcing of legal services.

    # If all above is not enough, the companies which are outsourcing non-core processes from third party service providers are literally placing their fate in the hands of another company, which appears to be a normal setback of BPO at the outset.

    # Some companies which jumped BPO market in India are now looking to sell their assets being unable to scale operations upto the required level. As per the NASSCOM report, recently there were about 200 Indian companies offering BPO and related services looking for buyers.

    # Companies rush into BPO market without understanding the kind of operational and marketing issues they would have to cope with, and the kind of gestation periods to be expected before profits can start flowing in consistently. As a result, many facilities that were set up are lying vacant, and the failed enterprises have to either close down or get acquired, as they have neither funds nor clients.

    # The rapid growth of India's ITES-BPO industry, has not been taken too well in developed countries from where jobs are coming to India. Recently, in the US, bills have been tabled in five states namely; New Jersey, Maryland, Connecticut, Washington and Missouri that sought to ban the transfer of state data processing contracts to developing nations. In the UK, three of the country's biggest trade unions have come together to fight the loss of jobs to India.

    Mergers and Acquisitions in the BPO Sector

    M&A in the BPO sector in India are not confined to Indian companies alone. BPO operations in India that belong to multinationals are also changing hands. Last year British Airways PLC (BA) divested about 70 percent of the equity in WNS to Warburg Pincus, a New York-based private equity investor. WNS was set up in 1996 as a captive back-office for BA. WNS is now positioned as an independent third-party services provider, but still gets about 35 percent of its revenues from BA.

    In India, M&A in BPO sector are proceeding on two fronts. Even as some Indian BPO companies are getting acquired, other Indian BPO companies are acquiring operations both in India and abroad. HCL Technologies acquired over a year ago a 90 percent stake in the Apollo Contact Center in Belfast of BT Group. The deal gave HCL a beachhead in the European market, and helped it bag business from the London-based BT, including a $160 million order for setting up a BPO operation for BT in India.

    TransWorks Information Services Pvt. Ltd., a Mumbai based BPO company, was acquired recently by the Aditya Birla Group, a large Mumbai based business conglomerate.

    Customer Asset, a Bangalore based BPO company, was acquired a year back by ICICI OneSource. Customer Asset had about 750 employees and operated a 350 seat call center in Bangalore.

    Key buyers of BPO companies in India are software services companies which want to position themselves as vendors of a broad portfolio of services, including BPO, to their current customers. For example Wipro, a Bangalore-based software and services company, acquired Spectramind eServices, a CRM (customer relationship management) services company in Delhi a few months back.

    Relevance of Bpo For Company Secretraies

    The BPO sector seems to have opportunities which can be capitalised by the company secretaries as well. Apart from the work relating to the mergers & acquisition in BPO sector and Income Tax related matters, provisions of FEMA are also quite involved as more and more foreign multinational companies are entering into this sector, where role of the professionals like company secretaries comes in the picture. Besides, as far as practicing company secretaries are concerned, in the words of outsourcing they are out and out third party service providers. The services rendered by them e.g. consultancy services, secretarial audit, various certifications, reports, issuance of various certificates, etc. and other matters relating to corporate laws are generally outsourced by the corporates on a large scale.

    With reference to the BPO, if it is seen in detail, the outsourcing of work relating to 'Transfer and Dematerialisation of Securities' is pretty common practice among the large public companies. Instead of carrying out the aforesaid work in-house, companies use to appoint a "Registrar and Share Transfer Agent" (RTA) which happens to be a BPO company. The RTAs use to carry out the work relating to transfer and dematerialisation of securities and other related work and charge the companies as per the terms and conditions of the agreement entered into between the company and itself. What is important to mention here is that, looking to the skill-set and expertise, qualified company secretaries can promote a company (i.e. a BPO company) with its main objective to undertake the share registry work and other objects which are allied and incidental thereto, which will perform as RTA to various corporates. Even to see it other way round, the companies which happen to outsource the work relating to transfer and dematerialisation of securities, will certainly prefer to hire such kind of RTA which is led by the professionals who have requisite background and specialisation in the field.
    Similarly, there may be other areas too which can be explored in the present trend of BPO, which is seen as a tool by the corporates to reduce the costs incurring on account of carrying on the non-core processes in-house.

    As per the estimates, India is poised to become a No. 1 BPO destination in the Asia-Pacific overwhelming all the so called odds. Particularly, when it comes to ITES-BPO tier, with a current base of 96,000 call centre seats, India is supposed to grow by 85 per cent to reach a capacity of 1,77,000 seats over the next 12 months to become the biggest BPO hub in the region. Newspaper and magazine articles and analysts' briefings throughout the globe are reporting the projected strong growth of the BPO market in India.

    Thus, let us keep our fingures crossed and see that how does the BPO strategy instill perfection into the Indian corporates to help them achieve efficiency in their core businesses and reduce costs related to the non-core business activities, and further, how does it add new hue to various professions involved in this paparazzi to make the BPO a fertile business strategy.

    (Data & statistics source : NASSCOM & media reports] The Author is a Company Secretary, and can be reached at: [email protected]

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