Performers for a new gig

AFTER EIGHT YEARS AS CEO, Aparup Sengupta quit Aegis in December. Aegis is the BPO (business process outsourcing) company of the $15 billion (Rs 81,075 crore) Essar Group. Though Indian BPO firms have seen eight other top-management exits (see sidebar) in three years, his resignation surprised the industry. He had founded the business, taken Aegis to 13 countries, and ramped up headcount to 56,000 on the back of 14 acquisitions. Aegis’s revenue is estimated to be over $1 billion in a sector that exports $16 billion of BPO products and services. Sengupta is averse to discussing why he quit Aegis but, at 48, takes pride in being a “startup artiste” rather than a curator of mature businesses.

Sengupta’s strategy was “scale to scare” competitors. But after the global meltdown, growth without increase in profits no longer works for investors. They now want operating profits, or prefer an exit. This calls for CEOs to demonstrate a new set of skills. “At different stages of a business, there will be different [kinds of] CEOs,” says Ravi Venkatesam, CEO of Bangalore-based OnTrac, which helps BPO firms improve operational efficiencies. “The CEO who can set up and grow a BPO business quickly in an unstructured industry is different from the one who can run it in the mature stages.”Sengupta’s departure is symptomatic of a shift, which Venkatesam calls the “industrialisation of Indian BPO”.

In April 2009, family-promoted groups were investors in three of the 15 largest BPO firms in India (ranked by Nasscom), excluding sole proprietors Azim Premji and Shiv Nadar, whose business groups derive revenue mostly from IT services. Today, five of the top 15 are owned by business families. They are Aegis (Essar Group), Aditya Birla Minacs (Aditya Birla Group), Firstsource Solutions (RP-Sanjiv Goenka Group), Hinduja Global Solutions (Hinduja Group), and Hero Management Services (Hero Group). BPO arms of IBM, Accenture, and Cognizant don’t figure in Nasscom’s top 15 rankings because they are incorporated in the U.S. But one thing is clear: Family-promoted groups are looking to apply their operational nous in the BPOs.

And then there are the PE (private equity) investors. Partha De Sarkar, CEO of Hinduja Global Solutions, 67% of which is owned by the Hindujas, says, “A substantial part of Indian BPO has so far been promoted by PE funds—not strategic investors. After the 2009 financial meltdown, their valuations depleted, and CEOs have had to take the blame. So, even well-run companies can lose their CEOs.” Venkatesam says the big-risk investors who came earlier [from 2000 to 2004] are almost gone. “Now, the next set is coming—people who really know how to run a business.”

So far, well-run BPO firms have seen investors change, as they exited when they found good opportunities. General Atlantic and Oak Hill sold their stakes in market leader Genpact last year to Bain Capital and Singapore’s GIC, respectively. Blackstone exited Intelenet, selling its stake to Britain’s BPO group Selco in mid-2011. Sengupta says investors today have two bands for return on equity. “They get 9% to 10% operating margins from onshore BPO, while offshore BPO delivers 16% to 18%.”

AGINST THIS BACKDROP, CEOs have a new toolkit centred around three principles. One, find new markets where client partnerships are not volatile. Second, stop increasing headcount and, instead, innovate. Three, grow onshore operations without taking the eyes off profits.

Raman Roy, widely regarded as the Father of Indian BPO, is showing the way in finding new markets. In 2006, he abandoned the model he had mastered: growth by chasing large companies based in the U.S. or Europe. He created Quatrro, which would focus on small and medium-size clients, who would give all their work to one company. Quatrro wants to be the only vendor, not one of many working on a client’s technology platform. Its solutions are based on its own technology platforms, not on the client’s. Quatrro doesn’t charge its 15,000 clients by the hour, but on the basis of its dealings with the clients’ customers. Roy says he does not need to dedicate people for his clients. So his costs are lower and profits almost 70% higher.

Setting an example in innovation, [24]7, a customer solutions company headquartered in Campbell, California, is finding new growth segments that do not put pressure to rapidly scale up teams or increase margins. Last year, it created a process based on voice-recognition that makes call-centres obsolete. In the age of tablet and mobile devices, [24]7 is betting on its clients’ customers to help themselves by using voice-recognition apps or interactive websites. “We can run the world’s largest self-service system: 2.5 billion interactions with customers in an automated fashion,” says P.V. Kannan, founder and CEO of [24]7.

“We are seeing if we should automate a process or use a person, or use a mix of both, to develop a method where end-users use chat or the clients’ website [to interact],” says Kannan. For this, [24]7 has to build processes to monitor customer trends and understand the market for which it builds apps. “[24]7 is now effectively a customer-analytics company, and BPO is one of the enablers it uses,” says Venkatesam of OnTrac.

Among the companies that have taken to onshoring in a big way is Hinduja Global Solutions. It delivers 58% of Hinduja Global Services’ BPO services from the customers’ base. “Given the political climate in the U.S. and Europe, we are creating jobs there,” says De Sarkar, adding that 75% of its Rs 1,554 crore revenue comes from the U.S. and 12% from Britain. If India has to stay relevant, its BPO firms have to go onshore. “Offshore delivery may be more profitable, but my effort has to be to grow onshore and improve profitability there,” says De Sarkar.

Investors have an open mind on these three pillars of a CEO’s strategy. “For any diversified group, there will be a portfolio rationalisation,” says Rohit Kochar, former CEO of R.R. Donnelly’s Asia BPO operations and CEO-in-residence at Veronis Suhler Stevenson, a New York-headquartered PE firm. PE investors have a five-to-eight-year timeframe for their investments, after which they will exit for a healthy profit. They will redeploy this money or fresh capital into a newer industry or a new player at a lower capitalisation.

In the next round, Kochar foresees PE players buying into a BPO firm in India, replacing or complementing its management and improving growth and profitability before exiting at multiples of those profits. That’s at least another couple of years away. But CEOs in this industry are clearly in the hot seat.