WHAT IS OUTSOURCING?
The idea of outsourcing has its roots in the ‘competitive advantage’ theory propagated by Adam Smith in his book ‘The Wealth of Nations’ which was published in 1776. Over the years, the meaning of the term ‘outsourcing’ has undergone a sea change. What started off as the shifting of manufacturing to countries providing cheap labour during the Industrial Revolution, has taken on a new connotation in today’s scenario. In a world where IT has become the backbone of businesses worldwide, ‘outsourcing’ is the process through which one company hands over part of its work to another company, making it responsible for the design and implementation of the business process under strict guidelines regarding requirements and specifications from the outsourcing company.
The key to this definition is the aspect of transfer of control. This definition differentiates outsourcing from business relationships in which the buyer retains control of the process or, in other words, tells the supplier how to do the work. It is the transfer of ownership that defines outsourcing and often makes it such a challenging, painful process. In outsourcing, the buyer does not instruct the supplier how to perform its task but, instead, focuses on communicating what results it wants to buy; it leaves the process of accomplishing those results to the supplier.
There are two principal types of outsourcing:
Traditional outsourcing: – In “traditional” outsourcing, employees of an enterprise cease to perform the same jobs to the enterprise. Rather, tasks are identified that need to be performed, and the employees are normally hired by the service provider. For example, an information technology outsourcing may include a transfer of responsibility for management of data centers and networks (LAN, WAN, and telecommunications). In the field of facilities management, individuals acting as property managers might become employees of a facilities management company.
Greenfield outsourcing: – In “greenfield” outsourcing, the enterprise changes its business processes without any hiring of personnel by the service provider. For example, the enterprise might hire a startup company to provide a new service, such as wireless remote computing, that was not previously managed internally.
This brings us to the areas of outsourcing. Outsourcing takes place in the following three main fields:
Business Process Outsourcing: – It aims at providing optimal performance in critical enterprise processes. It provides industry-specific as well as cross-industry solutions, enabling clients to focus on core competencies and move to a higher level of performance.
Application Outsourcing: – This aims at applications development, management and maintenance services that complement strategic goals and produce measurable business value. This could also encompass innovation that enables the clients to achieve high performance.
Infrastructure Outsourcing: – Our professionals collaborate with forward-thinking organizations to create low-cost, high-value solutions for the entire enterprise. Accenture Infrastructure Outsourcing (IO) enables companies to transform business-critical applications and processes and achieve high performance.
WHAT IS BUSINESS PROCESS OUTSOURCING?
The BPO handles the outsourced project in a four-fold manner.
It invites companies to outsource to it by advertising its manpower efficiency and its technological advantage.
The next step is achieving the desired results. The company generally has a prescribed set of SLAs (Service Level Agreements) that it has to meet.
Then it needs to assure clients that they would be able to deliver the desired results with utmost security, since a loss of data could lead to grave consequences for the parent company.
The final stage is the result stage. You deliver the results that lead to quality output at cheap rates, thus benefiting the parent company.
The services offered by a BPO range from voice based processes to non-voice based processes. The non-voice based processes are termed as back offices wherein computations and data feeding and processing takes place.
Rapidly changing and increasingly complex business forces are bringing fundamental shifts in management and organization. The steady advance of technology, the complexity of business operations and the need for constant growth are conditions that require core competence in too many functional areas. This business climate demands that companies adapt to keep up with the changes. The benefits of outsourcing of course are variable, dependent upon the nature and situation of the organization. However, the following is a list of common reasons why outsourcing is undertaken:
• To improve business focus: Outsourcing lets a company focus on broader business issues while having details assumed by an outside experts.
• Free management from day-to-day operations oversight
• Access to world-class capabilities: By the very nature of their specialization, outsourcing providers bring extensive worldwide resources to meeting the needs of their customers
• Redirection of resources: Every organization has limits on the resources available to it. Outsourcing permits an organization to redirect its resources from non-core activities toward activities that have greater return in serving the customer.
• As business practices continue to change and evolve within organizations looking to remain competitive, the nature of outsourcing is undergoing a transformation in both its use and its impact.
• Lower costs due to economies of scale
• Ability to concentrate on core functions
• Greater flexibility and ability to define the requisite service more readily
• Specific supplier benefits. For example, better security, continuity, etc.
• Higher quality service due to focus of the supplier
• Improved internal management disciplines resulting from the exercise itself
• Less dependency upon internal resources
• Control of budget
• Faster setup of the function or service
• Lower ongoing investment required in internal infrastructure
• Greater ability to control delivery dates (e.g.: via penalty clauses)
• Lack of internal expertise
• Increase flexibility to meet changing business conditions
• Purchase of industry best practice
• Improve risk management
• Acquire innovative ideas
• Increase commitment and energy in non-core areas
• Improve credibility and image by associating with superior providers
• Generate cash by transferring assets to the provider
• Gain market access and business opportunities through the supplier’s network
• Turn fixed costs into variable costs
ADVENT OF THE BPO INDUSTRY IN INDIA:
Since the onset of globalization in India during the early 1990s, successive Indian governments have pursued programs of economic reform committed to liberalization and privatization. Till 1994, the Indian telecom sector was under direct governmental control and the state owned units enjoyed a monopoly in the market. In 1994, the government announced a policy under which the sector was liberalized and private participation was encouraged. The New Telecom Policy of 1999 brought in further changes with the introduction of IP telephony and ended the state monopoly on international calling facilities. This brought about a drastic reduction and this heralded the golden era for the ITES/BPO industry and ushered in a slew of inbound/outbound call centers and data processing centers.
Although the IT industry in India has existed since the early 1980s, it was the early and mid 1990s that saw the emergence of outsourcing. One of the first outsourced services was medical transcription, but outsourcing of business processes like data processing, billing, and customer support began towards the end of the 1990s when MNCs established wholly owned subsidiaries, which catered to the process off-shoring requirements of their parent companies. Some of the earliest players in the Indian market were American Express, GE Capital and British Airways.
The ITES or BPO industry is a young and nascent sector in India and has been in existence for a little more than five years. Despite its recent arrival on the Indian scene, the industry has grown phenomenally and has now become a very important part of the export-oriented IT software and services environment. It initially began as an activity confined to multinational companies, but today it has developed into a broad based business platform backed by leading Indian IT software and services organizations and other third party service providers.
The ITES/BPO market expanded its base with the entry of Indian IT companies and the ITES market of the present day is characterized by the existence of these IT giants who are able to leverage their broad skill-sets and global clientele to offer a wide spectrum of services. The spectrum of services offered by Indian companies has evolved substantially from its humble beginnings. Today, Indian companies are offering a variety of outsourced services ranging from customer care, transcription, billing services and database marketing, to Web sales/marketing, accounting, tax processing, transaction document management, telesales/telemarketing, HR hiring and biotech research.
DEMAND-SUPPLY ANALYSIS OF THE INDUSTRY W.R.T. INDIA
Robust communication infrastructure, a large English-speaking workforce, low labor costs, appropriate time-zone difference with the West and the brand equity built by the software services sector are compelling reasons for choosing India as the BPO destination. To top it all a friendly tax structure places the ITES/BPO industry on par with IT services companies. Further outsourcing to India offers significant improvements in quality and productivity for overseas companies on crucial parameters such as number of correct transactions/number of total transactions; total satisfaction factor; number of transactions/hour and average speed of answer. Some of the other key benefits of outsourcing from India are enlisted below:
Access to leading practices: external service providers give companies access to an extensive, highly specialized knowledge base–which providers must improve continuously to stay in business.
Clearer strategic focus: allows a manager to focus on core competencies and strategic issues rather than on routine, time-consuming activities
Better resource allocation: can help shift the traditional focus from transactional activities and reporting to the delivery of forward-looking information and value-added business analysis.
Improving service quality and productivity. Fast turnaround times and the ability to offer 24×7 services based on the country’s unique geographic location that allows for leveraging time zone differences.
Improve performance–maximize the performance of an organization’s enterprise client/server computing environment through the use of the latest technology and an outsourcer’s performance management tools and expertise
Achieving cost effectiveness as well as cost Reductions
Significant cost savings, up to 80% in certain cases.
While it can be quite difficult to recruit the expected competence in Western countries, it is a completely different scenario in India, where there are lots of available programmers with a good academic background.
Abundant, skilled, English-speaking manpower, which is being harnessed even by ITES hubs such as Singapore and Ireland.
Improving telecom and other infrastructure, which is at par with global standards.
Strong quality orientation among players and their focus on measuring and monitoring quality targets.
Proactive and positive policy environment, which encourages ITES/BPO investments and simplifies rules and procedures.
DEMAND FOR BPOs – PRICE DETERMINANTS:
The Law of demand states that “higher the price, lower the demand” and vice-versa, other things remaining constant. This concept is well illustrated in the BPO industry. Since the employee costs are higher in nations like the US and the UK, they are looker towards fresher pastures to cut costs.
The break up of a fictitious company’s expenses is given as follows. The overheads amount to around 17.7%, the facility maintenance is around 5.7%, the technical and telecommunication is the major expense commanding around 47.5% while employee costs in terms of salaries and employee benefits brings up the year with 29.2%. Now by outsourcing to an Indian firm they cut costs to the magnitude of almost 75% on employee costs. The main drawback though is the fact that they tend to lose around 35 – 40% in terms of technical development and telecommunication costs. But technical development is a one-time investment and the rest is more than offset by the savings on employee costs.
To make matters better the international bandwidth situation has improved dramatically over the last 3 years with the launch of India’s first private undersea cable. Moreover, considerable bandwidth is also available to companies through state owned Videsh Sanchar Nigam Limited – VSNL. It has strategic stakes and has negotiated contracts to use parts of several international cables like SEA-ME-WE II, SEA-ME-WE III (40 GBPS capacity), FLAG (10 GBPS capacity) and SAFE (40 GBPS capacity) offering connectivity to most locations around the world.
Other private operators in India also have aggressive plans to build undersea cable with considerable bandwidth over the next 2-3 years. Besides, the privatization of NLD operations within India has resulted in the emergence of new players. The privatization of the telecom Industry has resulted in significant drop in telecom rates. Continuing competition in the industry with the recent entry of newer players will see a further drop in telecom prices. As a result, the telecom costs have dropped by 85% in 3 years. This has led to decreased expenditure by the international firms that have outsourced to India.
A, B and C are points upon the demand curve (demand for cheap labour available in India). Each point upon the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price the less the quantity demanded (A), and the lower the price, the more quantity will be demanded (C). This graph further highlights the reason as to why companies are looking forward to outsourcing their processes.
The reasons underlying law of demand can be explained as follows:
Income effect: Fall in expenditure on employee costs is equal to an increase in the profits earned by the company as it now spends less in getting the same amount of work done.
Substitution effect: Further when the total manufacturing costs drop price of commodity falls, the consumer buys more of this commodity as compared to other commodities, which are more expensive.
NON-PRICE DETERMINANTS OF DEMAND:
The major non-price determinant in this case is the backlash against outsourcing or off shoring by the general American public. This is further supported by the political scenario and changing government policies and strategies. Despite these two factors being strong detractors for trade, the price payoff seems to continue to lure the big companies to outsource. It is business logic that will drive the growth in the sector. One final but major detractor after the public backlash is the issue of data security, which might be projected as a hindrance to the flow of free trade between the two nations.
SUPPLY OF LABOUR TO BPOs – PRICE DETERMINANTS:
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied into the market is known as the supply relationship. Price therefore, is a reflection of supply and demand. The law of supply demonstrates the quantities that will be sold at a certain price. Opposite to the demand relationship, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price offers greater revenues.
A, B and C are points upon the supply curve (the supply here is of skilled labour, which may be cheap by US and UK standards but is profitable by Indian standards). Each point upon the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point B, the quantity supplied will be Q2 and the price will be P2, and so on.
A major factor affecting the supply curve is cost of production. The cost of production in India, where production would refer to tasks ranging from telemarketing to mere data entry, are low due to the availability of extremely cheap but skilled labour compared to the labour in the US. This is profitable for Indian companies as they can earn large profits despite paying god salaries to employees and so these producers undertake these processes on a large-scale.
EFFECT OF SUBSTITUTES:
In the case of outsourcing, substitutes are of two types. The first type comprises of service providers from the same country, while the second type makes up the other countries to which processes can be outsourced.
Service providers within the country that are real successful are enlisted below. Each of them specializes in single or a range of processes.
Three years since, Office Tiger is the fifth-largest third-party BPO Company in India with revenues over $25million. It has 1000 employees in two facilities. Two more Office Tiger centers will go live by the fourth quarter of2003. Besides office documentation, it now offers services as specialized as business research for the banking industry and analytics to its 20 clients in the US and Europe.
Most industry observers believe the Indian BPO industry is headed skywards. A research director (off-shore BPO), Gartner India said, “India will soon have nearly a dozen $100-million third-party BPO companies. In the next 18-24 months, there will be 8 to 10 third-party operators with revenues in excess of $100 million. This is not too difficult to assess considering the over 70% growth of these players”.
The $100-million mark is crucial for two reasons:
First, it gives the companies a critical mass to fight multinationals like EDS, Computer Sciences Corporation (CSC), Accenture and Exult Inc.
Second, it gives the prospective client enough confidence to trust them with larger contracts. Of course, business is still not pouring in, but Indian companies are beginning to graduate from $2-4 million contracts to tens-of-millions contracts.
Early this year, HCL Technologies (HCLT) BPO Services bagged the biggest-ever third-party BPO deal among Indian firms – a five-year contract from British Telecom (BT) worth $160 million. Add to that an existing contract of $15 million from BT’s Belfast unit and HCLT BPO has assured revenue of $175 million over the next five years. That’s $35 million a year from just one client. It has 23 more. Among others who are projected to pull through to the $100-million club by March 2005 are the $30-million Daksh eServices, the $41-million Wipro Spectramind and the $35-million World Network Services (WNS).
Daksh has projected a revenue increase of 85-90% by March 2004 on the basis of ramp-up of its current projects from nine clients and Wipro Spectramind, India’s largest BPO Company could be there in the next 12 months based on just organic growth. Others who could hit the $50-million mark are the $20-million MsourcE and the $29-million exl Service.com. Given their current growth rates, even their targets seem well within reach. For instance, exl, which started as a Conseco (US-based insurance company), promoted venture with 95% of the work coming from the parent, now does barely 7% of Conseco work. If all these companies hit $100 million by 2005, they would have outdone their better known cousins-the IT services companies.
The other type of substitution is in terms of countries other than India. They are given below with their advantages and disadvantages mentioned alongside.
Country USP Limitation
Philippines Understands the US market; voice work; low attrition More expensive than India; small talent pool
Canada, Ireland, Australia Understand the US; high -end skills High costs
South Africa Time zone similar to Europe; 25% cost saving, good for niche work Skill shortage
China Low costs No English Capability as yet
Russia, Ukraine Technology skills Poor Infrastructure; corruption; language
Czech Republic, Hungary European language skills Small talent pool; high costs
Mexico 30% cheaper than the US; Spanish skills Good only for low-end jobs
The country’s outsourcing revenues are just $350 million compared to India’s $2.3 billion. But it has some talented software engineers who speak English and are familiar with American culture. A former US protectorate, it has an excellent telecom infrastructure thanks to the US military’s Clark Air Force Base and Subic Bay Naval Station. Cost savings are about 30-50% over the US operations but wages are nearly 12% more than in India. The Philippines is known for low attrition rates. Compared to India, it has fewer people (population: 81 million) and higher labour costs. The Philippines is ideally suited for such processes as it has plenty of accountants trained in US accounting standards. But then, ramping up is a problem. As a result, nearly all facilities have fewer than 1,000 people.
• Canada and Ireland:
The biggest advantage that these English-speaking countries offer is their similarity to the US’s in terms of people and culture. They also have good infrastructure and low economic and political risks. Ireland has a labour force of just 1.8 million and professionals are expensive ($23,000 per year against $2,500- 5,000 in India). Canada’s advantage is low real estate prices and low salaries compared to the US, but they are high compared to India. Vis-à-vis the US, clients can save up to 25% in Canada. Canadian villages are also well suited for 200-300-people operations. In India, savings are higher but US firms feel reduced risk is worth the extra money. Canada is suited for complex businesses that require proximity to the US. It has superior employee retention rates and BPO experience.
• Brazil and Mexico
Mexico and Brazil have an edge because their time zones are similar to the US and they are also close to the US. Also, labour costs are low (around $1,300 per annum). But proficiency in English is poor and skill levels are very low. Thus, scalability is the major concern. They are, however, ideal for operations like document management that require proximity to the US. Brazil’s strengths include huge investments in IT and telecom and a large low-cost labour pool, which is cheaper than Mexico’s. But Mexico’s forte is Spanish language skills. However, Mexico lacks technical and mathematical skills. But for low-cost, low-maintenance data-entry type of work, it is the best bet.
China’s greatest strength is low-cost labour (similar to India’s), which attracts companies with high-volume work and transaction-based business processes. China can provide Japanese and Asian language capabilities. The country is pushing English language in both schools and colleges, in a major way.
• South Africa
South Africa is emerging as a hot BPO destination because it has a time zone compatible with Europe and a 17- million strong labour pool (compared to India’s 270 million). The government’s support to BPO activities and a robust English-based education system are attractive propositions for US firms to move their operations to this nation. Computer Sciences Corporation has set up a facility in South Africa. Costs are about 25% lower than in Europe. But skills are not as easily available.
This could be ideally represented graphically with the following diagram:
ECONOMIES OF SCALE:
When there are economies of scale, manufacturing costs per unit decline as a firm produces more of a product. Declining unit costs enable firms to earn excess profits the larger their scale of output. This creates a tendency toward concentration and imperfect competition: normally there are few producers, each one an oligopolist or monopolist, with profits commensurate to their scale of production and the number of competitors in the market. Economies of scale are important to the political economy of trade because trade enlarges the available market, which affects plant size. For example, trade encourages firms to expand production runs, increase capacity utilization, rationalize production facilities, and pursue mergers and acquisitions.
Business Process Outsourcing is generally categorized as being transactional, niche, or comprehensive. Transactions are generally sub-processes such as account payables, account receivables, journal, general ledger, order processing, medical transcription, etc. Niche support moves up to support a complete business process by specialized business services providers such as accounting, human resources, etc. Comprehensive usually thoroughly covers multiple business processes by one of the large Business Services Providers (BSPs).
Business Process Outsourcing since its inception has been the turf of large business clients. Small, and many medium sized businesses do not have the staff required to develop, negotiate, and manage the contracts, service level agreements, and other overhead associated with doing business with the large Business Services Providers (BSP). As a result, business process outsourcing has been practically unavailable to small and some medium sized businesses.
Major problems faced by small service vendors are:
Reckless Start-ups- a vast majority of the 310 start-ups are headed for a dead-end. Their capacity utilization is less than one of the three shifts. Many of these companies that converted their empty basements and warehouses into BPO units or firms with $10 million-20 million VC funds that ran out of cash without creating anything more than white elephants. They have driven down prices to grab business, but have failed to deliver. They were always clueless about people, processes or technologies- the three key elements of the BPO business.
Poor Infrastructure- the industry has more to worry about than just reckless start-ups. Primary among those is infrastructure. While telecom networks are state of the art, getting a connection still takes up to three months. Unreliable power supply is forcing units to create their own back-ups, which they can barely afford. Roads are bad and airports are in dire need of repairs and upgrades.
High Attrition-another major problem is the high attrition and growth aspirations of the workforce. At least 60,000 of the 171,000 workforce change jobs every year. About 80% of them look for better leaders. Team leaders want to upgrade to supervisors, quality professionals or operations heads. The HR problem threatens to soon become grave. Good agents are becoming hard to find and with tardy infrastructure, big moves to the much talked about smaller towns will take longer. This means costs will rise making it difficult for small VC-funded companies to survive.
The big service vendors thus highlighting the economies of scale face neither of these problems. But then as the size of the company keeps growing the diseconomies of scale strike in a big way in the form of increase in demand for employees.
The BPO sector is facing a roadblock of sorts, a human one. BPO companies are struggling to hire new employees in sufficient numbers in the metro cities. Consequently they are trawling small towns looking for ”employable” graduates. For cities like Mumbai, Delhi, Hyderabad and Bangalore demand is already outstripping supply of people. The demand for fresh graduates from BPO companies in the National Capital Region (NCR) region is around 20,000 to 25,000. The colleges and the universities within the NCR are unable to supply ”employable” graduates to meet this demand. This is because the total number of graduates from all colleges, diploma institute and universities is not necessarily relevant. This has led to a problem wherein despite wanting to expand and accept new processes the companies cannot do so for wan of manpower. This leads to recruitment of semiskilled labour and a subsequent drop in quality.
DEMAND SUPPLY EQUILIBRIUM:
The concepts of supply and demand bring us to an important effect that they have on price. When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be in equilibrium. At this point, the allocation of goods (in this case labour) is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
With reference to the BPO industry this could be explained as follows. The demand here would be of skilled labour from international companies wishing to outsource to the service vendors in India. The supply would be of facilities and labour to complete the assigned process catering to the SLAs. The equilibrium price would be when the service vendors are sure of making reasonable amount of profits and the international company is assured of having excellent quality work done at lowered rates.
Equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply. Before we move on lets look at two phenomenons:
1. Excess Supply: If price is set too high, excess supply will be created within the economy, and there will be allocative inefficiency. This is to say that if the international company offers a very high price then the number of BPOs will mushroom causing excessive supply and in the long run slashing prices to the extent of barely being able to cover expenses.
At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell in hope of increasing profits, but those consuming the goods will purchase less because the price is too high, making the product less attractive.
2. Excess Demand: Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. Coming back to the BPO industry the excess demand could come in the form of too many firms wanting to outsource. But due to lack of resources and infrastructure the service vendor is not able to provide the necessary functions. This has two fold effects:
Due to excessive demand service vendors will naturally hike their prices
The vendors will suffer an opportunity loss for being unable to service the remaining requests, which would have earned it revenue.
In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more, thereby bringing the price closer to its equilibrium.
The degree to which a demand or supply curve reacts to a change in price is the curve’s elasticity. Elasticity varies among products because some may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.
A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one whose changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.
As of today the BPO industry is relatively inelastic up to a limit. This occurs mainly because outsourcing is not just beneficial in terms of financial savings but the quality and the technical benefits are also enormous. But beyond that point it would be elastic with companies turning towards cheaper avenues that would either be other service vendors or other countries.
IMPERFECT COMPETITION – OLIGOPOLY:
In a market structure of an oligopoly there are only a few firms that make up an industry. The few firms making up the industry have control over the price, and, like a monopoly, an oligopoly has high barriers to entry. The products are almost identical and thus the companies, competing for market share, are interdependent via market forces. If, for example, an economy needs only 100 widgets but Company X produces 50 and its competitor, Company Y, produces the other 50, the prices of the two brands will be interdependent upon one another and therefore similar. So, if Company X starts selling the widgets for cheaper, it will get a greater market share and force Company Y also to sell for cheaper.
Oligopoly is basically of two types:
In the case of BPOs, collusive oligopoly would be when the service vendors decide to charge fixed rates per hour, while in non-collusive oligopoly the rates differ with predatory pricing being dominant. This kind of pricing prevents small companies from entering the markets. Of late, BPOs have started informal cartels to combat attrition. They have common employee databases. In this way, an employee leaving a company in less than the required time can be tracked and other companies in the cartel refuse to employ him. This makes sure that employees stay with the company for a long period and leave only after following the proper procedures.
Industry Type Number of Firms in the Industry Presence of Competition in the Industry Ease of Entry for New Firms Into the Industry
Oligopoly Few Restricted by collusion. Difficult due to high fixed costs.
Despite being a fledgling in the global ITES/BPO industry, the Indian ITES industry recorded a growth rate in excess of 50% in 2002-03. Industry experts consider this a positive indication of the times to come and a look at the ranking and the revenue and headcount statistics show the potential of the industry. The global ITES/BPO industry was valued at around US$ 773 billion during 2002 and according to estimates by the International Data Corporation worldwide, it is expected to grow at a Compounded Annual Growth Rate (CAGR) of 9% during the period 2002-2006. NASSCOM lists the major indicators of the high growth potential of the ITES/BPO industry in India as the following:
During 2003-04, the ITES-BPO segment is estimated to have achieved a 54 percent growth in revenues as compared to the previous year.
ITES exports accounted for US$ 3.6 billion in revenues, up from US$ 2.5 billion in 2002-03.
The ITES-BPO segment also proved to be a major opportunity for job seekers, creating employment for around 74,400 additional personnel in India during 2003-04.
The number of Indians working for this sector jumped to 245,500 by March 2004.
By the year 2008, the segment is expected to employ over 1.1 million Indians, according to studies conducted by NASSCOM and leading business Intelligence Company, McKinsey & Co. Market research shows that in terms of job creation, the ITES-BPO industry is growing at over 50 percent.
Surveys of the Indian ITES/BPO industry in 2004 expected it to follow the trends given below:
Customer care: Customer care and support services will continue to lead in terms of revenue generation, with a turnover of around US$ 1200 million in 2003-04. Up from last year’s turnover of US$810 million.
Finance: With the financial services segment moving into value added domains like insurance claims processing, financial management services and equity research, this segment is expected to clock the highest growth, with estimates of US$820 million in revenue in 2003-04, up from US$510 million in 2002-03.
HR services: HR services are also expected to grow and revenues are expected to touch US$70 million during 2003-04, thereby providing latent opportunities to the industry’s dominant players.
Payment services: This segment has also been identified as a high growth area within the industry, and is expected to generate revenues of around US$430 million for 2003-04, up from US$210 million in 2002-03.
Administration: Revenues from the administration services segment are expected to increase from US$ 310 million in 2002-03, to US$540 million during 2003-04.
Content development: The content development services segment which includes engineering and design services, digitization (GIS), animation, network management and biotech research, is expected clock a turnover of around US$520 million in 2003-04.