With the slowdown in the US economy, a strong rupee and questions over extension of the Software Technology Parks (STP) scheme looming large, 2008 will be a crucial year for the Indian BPO industry. While players and analysts agree the troubled American economy is unlikely to have a significant impact on the industry, the decision on STP-extension closer home is seen as a clincher.
Analyst firm Forrester has predicted that the US technology economy will flirt with recession but will post another decent growth year in 2008. “The US economy is expected to be weak in the first quarter of next year but will be stronger as the year progresses,” it said.
It’s the extension of the STP tax holiday, which expires in 2009, that tops the industry’s wish-list this year. “STP extension is important for India to remain competitive on the global platform where China and Philippines are offering 10-year tax holidays. Whether the tax holiday is extended or not will have a decisive impact on the BPO industry,” said Quatrro BPO Solutions managing director Raman Roy.
While it battles such issues, the industry is looking forward to some consolidation and heightened merger & acquisition (M&A) activity in 2008. “Captives, which is how this industry got started, are going to become rarer next year,” adds Mr Roy. While clarity on the Citi captive sale is expected to emerge next year, Aviva’s offshoring centres, too, are on the block.
Analysts also see greater investor interest, due to more realistic valuations. “One can expect greater interest among private equity (PE) firms to invest in BPO/ KPO firms. After an upbeat 2007 where valuations were a bit on the higher side, 2008 will bring more realistic valuations, giving a boost to consolidation,” says offshoring advisory firm Tholons president Pradeep Mukherji. The year 2008 assumes greater importance as the US goes to polls. While outsourcing has already become an election issue, more anti-outsourcing rhetoric is expected as the race hots up. “Wait till the first quarter of 2008 and the rhetoric against job-loss and outsourcing would gain ground to gain votes,” says US India Business Alliance vice-chairman Abhi Shah.
However, players think the impact would be insignificant. “Considering the recession in US, offshoring is an imperative and hence, anti-outsourcing rhetoric won’t have much impact. BPOs in India are going to benefit from the global credit crunch as companies will resort to more offshoring to minimise impact on falling margins,” said HCL BPO chief exec Ranjit Narsimhan. Adds ExlService Holdings president & COO Rohit Kapoor, “It’s expected that banks and other financial institutions will downsize staff in the first half of 2008. After the restructuring, these institutions will start outsourcing their back-office work to cut costs.”
The BPO industry could see some sobering in salary hikes in 2008. “Salary increases won’t be as dramatic as last couple of years. We expect a 9-12% wage hike, rather than a 15-17% hike as in the past. Also, we expect more and more companies to weave in the variable component into contracts at all levels,” said Mr Mukherji.
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