Underpricing by small BPO players a threat

The proliferation of smaller players in the burgeoning business process outsourcing industry has put the bigger and established players in a spot.

Some larger BPO players see the smaller players 'spoiling the market' by offering services at unrealistically low prices, thereby affecting margins of the entire industry.

Speaking at the sidelines of the Global Offshore Outsourcing Summit 2003 in Mumbai on Wednesday, Raman Roy, chairman and managing director, Wipro Spectramind said, "There is a perceived commoditisation of the space as the supply of BPO companies is higher than the opportunities available. This is true especially in the low-end of the market and creates a margin pressure on all players."

Industry body Nasscom has pegged the number of BPO companies in India at over 400.

Infosys Technologies' co-founder and chief operating officer S Gopalakrishnan said, "People who only use price (to bag contracts), do not continuously win. Until the focus remains on price, there will be price pressure on all the players."

Infosys' BPO operations are routed through subsidiary Progeon. Recounting Wipro Spectramind's experience, Roy said "There were times when we had to walk away from contracts because we felt that we could not justify the price that was being demanded. But that is not always possible for smaller companies."

Roy said he expected profit margins for BPO firms to come down and stabilise at around 18-23 per cent in few years.

The appreciation of the rupee is another factor that is likely to eat into the profit margins.

Roy said this was primarily because companies earn their revenue in dollar terms, while their expenses are in rupee terms.

Gopalakrishnan said for every 1 per cent appreciation in the rupee value against the dollar, there is about a 1.4 per cent impact on the bottomlines of companies.