Telco price wars hit BPO margins

The plethora of new pricing schemes from telecom companies, like 'one paisa per second' billing, has squeezed the margins of their business process outsourcing partners.

Telcos typically outsource work on customer service (voice) and some back-office operations. BPOs get 70 per cent of their revenue from voice alone. However, Indian telcos are witnessing a dip in volumes and calls due to the pricing and other wars for customer share in an already crowded market. Telcos are now asking their BPO partners for price reductions of 9-15 per cent to protect their own margins.

Since the revenue model of BPOs is subscriber or call-linked (the more calls they take in a day, the higher their revenue), a fall in these impacts their bottom line. Hinduja Group's BPO arm, Hinduja Global Solutions, is a case. Its net profit for the third quarter (October-December 2009) was down 20 per cent sequentially. It said one reason was the pricing war among telcos.

Firstsource reported a similar quarterly dip. Bank of America Merrill Lynch said operating margins were down three per cent more than expected due to slippage in Indian operations.

Analysts say the dips in calls are because of the way schemes are structured. For instance, many firms provide a SIM card free or allow you to create a special group for low talk-time. A majority of users have at least two to three SIM cards. "Callers just use those SIMs for a particular service. That, in turn, impacts the volumes."

The variation in this regard can be very high, with the number varying between 30 and 300, says a source from a leading listed BPO firm. And, the 'per second' call rates are directly impacting the average revenue per user (ARPUs) of telecom companies. "We have seen telcos retendering business with existing service providers to get better price points," says Milind Godbole, President, Asia Pacific, Aditya Birla Minacs.

"The cost of service two years back was Rs 2.9 to 3.2 per connect minute (cm). In 2008-09, it came down to Rs 2.2 to 2.7 per cm and today the rates being quoted are Rs 1.5 to 1.7 per cm," said  a source.

BPO firms are, therefore, changing their delivery models. Hinduja Global Solutions and Aditya Birla Minacs are moving to tier-3 and tier-4 cities. ABM's Godbole says their strategy works on a hub-and-spoke distributed delivery model. "The hub, located out of a Tier-2 city, has 800-1,000 seats and handles 20-25 per cent of volumes across various telcos. The rest of the volume is distributed among the six to seven spokes, the seat capacity in each around 200."

He says these spokes are in rural areas, so it takes care of issues like attrition, wage inflation and real-estate costs. Partha Sarkar, CEO Hinduja Global Solutions, also  feels moving to smaller cities is the only way.

"We are reducing volume from tier-1 cities and increasing these from tier-3. This immediately acts as a cost advantage and helps maintain our margins. We are also trying to see if we can consolidate common language capabilities like English and Hindi."