Better tools at next-generation BPOs attracting venture capital

Better tools at next-generation BPOs attracting venture capital
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First Published: Mon, May 28 2007. 12 12 AM IST

Updated: Mon, May 28 2007. 12 12 AM IST
Call it BPO 2.0. When serial entrepreneur Uday Challu hit upon an idea in May 2005 to offer remote technology support directly to personal computer users in the US and the UK, most people thought he was crazy.
In India’s $6.3 billion (Rs25,830 crore) business process outsourcing (BPO) sector, an industry built to serve industry, it was a paradoxical idea.
Now, Challu’s Gurgaon-based start-up iYogi Technical Services Pvt. Ltd has 72,000 users and has roped in $3.1 million in venture funding from Canaan Partners and Silicon Valley Bank.
IYogi is part of a growing tribe of outsourcing companies in India that have a fresh spin on the traditional BPO model. “We leverage India’s intellectual property dramatically more than a standard BPO,” Challu says.
Consider some other examples.
Mumbai-based Gridstone Research, a company founded in 2006 by former Infosys Technologies Ltd marketing chief Basab Pradhan, uses proprietary technology to analyse and structure financial data for investment banks and equity brokerage firms in the US.
Chennai-based Anantara Solutions Pvt. Ltd, started in March by a group of former Satyam Computer Services Ltd executives, has evolved a proprietary methodology called Nextgen Sourcing, which bundles business consulting solutions with technology services.
Indo-US firm Mindcrest Inc., has lawyers on its rolls to help clients in the US with legal research and analytics.
Some of the new breed of BPO entrepreneurs actually don’t even want to call it that.
“We believe the first generation of the outsourcing phenomenon is coming to an end with the elimination of arbitrage,” says G.B. Prabhat, founder and chief executive officer at Anantara, referring to a business model that thrives on price differentials between India and, say, the US.
And this shift is being noticed by those with deep pockets. These second-generation outsourcing start-ups already have the attention of venture capital investors, a privilege that their predecessors did not immediately enjoy in their start-up phases.
Since January 2006, almost $300 million in venture money has bankrolled several such companies. Another estimated $1.2 billion has been raised by venture capitalists (VC), mostly hailing from Silicon Valley, to invest in start-up to early-stage companies in India.
About 60% of this is estimated to flow into technology-related outsourcing companies.
There are a couple of reasons behind the funding.
In the last four years, VCs have achieved profitable exits from their first-generation BPO investments. This was kicked off by Wipro Technologies Ltd $60 million acquisition of Gurgaon-based Spectramind services (backed by ChrysCapital) in 2002.
Since then, exit multiples for VCs in the BPO sector have ranged between two and five times their original investment. As a result, some of the money that has been freed up through these exits is now flowing back into new start-ups.
Meanwhile, encouraged by the exit track records of early investors, Silicon Valley’s frontline VCs are now making a beeline into India. It also helps that in 2006, three Indian BPO firms pulled off successful public market debuts—WNS Holdings, EXL Services and Firstsource.
Most VC investors are increasingly saying that an Indian tech company that competes only on cost is no longer a strong investment.
“The general sense in the investment community is, that is a trend that has come and gone,” says Promod Haque, managing partner at US venture capital firm Norwest Venture Partners.
Companies that provide cost arbitrage on voice-related services, such as call centres, have matured. Even non-voice transaction processing services have become a volume game dominated by large players.
In recent years, the entry of global IT services’ big boys—IBM Corp., Accenture Ltd and Electronic Data Systems Corp.—have made the going tough for even standalone BPO majors such as Firstsource and WNS.
“If you look at a plain call centre kind of business model, it is becoming tougher for smaller players to launch,” says Kanwaljit Singh, managing director, Helion Venture Partners.
The future, investors say, is in knowledge or domain driven areas such as legal, financial services, product development, education, animation and technology-enabled services.
The pricing models are naturally different. If first generation BPOs charged clients per hour per FTE (full time employee), their successors charge on the basis of what is delivered. So companies such as Encora Inc., Aztecsoft Ltd and Symphony Service Corp. are trying to provide more knowledge-based services in product development. V.C. Chandra, Aztecsoft’s founder, says he expects revenues to grow 35-40% for the next three to four years.
Companies in legal and financial services were natural mutations from first generation BPOs. They adopted the call centre model and then added domain expertise. These companies are growing in size and number. In the legal area, which already has some well-established players, new entrants include UnitedLex Corp., Pangea3 LLC, Mindcrest and Intellevate India Pvt. Ltd. The financial services area is even more mature today with a company list including Wipro, IBM-Daksh and Adventity Inc..
Promising as it looks, next generation outsourcing may have to contend with a few concerns.
3i Capital partner Akshaya Bhargava, for one, is not convinced that the revenue models are in place yet.
“Either you have scale or you have a technology model that changes the relationship between resources and revenue. Not clear to me where KPO, as you call it, belongs,” he says, referring to knowledge process outsourcing.
The other big concern for such companies is competition from the big boys. Firstsource, WNS, Infosys BPO and HCL BPO have set up large KPO teams in the last three years and now offer services such as research and analytics, remote diagnostics and legal services.
KEY BPO EXITS (Graphic)
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First Published: Mon, May 28 2007. 12 12 AM IST
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