Trends in BPO/KPO industry in India

From the hey days of IT outsourcing which put India on the world map in 2000-2001, this is a successful and tested model. This model has contributed almost 3-4% of India's GDP in the past.

The Indian IT-ITeS sector (including hardware) grew by 33 per cent in FY 2008 to reach US$ 64 billion in aggregate revenue. Of this, the ITeS/BPO sector contributed US$ 12.5 billion as against US$ 9.5 billion in FY 2007, an increase of 31 per cent.

The Indian ITeS-BPO exports grew significantly from US$ 8.4 billion in FY 2007 to US$ 10.9 billion in FY 2008 while the revenues of domestic BPO grew to US$ 1.6 billion in FY 2008 from US$ 1.1 billion in FY 2007. The sector provided direct employment to 700,000 in FY 2008 up from 553,000 in FY 2007.

This business model is based on labor arbitrage and works on two conditions being fulfilled- one, wage disparity between different countries and secondly, tasks that can be performed off line using a predetermined set of instructions. My personal take on this is that wage discrepancy will exist in India so long as India keeps churning young eager high caliber talent from its numerous engineering and management schools ready to work for less than $500 a month. According to economists, India would have the largest population in the world in the age group of 20-50 by 2035.
The two new trends in outsourcing are legal process outsourcing and with the demise of banking system in the US - banking and research KPO. However from my experience working at a services company, for the long term success of such models - the model down the line needs to maintain Service level agreements (read Quality) as well as provide value addition to the process/task ( read move to being a product company in addition to a purely services company or be able to provide on the ground research/intelligence not available to the foreign outsourcer). Some of the emerging financial services companies are Amba Research (Helion Ventures), Copal Partners, Evalueserve, UnitedLex (Helion Ventures), Pangea3 (Sequoia Capital), Mindcrest (Ganesh Natarajan), and JuriMatrix (Jerry Rao) to name a few.

How do Venture Capitalist value your startup

There are generally two ways VC's do their Voodoo !!

1. Early Stage start-up - This is more of an art and less of a science. To calculate the exact value of a business is tough, since a lot of assumptions used can change over time starting with from the definition of the market the startup is going after. However, the general method used is - start with the market size, estimate as to how much of the market share this startup can potentially capture and then multiply these two with the profit margins. This would generally give you an idea of the value of the startup. But as you can imagine there are a lot of variables and most numbers are best a gestimate firstly because there are no published authoritative reports on how big the market size is or would be and secondly, over time how would the competitive landscape change - meaning, how much market share and the startups' profit margins might be. Hence, frequently you would find a lot of Venture capital firms focusing on the sectors they know best(so the assumptions/variables have been tested and verified against) and investing money with people they trust (so they are reducing at least one variable/risk - the management's ability to deliver.

2. Late stage start-up with some cash flows - Again, you would use the same methodology as you would with early stage start-ups, the only difference is the variables/assumptions are more grounded in reality. Firstly because the company has been in operation for a while so you can judge from past performance as to market share and profit margins. Secondly, hopefully you are in a sector which seems attractive to other enterpueners and you see competition - you a benchmark to compare your startup both in terms of precedent deals that other VC's have done as well as market share and profit margin numbers to compare.