The Indian Business Process Outsourcing Industry: An Evaluation of Firm-Level Performance Arti Grover Delhi School of Economics

Agenda ◈ Background ◈ Theoretical Models ◈ Data ◈ Preliminary Analysis ◈ Econometric Model ◈ Empirical Results

◈ Motivation: No theory of BPO Firm: Pre-cursor to build a theory of BPO firm Outline the factors that impact the performance of a typical service provider firm ◈ Importance: Macro perspective Key to the expansion of the global offshoring industry: BPO industry makes a crucial contribution to the host economy through trade. Micro perspective Buyer: If the factors determining the performance of the supplier are known, then an increase in the vendor’s efficiency is an additional source of productivity for the client. Supplier: For optimal resource allocation, it is crucial to know how a change in one variable filters through the organization to affect the bottom-line performance. Introduction

◈ Theoretical Framework: Aghion et al (1999): Firms in BPO industry provide differentiated services and thus fit in the Monopolistic Competitive set up BPO firm leverage technologies to provide services Needs to update technology to improve service quality Factors: VC funded firms, Fixed Cost of Operations, High variable /Labor Costs, Seat Utilization, No. of Clients Arora and Asundi (1999) Impact of Investment in Quality (ISO Certification) Quality Effect and Signaling Effect Other Factors with similar effect: Number of plants/locations (Additional signaling effect of BCP), Information Security Certifications, Quality measure: Degree of Specialization – Voice based services (Wipro, Technovate) Introduction

◈ Theoretical Framework: Antràs (2005) Which organizational form (captive or TPV) has higher productivity ◈ Data: Firm Level: CMIE, CRIS INFAC, DqIndia, Voicendata, NASSCOM Aggregate Data: NASSCOM Introduction

Preliminary Analysis: Partial Correlations

Empirical Specification ◈ Based on Aghion et al (1999), Arora and Asundi (1999) ◈ To ensure that results are invariant to estimation procedure: Number of Clients determined endogenously with revenue per employee ◈ Productivity Measure: Revenue per employee - Arora and Asundi (1999), Aron, Yeaple (2003), Idson, and Oi, (1999), Bernard and Jensen, (1999) and Bernard, Jensen, and Schott, (2003)

Empirical Results ◈ Ordinary Least Squares: BPO Firm Performance

Empirical Results ◈ Testing for Normality ◈ Testing for Heteroskedasticity

Empirical Results ◈ Ordinary Least Squares: Number of Clients

Aghion et al (1999) – Endogenous growth model ◈ Similarity with Input suppliers of Aghion et al - Firms in BPO industry provide differentiated services and thus MC model is fit - BPO firm leverage technologies to provide services: BPM combines management and implementation technologies like BPMS - Needs to update technology to improve service quality Firm Models – Resembling BPO Firms Intermediate Good Supplier Profit MaximizingNon-Profit Maximizing Self Funded BPO VC funded or outside source of finance

Model Aghion et al (1999) ◈ Examples from BPO: Initial VC funded firms – Infowavz and Tracmail Fixed Cost of Operations/Technology Acquisition: Lowers T – Example from BPO – Voice Based Processes (Wipro Spectramind made a concious decision to lower from 84% to 60% in 1.5 yrs) High variable /Labor Costs: Lowers T -- expected profit from adoption and the cost of adoption rises – Evidence from BPO – High Attrition rates (Voice versus Non Voice, 50-55% versus 30-35% eg. GE, Wipro) Suggestion: Increase Shift Utilization – Lowers operational Costs Sell to more number of clients – Example - IBM Daksh

Attracting Clients – Arora and Asundi (1999) ◈ Profit Function: ◈ Impact of investment in quality: ◈ Other variables which have similar effect: -Number of plants/locations (Additional signaling effect of BCP) -Information Security Certifications -Quality measure: Degree of Specialization – Voice based services (Wipro, Technovate, Trinity Focus), change demand induced

Organizational Structure – Antràs (2005) ◈ Demand Function: ◈ Production Function: ◈ Difference between Captive and TPV: ◈ Final good Producer maximizes: ◈ Profit Maximizing Price: ◈ Technology adoption, Spillovers higher for high-tech industries: Denny, Bernstein, Fuss, Nakamura & Waverman (1992)

Organizational Structure – Antràs (2005) ◈ Captives have higher productivity: ◈ Large Size – Amass larger capital for Investments ◈ Attract better talent – brand name ◈ Captives of International BPO Players: Convergys, Accenture, Sitel ◈ BPO arms of IT Outsourcing firms/Indian Business Houses: Progeon, Zenta, Epicenter

Empirical Specification ◈ Importance of the Study: All firms ◈ Importance of the Study: Domestic TPV