STANDING on 42nd Street in New York, an old lady desperately trying to find an ATM called a number. The call was taken in MphasiS BFL's Pune office. The operator put her on hold, checked the database, sifted through the ATM location list, did a few mental calculations and then gave her the address of the nearest ATM. The call lasted 50 seconds. The old lady muttered a 'thank you' and hung up. This was not the first time. The operator in Pune was smart enough to realise there was a pattern. The query was simple, but took almost a minute to answer. She spoke to a few programmers in MphasiS and they retrofitted the database with an algorithm that would throw up the address of the nearest ATM in 3-4 seconds. That was August 2001. When MphasiS chairman and CEO Jerry Rao heard about the incident, he knew he had stumbled upon an idea whose time would come pretty soon. The idea - to meld IT services and business process outsourcing (BPO) - is as simple as it is powerful. But it's difficult to execute.

"It wasn't clear to us then what we were on to. But our customers were demanding that we provide BPO services along with IT services," says Rao. More and more customers of Indian IT services firms are behaving like that old lady. They want to add transaction processing, call centres and helpdesk support capabilities along with IT services.

BPO is already a $2 billion industry in India and growing at more than 20% a year. But a large part of the revenue comes through pure play BPO outfits. Most IT services firms are still unsure about operating this business. MphasiS is the only one in which BPO brings in almost 30% of the revenues. Its biggest customers like Capital One, JP Morgan Chase, Citigroup and FedEx use both the services. "We are trying to convince customers that ours is a new way of doing business," says Rao. Its BPO revenues as a percentage of total revenues is unmatched by anyone in the IT services industry (See 'The BPO slice'). But MphasiS' BPO division, MsourcE, is still not profitable though its losses have come down from Rs 2.97 crore in Q4 2002-03 to Rs 74 lakh in Q1 2003-04. And MphasiS as a whole is making profits.



Why is this integrated model so important? "IT services are ultimately used to improve processes. You can take a bite of IT services of many processes or take entire processes offshore, including the IT services part. The margins as well as stability of revenues improve if you do it right," says Jessie Paul, head (marketing), Quintant, which has developed frameworks that help companies identify which processes can be offshored most effectively.
There are many difficulties in integrating IT services and BPO. First, while the end solution is a combined offering, the skill sets required for the two are different and managing the two types of employees is a challenge. Second, IT service projects typically last 3-6 months, while BPO contracts last 3-5 years. Third, since IT services earn more revenues than BPO in most companies, it calls the shots on how solutions are designed and sold.

Its competitors say MphasiS never planned on integrating the two businesses. "(Even now) they hold both the businesses in separate companies!" says one. Rao admits that, but says: "We are beginning to see the synergies, and very strong ones at that." In fact, it was a customer that pointed out the synergies. "We (MphasiS) were developing the website for this company. Our call centre (MsourcE) was handling their helpdesk. One of their guys asked, 'Why don't you use the problems that people report with our website to improve its design?'" says Rao. That is what got MphasiS scale its up BPO operations.

But success is not without its detractors. "I have two questions for MphasiS. One, why are they in such low-end work as call centres? And two, why are they making losses?" asks a New Delhi-based BPO competitor which has a large analytical services division that does genomics data mining.

Aditi Malik says it is time to put BPO and IT together

The point is call centres have the lowest billing rates (of $8-12 per hour) and offering cost improvements year after year will be tough. Rao has a simple explanation: "Call centres are the way you begin. But we are starting to change the work profile." MphasiS has just signed up a customer for which it will be doing the back office tax preparation work for accounting firms in the US. "In the US, 120 million tax returns are filed annually. We think the business can scale up well," he says.

And even on the call centre business, Rao put a different angle. "As more and more Americans decide that companies should not call them for telemarketing, the only time companies will have of selling to their customers is when the customers call the company with a complaint or for help," he says.

What about the losses BPO is running up? "We made a few mistakes. We started two centres. We should have started one, made that profitable and then started the second. We also made errors when we negotiated our early contracts. But it is not a serious loss. We will grow and have double-digit net margins in the second half of this year," says Rao. That is also because upfront investment in BPO is typically three times that in IT services. "Even Spectramind went into profits only when they reached a headcount of 4,000 or so. In BPO you have to invest ahead of the demand and make money when the demand and capacity utilisation increases," says an equity analyst.

At a headcount of 3,000 today, MsourcE expects to make operating profits over the six months or so. Group marketing director Aditi Malik says: "I think this is right time to put the two (BPO and IT services) together." MphasiS has taken some steps to move in that direction. One is a clear organisational change. "We'll have global relationship managers to deal with business heads of our clients," says Rao. The idea is to sell MphasiS at a higher level in the organisation. He adds: "The global relationship manager will then be able to drive the BPO and IT services parts of the solution that go out to the customer." This is to ensure that the customer does not have to talk to two different parts of MphasiS and then hope that they combine their efforts.

The other thing MphasiS has done is it has hired people from its target industry - banking, financial services and insurance. These are the people that the global business heads can relate to. "These people understand what should be offshored and where the problems will arise. We will continue to increase their numbers," says Madhavi Soman, head, business analysts group, MphasiS. Even now, among similar companies, the ratio of business analysts to IT services professionals is the highest for MphasiS (See 'Staffing patterns').

Strategically, Rao has MphasiS at an interesting phase. Since it has already learnt from its mistakes, it should be able to operate the two businesses as part of a whole. How quickly it is able to offshore processes like claims processing, loan services and origination over the next year will be a test of its model.