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The Indian Business Process Outsourcing Industry: An Evaluation of Firm-Level Performance

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. Introduction. Motivation:

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The Indian Business Process Outsourcing Industry: An Evaluation of Firm-Level Performance

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

  2. Agenda • Background • Theoretical Models • Data • Preliminary Analysis • Econometric Model • Empirical Results

  3. Introduction • 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.

  4. 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)

  5. 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

  6. Preliminary Analysis: Partial Correlations

  7. Preliminary Analysis: Partial Correlations

  8. Empirical Specification • 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) • 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

  9. Empirical Results • Ordinary Least Squares: BPO Firm Performance

  10. Empirical Results • Testing for Normality • Testing for Heteroskedasticity

  11. Empirical Results • Ordinary Least Squares: Number of Clients

  12. Firm Models – Resembling BPO Firms Intermediate Good Supplier Profit Maximizing Non-Profit Maximizing 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 • Self Funded BPO • VCfunded or outside source of finance

  13. Aghion et al (1999) Model • 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

  14. 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

  15. 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)

  16. 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

  17. Empirical Specification • Importance of the Study: All firms • Importance of the Study: Domestic TPV

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