Most of the BPO firms that started off in the early part of this decade had hit the trough and they needed capital to scale up their operations. That was when the PE firms sprung into action. The name plate capacity of a BPO has been increasing rapidly and there is no average critical mass number that the industry has as a benchmark unlike the chemicals sector where there are clearly defined ‘large-scale’ and ‘medium-scale’ capacities. It was more of what the market perceived as the ‘critical mass’ and ‘sustainable’ valuations that drove the funding spree.

 

In 2003 and 2004, few BPO firms that had a name plate employee size of 200 or so received funding. Of course, the funding amount was as low as $3-4 million to begin. This initial round of funding was a decent amount to stand tall and run given the tight cost structures of small BPO firms. The early bird BPOs who touched the 1000 mark, during that period, gained the cheese. Few of these BPOs got funded by multiple PE firms with a total fund amount exceeding $50 million in a few cases. Some PE firms which realized the potential in this small and medium BPO market included Oak Investment Partners, General Atlantic Partners, ICICI Ventures, DaviDow Ventures, ChrysCapital, Baring Private Equity, West Bridge Capital Partners and Sequoia Capital. There were a few Indian Venture funds who shared the pudding as well.

 

Today, the benchmark has been raised. BPO firms get funded typically when they touch a minimum threshold size of 800 to 1000 employees. The funding bracket typically exceeds $10 Million. Lots of reasons, perhaps, answer this:

 

On the demand side, outsourcing seems to be one of the key strategies for companies to improve their operating margins. This would benefit the Indian BPO sector, given the way it is poised.

 

The industry is now highly fragmented with about 200 BPOs operating in the 100 to 500 employee mark. There is very little differentiating factor in the service offering, which are continuously pulling the billing rates down. Therefore, the PEs opt to fund the BPOs who have a scale higher 800 employees. Few exceptions exist however, but in such cases there has been a clear niche factor. Exit options for mid-sized BPOs are very attractive as the industry is in a consolidation mood.

 

The next wave of the action is yet to be seen. Although we have come a long way from swimming in the backyard pool to now swimming in shallow creeks we are yet to face the ocean waves. The Indian BPO scale is no where in comparison to what the global BPO size can offer. The industry is yet to learn the trick of running a ‘world-scale’ BPO. 5 years ago the Indian IT industry went through a similar phase. Time seems to be ticking fast with other ‘emerging markets’ joining the sweet trail. The threshold size would be redefined in the next 3 – 4 years. PE funding, which once was used as a ‘survival trick’, would henceforth be used by large PEs for funding domestic and global acquisitions. The large Indian BPOs have already hit this wide road, and others would begin to follow the bandwagon. PEs would follow and fund the industry at all these modes.