Is Gen AI starting to hurt Indian BPO companies?

The advent of Chat GPT, a Gen AI tool that can be used to create content, in November 2022 propelled Gen AI to boardroom discussions in companies globally. Across industries, companies are now looking at the technology disruptor, which can create content in written, audio and visual form, to replace routine human work.

“We are seeing in general an overall slowdown in BPO. Contracts are being renegotiated and companies are looking to automate BPO operations," said Ray Wang, chief executive officer and founder of Constellation Research.

Two months ago, K Krithivasan, chief executive officer of Tata Consultancy Services, India’s largest information technology services company, said in an interview with the Financial Times that Gen AI could almost finish the BPO business.

Pune-based Tech Mahindra’s BPO division generated ₹7,712 crore ($930 million) in revenue in FY24, which was about 15% of its overall revenue of $6.28 billion. Revenue growth at 7.12% was the slowest since FY18 and came after two consecutive years of growth exceeding 30%.

Infosys’s BPO unit did not fare well either. Revenue at Infosys BPM was $953 million as of March 2024, a growth of 2%, the slowest in seven years. Only Infosys and Tech Mahindra disclose the revenue from their BPO businesses.

“My sense is that the BPO business is moving towards self-serve channels, conversational AI or automated or digitised systems, which do not require much manpower, which is why the demand from BPO businesses of IT services companies might be slowing," said Kshitij Saraf, equities associate at Tusk Investments.

Uncertainty a drag

A third analyst attributed the slow growth in BPO services to the difficulty in scaling up an already large business.

“As this successful business has gained scale it becomes harder to grow fast on a larger base," said Peter Bendor-Samuel, chief executive of Everest Group, a US consultancy that advises clients on outsourcing. “The customer experience market where Tech M has most of its work is facing significant uncertainty, driven by the possibilities offered by Gen AI. As these issues get sorted out, we expect that this area will regain momentum. However, at this time, the uncertainty is creating a drag on growth."

In the case of Tech Mahindra, another analyst said the BPO arm’s slowdown was due to easing demand in its mainstay telecom business.

“I would attribute slower growth in BPO due to the softening demand in Tech M's major vertical of telecom. Last year's protracted transition of leadership from CP Gurnani to Mohit Joshi didn't help matters," said Phil Fersht, chief executive of HfS Research, an outsourcing-research firm in the US.

Tech Mahindra earned about 36% of its revenue through its communications, media and entertainment business. Joshi took over as CEO in December 2023, replacing Gurnani, who was in the top spot for 14 years.

A Tech Mahindra spokesperson said the company is looking beyond business process services for growth.

“Our current focus is on diversifying our business, attracting new clients in high-margin industries, and providing value-added services beyond traditional BPS offerings. We are also committed to upskilling our workforce to manage specialised tasks," Birendra Sen, business head, Business Process Services at Tech Mahindra, said in an emailed response to Mint’s queries.

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However, revenue growth at pure-play BPO companies ExlService Holdings Inc and WNS (Holdings) Ltd was stronger. EXL reported revenue grew 15.5% to $1.63 billion in the year ended December 31, 2023. WNS said its revenue increased 8.1% to $1.3 billion in the year ended March 2024.

“The pure play is in a hot segment and its focus in this high-growth niche area combined with its smaller scale allows it to post above-industry averages," said Samuel.

Wang of Constellation Research attributed the growth of pure-play BPO companies to a faster AI embrace.

“Pure-play BPOs have a competitive advantage as they are delivering more automation and AI at a faster pace," said Wang.

BPO was one of Tech Mahindra's core focus areas when it was known as Mahindra British Telecom. A growing client base and capabilities prompted a change of name to Tech Mahindra on 3 February 2006. The IT services company, started disclosing the BPO revenue share as part of overall revenue from the year ended March 2007.

Infosys's BPO business started as Progeon Ltd in 2002. It was renamed Infosys BPO Ltd in 2006 and as Infosys BPM Ltd in 2017. The Bengaluru-based IT services company's BPO arm had 57,694 people, or 18.2% of Infosys's overall workforce, as of March 2024.