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More stork than fish? - BPO , Build Operate and Transfer (BOT) model.

When something looks too good to be true, one is generally right to be
sceptical. Much like the build-operate-transfer model in the BPO space. It
could well be a case of the pool looking inviting but yielding no rich catch.
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Source: The Hindu (http://www.hinduonnet.com/ew/2005/10/24/stories/2005102400130200.htm)

More stork than fish?



Akshaya Bhargava


When something looks too good to be true, one is generally right to be sceptical. Much like the build-operate-transfer model in the BPO space. It could well be a case of the pool looking inviting but yielding no rich catch.




I WAS recently in a meeting with a prospective BPO client who was travelling through Bangalore educating himself on what was on offer. Towards the end of the meeting, he asked me what I thought of the Build-Operate-Transfer (BOT) model.

The question was a good one as the BOT model is something that is very much in favour with a number of BPO advisory firms and on the face of it looks like a great way to minimise risk while maximising speed of implementation. Almost too good to be true! Unfortunately, as with so many of these things, if it looks too good to be true, it generally is.


The BOT model



The BOT model was made popular by the infrastructure construction industry where a vendor would build a highway or a bridge or even a power plant, would operate it for a period before handing it over to the ultimate owner (often a government agency). It allowed a specialist firm to bring best-in-class knowledge and skills in the early stages of the project and once it was up and running, it could then be taken over and run by someone else.

Two key points here - one is that the specialist firm manages the project for a period of time so as to realise a proper return on its investment and second, the ultimate owner does not really have any intellectual property or competitive advantage associated with the project (e.g. there is no real competitive advantage for the government to run a highway or a power plant)

A variant of this model has been around in the Indian BPO industry for the last 2-3 years where a BPO customer who actually wants to set up a captive but does not have the management bandwidth to do this, contracts with a BPO company.

The BPO company fits out the premises, recruits and trains the people, completes the transition of work into India and once it is running smoothly, hands over a running operation to the BPO customer, premises, people, technology and all. Well, that is how it is supposed to work, at least on paper.

The notion, as being used in the BPO industry, has several logical inconsistencies that make it very hard to implement in practice.


BOT - The supply side



As a BPO supplier, it has always been a mystery to me why other BPO companies are even willing to enter into a BOT discussion. To me, BPO is about a long-term change in the way processes are handled - it absolutely needs a long-term relationship and how can one willingly enter into a short-term arrangement for long-term change? Leaving aside concerns of the buyer for the moment, why does it really make sense for the seller?

Unfortunately, the answer lies in the approach to new business that we see from many Indian BPO companies - take what you can get. One CFO of a major BPO company told me that his company contracted BOTs on the hope that the "T" would never actually happen! This may well be the expedient solution but isn't it truly risky to enter into a structurally unsound arrangement just to get business through the door?

I do believe that basically, a BOT contract, as prevalent in the Indian BPO industry, is a fundamentally unequal commercial arrangement and therefore unsustainable. Here's why:

Structure. If what the customer really wants is your help in putting together a BPO facility, would it not be better to structure it like an advisory assignment where you (the BPO vendor) are responsible for achieving certain milestones? Why must the deal be structured with the full risk and accountability of building a "normal" business only to have that part taken away without adequate value being paid for it?

Pricing: I have yet to come across a BOT that is priced correctly. To my mind, in a BOT, a supplier does everything that he would do if the contract were a long-term relationship. Then why should he be obliged to transfer a running operation to the client at anything less than a price that includes loss of future revenue as well as value created. Sadly, I have yet to see a BOT priced at 20 times P/E or 5X of revenues!

Recruitment: When you hire for a BOT, what do you tell the employee (who, hopefully, has joined you for a long-term career)? That he will be moved to another employer, with different employment conditions and different career prospects and that he has no choice in the matter? Can you really treat real people in such a cavalier fashion and expect them to stay loyal to you? Have you not heard of the high attrition in the BPO industry and if you have, do you really believe this is the way to deal with it?


BOT - The demand side



From the demand side, I have always wondered how client organisations resolve the conceptual dichotomy of wanting to control a certain operation (i.e. run it in an owned entity) and then outsourcing it for 12-36 months (under the BOT phase).

I mean, if you can have someone else run your processes for so long, do you really need to insource it after that? If you haven't controlled a process for two years and have not had a problem, what value will be added by taking it back?

The example of a large international company who did a large BOT with two Indian BPO firms is often quoted. I have also heard that it is a three-year deal - again, I completely fail to understand the logic for this company to insource and run a process after three years of not controlling it.

(I have also heard of six-month BOTs in the market. A customer who wants a six-month BOT really wants a recruitment firm, a premises firm, an HR consultant and a project manager to keep them all in line. Well, why don't they get themselves just that? Any number of top-notch consulting firms will do it for them. In my opinion, calling a spade a spade is always better.)

The fact is that very few people on the buyer side have fully thought through the logic of a BOT. It sounds nice, so let's do it. Consultants recommend it, so it can't be that bad, can it? We have been asked to do a captive, we don't have the management ability to do it - let's get someone else to do it for us for as little as possible.

No one seems to care about the fact that a BOT is a non-answer to a long-term problem that people are seeking to resolve with short-term solutions.

Never mind that it makes no sense for either side. It is expedient and it gets me a bonus on this year's performance, so who cares?

From the demand side, a BOT simply postpones most of the problems. Unfortunately, in these days of the tyranny of quarterly earnings, expediency does have its attractions.

While we debate all this, I suspect we will continue to see more BOT deals.

I can only hope that we will also see the need to take the time and effort necessary to ensure that one (or both) of the parties are not getting into something that is not sustainable.

What will hurt the industry is if these deals start unwinding. This will certainly impact individual companies but it will also do no favours to Indian BPO.

As an industry, we need to make sure that when faced with BOT requests, the right red flags go up and the right questions are asked. That is the only way we will fulfil our long-term responsibility towards our customers.

The author is MD and CEO of Progeon.

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