The gentlemen who run the business process outsourcing industry in India will be surprised if they are told that they ought to be suffering from existential angst.

Their main headache is delivering what they have contracted for. This is because the competition is also in the same boat, not knowing how to chew what they have bitten off.

The result is a massive raw materials shortage -- in this service industry, bottoms that can be put on seats. They are surviving by poaching on each other.

An annual attrition rate of 50 per cent plus is par for the course and a company that boasts of an attrition rate of 30 per cent struts about like a prima donna. So the situation is somewhat like what prevailed in the software industry during the period of the tech bubble -- more orders than what you know how to cope with.

Outsourcing and India: Complete Coverage

In keeping with this, most industry watchers are confident that over the next few years the industry will grow its topline in dollar terms by 40 per cent plus. So what's their problem?

The catch, the reason industry leaders should be worrying about the future of their existence, is that this growth does not have a firm foundation.

About 85 per cent of Indian BPO work is handling calls, but this category accounts for less than 10 per cent of work outsourced globally. So you can't build a sustainable future on such a narrow global base.

The answer to this can be: yes, but you got to begin somewhere; we will do more and more difficult things, spread our net wider, as we go along. Raman Roy, chairman of Wipro [Get Quote] Spectramind, belongs to those who take a more or less positive view of things.

To him, the attrition rate and the price-cutting that has gone on in the industry are really the pangs of growing up. He is not worrying about achieving 40 per cent plus growth. He is asking, why have we not got our education system in shape so that we could have grown at 60 per cent?

His positive mindset also results from the fact that "the price cutting seen 18-24 months ago is not there. Today, there is some method in the madness."

The trouble with the earlier period was that people wanted to get revenue without investing. The venture capital funds, which had provided the initial rounds of funding wanted to get out and were keen on high toplines so as to get good valuations.

Hence, at a time when everybody should have been making money, they were undercutting each other. The good news is that today, with several promising companies changing hands, "the VC syndrome has declined but is not over."

So has the industry put the worst behind it? No, says K Ganesh who built and exited Customer.Asset (now part of ICICI [Get Quote] OneSource) and is now chairman of Marketics, a business intelligence and marketing analytics startup. He sees a systemic problem.

The attrition is forcing BPO companies to pay more. This is affecting their gross margins and so they are being left with less to invest. Without investing you cannot maintain consistent quality with growth.

This is a problem particularly with middle and smaller companies. "You need healthy margins to be able to invest in quality and scalable quality needs to be demonstrated."

This is just what the top few software companies are able to do, thus being able to grow at 40 per cent plus on a base of a billion dollars plus. On the other hand, most BPO companies in India are at the sub-hundred million dollar level.

So, by when can we see BPO in India throwing up a few winners that have become global players? Raman Roy is confident that what Indian software has done in 20 years (Texas Instruments began in India in 1984 and Tata Consultancy Services [Get Quote] much earlier), BPO will do in 5-8 years.

Since three years are over, that gives the industry five years more at the most to come up with clear global winners. "This is bound to happen, the customer is very discerning and we are already seeing early signs of winners emerging."

Nobody disagrees that consolidation is taking place in the industry but there is a difference in perception: everybody knows who today's winners are, but experts differ on who tomorrow's winners are likely to be.

Avinash Vashistha, managing director of the offshoring consultancy neoIT, is worried that BPO in India, even counting the captives, remains mostly (85 per cent) at the call handling commodity end of the business where it is easy to grow quickly but soon there is pressure on margins. "There is no future unless BPOs do well in the non-voice part of the business," he firmly declares.

Vashistha sees a key inadequacy in India -- its inability to put in place till now a data security law. In the absence of it, customers are most likely to pass on work to erstwhile Eastern Europe, now member of the European Union which has the necessary law in place, or their captives in India. So who gives high-end work to Indian third parties?

Wipro Spectramind, till now mostly in call handling, is seeing significant growth in high-end work, particularly non-voice, says Roy.

Progeon, the BPO subsidiary of Infosys [Get Quote], began by aiming at the high-end work, with call handling accounting for less than 30 per cent. On the other hand, ICICI OneSource, which has seen significant inorganic growth, is mostly into call handling.

High-end work and answering phone calls are different animals altogether, says Ganesh. The only thing common between high and low end BPO work is they are both offshored to India. Locomotives and cars are both in transportation but that is about all.

The low-end work comes to India seeking a cost advantage. On the other hand, high-end work like marketing analytics done by Marketics identifies new customers, thus increasing the topline. Those seeking to give work to companies like Evalueserve or Office Tiger don't go around shopping for the lowest bidder.

High-end work coming to start ups will necessarily not bring in the volumes in the initial years but they are the ones that are laying the right foundations.

Vashistha is not very optimistic about the future because he feels "today's stars are not taking the right steps in terms of investment, acquisition of domain knowledge, recruitment procedures and servicing of customers."

But then who will be the stars of tomorrow? Who will be the TCS, Wipro and Infosys of Indian BPO? Vashistha feels they will emerge from among the former captives now gone third party.

There is a long illustrious list of such companies going back to WNS which was earlier a part of British Airways, EXL which was earlier Conseco, Deutsche Software which is now DSL and most recently GECIS which was till the other day a part of GE.

Plus, the till now significant captives like Scope International of Standard Chartered and Indigo Lever of Unilever are gearing up to accept third party work. These have had the resources to build up quality and a client base. They also have the necessary domain knowledge base.

But then, what happens to the Indian third party BPO operations? Spectramind is now part of Wipro, Daksh has been subsumed into IBM. Those that are still unattached like 24/7 are seeking to acquire a front office in the US or a back office in the Philippines.

"There will emerge three or four top successful Indian BPO players but none should think they can get there by simply being a call centre," says Ganesh. If some of the remaining third party operators get acquired through a good valuation that is par for the course.

The peculiarity of the current Indian BPO scene is that it is dominated by multinational company captives or former captives, which are now private equity owned.

In that sense there is a BPO industry in India but not much of an Indian BPO industry. IT industry veterans are unfazed by this. They recall that the software industry also began in a similar manner.

It is the multinationals that first came and established the proof of concept, that software development can be done out of India. Then came along the Indian companies, first fledgling and then robust. The same, they say, will happen to BPO.

Once domain knowledge comes in through the multinationals and Indian professionals assimilate the skills, the seed has been planted. It is then a matter of time for the innate entrepreneurship of the Indian to venture out, take the risk and eventually grow a few winners.