DQ-IDC E-Readiness Survey: "Yesterday's Midgets, Tomorrow's Giants?"

Two years ago, a colleague went to Kolkata. A small, little known arm of the
ruling party had called for a "bandh" (strike), and the entire city
had its shutters down. The bandh had support from most quarters, including the
people. Said a tech manager, "You know, if Kolkata doesn't have these
bandhs, the people start getting itchy."

Two
years down, the change is evident. The bandhs are still there: August 2,
December 3. But their impact has been middling to low in general, and negligible
on tech and BPO services in particular, both of which are both protected under
the Essential Services Act, with security from the state.

Are we talking about a "Red" government? In a state that is a power
surplus state, a rarity in India, only because the companies that would have
consumed the electricity had left the state en masse due to bandhs and labor
problems?

Today "reform" is not a dirty word in West Bengal; neither is
capitalism. The government is pushing ahead with reforms and has convinced the
industry that it means serious business. Remember that West Bengal is the first
state in the country to place tech services under the Essential Services Act.

For BPO and tech services are indeed a big deal. The 2004 World Investment
Report of the UN Conference on Trade and Development (UNCTAD) ranks India among
the top four Asian investment destinations and the top 10 developing country
recipients of FDI in 2003. The prospects for higher foreign investment flows are
brighter in 2004 as the global economy rebounds this year.

At least for the various state governments, BPO and IT are the route to
nirvana, for mitigation, if only partial, of unemployment and revenue generation
issues. No wonder then that all the state governments are wooing the IT and BPO
top honchos, some with success and many without.

Let's roll out the statistics on how important BPO/IT is for the various
state governments. Take the case of Karnataka (read Bangalore). According to
government statistics, today there are over 160,000 professional working in the
technology sector and the number is the largest for any one place on the planet.
100,000 of these work in IT companies while the remaining 60,000 work in the
ITeS-BPO sector. The number of working professionals is expected to cross
200,000 during the year 2004-05 with many IT and BPO companies rapidly expanding
their manpower.

Or the case of the Andhra Pradesh government, which is targeting a 30% share
of the IT and BPO export market by 2009. Or West Bengal, which has been hard
selling the state as an IT destination like no other, hopes to earn 10% of the
country's revenue from the infotech sector by 2006-07 and 15% by 2010.

It is not only just the state governments that are gung-ho about the BPO/IT
potential they can exploit. The central government has equally ambitious plans
for the same. According to a statement by the minister for IT and
communications, Dayanidhi Maran, earlier, "It is expected that IT software
and service exports will account for 30% of all foreign exchange inflows in 2008
from the figure of 8% currently".

State governments are going out of their way to woo IT/BPO companies. While
the pitching pace has picked up in recent times, various states governments
realized the importance of good infrastructure and good marketing quite early
on. The competition is so intense that today all state government IT policies
seem largely to be cut-and-paste jobs of the original one.

A similar situation exists for any new policies. One state announces a new
initiative and within a short time you will see it in the policy document of all
the states. For example, seeing the success the West Bengal government has had
with bringing the IT/BPO segment under the Essential Services Act, Kerala has
also initiated the same some time ago. Today almost all the state governments
offer exemptions/concessions to capital and operating expenses like capital
subsidies, rebate on registration and transfer of property charges and
exemption/concession from stamp duty, sales tax holiday on IT software, etc. So
merely having an IT policy is no longer a differentiator.

Dataquest and IDC look at which states are eReady-which states have the
right mindset and the right infrastructure and which can attract IT/BPO
investments. Why conduct this survey at the state level and not the city level
as many other surveys, one might ask. The state-wise reckoning allows us to
study the extent to which the eReadiness phenomenon has percolated to the
country in the larger sense, instead of just remaining confined to its metro
avatar. We believe that if you have the basic infrastructure in place and a
proactive government, it is just a matter of political will to put the
accelerator on developing another city as the next IT/BPO hub. In retrospect,
one of the key flaws in many state IT policies has been to excessive dependence
on one city, only to then see the investment flowing out of the state once the
city has reached saturation or maturity levels. Bangalore is one of the best
examples of the same. Mumbai would have followed the same path but thanks to the
development of Navi Mumbai and nearby Pune, Maharashtra is yet to see ebb of
investments.

The development of alternative hubs is important from a long-term
perspective. So while the Mangalores and the Mysores may not be able to compete
directly with the Kolkatas, if the government starts looking at developing the
smaller towns in the same way as it gives impetus to the big already-made names,
it will not be long before these start attracting investments. However, if the
base infrastructure is not in place, it will be a long time before the state can
offer the industry alternatives. We rate as very important the ability of state
governments to aim at overall development. Hence, the survey's wide-angle
focus.

What are the factors that help determine where to locate one's
organization? What would the CEO look for? While deciding on a new location is
obviously a tricky affair, the deciding factor is obviously the manpower
availability, not only within a city or a state, but the region. As per the data
available, states/UTs like Goa, Chandigarh, Haryana, Punjab and Delhi lead the
same.

Barring Delhi, which has good educational facilities and hence excellent
manpower resources, the other states in the northern region fall far short.
Traditionally, the southern states, Tamil Nadu, Karnataka and Andhra Pradesh,
figure in the top slots, along with Chandigarh and Goa, both union territories.

Why then has IT/BPO activity in Chandigarh and Goa not picked up? We think
that these states have still to gain the critical mass-sufficiently large
concentrations-of qualified and experienced professionals needed to let any
industry take off in any given state/location. Therefore, Chandigarh and Goa
will have to contend with their overall smaller population of skilled
professionals and hence may not be on the investment horizon of big-ticket BPO/IT
services companies.

Once manpower supply is ensured, the CEO is next likely to evaluate operation
cost, and this includes factors like cost of living and cost of office space.
This is a no-brainer too: if the cost of living or cost of office space is high,
the operation cost would automatically be high and vice versa. Our survey shows
that this is where states like West Bengal (Kolkata) and Maharashtra (Pune) are
scoring over their expensive brethren like Karnataka. No wonder, today
investment is flowing into what were once "second" tier cities, with
Mumbai and Bangalore losing favor with large companies.

Policies are easy to replicate. It is tangible benefits investors want. The
companies we polled were unanimous in rating as the top factor influencing the
choice of location the special benefits and incentives offered to specific
industries, like land at nominal rents for setting up a facility. And no one
understands this better than the state governments. Andhra Pradesh is a case in
point. According to news reports, the state government has decided to extend
various time-bound incentives for those companies creating "intellectual
property" in software products. The government has agreed to provide even
"free land" to those companies focusing on high-end research and
development areas. Why? The state wants to become numero uno among the
neighboring IT hubs, including Bangalore, and attract high-end research
companies to set up their bases in Cyberabad.

What the Survey Says

Two aspects-legacy and perception — require careful consideration. On
the legacy variable, read available infrastructure or export revenues, Karnataka
was the clear leader. While it needs to do a major re-haul of its infrastructure
in Bangalore, it is evident that Karnataka is way ahead of other states like
Delhi and Chandigarh. Karnataka has a history of over 20 years in this business
and it is no surprise that it tops the survey and will perhaps continue to do so
for a couple of years more. An analogy would be to look at Punjab, which has the
highest per capita income in the country, thanks to the tremendous success of
the Green Revolution.

However, the numbers do not reflect the ground realities, which say that
companies are moving out of Karnataka (read Bangalore). Mumbai would have been
another city with similar problems, but for the development of Navi Mumbai and
Pune because of which Maharashtra continues to see inflow of investment in the
state.

If vital infrastructure is not in place, investors are not even willing to
look at a state, obviously, as a location worth considering. Take the case of
states like Bihar, where basic infrastructure is abysmal compared to other
states. There were a few companies in the STPI there in 2002, but by 2004, these
had either closed down or moved out. At the other extreme would rate states like
Delhi and union territories like Chandigarh. They would get top-notch ratings on
most parameters but their biggest drawback is their lack of new office space.
But the lack of space can paradoxically have a good effect-it might take some
of the custom on to neighboring cities/states, a good example of this being the
national capital region. Investment has been flowing to cities like Gurgaon and
Noida, thanks to Delhi, even as other Haryana and Uttar Pradesh cities continue
to be stay out of investor favor.

So does the number one state in terms of infrastructure automatically top in
terms of getting IT/BPO investments? Chances are, not. Perception comes in here.
Even when infrastructure is satisfactory, "perception" is a
determining factor. If CEO/industry perception is favorable, investment results.

Today CEOs perceive West Bengal more positively vis-à-vis Kerala despite the
latter's having had a head start. The result: today West Bengal is one of the
major names attracting investments in the IT/BPO space. While Kochi has been
repeatedly cited as a top location for BPO companies, the big guys still prefer
the other "K" city-Kolkata. An instance of when it all lies in the
beholder's eye.

While we have captured the first part of the eReadiness matrix, Dataquest and
IDC are doing a survey of the Top 50 CEOs to gauge their perception, the second
part, on where they are likely to make their next round of investments, the
results of which we will be bringing to you in the next issue.

Yograj Varma in New
Delhi

Methodology

A shortlist of 14 leading states was initially created from the 28 states and
7 union territories by conducting an evaluation on five broad socio-economic
indicators:

• exports of STPI registered companies in the state
• general graduates per 1,000 population (a key parameter for BPO investors)
• enrolment in computer-related courses like BSc, BE and MCA per 1,000
  population (a key requirement of software services companies)
• urbanization rate, and
• Internet subscribers per 1,000 population.

This led to the emergence of the following list:

1. Andhra Pradesh

2. Chandigarh

3. Delhi

4. Goa

5. Gujarat

6. Haryana

7. Karnataka

8. Kerala

9. Madhya Pradesh

10. Maharashtra

11. Punjab

12. Tamil Nadu

13. Uttar Pradesh

14. West Bengal

Each of the 14 short-listed states was then evaluated on the basis of 13
factors categorized into four broad sets:

• Business/market performance: primarily reflected by exports of STPI-registered
  units
• Educational facilities and infrastructure
• Physical and social Infrastructure
• ICT infrastructure

The composite scores obtained were then used to arrive at a relative ranking
of states such that each state could be placed on a life-cycle stage curve
(S-curve), reflecting not just socio-physical infrastructure availability but
also the stage of maturity and size of its IT industry. Thus, a state like
Karnataka, home to the "Silicon Valley of India" — Bangalore, was
placed high on the life-cycle maturity cycle, whereas "new entrants"
like West Bengal and Kerala were placed around the introduction/early growth
part of the cycle.