IT-ENABLED SERVICES: Indian IT’s Lone Crusader

It stands out like a beacon of light in a storm,having withstood the test of

the worst slowdown since the inception of the IT industry in the country. In a

year of layoffs and benchings, it has generated employment at a faster rate than

any other before it, and in times of slowing growth rates and slackening

revenues, it has registered its strongest growth ever. In the process, the

IT-enabled services segment has emerged as the new infotech wave, one that

promises to get bigger each year, and promises to equal in revenue size and

employment generation the IT industry itself–or perhaps even surpass those

numbers.

And if that sounds hard to comprehend, chew on these ITeS numbers:

• Growth rate of 73% in 2001-02, against 14% for the overall IT industry;
• From Rs 7,100 crore in 2001-02 to Rs 81,000 crore in 2008;
• From 106,000 employees in March 02 to 2 million employees in 2008;
• From 1.4% of GDP in 2001-02 to 7% in 2008 (IT services plus ITeS);
• Forex inflows to increase ten-fold from $6.2 billion in 2001-02 to $60.72 in 2008 (ITS plus
  
  ITeS);
• The largest player, General Electric, to increase employee count to Rs 20,000 by 2005; and 
• Customer care, HR and payment services will constitute 70% of long-term ITeS potential.

Nasscom has 210 registered ITeS companies 50 global companies to offshore services to India ITeS has increased from 9% to 21% of the IT industry ITeS is expected to account for 37% of the country’s software and services export segment by 2008

It currently employs 106,000 of the country’s workforce and

is expected to generate jobs for over 1.1 million Indians in the next 3 years.

The ITeS sector has opened up an entire vista of opportunities. With the

Nasscom-McKinsey study indicates a revenue potential of Rs 81,000 crore ($17

billion) by 2008, the ITeS space has been moving ahead fast, growing in size and

potential, defying all market deterrants. Whether it was 9.11, the threat of a

World War or the overall economic downturn, the industry has continued to grow

at the same pace, and with the same enthusiasm. In 2001-02, it grew by about

73%, rocketing from a turnover of Rs 4,100 crore in 1999-2000 to nearly Rs 7,100

crore ($1.5 billion), according to Nasscom estimates.

The segment itself includes people-intensive services that

are delivered over telecom networks or the Internet to a range of business

segments and verticals. These include telemarketing, help-desk support, medical

transcription, back-office accounting, payroll management, maintaining legal

databases, insurance claim, and credit card processing. India, with its

strengths in the form of low-cost manpower, a large pool of skilled,

English-speaking workforce and government support, is emerging as a preferred

destination for outsourced services. The country is well positioned to derive

benefits from the global ITeS market.

A study conducted by KPMG on competitiveness found India

rated very high for its ‘people factor’, apart from a supportive policy

framework. However, there were some drawbacks like the absence of a clear

marketing and positioning platform for the industry at large. Another survey by

Merrill Lynch revealed that cost cutting is a key criterion for outsourcing

services to India and cost savings were viewed as India’s topmost competitive

advantage. Considering that labor costs represent as much as 20-30% of a typical

client’s business, India’s low-cost skills seem attractive. The salary of a

database manger in India could be as low as a fifth of that in the US.

Business potential



The level of value add from ITeS depends on the range of services offered,

ranging from standardized and simple infrastructure services (network

management, secretarial services etc) to specialized and complex workflow

management (customer research, product design, inventory management etc). Based

on the ownership structure and geographic distribution of clients, KPMG

classifies ITeS businesses presently operating in India under two categories:

Outsourcing services or outlocation services.

Reforms Recommended Policy changes required for creating a more favorable growth environment for IT-enabled services: Telecom policy Allowing connectivity between domestic and international call centers. Allowing ITeS providers to set up international gateways (currently allowed only for ISPs) for captive use. Allowing sharing of bandwidth at group-level as well between companies, gradually migrating to bandwidth trade exchanges. Classifying Internet-related projects as infrastructure projects to allow four-year debt servicing moratorium. Allowing ITeS providers’ exemption from payment of royalty charges related to radio link connectivity required for backup. Increase FDI limit from 49% to 74%. Internet and software policy Import benefits similar to those offered to ISPs, to be made available to ITeS with extension of benefits beyond just hardware equipment. Special software licensing benefits to encourage start-up. Ease in procedures for setting-up of Internet Payment Gateways (currently allowed by the RBI only for members of the inter-bank cheque-clearing system i.e. banks) Tax relief on end-consumer computer equipment such as PCs, set-top boxes. Approval processes Appointment of a single, national-level, licensing and monitoring authority for ITeS licensing and service monitoring. Reducing the time for approval required from DoT (Department of Telecommunications) by allowing approvals at the Additional Director/Joint Director level.

Outlocation services are for captive use by companies while

outsourcing services are through a third-party service provider. Multinationals

such as GE that invested in remote services as captive facilities for worldwide

group operations have adopted a primarily outlocation focus. Spectramind,

operates as a pure outsourcing service provider. It is funded by banks and VC

finance and operates a niche of contact center services for Fortune 200

companies.

For most IT-enabled service providers in India, a majority of

the revenue comes from serving clients in industries such as banking and

finance, insurance, e-commerce, software, telecom, media and entertainment,

retail and airlines. Most of them currently focus on a narrow portfolio of

services, settling for low-end work. While most ITeS companies plan to leverage

existing skills, expertise and established reputation with clients to grow their

portfolio of services, they remain cautious about migrating their service

portfolio to high value services. Services in the area of human resources and

administration, digital media, IT and technical support, research, and design

services could be the new growth areas.

Although there are about 210 IT-enabled service companies

currently registered with Nasscom, there are many more players offering a whole

range of such services. Several companies such as HSBC, Standard Chartered Bank,

American Express, Citi Bank, and British Airways have or are setting up

back-office processing centers in India. Indian IT companies like Wipro, HCL

Technologies, Mphasis BFL and private telecom group Bharti Enterprises are among

a few that are expanding their services to ITeS. These companies have the

advantage of an existing IT customer base so they can tap clients for BPO

(Business Process Outsourcing) as well.

Key trends



The last one-year has been quite significant for ITeS as it has been witness

to some key trends that are shaping the industry. The industry is not just

growing in terms of business, but is also gaining more respectability in the

international market. Potential outsourcers now feel more comfortable handing

over their work to an Indian company. An experimentation that started with

Convergys outsourcing a few seats to 24/7 Customer a couple of years ago, has

led a others like Sitel, West, Stream, and more recently Teleperformance USA and

7C opening up facilities.

Indian companies are looking at various options to acquire

more clients. The professional ones, who understand the US market better, are

taking the long-term approach of marketing directly to clients.Some of the

bigger companies are also trying to access the US market by acquiring companies

abroad. Among the notable ones are Hero Group, which acquired a major stake in

First Ring, a US company with a delivery facility in Bangalore, Essar Group that

acquired eTelequest and E Serve Technologies (the BPO venture of HCL

Technologies), which bought Apollo Call Center in Belfast, Northern Ireland from

BT.

When it comes to service delivery, most of the good companies

are beginning to realize the need for differentiation. Daksh, for instance, has

90% focus on customer service and for HCL Frontline, it is 100% tech support.

One common example of using technology to build a differentiation is doing

customer response analysis. In fact, many companies like Spectramind, Daksh,

24/7 and Epicenter are doing that. A few others like E Serve and Global are

trying out integrated global delivery models. They are offering different

services across multiple geography-based delivery facilities with multiple

language, multiple skills and redundancy also built into the model.

The demand factor

Despite India’s numerous strengths, long-term sustainability of this

growth could be an issue. According to Nasscom, Indian technical institutions

will be unable to meet the projected demand for 500,000 professionals in 2006.

Unfortunately most Indian firms are attempting to take the pure cost advantage

route rather than a quality plus value pitch. At present, India caters to only

0.5% of the total ITeS opportunity by value and a little less than 1% by volume.

The leading players in the market have started ramping up their scale of

operations to meet the rising demand. GE’s original target for its Indian

operations was 10,000 people by 2005, which has been revised to 20,000.

Spectramind has recently added a new center in Mumbai and intends to increase

the number of people to at least 4,000 by December 2002. MsourceE has already

received a third round of funding. Others such as Daksh, Vcustomer, TransWorks,

First Ring, and Customer Asset are also planning to expand their facilities.

Over the last 18 months, more than 50 global corporations have announced plans

to offshore services to India.

Needed: A push from the government



The Indian government has started making efforts in promoting ITeS. The

telecom sector is being liberalized, allowing private players in ILD

(International Long Distance), NLD (National Long Distance) and leased line

services. Regulatory concerns such as sharing of bandwidth between multiple

entities, allowing Internet and IPLC connectivity on the same LAN have also been

addressed. Various incentives such as a 10-year tax holiday, rebates in customs

duties, liberal investment policies, etc are also being offered to attract more

money into this sector.

Telecom majors such as Bharti, Reliance, and the Tatas have

started investing heavily in building networks. Bharti Televentures is expected

to invest as much as $1 billion in its various telecom businesses by 2004, while

Reliance Infocom is expected to invest about $5 billion in its national

fiber-optic backbone and telecom services. As these companies expand their

operations, it will increase the tele-density and bandwidth, thus creating the

required base for the growth of ITeS in the country.

However, the red tape involved in getting clearances and

getting telecom links in place is a big hurdle. In order to speed up the

process, a single, national-level, licensing and monitoring authority for the

industry should be set up. State governments should categorize ITeS as special

services under labor laws to allow 24-hour operations and flexi-working and

night working.

Cities like Hyderabad, Bangalore, Gurgaon, and Chennai have

shown what a positive political environment coupled with the right

infrastructure can achieve.

Beyond call centers

At present, the ITeS market in India is restricted to call centers. Even if

some activity has taken place in other areas such as medical transcription,

engineering and design or other Web services, it has been too little to make a

significant impact on the overall market or growth. The McKinsey-Nasscom report

lists ten processes as attractive opportunities–telesales/telemarketing, Web

sales and marketing, database marketing/customer analysis, benefits

administration, payroll services, engineering and design, inbound call center,

claims processing, billing services, and credit/debit card services. Globally,

there are four types of ITeS vendors who differ by origin and focus–in-house/captive

centers, spin-offs, focused BPO providers and broad-based service providers, who

offer consulting or IT services in addition to BPO.

Outlook



According to the Nasscom-McKinsey report, ITeS sector in India has steadily

increased its share in the overall IT software and services industry, from a low

of 6.5% in 1998-99 to almost 20% in 2001-02. The Indian ITeS industry is also

expected to account for 37% of the total IT software and services exports market

in India by the year 2008.

The industry and government have already become conscious of

the vast opportunity that lies in the ITeS space. As the market evolves and gets

mature, it will see more of consolidation and specialization happening.

Offshoring opportunities for Indian ITeS players exist both across a wide range

of processes as well as across multiple verticals. Banking and insurance are

likely to provide the maximum opportunity driven by the high cost base and high

extent of offshore-able processes in these verticals. In addition, six other

verticals–telecom, retailing, utilities, automotive, computer and

pharmaceuticals, also offer immense growth potential.

As growth prospects become definitive and investment returns

become more obvious, the smaller investor in the smaller cities might also want

to capitalize on this highly profitable business venture. In the US there is a

definitive trend towards smaller and more efficient call centers and we will see

this trend replicating in India in the next few years. However, a lot will

depend on how the pioneers play it. How the market finally shapes up would

depend on how well they are able to cash in their resources to take advantage of

its potential. How well they intersect will call for some savvy marketing, a

long haul approach and more than a little push from government. As consolidation

happens, it will separate the serious business from the non-viable ones. Also

verticalization of industry can lead to mergers and acquisitions, where

companies would acquire to bring new domain expertise.

The expectations built around this sunrise industry are

tremendous. While some call it hype, others like to look at it with cautious

optimism. Though some of the market projections could be a bit inflated, one can

not deny the huge opportunity that this segment has thrown open. And India

certainly has a key role to play in it.

TEAM DQ

The Inhibitors

Infrastructure:

Telecom costs constitute 25-35% of the operating costs of a call center. High

fixed costs and administrative delays are posing acute problems especially for

start-ups. The telecom infrastructure, power, real estate and the number of

clearances required during expansion, are problem areas.

Government initiatives:

Privatization of the telecom sector has been initiated through VSNL’s

divestment and entry of other players. But the overall impact will depend on the

pace of reform.

Procedural delays:

Although steps have been taken to reduce bureaucratic hurdles and legal hassles,

a lot more needs to be done to reduce the processing and approval time as well

as simplify procedures.

Manpower skills:

Although graduates are available in large numbers, most of them do not have

adequate skills in spoken English. While our manpower will score well on

technical skills front, we will have to continually keep training on softer

skills.

Outdated technology:

Many service providers are still using rudimentary technology. They have a

tendency to replicate technology of the West, without assessing the feature

enhancement cost.

Processes need streamlining:

Most of the call centers that have mushroomed in the recent past have paid very

little attention to the processes and see the business as a quick return game.

Lack of experience: The

ITeS industry has no prior success stories to follow and has to define its own

formulae. Many of them face the issue of business acquisition from the US and

Europe largely because the promoters don’t have relevant experience in

handling international trade.

Brand Image:

While efforts are on to promote India as an outsourcing destination, more

marketing initiatives are required to establish the brand image of the country.

The political instability in the country and on-going war threats can be

discouraging.