Of Upstarts, or the Tried & Tested?

What’s common between Infosys Technologies, Satyam Computer Services, NIIT,

Silverline Technologies, and Patni Computer? Apart from being India’s top

software houses, they are all first-generation companies–once upon a time

startups in the IT services (ITS) space. Barring Tata Consultancy Services, in

fact–which boasts a Tata Sons lineage–none of the leading IT players have

their roots in Old Economy companies. Wipro, meanwhile, lies in between, having

solid roots, but  having gained prominence only after its emergence as an

IT company.

The debate is not on whether Old Economy roots can lead to success in new

fields–the moot point is to try and ascertain whether basic knowledge of any

industry segment can give companies an edge over others that were in other

fields to begin with.

Today, we find traditional ITS companies–as also startups and entrepreneurs–focusing

on the IT-enabled services (ITeS) and business process outsourcing (BPO) space.

All major IT companies have already made a foray into the ITeS/BPO vertical,

setting up subsidiaries and joint ventures.

It was Wipro that opted for the easier but more expensive way out–it

acquired Spectramind. Says a Wipro spokesperson, "Starting an enterprise of

our own would have been cheaper, but we believe that this acquisition provides

better value to our investors, as well as our customers."

Also, entrepreneurs are queuing up to position India as an ideal destination

for ITeS/BPO outsourcing, and are making a beeline for a slice of the

$200-billion-plus global outsourcing market. So will history repeat itself and

startups end up hogging all the glory? Time will tell–it will be the next five

years that will reveal whether it is new startups or traditional IT services

companies that outrun all others in the BPO domain?

The players



Globally, there are different sets of companies addressing the BPO, call

center and ITS space (see table). Agrees Daksh’s CEO Sanjeev Aggarwal,

"The three are indeed very different. As mentioned earlier, IT companies

serve a very different consumer and have a totally different business

agenda." The big five with years of consulting experience have successfully

made a transition into the BPO space. In terms of ITS companies, EDS with a $2

billion plus BPO practice is among the few success stories of transition. IBM

with its acquisition of PwC Consulting, too, is aspiring to make gains in the

space.

However, in India, startups are hogging the limelight in the BPO space, as

ITS companies are moving in with the typical ‘conservative and cautious’

approach. Comments Prakash Gurbaxani, CEO, TransWorks, "A major advantage

startups have over the more established companies is ‘nimbleness’, ability

to make fast decisions, and flexibility." Agrees Raj Dutta of Spectramind,

"Flexibility and quick decision making and the near mission to succeed have

been key factors for Spectramind’s success."

Of Startups...
Why they can win...	Why they can lose...
Survival: No other source of revenue. If this does not work, it’s good bye. So it’s 100% focus on work … to build a strong company Nimbleness: Given the lack of legacies and the lean and mean management structure, a big advantage is ‘nimbleness’, ability to make fast decisions, flexibility, and scale up rapidly. People are talking about Spectramind, Daksh, and TransWorks more rather than Progeon (Infosys) or Intelenet (TCS JV) Domain expertise: India needs to thank GE for churning specialists and entrepreneurs in the ITeS space. Having gained domain expertise and knowledge, this is a competitive advantage and that’s what customers are looking for	Hype: The air is already charged with warnings and over enthusiasm of the potential. Too much of hype is bringing in a lot of players and can spoil the party even before it begins  Risk perception: No branding will create a lot of risk perception amongst the global clients. The chicken and egg story of getting business when a success story happens is valid here. But the success story can happen only when the business comes in Sustainability: No money, No future. The eternal problem with startups of sustaining and especially when the sales cycles are long and have a capital-intensive setup. If the startup cannot find a good source of funding for the first two years, it would mean sounding the death knoll for the entrepreneur. Also to get quick business, many would compromise on the rates and further spoil the party

But the nimbleness is unlike during the dotcom era where wannabe millionaires

started companies of all shapes and kinds. In the BPO space its wannabe

millionaires with long years of similar experience have moved into this space.

So the players are serious and only like-minded money is flowing into this

segment. That is definitely a big plus point compared to the bygone dotcom era.

Apart from converting sweat into a multi-million dollar bank balance, another

key driver for the startups is the sheer need to survive and hence the

management has no option but to have a single-minded focus on the same.

Conversely, look at the ITS side, most of the companies take a long time to

start operations simply because there is no hurry and the company’s survival

is not dependent on the timing.

As more and more professionals start moving into this space as entrepreneurs,

and the emphasis is no longer on cost savings but value delivered, the success

ratio is on the increase. Add the non-existent legacy system of HR amongst the

startups, and one has a lethal combination pegged for success. Since most of the

professionals come from the ITeS segment, they understand that the HR issues are

very different from that of ITS companies. Agrees Gurbaxani, "Both ITS and

ITeS are into the field of ‘services’ with the only difference between the

two businesses being the ‘profile’ of people you recruit. Startups are

typically more nimble and have no legacy to deal with ...hence are more capable

of handling any ‘new’ business than established large companies."

So while ITS companies have built great companies based on HR policies,

people management in the BPO domain is a 360-degree turn. The profile, behavior,

and aspirations of the BPO employees are totally unlike those of ITS employees.

Adds Aggarwal, "BPO players have to understand the communities they serve

and only with that as the backdrop can they function at all. IT companies have

little or no exposure to that." No wonder then that Infosys had to spin off

Progeon, its BPO initiative company, as an independent venture to tackle the HR

issues. Claims MsourcE’s (ITeS subsidiary of MphasiS BFL) CEO Milind

Chalisgaonkar," MsourcE was formed as a separate company (and not a

division of MphasiS) because we felt that ITeS is a very different business from

IT and needs a different kind of management focus."

Evolution



Eventually, the industry will go (perhaps it already is going) through an

evolutionary process. Like elsewhere, the startups will start making a mark and

change the fundamentals of the business. The global IT industry is replete with

such examples of startups changing the market dynamics and later being acquired

or growing to become present day Goliaths. Intel, Compaq and Apple are examples

of the latter while a whole lot of acquisition happened in the dotcom era with

India too witnessing its share of the same (e.g. Sify buying out Indiaworld for

a whopping Rs 499 crore). Sooner or later, established companies will evince

interest and move in but with a difference.

They will bring in institutionalized money in the market and a phase of

consolidation will happen. Also pressure on the startups by their VC partners

will result in mergers and consolidation in the industry. India is currently

witnessing parts of both the stages as startups are changing and making India a

viable ITeS/BPO destination even as institutionalized money has started pouring

into the industry. Another trend that is expected soon is a shakeout. Given the

hype building around BPO and ITeS and a multitude of players going after this

pie, chances of a shakeout are very evident.

Of Established IT Companies...
Why they can win...	Why they can lose...
Brands: TCS, Infosys, or Wipro have created a strong brand presence in the international markets for themselves and the Indian IT services players. So doors will be opened faster to ITS companies and other players will be willing to talk to them. Cash: Wipro wanted to get into the ITeS domain. The easy way out–they dug into their wallets and dished out Rs 400 crore for Spectramind. Cash is still king and ITS companies have no dearth of it. So they can sustain the cash burn rate for a longer time compared to startups.Â	BPO/ITeS is an extension by ITS: A popular misconception is doing the rounds as more and more ITS companies look at BPO and ITeS as an extension of their existing business, and with these services in their portfolio will offer end-to-end solutions to customers. The market dynamics are very different and this could be the biggest trap for the ITS companies People mismanagement issues: This is another big issue. The people profile for ITS and ITeS are ‘totally’ different and most companies have to spend a lot of time dealing with this complexity. If they assume that the successful people management on the ITS side, could well be replicated in the ITeS side, they need to gear themselves up for a high attrition rate

Look at the smaller players in call centers, who got business on the basis of

their low prices, are now face closure as the prices are not sustainable. Global

clients are outsourcing only low-risk functions, low-value processes, and

low-business-impact processes. To move away from this would mean a shakeout, and

the remaining players will then move up the BPO value chain. Comments Andy

Kankan, executive vice-president (operations) at Acfin Services, "That’s

the natural process of evolution. Companies with strong management teams should

be able to see the consolidation phase through once it begins."

Who can make it?



That’s the multi-billion-dollar question. Will it be the startups or the

ITS companies? Will India see ITS companies offering a complete portfolio of ‘end-to-end’

solutions and rewrite the rules in this space, or will startups grow into

companies worth billions and buy out the subsidiaries of other/existing ITS

companies. Currently, the balance is tipped in favor of the ITS companies. And

for one simple reason–money. Look at Spectramind, the leading beacon in the

BPO space. Acquired by Wipro for over Rs 500 crore. Chalisgaonkar agrees,

"The solid financials allow us access to funds for the expansion of

facilities and equipment."

Apart from the promoters, one other player jingling all the way to the bank

is ChrysCapital, the VC behind Spectramind. Post dotcom frenzy and saddled with

a portfolio of dead dotcoms, VCs are also optimistic about the ITeS space. Will

they wait and try to convert their investments into multi-million dollar

companies? Probably not. A good exit route, which also promises a high rate of

return, can entice them to disinvest.

And without the funding, it will be hard for the entrepreneur to maintain

smooth functioning of his company. Also, if entrepreneurs want to avoid the

looming threat of someone pulling the rug out from under their feet, the only

option left will be to be acquired or to seek public funds.

Yograj Varma in New Delhi