The Next Big Wave

Young, energetic and cheerful voices with rehearsed accents and natural grace

and poise to match– welcome to the world of calling agents! These fresh

out-of-college grads have managed to find well-paid jobs for themselves and are

part of an emerging workforce that comprises India’s most happening industry–IT-enabled

services (ITeS). ITeS encompasses areas like telemarketing, helpdesk support,

medical transcription, back-office accounting, payroll management, maintenance

of legal databases, insurance claim and credit-card processing, animation, and

higher-end engineering design–all of which can be delivered over a telecom

network and the Internet to any part of the world, any time. It is estimated

that about 70,000 people are employed in the Indian IT-enabled services industry

and the number is projected to grow to 1.1 million by 2008.

Growing at an impressive rate of 66.7% per year, ITeS in India is being seen

as the next big opportunity for the country. As per a Nasscom survey, revenues

from the IT-enabled services sector in India in 2000-01 are estimated to be Rs

4,100 crore, a significant jump from a base of Rs 2,400 crore in 1999-2000. By

2008, the total ITeS market in the country is expected to surge to around $17

billion. The global opportunity is expected to reach $611.4 billion by 2005 and

studies estimate that India has the potential to address 38% of that market.

India, a hot favorite



While countries such as Australia, New Zealand, Ireland, Canada and the

Philippines have been providing call center services for long, India, with its

cheaper, skilled, English-speaking and IT-savvy work force is fast becoming an

attractive alternative. Says Raj Dutta, vice-president, Spectramind,

"Having an India strategy has become a must for multinationals. If a large

US company does not have a policy on India, it is considered out of sync with

the times." Adds Milind Chalisgaonkar, CEO, MsourcE India, an MphasiS-BFL

subsidiary, "The competition from Canada, Ireland or Australia is not

serious because the cost of operation is very high there. Philippines is the

only other country competing with India, but that has issues of political

instability."

Where does India stand?: Among various countries offering IT-enabled services across the world, India and Ireland have emerged as particularly attractive locations

In a study conducted by KPMG on competitiveness, it was found that while

India is rated very highly for its people factors and has a supportive policy

framework, it does not have a clear marketing and positioning platform for the

industry as a whole. Ireland is consistently rated high on various

infrastructure and environmental factors but lags behind on availability of

skills in the right numbers and at the right costs. China is seen as a key

emerging competitor with balanced strengths.

According to another survey by Merrill Lynch, cost cutting is a key criterion

for outsourcing services to India and saving costs was 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 very

attractive. The salary of a database manger in India could be as low as a fifth

of an equivalent position in the US. Even the salary of a primary school teacher

in India, could be one-tenth of that in Ireland or the UK and 60% of that in

China.

Can we meet the demand?



Despite India’s numerous strengths, experts warn that 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. The current system lacks the training capabilities

required for new value-added ITeS and for new geographic target markets such as

Europe or South Asia. The most important among these are language and technical

training requirements with the need for a certification or grading system to

ensure quality. Says Sonali Verma, chief operating officer, iEnergizer, "It

is a relatively new industry and there is a huge mismatch between the demand of

professionals and availability of experienced hands in the industry."

"India has excellent positioning. It is a pity most Indian firms are

attempting to take the pure cost advantage route rather than a quality plus

value pitch which would be a much better strategy for the industry," says

Leo Fernandez, vice-president, India Life Hewitt, a leading HR administration

outsourcing firm. "While Indian professionals will score well on the

technical skills front, it is on softer skills that we will have to continually

keep training and updating and keeping pace. Elements like responsiveness,

proactively interacting with the customer and adapting quickly to the client

culture is now part of any market need in order to remain engraved on the

priority list," he says. Although the country has emerged as a prominent

destination for IT-enabled services, according to analysts, India presently

caters to only 0.5% of the total ITeS opportunity in terms of value and a little

less than 1% by volume. The quality of resources available will have to be

spruced up to tap the full potential unleashed by this new opportunity.

"Our obvious advantages in manpower and infrastructure need to be fully

utilized. The industry that saw the growing hype in 2001 also saw the hype dying

down in 2002," says DJ Dutta, chief operating officer, Parsec Technologies,

a call center solution provider.

Policy, procedure and politics



India has the potential to tap a market of $200 billion in the IT-enabled

services segment after three years but will have to take steps to invest in

infrastructure and appoint a nodal agency for the clearances necessary. This is

as per the assessment of the Confederation of Indian Industry (CII) and KPMG

Consulting which have prepared an action plan to help India corner a third of

the global IT-enabled services by the year 2005. "The red tape involved in

getting clearances and getting telecom links in place is a big hurdle. Many of

these happen sequentially so the total time taken could be six months or

more," says Hemant Kohli, CEO, IT&T.

On the role of the government and regulatory bodies, the KPMG-CII study

suggests that a single, national-level, licensing and monitoring authority

should be set up for the industry. It should have the authority to provide

approvals for multi-facility operations. Clear and transparent business policies

should be developed around them. The report also urges government and regulatory

bodies to speed up the reforms’ process in the telecom sectors. This must be

linked to spreading tele-density and also supporting special service-level

requirements like full redundancy, voice-data convergent networks and bandwidth

on demand.

While the government urgently needs to improve infrastructure conditions, the

report suggests inviting private sector and IT-enabled services industry players

to set up dedicated ‘parks’ to provide these facilities in concentrated

areas. It also proposes that state governments categorize ITeS as special

services under labour laws to allow 24-hour operations,



flexible working hours and night duties.

Industry associations such as Nasscom and CII are doing a good job of

marketing India as ‘the’ ITeS destination. But the government should also

play a key role in taking a holistic approach to developing the sector.

"Besides measures like tax incentives, a more sensible regulatory framework

is what the industry is craving for. The government continues to over-regulate

and under-supervise and that must change for ITeS to hit the fourth gear. The

legal system needs desperate reforms especially to regain investor confidence in

a post Dabhol scenario," says Fernandez of India Life Hewitt.

Chalisgaonkar points out that though the government is providing incentives

through policy changes or schemes such as the STPI, the political environment in

the country needs to remain stable. "This is critical to improve the image

of India Inc in the minds of our clients in the US or UK," he says. Cities

like Hyderabad, Bangalore, Gurgaon and Chennai have shown what a positive

political environment coupled with the right infrastructure can achieve. Cloning

this success across more cities is the challenge both the industry and the

government must address.

Business wise



The benefits from ITeS largely depend on the kind 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 or

out-location services.

Money Makers: 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 airlinesÂ

Out-location 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 out-location focus. Spectramind, on the

other hand, operates as a pure outsourcing service provider. It is funded by

banks and VCs and operates in a niche of contact center services for Fortune 200

companies. Pure outsourcing companies have to depend on aggressive marketing.

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 and British Airways 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 have announced plans to

expand their services to the IT-enabled business arena.

"Revenues are volume driven and will continue to grow, both as existing

customers extend the range of services and as the Indian market itself gradually

wakes up to tremendous opportunity," says Fernandez. 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. The KPMG

study says that while most ITeS companies plan to leverage on existing skills,

expertise and the rapport established with clients to grow their portfolio of

services, they remain cautious about migrating their services 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.

Hitching on to the brand wagon



In order to grab more business, Indian companies need to build marketing

skills and strong infrastructure. "A lot will depend on how the pioneers

play it. Savvy marketing, a long haul approach and more than a little push from

government are some of the factors needed," says Fernandez. The industry

and government have already become conscious of this reality. As the market

evolves and matures, it will see more of consolidation and specialization.

Says Sanjeev Aggarwal, CEO, Daksh eServices, "In the next few years,

there would be consolidation separating the serious businesses from the

non-viable ones. Also ‘verti—calization’ of the industry can lead to

mergers and acquisitions, where companies would acquire to bring new domain

expertise." According to Dutta of Parsec, in the US there is a definitive

trend towards smaller and more efficient call centers and we will see the same

in India in the next few years. "Another trend we see is that call centers

will gradually become increasingly segregated according to strictly inbound or

pure outbound traffic of communication," he says.

As the industry matures further, call centers will also branch into various

specialized businesses of finance, technology, collections, health services,

hospitality and the like. 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. Elaborating

on the factors driving the market, Hemant Kohli, CEO, IT&T says, "We

export software to 95 countries around the world. India clearly enjoys the

confidence of global corporations as 82% of US-based companies ranked India as

their first choice for software outsourcing."

The industry forecasts indicate a positive trend and investors appear quite

bullish. Even if we cut out the hype and view these estimates with cautious

optimism, the fact remains that ITeS has thrown open a tremendous business

opportunity. How the market finally shapes up would depend on the first movers

and how well they are able to cash in their resources to take advantage of its

potential.

SHWETA VERMA in New Delhi

What Ails the Indian ITeS Industry?

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 of the country is still to come up to global standards. While

power continues to be a problematic area, real estate is also a big hurdle as a

number of clearances are required during expansion.

Government initiatives

The privatization of the

telecom sector has recently been initiated through steps such as VSNL’s

divestment, entry of other players and various other deregulatory steps. But the

overall impact in the long term will depend on the pace of reform and commitment

of the government.

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 such as responsiveness, being

proactive, understanding customer needs and adapting quickly to the cultural

environment.

Outdated technology

Many service providers are

still using rudimentary old technology that barely meets their goals. They have

a tendency to replicate technology of the West, without properly assessing the

on-going support and 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.

There is a lot of scope for improvement and streamlining of business processes

when compared to global standards.

Lack of experience

Being a new opportunity area,

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.

Marketing efforts

While efforts are on to promote

India as the call center hub, more has to be done to establish the country’s

brand image

The Competitive Edge

Some advantages India offers as a preferred destination for outsourcing

services

Attractive Time zone

Being in a time zone of GMT

+5.5 hours means that work can be done overnight.

• Customer response time at e-serve (Citigroup)
  
  has been drastically cut with more time available.

Technology support

The technical skills of Indians

have already been recognized the world over. With its 4.2 million IT

professionals and 17 of the global 25 SEI-CMM Level 5 companies, the country

offers abundant tech support.

• WebTek (Dresdner Bank) to migrate to ‘thin
  
  client’ technology as accounting work is outlocated.

Lower salary levels

Salary levels are often

one-tenth to one-fifth of those in developed countries.

• 40-50% savings in costs for SwissAir,
  
  American Express, BA, GE etc.

Access to qualified manpower

India has abundant qualified

manpower that can be tapped. The number of people expected to be employed in

IT-enabled services alone is 1.1 million by 2008.

• eFunds (earlier a part of Deluxe, US) has
  
  reduced data processing errors by 90%

Client cultural fit

Outsourcing service providers

are increasingly looking at co-sourcing instead of outsourcing.

• Daksh.com, a call center for Amazon.com
  
  worldwide stresses on accent training and understanding client core values.