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IT enabled services: To the rescue - Views on News from Equitymaster
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  • Oct 27, 2001

    IT enabled services: To the rescue

    The need
    The Internet evolution has been a bane and a boon for corporates. While at one end the Internet has opened global markets for them, at the other it has also brought in global competition. The dynamics of global competition are speed in delivery and value for money. Thus, organisations are today faced with the task of delivering the best services & products at the lowest possible cost. The imperative for survival is cost leadership - get it done where it costs the least. However, this concept is not very new. We have, in the past, seen leading brands outsource manufacturing of clothes and shoes to the Asia Pacific region to avail the benefits of cheap labour.

    The gamut
    What is new, however, is the fact that thanks to the Internet now a whole new gamut of services can be outsourced. Services like payroll accounting can now be outsourced to geography’s like India where the same process can be carried out almost half the cost. These services are of a routine nature that do not require much of innovation and imagination but are still very critical to an organisations functioning, This is due to the fact that salary for an employee is a nothing but a simple calculation based on the number of days worked for and the salary structure. If the inputs are sent over the Internet to India the result can sent back in almost no time and (of course almost no/low cost). What are the other possibilities? The list is a very big one.

    The IT enabled services spectrum
    Call centres Content development / animation
    Medical transcription Payroll management
    Back office operations, Revenue accounting
    and other ancillary operations
    Logistics management
    Insurance claims processing HR services
    Legal databases Network consultancy and management
    Engineering and design Web services

    Why India?
    Why India? The same old story labour is terribly cheap in the country thanks to a population of more than I bn. Therefore, manpower cost for these services if carried out in India is almost one-fourth of that in the US. According to Nasscom, India scores over other geographic destinations like New Zealand, Kula Lumpur and Hong Kong due to skilled man power inspite of having disadvantages in terms of infrastructure.

    The market
    IT enabled services is anticipated to be the next "big" thing in the Indian IT industry according to NASSCOM. This sector will grow at a CAGR of 47% to the size of US $ 19 bn (Rs 855 bn) by 2008. Currently the size of the sector (FY00) is a small US$ 0.5 bn (Rs 24 bn). This translates to the fact that the sector will have a 21% share of the IT industry in 2008. Another very interesting projection is that the CAGR of 47% is greater than the 39% growth for the whole IT industry.

    For FY01, according to figures released by Nasscom, IT enabled services sector grew by 70% to clock revenues of Rs 41 bn (US $ 881 m). The sector employed 70,000 people. For FY01 the projected figures was Rs 40 bn in revenues (66% growth rate) and the sector was expected to create 68,000 jobs. Thus, the sector has performed better than expectations. The industry was a small Rs 24 bn in size in FY00 employing just 45,000 people. Thanks to its higher growth rate the share of IT enabled services increased from 6.5% of software and service revenues in FY99 to 10.6% in FY01.

    The areas that Indian companies have shown interest in so far are Customer Interaction Services (including call centres and customer support centres) and back office operation or BPO (business process outsourcing). In FY01, while revenues from customer interaction services accounted for 21% of the revenues of the sector, BPO (business process outsourcing) contributed 33% to the total revenues. For FY01 the segment (within the sector) that has shown the fastest growth rate is that of customer interaction services (call centres and customer support centres). The segment has grown by 112% in FY01. The back office segment grew by 42% to clock revenues of Rs 13 bn (US $ 290 m).

    The players
    The major players in the sector have been mostly software companies. IT enabled services is a logical extension of their business. While GTL and Mphasis BFL have concentrated on the call centre business, company’s like Infosys and HCL Tech are focusing on the BPO market. Others that have had a presence in the hardware business are addressing areas like facilities management, network consulting & management and hosting services. The players in this segment include Digital, Wipro and GTL.

    The experience
    When business started to flow from abroad everyone jumped into the medical transcription business. These players were inexperienced. The human resource was not qualified enough to meet the business needs, as a result the quality suffered. Consequently, new business started to come in at a lower pace. With business evaporating this in turn put pressure on the realisation of companies and they found profit suffering. As a result the growth of the industry suffered. The contribution of the transcription segment to the total revenues of the sector declined from 11% in FY00 to 3% in FY01. However, there was growth of 33% even in this segment.

      Mid 1999 End 2000 Change
    Medical transcription centres 1400 70 -95%
    Medical transcription training institutes 200 40 -80%

    Source: Itspace.com

    The lessons and concerns
    One point that emerges very clearly from happenings in the medical transcription business is that domain expertise is critical for success. Therefore, if there is to be an IT services revolution there should be enough domain expertise to deliver quality? The entry barrier into the sector is low. This means that competition is going to be intense and the margins will be under pressure. Therefore, with low margins it might turn into a volumes game. Size would be critical.

    Further, we have neighbors that can beat us in cheap labour any day. Where they lose out is the knowledge of English language. Though domain expertise is going to be an equally strong entry barrier.

    But there will be growth
    Coming to the positives for the IT enabled services sector the cost of bandwidth will certainly reduce in future and availability of human resource will improve too. These factors would stimulate growth of the IT services industry in the country. Large corporates like Infosys, Wipro and HCL Technologies that have successfully managed growth will probably make the most of this opportunity. What these companies know is how to manage people successfully even when the number of employees growth from 200 to 10,000. The dynamics of which are not very different. After all, the IT services business is nothing but selling ‘man-hours’. It is not magic that for FY01, the contribution to the total revenues from each segment is almost the same as the percentage of total employment in the sector. Thus, IT enabled services could bring back the lost zeal in the growth rates of technology companies.



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