X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
IT enabled services: To the rescue - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • 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.

     

     

    Equitymaster requests your view! Post a comment on "IT enabled services: To the rescue". Click here!

      
     

    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Ankit Shah's First Five Insider Recommendations (The 5 Minute Wrapup)

    Aug 5, 2017

    How to get exclusive insider recommendations from Ankit Shah.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE IT


    Aug 22, 2017 03:24 PM

    S&P BSE IT 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS