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.
Call centers: A tough job - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 21, 2002

    Call centers: A tough job

    The ITES (Information Technology Enabled Services) industry has been heralded as the new growth engine of the domestic information technology industry. But within this too, there have been segments that have performed much better than others. Call centers is one of the fastest growing segment in the ITES industry. In the year 2001-02 call centre segment revenues amounted to Rs 18 bn and grew by 112% in last three years on a CAGR basis. The Nasscom-McKinsey report has estimated that the call centre industry is likely to grow to Rs 200 bn by 2008.

    While there is immense potential for growth and barrier to entry is low in terms of capital involved, running call centers is a very difficult task. Therefore, we feel that there is likely to be an all around consolidation that will see the smaller players go out of business or be acquired by the larger players. Here’s why…

    Frost & Sullivan, a market research firm, defines a "call-centre" as a group of people processing a large number of telephone calls. Within this, call centers can be divided into two groups: inbound and outbound systems. Operation of a call centre revolves around serving an existing and potential customer base. This need translates into providing satisfying and well-informed responses to a customer query, or in case of a potential customer, meeting his expectations with regard to information that can benefit him.

    The Indian call centre industry mainly consists of companies engaged in providing telemarketing, tele-servicing and help desk services. Most of the call centre outfits engaged in running outsourced centers use their large capacities to serve multiple companies. In FY02 call centers contributed nearly 25% of the total domestic ITES business.

    So what has attracted so many new players to this segment? A look at the revenues and cost estimates of the industry will tell us that this business may have better margins than the software services business also. Average billing rates for a typical call centre works out to be in the region of US$ 12-14 per hour (Rs 588-686). These hourly billing rates are much lower than what is prevalent in other countries. For example billing rates in the US for call centre services are nearly US$ 76 per hour while in Australia they are nearly US$ 36 per hour. The average employee cost on the other hand works out to be nearly US$ 200 per month, which works out to nearly US$ 1 per hour assuming an 8-hour shift.

    The other major cost head is the communication costs. If we assume that as a percentage of total revenues, the communication costs in this industry are twice as that much in the software services industry, we are looking at communication costs between US$ 3-4 per hour per employee. Our talks with the managements’ of at least two leading call centre service providers indicate that the operating margins in this business can be anywhere in the region between 35-40%. On the net levels also margins may be in the region of 15-20 %. These numbers have attracted a lot of domestic players to this market.

    Apart from the high level of competition, high bargaining power of customers is another feature of this industry. The bargaining power of customers is very high due to the fact that most of the customers in this industry are large corporations. For example, a typical call centre operation is a customer support centre for a credit card operation. This is a call centre with which most of the credit card holders are familiar. In such kind of an arrangement the customer is usually a large bank or a credit card company who has the upper hand as far as billing rates are concerned, as the call centre is usually a small player in the market.

    Higher bargaining power is also due to the fact that Indian call centre outfits are still too small compared to their western counterparts to command the respect of their clients. For example, one of the largest call centre company in the world is Sitel, which employs more than 24,000 people around the globe and has an annual turnover of more than US$ 1.5 billion (Rs 74 bn). While in India Spectramind is one of the largest in this industry but has only a capacity of 3,000 seats.

    Due to the lucrative nature of this business and the entry of a large number of players in the market, competition has increased considerably in this industry. GE, American Express, E-funds, Spectramind, Msource, e-Serve Technologies (HCL), E-Serve International (Citibank), Bharti, Daksh.com etc, are the major call centre operators in India. The most recent addition to this list is Tata Infotech, which has recently picked up a 40% stake in Sitel India. This follows the high profile acquisition of Spectramind by Wipro in July 2002.

    Multinational Call Centre clients
    Cisco, Delta Airlines, American Airlines, amazon.com, British Airways

    Low entry barriers have also prompted many players to join the bandwagon. According to NASSCOM, the infrastructure costs are small. The investment per seat varies from Rs 700,000 to 1000,000 for setting up a state-of-the-art call centre with 100 to 300 seats (Source NASSCOM). For a call centre of 300 seats this works out to be Rs 300 m in capital costs. India has a good supply of skilled English speaking manpower. There is also a perceptible shift in the outlook towards outsourcing call centre contracts to India. More and more organizations are realizing the benefits of outsourcing due to the inherent cost benefits.

    With the mushrooming of call centers in India, consolidation seems imminent. In that scenario, software companies like Wipro and Mphasis that offer call centre services to their existing clients as an add on to their existing gamut of services have better chances of survival. Due to their size and background of relationships, these companies may be in a better position to ensure revenue flows in the future. Also call centre business is a volumes game. Large software companies offering a wide bouquet of services including call centre services are best equipped to garner large volumes.

    Call centre business involves a lot of training as far as the call agents are concerned. A lot of effort has to be put in to teach call centre agents different accents to cater to different customers across the globe. Call centre operations involve developing well-defined systems, which also involve processes like predefined query responses. There are a lot of call centers mushrooming in the country, but their sustainability will depend a lot on how fast they are able to set up systems and processes in place and how well they acquire domain expertise in different verticals.

    Having enumerated the characteristics of this industry we would like to point out that, though this industry is nascent in India it is already facing international competition and opposition. International competition is in the form of countries like Philippines and Ireland who have a large number of English speaking population. International opposition is in the form of movement against the transfer of call centre jobs to India. Already the state of New Jersey in the US has passed a bill to stop the flow of back office services to India mainly from the governmental organisations. It is feared that more and more states may follow suit and enact similar laws in the future. There is also a risk that this opposition may spread to private sector companies due to increasing pressure from labour unions.

    Indian investors may be taken in by the ITES and call centre boom, but we would like to point out that providing call centre services is not as simple as it seems and only the serious players are likely to survive the shakeout. There are a lot of non listed call centre service providers regarding whom there is little or no information available. Under these circumstances investors are advised to invest in companies that have a proven track record of at least over two years.



    Equitymaster requests your view! Post a comment on "Call centers: A tough job". 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

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    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!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    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 24, 2017 10:53 AM