IT-ENABLED SERVICES: The Next Big Frontier

If Nasscom

estimates are to be believed, the next best business opportunity in the IT world

is IT-enabled services (ITES). According to its recent study, the ITES market in

India grew by 66 percent last year. It also estimates that ITES could generate

an additional 1.1 million jobs and annual revenues of $17 billion from export

activities by 2008.

The figures

are impressive indeed! And the future appears bright. But what's in it for

channel partners? Many partners are already complaining about business slowing

down and reduction in margins. Traditional trading has left them with very

little option but to either wait out the current market recession or close

shop. 

In these

days of hard time, it has become important for the channel to look out for

alternatives to survive. Small-time importers have stopped importing and are

concentrating on local trading. But when local trading itself fails to pick up,

survival becomes even more difficult.

The answer

is diversification. And ITES, with a bright future, is an option worth giving a

shot.

What is

ITES?

ITES are

services performed or provided from a remote location and can be delivered over

communication networks, including the Internet or an intranet. ITES is not about

being voice, web or data-enabled business. Rather it is about availability --

when, where and how customers want to access their chosen vendor, brand or

service.

According

to McKinsey & Co, ITES is expected to grow 15-fold by 2008, providing vast

opportunities for Indian players. Currently, call centers account for 80 percent

of these services. By 2008, the overall market for ITES will amount to

approximately $142 billion worldwide. This is what the people already involved

in ITES have to say about its future:

Anthony

Hales, CEO, Healthscribe India: “The future for ITES companies in India is

bright so long as business developers recognize that it cannot be overnight

successes. It takes thorough planning, significant investments of cash and time

as well as constant vigilance to develop a successful ITES business.”

Anup Kumar,

VP (operations and IT), India Life: “The ITES revolution has the potential to

broaden the impact to a much larger part of the workforce. The cost value

proposition is clear. India has huge competitive advantages in the key elements

of cost (technology, labor, and CRM).”

Mohan Menon,

Sr Consultant (International Marketing), Solutions Integrated Marketing

Services: “Most organizations want support, and to outsource such an activity

is extremely cost-effective. And to invest in setting a call center does not

make sense. With outsourcing, the responsibility of upgrading the technology and

operations rests on the third party. There is no denying the fact that the

future is bright.”

Jayashankar,

COO, Q Support: “In a few years India will rise to the status of being an

intellectual superpower. As a result of this it is India who will fuel the

services industry throughout the globe.”

Samir Sethi,

Director, Kalltech says the future for ITES is bright, provided things don’t

go the medical transcription (MT) route. “We have to be aware that middlemen

squeeze the margins and that leaves no scope for further improvement. In MT,

many players had their infrastructure up, but no business and this led to a

price cut. It is this situation that we should avoid. Seeking business and

erecting infrastructure should be a simultaneous process.”

While most

of them see a good future, Girish Prahalad, Manager Business Development,

Integra Micro Systems has a different opinion. “NASSCOM has predicted annual

revenues of $17 billion, but I don’t think much has been happening till date.

People who have ventured into this business are not doing great turnover-wise.

Though I don’t completely disagree with NASSCOM, I will certainly not go with

the predicted market growth,” he adds.

Diversification

possibilities

ITES is the

outcome of technological advancement, benefiting every business in one-way or

the other. So, why shouldn't channel partners explore diversification

possibilities here? As of now there are very few who have diversified into ITES.

This is because of the novelty of this sector and the lack of awareness of its

potential. For those who are aware of ITES, they look upon it as a specialized

field.

Manoj

Mathre, Sr Manager, Technology, Lawkim feels ITES is a specialized field and you

require a special skill set for doing this business. “And only people who

understand the servicing industry can do it. It is not for mere box

sellers.” 

According

to Manoj, investment for setting up an ITES business has to be a calculated

investment. There should be value additions. His advice is that one should start

small, understand the quality and then market.

Rashi

Peripherals, a major distributor in Mumbai has hired a domestic call center for

servicing some of its products. For Rashi, setting up a local call center for

its products on its own is not a big thing. Yet, it has outsourced it servicing

to a small time call center. Rajesh Goenka, Divisional Head, Rashi Peripherals

says, “ITES and distribution are two different fields. You require

specialization for providing service. It is better to hire the service than to

start on your own. It is just like hiring a courier company or travel agent.”

This might

not be a distributor’s cup of tea, but Rajesh agrees that there is more profit

once you manage it effectively. Unlike trading, the risk involved is very less

because the payment is made in the beginning before the service is started.

Where ITES is applicable

An analysis

of top 20 industries/sectors of the global economy revealed that ITES is

applicable to business process across most sectors. This means channel partners

can very well look at ITES as an alternative business. 

ITES is an

essential infrastructure for most large service organizations, which experience

large turnover of data, have a frequent and extensive customer interface and in

which, tolerance for mistakes or customer dissatisfaction is low.

Girish

Prahalad, of Integra Micro Systems is optimistic about channel partners entering

ITES. “Channel partners have a good hold in the local entities, so they will

naturally have accessibility to the manpower to set up these units. Also they

know the Indian market dynamics, so addressing this local market is an easy

task.”

Girish

feels distributors rightly fit into the tier of the channel, which will stand to

gain benefits from migrating to ITES. “They have the right kind of contact

with leading vendors, thus it becomes sensible for companies like Ingram Micro,

Tech Pacific to get into this business,” he adds.

Infrastructure

requirements

Even though

there have been vast improvements in the telecom facilities in India over the

last five years, there is still much room for improvement. For Indian companies

to compete with their counterparts in the US, Europe and even Asia on an even

plane, telecom infrastructures should have the same level of reliability, cost,

quality of customer service and ease of use. “In India, it is not there as

yet,” says Anthony Hales, CEO, Healthscribe.

Anup Kumar,

of India Life feels, “Though things are getting better, they are far from

comparable to our competitors in Philippines and Ireland. The restrictions on

structure, architecture and usage of networks, Internet telephony, leased lines

create unneeded complications.”

There is a

requirement of large bandwidth from India to its customers internationally,

which is normally required for multimedia development and e-commerce

applications. In the US, coast-to-coast connectivity of 56 kbps costs around

$600 per month (frame relay) to $1,000 per month of a leased line. The cost of a

1MB link cost-to-cost is around $4,000 per month - this gives about 18 times

more bandwidth for four times the cost. The tariffs are discounted heavily as

the volume increase. 

However, in

India tariffs are not generally or substantially discounted for volume increase.

The charge for a 64 Kbps link to India from the US is around $ 5,000 per month.

For 1 MB, the charge is $ 30,000 per month.

Mohan Menon

of Solutions Integrated feels telecom industry requires changes. “The

advantages that come with a centralized call center are diluted if the lines are

down. The service level today stands at 90 percent while I think the customers

should get 99 percent service quality to ensure call center performance does not

go down. This can happen with private parties coming in the picture as they are

promising an uptime of 99 percent,” he adds.

Jayashankar

of Q Support feels the telecom services are simply not reliable enough to meet

international requirements. “Companies based abroad have high standards and

deadlines that we cater to, despite the telecom infrastructure available to us.

If India is to become the main service provider to the world then there is no

doubt that this is something the government will have to deal with

immediately,” he adds.

Factors of growth

According

to Nasscom, the three factors that drive the growth of IT-enabled services are

outlocation, outsourcing, and the World Wide Web.

Outlocation

is the term used for obtaining services outside the national borders of a

company. Outlocation helps companies to lower costs, take advantage of the

global 24-hour clock, find the most optimum global talent, and achieve economies

of scale by concentrating resources. A host of companies are now outlocating

services.

Outsourcing

is the term used for obtaining services from a third party. It has become a

large market; currently it amounts to over $100 billion in value.

Finally,

the growth of the Web is stimulating the growth of IT-enabled services by

allowing companies to centralize services and/or operations at the most globally

optimal location while providing access to customers anywhere in the

world.

Providing

services through the Web is also significantly reducing transaction costs. An

industrial company can reduce its transaction costs by 40 percent by providing

services through the Net than through call centers.

Government's

role

The

Government of India has recognized ITES as key an opportunity area. In fact, it

has moved rather proactively on this front and already announced important

policy decisions as regards tax laws, telecom infrastructure etc.

But, people

in the field feel that more should be forthcoming from the government in terms

of marketing support and eased bureaucracy.

Samir Sethi,

Director, Kalltech, says, “Entry-level barriers in this business are not too

high, but some marketing support from the government will help in growing this

business.”

True, the

government is all out to encourage ITES. But, even today some regulation is

impeding the growth of ITES. Prohibition of international Internet telephony is

one.

Says Jobina,

Brand Manager, i2i Media, “The government should offer a single window

clearance for various bureaucratic formalities such as telephone line

connectivity, leased lines, IPLC, power, etc, with committed deadlines.”

There is no

doubt that economic liberalization; opening of doors to foreign investors and

institutions has created a more conducive atmosphere for economic development.

However, the environment is still highly regulated and this prevents growth in a

number of sectors.

Some of the

action points market players expect from the government include:

• Initiate
  
  dialogue between government and industry to clearly define the parameters
  
  for each segment of the ITES sector. This will remove ambiguity with regard
  
  to income tax exemption applicable to ITES units.
  
  

• Building of infrastructure
  
  that will meet the requirements of companies operating in this space.
  
  

• Removal of all import
  
  duties and restrictions on IT hardware and software
  
  

• Flexibility of call centers
  
  to merge domestic and international business in the same facility.
  
  

• Setting up of ITES training
  
  infrastructure.
  
  

• Setting a single industry
  
  standard for Indian ITES industry.
  
  

• ITES should be promoted in
  
  smaller towns too.

Investment and returns

It is generally presumed that the investment required to start any ITES

is very heavy. And it is true to some extent if you look at some of the existing

set-ups in the country. But, what is important is whether a big investment is

required.

If you look at the general standards for setting up a call center, it

takes only about five to six crore to get into this business.

A reasonably big company like Healthscribe India invested around US

$5.2 million since its incorporation in 1993. However, it is yet to generate

returns on it. But, Healthscribe is confident of making profits from the current

financial year.

Whereas, a small company like Kalltech with an investment of just Rs 55

to 60 lakh is expecting to break-even in a year’s time and hopes to make

profits in another 10 months.

Problems and solutions

In the case of ITES, there are several teething problems given its

newness. The experience of ITES companies in the US and Europe may not be the

same in India. India may have more advantages and enough reasons to start ITES

business, but even today the infrastructure and government regulations are

hurdles in the growth of ITES.

Manoj Mathre of Lawkim feels basic infrastructure like power is still a

problem. “We are not happy with present infrastructure. Connectivity is

another big problem. When we complain about connectivity, we get a response that

the problem is at the last mile. Actually, they just keep passing the buck

between VSNL/STPL and the clients. Nobody actually helps.”

For Jobina, Brand Manager, i2i Media the major problem has always been

changing the mindset of the client to outsource call center services (customer

complaint desk, etc.) to a third party.

Samir Sethi of Kalltech has listed some of the problems he encountered

when he started his domestic call center:

1. Problems with hardware supply. Bad support on the products supplied.
   
   Poor infrastructure of the supplier.

2. Manpower problems. High attrition rates. But they have now stabilized.
   
   Problem related to training new recruits.

3. Bad experience with placement consultants. They pinch the very
   
   employees they have placed after they get the training and some experience.

4. Getting the right talent and building an organization.

5. Technical problems with the software. As things moved ahead Kalltech
   
   wanted the software to have added functionality, to deliver more. And the
   
   process of customization to deliver the desired results took long.

6. Connectivity problems with MTNL lines.

Bottomline

History of

ITES in India is not very old. As of now the customers are happy with whatever

service they get. But the time is not very far when customers will become more

demanding. The opportunity is open for all. The returns are good and the risk

involved is low. A calculated investment and a careful study is what one

requires. ITES is a serious and profitable business that channel partners can

indeed think of diversifying into.

Nelson

Johny in Mumbai, with inputs from Sunila Paul, Bangalore and Mohit Chabbra, New

Delhi

• After dotcom fiasco, VCs eye ITES

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