|
The second
week of June witnessed one more occasion to celebrate
India's success in the export of IT-enabled services: the
National Association of Software and Service Companies's (NASSCOM's)
ITES–BPO Strategy Summit 2003 held at Mumbai. Media
reports suggest that confidence and jubilation ruled the
day at the summit. Nothing captured the mood more than
NASSCOM President Kiran Karnik's statement: 'When I see
the rear view mirror, I see no one. We are so far ahead
that we have practically no competition at all'.
As international firms decide to outsource or locate their
back-office operations offshore, India has found for
itself a new opportunity. Prior to the digital
revolution's transformation of service activity, the
provision of most services required the presence of a
service provider at the point of delivery of the service.
As a result, export of services took the form of migration
of personnel to the location where the service was
provided, as epitomized by the migration of skilled
technicians, doctors and nurses to the US and of
semi-skilled and unskilled workers, including carpenters,
masons, chauffeurs and housemaids to the Gulf countries
from India. Benefits to the home country came in the form
of remittances of hard currency earnings by these
migrants to their families, which augmented the scarce
pool of foreign exchange available to these countries. But
the magnitude of such income was limited by the
restrictions on the movement of skilled and semi-skilled
and unskilled personnel set by the immigration laws and
practices of countries where the demand for the service
originated.
The digital revolution, it is argued, has changed all
that. Now there is a range of services being provided by
workers located in a country different from the one in
which the service is actually delivered. These services
are delivered via telecommunication or data networks, and
are either outsourced or organized by agents in the
country of origin of the service to whom the provision of
these services are contracted out or outlocated by
subsidiaries of corporations from the country of delivery
of certain services. When categorized by origin and focus,
it is possible to identify four types of IT-enabled
services (ITeS): in-house or captive centres, units that
were originally spin-offs, business process outsourcing (BPO)
units and broad-based service providers, who offer
consulting or IT services in addition to BPO. Examples of
services outsourced/outlocated include customer
interaction services; the processing of credit card
accounts, insurance claims and business payrolls; the
creation and maintenance of information bases in the form
of networked data centres and their use in the provision
of information services such as help desks, and the
generation of digitized records as in the case of medical
transcription. Other examples of outlocation include
investment in design subsidiaries and back-office
facilities. A McKinsey–Nasscom report lists ten processes
as attractive opportunities-telesales/telemarketing, Web
sales and marketing, database marketing/customer analysis,
benefits administration, payroll services, engineering and
design, inbound call centres, claims processing, billing
services, and credit/debit card services.
The possible range of ITeS in an environment where the
service sector's role is growing worldwide is immense. The
reasons why such relocation occurs are obvious. It
substantially reduces the cost at which such services are
obtained or provided, and so long as an appropriate
location in terms of the availability of manpower with the
requisite skills (say, basic computer literacy) and the
necessary characteristics (for example, knowledge of
English) is chosen, the quality and efficiency of the
service is also ensured. At present, India is the favoured
location on these grounds.
NASSCOM estimates that revenues from
ITeS increased from $565 million in 1999–2000 to $930
million in 2000–01, $1,475 million in 2001–02 and a
projected $2,400 million in 2002–03, increasing the share
of ITeS in the total revenues from IT services and the
whole IT sector respectively from10.2 and 6.8 per cent in
1998–99, to
11.3 and 7.5 per cent in 2000–01,
16.2 and 11.4 per cent in 2001–02 and 19.3 and 14.6 per
cent in 2002–03. With worldwide spending on ITeS and
business process outsourcing estimated at $712 billion in
2001, and with evidence that outsourcing of such services
is on the rise, there is reason to believe that this
growth can be sustained. As a share of exports, NASSCOM
estimates suggest that the contribution of ITeS rose from
14 per cent in 1999–2000 to 14.5 per cent in 2000–01, 19
per cent in 2001–02 and 24 per cent in 2002–03.
If the
current rate of growth in the ITeS continues, it would
generate ample employment oportunities in future.
According to NASSCOM's annual industry survey, the IT
Software and Services Industry is projected to employ
650,000 IT professional by March 2003. This reflects a
growth of 24.4 per cent from an employment level of
522,250, a year earlier. Of the total, while 205,000 are
still accounted for by the IT software exports industry;
160,000 are employed in ITeS; besides this there are
25,000 in the domestic software market and over 260,000 in
user organizations. Arun Kumar of NASSCOM is optimistic:
'In the ITeS sector, we saw almost 200 personnel being
hired every working day of the year. The interesting trend
here was that there was a shift from hiring freshers to
professionals with more domain specific skill sets and
business analysts with programming skills which reflects
that Indian companies are tapping high value service
lines', he reportedly said.
However, according to the industry journal Dataquest,
at present, the ITeS market in India is substantially
restricted to call centres. Even if some activity has
taken place in other areas such as medical transcription,
engineering and design or other Web services, this has
been too little to make a significant impact on the
overall market or growth. Yet worldwide, the ITeS sector
is highly diversified, holding out the promise of
diversification into areas of higher value. Such
diversification has other implications. Primarily, the
size of each operator needs to be extremely large to
accommodate the large business demand of each client. This
is already triggering a wave of mergers and acquisitions
in the industry, spearheaded by the creation of
Wipro-Spectramind in 2002, which, not surprisingly, has
emerged as the leader in NASSCOM's ranking of top fifteen
players in terms of revenue. One report quotes industry
experts as predicting that the number of firms in the
business would come down from 320 to around twelve. Thus,
though technologically a dinosaur relative to software
generation, the BPO sector is turning out to be a field
for really big players who could focus their energies
elsewhere.
While BPO has come as a blessing to a country that till
recently saw a virtual stagnation in employment generation
in the organized sector and was faced with balance of
payments difficulties, the dynamism of the ITeS sector is
disconcerting. This is an area where inability to sustain
operations based on lower wages can alter the scenario
quite quickly. Given the wage level, higher revenues per
worker should be the name of the game. In practice,
however, the business works the other way: given revenues
per worker, which decline with competition, keeping wages
low is crucial for profits. The evidence shows that except
for medical transcription, that records abysmally low
revenues per worker, there is not too much difference in
the revenue per worker across areas, that averages Rs 6
lakh (or around $12,500) per year. This low figure, which
can only get lower, points to the fact that even now, low
wages relative to the developed countries do drive the
industry.
Not surprisingly, the charge of unfair competition
repeatedly surfaces in India's principal markets abroad.
The bill passed by the New Jersey Senate, which other
states in the US are also threatening to adopt, to prevent
holders of government contracts from outsourcing their
business abroad, may not have made a dent as yet, but is
indicative of the dangers of relying on this area. There
are indications that pressures are building on other
markets such as the UK and Germany to protect local jobs
against being outsourced to low-wage locations,
particularly India.
Besides, notwithstanding Karnik's perception that India is
way ahead of the competition, the recognition of the
prospects in this area would encourage other countries,
with a pool of educated unemployed, to bridge the barrier
of language skills to enter the industry. This could
trigger a race to the bottom of the kind that is a
familiar story in the export of primary products from
developing countries.
Moreover, India's ITeS success is clearly shifting
attention from the area of more technology-intensive
software. At present, the game in the ITeS business is
easy to play and export revenues from this are eligible
for the no-tax benefit provided originally to software
exporters. This has resulted in a rush in the industry,
that in practice tends to overstate India's information
technology success. Not surprisingly, there is reason to
believe that India's overall thrust in the software
industry during the last decade is not as spectacular as
it appears. It is substantially export of lower-end
software and IT-enabled services facilitated by the
availability of cheap skilled labour. And it is in large
part a technology-aided extension of the earlier waves of
migration by service-providers of different kinds-doctors,
nurses, and blue-collared workers. An expansion of that
kind cannot be self-sustaining for too long.
Even in quantitative terms, the latter development is not
as spectacular. The 'net foreign exchange revenue' to the
country from migration of the earlier kind, captured by
the volume of remittances into India, is in the range of
$10–12 billion annually. The 'gross' foreign exchange
revenue from software services and ITeS exports is, even
after the boom, placed at $10 billion. Unless software
services and ITeS exports can avoid the tendency for
inflows to taper off because of exogenous forces like
protection and third-country competition or because of
internal competition, as happened with remittances, this
may be one more overstated opportunity, even if extremely
useful in the current circumstances. Complacence and
unwarranted hype leading to the neglect of other avenues
of growth must therefore be avoided. Ironically,
therefore, NASSCOM's celebration of the ITeS boom suggests
that this is a real danger lying ahead.
|
