It's the new one-degree-of-separation rule in India: chances are you know someone who works/worked in a call centre or Business Process Outsourcing outfit, someone who owns/owned one of the two or both, or are thinking of becoming an ITEs (that's it Enabled Services, duh) entrepreneur yourself. That wholly Indian obsession with ITEs is explained easily.

The industry grew by 71 per cent in India in 2001-02, a year when big cousin software services grew by a relatively modest 18 per cent. In a job and foreign exchange hungry nation like India, it employed 106,000 people and generated Rs 7,350 crore ($1.5 billion) in revenues, numbers that are projected (by Gartner) to touch 1 million and between Rs 102,900 to 117,600 crore ($21-24 billion) by 2008.

Azim Premji, Chairman, Wipro

Faced with slowing growth in their main business, several software companies have entered the ITES domain-Premji's Wipro, for instance, acquired Spectramind

And suddenly, everyone wants to get into the business: from Reliance to Infosys to the Mumbai-based Hiranandani Group (it's big in real estate) to the Kolkata-based Emami Group of Companies (remember, it is the company for which Madhuri Dixit is creating and endorsing a range of cosmetics) to your neighbourhood garment exporter with space and money to spare and dollar dreams in his eyes.

Reason suggests caution, but the lure of big-time money is strong to resist. "We are cautioning against the hype," shrugs Sujoy Chohan, Country Director, Gartner. "There is too much capacity being created and there could soon be a situation where returns don't match investments." Worse, opportunism could erode India's competitiveness in the business.

ITEs Is A Reality

There's no questioning the existence of the market. Its size varies depending on which research or consulting firm, investment bank, or industry association you want to believe. Thus, there's Booz Allen Hamilton's $3 trillion (Rs 147,00,000 crore) by 2005 to Goldman Sachs' $350 billion (Rs 17,15,000 crore) by 2004 (hey, that's almost here) to Gartner's $154 billion (Rs 754,600 crore) in 2002. Gartner, however, believes that India's addressable market in Business Process Outsourcing (BPO) and remote services is $26.5 billion (Rs 1,29,850 crore). The number is real, vouches Atul Pradhan, Managing Director (Consulting), KPMG, "but it doesn't (always) mean India."

The country may have several things going for it (See ITEs @ India Is Still Lucrative...), but it faces competition from Ireland, UK, Australia, Singapore, Hong Kong, China, Philippines, Netherlands, Mexico, even Fiji and Jamaica.

Cost and a huge English-language speaking population still work in favour of India but "we have to assume our cost advantage will be negated in the long term," says Sunil Mehta, Vice President (Research), Nasscom (National Association of Software and Service Companies). Mehta is right; the costs associated with the business in India are increasing.

People account for close to 80 per cent of the costs of running an ITEs business in the US; in India infrastructure accounts for a similar proportion. And 9-11 has only made things worse. "Enhanced geo-political risk means companies have to invest in business continuity plans, an expensive proposition," explains Krishan Dhawan, Director (Marketing), EXL Services. Many of the Indian companies in the fray do not have the resources to make this investment. There's worse to come. "Substantial savings in the business come from scale and size," says Sanjeev Aggarwal, CEO, Daksh e-Services, which provides back-office support to companies such as Amazon, and not all Indian companies can afford that scale. The cost of a seat goes down from Rs 11 lakh in a 100-seater call centre to Rs 4.5 lakh in a 1,000-seater one.

The Biggies Are All There

Scale certainly doesn't pose a challenge to India's software biggies. Faced with pedestrian (compared to the go-go 1990s) growth in their main business, each has utilised the surplus cash in its balance sheet to enter the ITEs sector. Infosys has Progeon, Wipro acquired Spectramind, HCL Technologies was the first-among-equals to enter the business with E Serve, and Satyam has recently launched a new business, Satyam Bioinformatics.

N.V. Tyagarajan, CEO, GE capital international services

India has emerged as the back-office to the world. GECIS, according to a Nasscom-McKinsey report, saved $270 million in 2001 for its parent

These companies speak of a growing need among customers to rationalise the number of vendors they deal with. "ITEs is just another of their requirements, and by providing it we are just closing the loop," affirms the CEO of one.

"The decision makers are completely different," counters Aggarwal of Daksh. "Software companies deal with CIOs, whereas we deal with the CFO or the vice president in charge of customer services." Adds Rizwan Koita, Co-founder, Transworks, a Mumbai-based BPO company: "The entire delivery mechanism is different." That may be the case, but there's no denying the fact that the entry of these companies, with cash to spare, and relationships in place, poses a threat to stand-alone third party ITEs companies.

Regulations, that eternal bug-bear of any Indian business, could spike the Indian ITEs industry's global prospects. "We don't have a national gameplan for the sustainable development of ITEs; countries like Singapore do," says Raman Roy, Chief Executive Officer, Spectramind.

What we do have are regulations that make it necessary for an ITEs company to secure 32 clearances before it can do business, require companies to get the Department of Telecommunication's permission to connect to every new customer, and prevent the sharing of bandwidth between multiple entries. The last assumes significance in light of the growing importance of disaster recovery management. No single company can afford the multiple networks required to guarantee business continuity for its customers. But the biggest threat to India's aspirations to become an ITEs superpower comes from within the industry.

The Get-Rich-Quick Hurdle

ITEs companies launched by the we-want-to-get-rich-quick brigade-such as a garment exporter who tried to lure Spectramind's Rao on to his board, a story the latter is fond of recounting-end up playing the price card. Or go out looking for buyers.

In 2001, Flex Industries promoter Ashok Chaturvedi-the same man who was in the news for allegedly trying to bribe a government official-opened a call centre with a capacity of 800 seats. Today, the centre has 180 live seats, and Flex has decided to either lease it out or find a buyer.

Sanjeev Aggarwal, CEO, Daksh e-services

Customers prefer large third-party service providers that can scale up rapidly. Aggarwal's Daksh provides back-office support to e-tailer Amazon out of India

Another centre, this one promoted by Delhi's Ansal Group, has a capacity of 1,200 seats but uses a mere 142; the Ansals too are looking for a buyer. Then, there's Sanjay Dalmia's Ikon Data, which uses 100 seats out of a possible 240; when last heard of, the company was desperately in search of a front-end sales team in the US.

"Many small Indian third-party players are working under sub-optimal conditions," says Nasscom's Mehta. "The sector is headed for consolidation-either (through) closure or acquisition."

Unfortunately, adds Spectramind's Roy, the experience of customers with these centres will "result in a loss of goodwill" for other companies and for India as an ITEs destination.

That's within the realm of the possible. One bad customer experience is all it will take to erode brand equity that the country has built over the years. Most of these short-termists don't believe in training, and poach experienced employees from the larger companies at inflated salaries. These companies never last long, but they do enough to distort the employee-cost structure of the industry as a whole.

Companies like GE, hsbc, and British Airways that run huge back-office operations out of India aren't likely to be affected by the get-rich-quick types. And the clutch of American BPO companies that has set up operations in India-Convergys, Sitel, ACS-will escape the impact too; they boast long-standing relationships with customers.

However, third-party service providers, the ITEs arms of software companies, and the large ITEs companies may feel the pressure to match the prices of the upstarts.

That could render their business models unviable. Given the slowdown in the US economy-and the US is where most customers for it-enabled services are based-companies will likely look for the most competitive rates they can find. And the glut in the market could force larger third-party service providers to cut their prices.

At a larger level, it could impact the competitiveness of the Indian ITEs industry from the inside. Rampant undercutting of prices, an unviable employee-cost structure, the inability to meet specific-customer requirements for infrastructure, and the loss of goodwill are just some of the ills in the offing. Given the emergence of competitors such as China and Philippines, among others, that would be disastrous. But once again, we'll have no one but ourselves, our regulations, and our greed to blame.