[Reader-list] Economist on the Indian New Economy

[Ravi Sundaram]

This came out in the Economist...A good sense of the future of the 'new
economy' as seen by international capital


The Economist May 5, 2001 U.S. Edition 

May 5, 2001 U.S. Edition 

 


UNTIL a few months ago, Marc Vollenweider was a partner in the Delhi office
of McKinsey, that most patrician of management consultancies. Mr
Vollenweider, who is Swiss, is still in Delhi, but in a line of business
that sounds almost plebeian by comparison: back-office work. He and his
partner (lured from running the Delhi arm of IBM's research centre) have
set up Evalueserve, a firm that undertakes various business processes for
clients in Europe and North America, offering cheaper, better and faster
service than they can deliver themselves. 

Mr Vollenweider and his partner, Alok Aggarwal, were seduced by an
irresistible proposition. First-world companies do lots of things that are
expensive and necessary, and yet peripheral to their "core competence". The
main requirement for these tasks is an intelligent English-speaking
workforce--which India has in abundance, at a small fraction of
rich-country wages. 

So why not ship the work electronically to India, which missed out when the
West sent much of its manufacturing to China and other points east? With
admittedly suspicious precision, Mr Vollenweider has calculated that a
typical western bank can outsource 17-24% of its cost base, reducing its
cost-to-income ratio by 6-9 percentage points, and in many cases doubling
its profits. 

Such calculations have created a new industry in India that could, in
theory, transform commerce in the developed world. The fizziest forecasts
have come from Michael Dertouzos, director of MIT's Laboratory of Computer
Science. He reckons that India has some 50m English-speakers who could each
earn $20,000 a year--making a total of $1 trillion, twice India's current
GDP--doing "office work proffered across space and time". 

Other predictions are more restrained, but still heady. NASSCOM, India's
main association of information-technology companies, thinks India will
employ 1.1m people and earn $17 billion from what it calls IT-enabled
services by 2008. A report to the Electronics and Computer Software Export
Promotion Council (ESC), a government body, sees the industry's exports to
America growing from $264m in 2000 to over $4 billion in 2005 (see charts). 

Yet India has been doing white-collar work for the rest of the world long
enough to know that reaching targets such as these will not be easy. The
new-born industry is already old enough to have tasted failure. 

"Indian entrepreneurs look at riding the wave," says Sanjay Jain, a partner
in Accenture, a consultancy. Earlier waves were the power industry,
telecommunications and dotcoms. "Now the latest buzzword is IT-enabled
services," he says--what this article will term teleworking. Charismatic
captives 

The first riders of this particular wave have been of two types. One is
"captive" operations of big western companies looking to reduce back-office
costs without outsourcing. The other is more fleeting arrangements between
western clients and subcontractors in India, often brokered by middlemen. 

The first sort, which provide the bulk of employment in the business, have
prospered. GE Capital Services opened India's first international call
centre in the mid-1990s. It now employs more than 5,000 people, whose jobs
range from such relatively simple tasks as collecting money from delinquent
credit-card users to such complex ones as data-mining. Swissair and British
Airways have centres that run frequent-flyer programmes and the handling of
errors in computer messages. American Express has a big back-office
operation near Delhi. 

Such companies often save 40-50% by shifting work from their home base to
India. The savings may grow, because India's telecoms costs, which are
higher than in rich countries, are falling thanks to liberalisation.
Shipping out more sophisticated services could also produce higher savings,
because the salary gap between, say, an American or an Indian accountant is
larger than that between an American high-school graduate and an Indian
college graduate doing the same job. 

Money is not the only attraction. No company will direct white-collar work
to India for long if it does not get standards of service at least as high
as those it is used to at home. Many Indian teleworking bosses claim to
raise service quality. eFunds International, part of a company spun off
from Deluxe, the biggest American printer of cheques, says that in Gurgaon,
a suburb of Delhi, it has cut the number of errors in data processing for
one client by 90%, and also cut the number of days taken to close the
client's monthly accounts from five to three. Rajeev Grover, eFunds' head
of "shared services", says that Indian teleworkers outperform Americans in
similar jobs because they treat them as serious careers, and also because
they are better-educated than their American counterparts, who are often
college drop-outs. 

Shifting office work to India can also provide an opportunity to upgrade
technology and service. Citigroup, an American financial giant, has an
affiliate in Mumbai called e-Serve International, which employs 2,000
people to provide such services as the processing of documentation for
letters of credit and the handling of questions over money transfers.
e-Serve says that the time needed to respond to inquiries about global
money transfers has been "drastically cut". WebTek, a subsidiary of
Germany's Dresdner Bank, plans to use a shift in accounting work from
London to Delhi as a chance to introduce "thin client" technology, which
plucks from a computer only new data needed when a change is made, instead
of always having to pick up an entire screen of data.Insecure independents 

Independent teleworking outfits have had a rockier time than captives. Too
many crowded into the field too fast. One popular offering is medical
transcription, in which companies convert dictation by doctors in America
into written medical records. The report for ESC (conducted by Stevens
International Consulting) estimates that India has 200
medical-transcription firms employing 10,000 transcribers. America sends
enough work to India to employ only 6,000 of them. Bidding for business
through middlemen, India's glut of medical transcribers has driven the
price of a line of transcription from 12 cents to as little as three,
undermining both quality and profitability. Many firms in the business have
gone bust. 

A similar fate awaits some of the call centres that sprang up in the wake
of GE's success. Indian promoters hoped that, by filling a few rooms with
speakers of mellifluous English, and by hooking them up to a bit of
bandwidth, they could scoop up business from the American mid-west, from
Ireland and from other call-centre clusters in rich countries. One
entrepreneur tried to swap his sewing machines for handsets. But few
bothered to set up marketing operations in their target countries, and many
could not convince potential customers that they could do the job. Capacity
use at Indian call centres is "abysmally low," says Mr Jain of Accenture.
He estimates that some $75m-100m of investment is idle. 

There will, however, be life after the shake-out. Stevens expects the value
of outsourcing in America of medical transcriptions to double by 2005 to $4
billion, outstripping capacity. India could take as much as two-thirds of
that increase, providing work to 45,000 transcribers. Similarly,
outsourcing of work handled by call centres (now transformed into "contact
centres" that can handle e-mail, fax and other media as well) is expected
to go to India. Jones Lang LaSalle, a property firm, reports that people
cannot put up fast enough the buildings needed for such centres. 

Into this arena is stepping a new breed of entrepreneur, flaunting
international savvy, management finesse and venture-capital finance. He
does not skimp on bandwidth or any other technology; and nobody can
describe his premises as a data sweatshop. His employees are encouraged to
ponder careers with the company, and might even own stakes in it. He
aspires to the professionalism of a GE or an American Express, but aims to
serve many masters. Messrs Vollenweider and Aggarwal belong to this breed.
So does Sanjeev Aggarwal (no relation), who set up Daksh.com, a contact
centre that now employs 500 people. Yet another is Raman Roy, who left GE
Capital Services to set up Spectramind, which has a similar-sized
workforce. None of these firms is much more than a year old. 

Many of the charismatic captives are themselves joining the ranks of the
independents. eFunds (no longer part of Deluxe) has landed a second client
and is eager for more; e-Serve is scouting avidly. British Airways and
Swissair are selling services outside their groups. All are eyeing the $200
billion of "business-process outsourcing" that Dun & Bradstreet, a
research firm, says is farmed out by companies worldwide. They see no
reason why India should not claim a big chunk of that. 

Mr Roy divides the teleworking pie into five slices, in ascending order of
value: 

* data entry and conversion, which includes medical transcription; 

* rule-set processing, in which a worker makes judgments based on rules set
by the customer. He might decide, for example, whether, under an airline's
rules, a passenger is allowed an upgrade to business class; 

* problem-solving, in which the teleworker has more discretion--for
example, to decide if an insurance claim should be paid; 

* direct customer interaction, in which the teleworker handles more
elaborate transactions with the client's customers. Collecting delinquent
payments from credit-card customers is one example, sorting out computer
snags is another; 

* expert "knowledge services", which require specialists (with the help of
a database). For example, a teleworker may predict how credit-card users'
behaviour will change if their credit rating improves. 

Mr Roy's taxonomy, broad as it is, could be extended to just about any
service that is deliverable over fibre-optic wire. Indian animators are
putting virtual flesh on the skeleton ideas of American film makers. Indian
lawyers are doing research for British and American firms. Indian engineers
are designing construction projects and testing car parts for foreign
clients. At the most rarefied end of the spectrum, Indian scientists are
conducting basic research and development for western firms. In some cases,
the availability of low-cost, high-quality expertise in India could
transform the economics of the industries that they serve. 

Most of the new entrepreneurs are aiming for the higher rungs of the value
ladder, where competition is scarcer, returns are generous, and new
technology does not threaten to make them redundant. Technologies that
enable computers to interpret voice and handwriting, for instance, could
eliminate the simplest "data capture" jobs, such as converting handwritten
documents into electronic form. To avoid being swamped by copycats, Mr
Vollenweider says he is erecting "as many barriers to entry as I can"--one
of which is not to say much about what exactly he plans to sell. 

The sales pitch is similar to that of India's software houses, which have
built an $8 billion business on the quality and price of Indian programming
talent. There are differences, though, which work both for and against
Indian teleworking. One is that, unlike software, where the shortage of
manpower has long been acute (at least until the technology recession took
hold), teleworking has ample scope to increase output, even at the top end.
India "churns out vast numbers of PhDs," says Mr Roy. 

Another is that recession is less likely to hurt teleworkers, and may even
help them. Cuts in IT investment by customers are leaving Indian software
programmers idle. But teleworking firms are offering to reduce the cost of
back-office processes that are indispensable. Thus, while the notoriously
profitless Amazon.com has cut customer-service jobs in Seattle, it has
added positions in Gurgaon through Daksh.com. 

Why, then, are teleworkers collecting merely millions, rather than the
billions that their cousins in software make? People in the business say it
is easy to persuade chief executives of the virtues of doing white-collar
work in India, but rather harder to convert those who must actually execute
the change--"the people whose world you're going to shrink," as Mr Roy
calls them. They find any number of excuses to resist, especially if the
prospective contractor is independent rather than captive.Dead lines 

Excuses are not hard to find. India has a reputation, partly deserved, as a
place where nothing works: the power cuts out and the telephone lines
crackle and die. The services provided by the teleworkers are as exotic to
most Indians as lychees are to most Americans: few Indians have
chequebooks, let alone the 12,000 variations available to Deluxe's
customers. Credit cards are even rarer. 

Then there is confidentiality, a particularly big issue in health-related
services. It is hard enough to keep up privacy standards at home; to trust
strangers thousands of miles away seems to many foolhardy. The issue is not
merely theoretical. Some American medical-transcription firms refuse to
outsource work to India on grounds of privacy, despite potential savings of
up to 50%. 

To overcome the problem, the new breed of teleworkers invest a lot in
reassurance. The office of Spectramind in Delhi, for example, is as slick
as anything in Silicon Valley. Two generators back up the municipal power
supply, and another generator backs up those two. If one telecom line
breaks down, others take over. Sound-absorbent ceiling tiles are imported
from America, and the name tags of Spectramind's workers report their blood
types, in case anybody needs an on-the-job transfusion. 

In the quest for seamless connections with their clients, call centres
often give their staff American pseudonyms and train them to speak like
Americans, a practice that has become something of a national joke (and a
badge of shame, in the eyes of some commentators). The workers at Daksh, a
Sanskrit word that the company translates as "utter preparedness to act
immediately with supreme urgency", sometimes, refreshingly, use their real
names in handling inquiries from customers of their clients. 

The new teleworkers increasingly try to absorb the specific corporate
culture of their clients. Sanjeev Aggarwal, Daksh's chief executive, talks
not of outsourcing but of "co-sourcing". When Daksh signs up a client it
sends over a ten-man team to learn its procedures and study its culture. On
its return, the team becomes the client's "ambassador for driving the
entire work ethic." For example, one person at Daksh "almost reports" to
Bill Price, Amazon's vice-president of customer service, says Mr Aggarwal.
Mr Price agrees. Daksh's Gurgaon centre, he says, "is virtually part of our
operation". 

Fulfilling Amazon-style promises to customers is not second nature for
workers who have probably never shopped online for anything in their lives.
Firms in the business, therefore, train all the time. At Daksh, training is
not part of the "human-resources" function but a department in its own right. 

India is such a tough place to operate in, the new firms argue, that only a
local outfit can deal with the hassles. But many are still poor at
attracting foreign clients. Some are simply not trying hard enough: they
have built up impressive operations at home, but they have so far neglected
to establish strong marketing arms in the countries in which their main
prospective customers are to be found. Former captives such as e-Serve and
eFunds have an edge over the local start-ups. Their international networks
are denser and their pockets deeper, a comfort to clients looking for
long-term relationships. 

Whatever the fate of the individual enterprises chasing it, the pot of gold
is too alluring to be ignored. Consider two examples from outside
mainstream "business-process outsourcing". Crest Communications, a
Mumbai-based company, spent four years and a couple of million dollars
training special-effects artists and building a 40-seat computer graphics
studio for them. To exploit this fully required further investment: the
acquisition eight months ago of an independent Hollywood producer called
Rich Animation, which has produced films such as "Swan Princess". 

Rich/Crest's next feature will be written and dubbed in Los Angeles, but
Crest's animators will do most of the rest, creating the look of the film
from the sketches that Rich sends over. Crest promises savings big enough
to change the economics of film making. "Mad" Max Madhavan, head of
international business, claims that Crest can produce a film like "Toy
Story 2" for little more than half its American cost. 

The acme of teleworking occupies a spanking new building in a technology
park near Bangalore--the John F. Welch Technology Centre, which is to
double GE's research and development capacity within three years. (GE,
incidentally, now employs more people in India than in America.) Less than
two years after opening its doors, the centre employs 600 people, nearly a
third of them with PhDs. GE plans to double that number by October. "The
pipeline of advanced scientists is unlimited," says the facility's
director, Jean Heuschen. 

The abundance is such that GE can deploy 60 scientists on its plastics
business alone. They are available at a cost that makes some projects that
would have failed the profitability test more viable. "Now you have finance
people who like R&D," says Mr Heuschen, with glee and wonder. "All of a
sudden they say, give me more." 

With accolades like this, white-collar work may shift to India even faster
than some forecasters expect. Consider exlService, a teleworking outfit
started in 1999 by Gary Wendt, ex-head of GE Capital. Mr Wendt later became
boss of Conseco, a financial group in Indiana, and soon persuaded it to buy
his Indian firm for $53m. Exl is now doing a roaring business: Conseco
plans to shift 2,000 jobs from Indiana to India, saving over $30m a year.
In America these jobs suffered from high turnover and quality problems over
customer service. If moving to Exl solves these problems, as well as saving
money, other American companies seem sure to join the stampede that is
turning India into the world's back office.