Remote services face threat

PUBLISHED : Wednesday, 03 July, 2002, 12:00am
UPDATED : Wednesday, 03 July, 2002, 12:00am

Lloyds TSB, one of Britain's biggest High Street banks, plans to follow other British firms by moving some back-office operations to India, South Africa or China. Like so many firms in the west, Lloyds TSB is motivated by the huge savings it stands to make.

Normally, this kind of news would have had Indian companies working in information technology-enabled services (ITES) or business process outsourcing (BPO) jumping up and down in anticipation.

ITES and BPO are the contracting out of IT-intensive and administrative work to countries such as India, Thailand or the Philippines where labour and other costs are dramatically lower than in the West. Management consultants estimate that Western firms stand to reduce their costs by between 30 and 40 per cent per annum by outsourcing, which is why several United States companies such as GE Caps and American Express are already in India.

But the news comes at a time when fears of war between India and Pakistan have dealt a severe blow to Indian dreams of becoming a hub for BPO and ITES. Although the threat of imminent war has receded, both countries still have one million soldiers massed on their border and the international community remains unconvinced that the worst is over.

The panic in Western capitals triggered stark travel advisories from governments urging their nationals to leave India and prompted an exodus of sorts. The advisories have been amended recently to recommend that nationals already in the country need not leave but should closely monitor the situation. But travel to India is still being discouraged unless absolutely essential.

Multinationals tend to think twice before moving their back-office operations to a country which regularly teeters on the verge of war.

'This has delayed business,' says Kiran Karnaik, president of the software industry association, Nasscom. 'If the travel advisories are not revoked in the next two to three weeks, the industry could be in serious trouble.'

The main difficulty is orders being put on hold. 'A couple of potential partners have decided to look at other countries as an alternative,' said Raja Natesan, vice-president sales and marketing of Interglobe Enterprises, a company that works with some of the world's leading airlines. 'So our loss will be a gain for countries like China, Thailand or the Philippines.'

Other companies have postponed the opening of new call centres. Raman Roy, president and chief executive of Spectramind e-Services, said that while he has had no cancellations, some of his plans had been deferred. Mr Roy, an old ITES hand who has worked with GE and American Express, started Spectramind two years ago on a bullish note but is anxious about what may happen if the war clouds do not evaporate soon.

The industry began on a very promising note, chalking up sales of US$600 million over the last three to four years. It still holds tremendous promise. A recent Nasscom-McKinsey report projected a 45 per cent annual growth rate over the next five years and employment for over one million Indians. The optimism is based on three tremendous advantages: educated (usually graduates) English-speaking manpower, good quality work and very low costs of production.

The same study said US firms typically added between US$20 million and US$40 million to their annual profits by contracting their back-office work to India. Many US corporations have shifted their entire customer service operations to Indian call centres. Thanks to technology and the time difference between India and the US, a US customers' queries can be answered even in the dead of night by an Indian trained to speak in an American accent and chat knowledgeably about the latest baseball results.

But now there is a real possibility that India's biggest competitor this year, the Philippines, with equally low costs, will walk away with the business opportunities. Lloyds TSB has not settled on India, it is merely one of several options. If it chooses India, it will be following in the footsteps of British household names such as health-care provider BUPA, HSBC and Barclays. British Airways has been using Indian companies for some years to process its ticketing.

If India and Pakistan resume their normal (that is to say strained) relations, outsourcing to India should flourish. Experts say the future trend will be the outsourcing of the whole process rather than a single function. Firms will outsource the whole human resources department instead of only their payroll functions. Then, as Indian capabilities develop and Indian companies mature, they will move up the value chain.

'We have to move on from checking someone's bank balance and answering someone's call to high-end work like sophisticated accounting work,' says Mr Karnik. 'The best areas of the BPO market are still emerging.'

While they emerge, companies are scanning newspaper headlines for signs of a thaw between India and Pakistan. If the US and Britain fail to cancel their travel advisories soon, the industry will see its fortunes plunge.