Introduction
The ideas driving IT Enabled Services (ITeS) are as old as organized business itself and have appeared throughout history in various forms. Outsourcing involves the transferring of certain value contributing activities, processes and/or services to outside (or the agent's) premises motivated primarily by cost saving considerations and/or a desire to focus on what one knows and does best on part of the principal. Existing studies on ITeS have largely tended to focus on a macro-level picture of India as a whole (CII-KPMG 2000; Nasscom-Mckinsey 2001) while deliberating on the opportunities and constraints at a national level.
From the large body of extant literature on the imperative to outsource, the following reasons come out very clearly: (a) cost reduction (b) core competence focus (c) flexibility while retaining control, and (d) competitive advantage through strategic outsourcing.
Outsourcing also represents certain risks to the firm. Many managers are also concerned about a loss of control over their transactions if an outsider handles them. In the BPO industry, this might come about as concern over confidentiality of information and data security (Economic Times, June 30, 2003). Very recent reports indicate that the government of India, in order to allay these concerns, is now considering legislation to bolster the legal framework (Economic Times, July 04, 2003). All transactions that can have serious effects on customer sales or relations have to be evaluated carefully before they are outsourced. That concern aside, however, many outsourcing arrangements actually provide better performance measures than in-house systems provide. This works even in case of off-shore captive BPO units. (Economic Times dated July 01, 2003). It is easier to hold an outsourcer to the promised benefits than it is to replace an internal staff. It also should be easier to get better information from a new system (Ochs and Parkinson, 1998).

The BD-Ops Dichotomy
From the ITeS point of view, the remoteness of the client, the outsourcing of business processes and functions to firms in another far-away country heightens risk-perception and client acquisition for the ITeS firm becomes a major task all by itself. The business development function of an ITeS firm focuses on giving assurance (as a synonym for risk mitigation) as its principal task. It is in this context that we discuss the current situation and develop possible future scenarios. There are indications that it is possible to propose to aggregate all primary value activities of the ITeS value chain into two distinct functional classes viz. Business Development capability (hereafter referred to as BD) and Operations or Execution capability (or 'Ops' in short).
We develop propositions about the characteristics of the BD and the Ops functions in Indian ITeS/BPO firms on the basis of three case studies of (relatively) small, independent call-centers in Hyderabad city (done through 2002) and we develop a framework for the study, to analyze the emerging industry structure in the increasingly diffuse ITeS market in India by using the inputs generated from the analysis of the three firms case-profiled.

Study Framework
For starting up any venture, the generic initial resources required are capital, technology and capabilities or competencies (primarily people-based resources). In the ITeS context, we propose to classify them as (i) Business Development and (ii) Execution or Operations competencies. The primary resources for building execution capabilities are capital and technology, apart from people based resources. The building of execution capability requires investment in operations infrastructure, and in turn heavily depends on the intended or planned extent of operations in scale terms. The scope for variation in the complexity of the task outsourced and level of expertise required for the execution is enormous, depending on the Functional Value Captured (FVC).
In the ascending order of value, the teleworking pie can be divided into five slices (originally suggested by Raman Roy, founder of Spectramind) (Economist 2001).
1. Data entry and conversion, which includes medical transcription.
2. Rule-set processing, in which a teleworker makes judgements based on a set of rules set by the customer.
3. Problem solving, in which a teleworker has more discretion; the rules here are fluid and less amenable to structuring than in the rule-set processing genre.
4. Direct customer interaction, in which the teleworker handles more elaborate interaction with the client's customers. Services here could include support and maintenance and payment collections.
5. Expert "knowledge services", which require specialists (with the help of a database)
'Teleworking' as described above is amenable to any definition of ITeS involving remote processing services of information (data, voice, images, multimedia). The Economist (2001) describes the categorization above as extendable to 'just above any service that is deliverable over fiber-optic wire' and this is intuitively understandable as well. The concept of FVC in turn brings up the issue of marketscope, which we define as the degree of vertical or horizontal competitive scope (Porter, 1985) a particular player operates in. FVC also directly influences the returns available from performing an activity (higher the FVC in performing an activity, higher the margins) and the potential for growth in that segment of the value ladder. We propose returns, market scope and growth potential as determined by FVC as being the three major measures of firm performance derived from this model.
Operations (Ops) capability may also influence the size of a particular ITeS concern. Some of the cost drivers in Porter's value chain used for cost analysis viz. economies and diseconomies of scale, patterns of capacity utilization, interrelationships, learning curve effects, policy decisions and the degree of integration provide insights into how firm size is affected by these cost drivers (Porter, 1985). Based on the above, the study framework is built around Figure 1.

FRAMEWORK USED FOR THE STUDY

Methodology & Cases
This study is exploratory and the object is not to test particular hypotheses but to contribute to an understanding of the emerging ITeS scenario in India and ultimately towards theory building. The nature of the study is inductive and hence particular care has been taken in the selection of the firms.
All the firms studied are Hyderabad based. The first firm, Birla-Global Call Center, is a joint venture between the BK Birla group and a first generation entrepreneur Vijay Raghavan. The second, Frontlinesoft is the telemarketing call center offshoot of a software firm of the same name and is managed by a professional president on behalf of the promoters. The third, Apollo Health Street (AHS) is the ITeS venture in the medical vertical of one of India's largest private health services groups. The profiles of the firms studied are as given above and we present directly the analysis of the cases.

ANALYSIS OF CASES
The Call-centers - Birla Global and Frontlinesoft
For both the call-centers, neither capital nor technology seems to have been any obstacle. Both started with a focus on building pure operations capability - constructing facilities and infrastructure. When both started in 2000-01, the prevalent model for getting contact-center business for small firms was to approach marketing intermediaries who had telemarketing campaign contracts to give, and both followed this.
Both call-centers are looking at ramping up capacity in an effort to gain critical size. Both are engaged in attempts to move up the value chain in terms of FVC (we note here the offers to partner potential clients in the lucrative and stable-revenue generating inbound ITeS by both firms) and both are attempting to set up a direct line to the end-user client hoping to bypass the layers of intermediaries. Both believe that there is not much to gain by specializing into verticals at their current scale of operations but are looking towards a vertical focus in the finance space post-expansion into the inbound ITeS segment. Both are clear that the horizontal market-space in which they currently operate would be preserved to take on any project they may get outside their vertical.
It is important to note that these intermediaries represent the pure BD segment in our classification. The bargaining power of call-centers vis-à-vis buyers (in this case the intermediaries and further up the chain end-user clients) is extremely low. These small call-centers set-up by local entrepreneurs are held hostage by the various layers of intermediaries between the call-center that actually executes the contract and the client who issues the contract. These intermediaries are typically marketing representatives or sub-representatives of the client (Their need to have specific industry knowledge for success is discussed later). The billing paid for by the client too is routed through this long-winding route and many a time the call-center puts up with payment delays and ends up getting a meager portion of expected revenues. There is a need to scale up operations to take advantage of scale economies both in terms of cost and bargaining power. The initial rush of entrepreneurs, lured by the promise of high returns, into the call-center business created excess capacity in the industry and prices automatically came under pressure.
As far as the risk perception of west-based clients is concerned, utilizing the services of such Indian call-centers for outbound telemarketing jobs seemed to be a win-win deal for them. Not only would the client be able to realize drastically lower costs (than if the same job were done in the west) but also completely de-risk his payouts since payments were made only on a commission per sale basis. So even if the call-center failed to make any sale, the client would lose nothing, paying only for confirmed sales made.

On the other end, for the call-centers, this situation turned out to be a classic chicken-and-egg situation. They would have to commit capital, invest in infrastructure and technology, pay staff salaries and other operating costs, and get the call-center up-and-running first. Only then could they even pitch for business. Business, as and when it did come, was of the short-term job/project-based variety, which would exhaust itself after a few weeks or months. This again, underlines the significance of size in the survival and growth of firms in the sector. (Economic Times July 30, 2003)
Case analysis - Apollo Health Street Limited (AHSL)

Call flow diagram for a typical call-center

This firm in its initial actions and in its strategic intent fits our definitional classification of a BD + Operations player. AHSL first setup a US marketing and liaison office. The focus here is on leveraging the established brand name of Apollo hospitals group (as India's leading and the oldest corporate healthcare service provider) in the healthcare vertical and bag inbound ITeS contracts while simultaneously developing the necessary infrastructure or managing leased/partners' facilities to begin business from (Economic Times July 26, 2003).
AHSL is intent on acquiring to execute in-house the high value, discretion-requiring expertise oriented ITeS activities (High FVC) while it is in turn likely to manage and supervise (another form of subcontracting out the operations facilities and infrastructure) the low discretion requiring healthcare ITeS work from either its own or partners' facilities. Extremely low FVC work like medical transcription is not on AHSL's active agenda.

Discussion
It is clear from the above analysis and the Table 1 that the classification (functional or organizational) of businesses in the Indian ITeS arena into BD-space and Operations-space depending on the capabilities developed and residing in any firm is a strong pointer to its performance (in terms of returns, growth and market scope) and even its likely survival (in terms of minimum viable size required). The cases of the call-centers (both outbound ITeS Operations players) demonstrate the size imperative and the inherent tendency to move towards the space that offers better returns (namely the BD function in either its pure or hybrid forms).
Analysis of the cases has identified a definite trend for the industry. We will now develop and generate propositions.

Comments, Predictions and Inductive propositions
We identify three broad trends and inductive reasoning leads to a variety of propositions under each of them.

Impact of growing competition
At the bottom rungs of the ITeS value ladder -'Data entry and conversion' and 'Rule set processing'- Ops involves low discretion, high labor 'sweatshop' activity and hence there arises no need for any vertical focus at this level. The principal driver for outsourcing firms ('clients') here would be cost, which translates into pricing pressure. The single most important tactical reason for outsourcing is to reduce or control operating costs. Access to the outside provider's lower cost structure is one of the most compelling short-term benefits of outsourcing (Antonucci and Tucker, 1998). The Pure Ops players who occupy this space will soon see an oversupply in the market and lowering prices (Economic Times, August 03, 2003).

The authors believe this is a likely scenario as (i) entry barriers are (relatively) low, (ii) the market appears attractive (in that it purports to offer high rates of return to players in mature or declining businesses looking to diversify) and (iii) a player, once in, faces sizable exit barriers (owing to durable and specialized assets invested in). The capital required to set up a medium size 108-seater call-center facility would be about Rs. 80 million worth of upfront investment and though this is a sizable amount from the view point of a small single entrepreneur, the funding options available in terms of VC and angel investor funding make it a surmountable barrier.
There are parallels to such a development in other industries as well - The Indian software industry saw a glut of supply during the heady technology boom years and was saddled with excess capacity immediately after the crash. Then began the inevitable downward pricing pressure from clients and the smallest players were the most affected. The resultant price pressure is faced not only by third party BPO service providers but also increasingly by captive BPO units, as demonstrated in a report from the Economic Times (July 01, 2003). Drawing lessons from the concept of Product Life Cycle (Kotler, 1991) we notice similar patterns in other industries as well during the shake-out. Summing up these ideas the first proposition is now discernable.
Proposition 1: Players in the (horizontal focus) pure Operations market-space will face an oversupply situation and the subsequent lowering of prices and margins.
All the 3 case firms are on an aggressive expansion spree. Current average size of sub-100 seats is seen as unviable. Consensus exists among them on a much higher minimum profitable size (varying from the 300 to the 450-500 mark). Bigger size comes with its generic advantages - attractive as acquisition target, greater bargaining power vis-à-vis buyers, easier to build and maintain redundancies in assets and labor - and some industry-specific ones as well. Clients are insistent on seeing proof of (financial) stability of the Ops players, an assurance that the Ops player will continue to be in business for the length of the project. Bigger size helps build credibility in this regard and can be taken as an important signal criterion (Porter, 1985).
The outbound call-center industry is working capital intensive and industry insiders estimate a minimum of 3 months of working capital being ready in hand to run this business relatively smoothly without financial jolts. Small firms face more problems than do big firms in such an unstable scenario as they are reliant on fewer clients and any default or delay in payments by any of these clients would hit them hard.
It does seem likely that all extant serious players in this sector are looking to ramp up capacity. Those that cannot must count on exiting the business as their small size in the Ops area makes business development that much more difficult and the business therefore unviable in commercial terms. These ideas are presented as:
Proposition 2a: Size would be the critical determinant for firm survival for Pure Operations players.
When a firm outsources processes it used to perform in-house, it in effect creates 'an extended organization' where traditional firm boundaries, stretched across separate business entities for the performance of a single function, begin to blur. Though bringing with it cost advantages and opportunities, the extended organizational form also brings its share of challenges and risks. It is for this reason that demonstrated execution competence in service providers would rank high on any outsourcer's agenda. Through close contacts and networking, service providers are able to assess and address outsourcer concerns, provide credible assurances and mitigate risk to a greater extent than would have been possible in the absence of close-knit business relationships.
The top-management view of all the firms profiled is that in a vast majority of cases, preexisting relationships with the client, contacts within the client firm and firm presence onsite with at least its marketing representatives and liaison offices there help broach new business opportunities.
Proposition 2b: Networking abilities and relationships are critical success factors for pure BD players.
Big corporate players are entering the ITeS arena by building physical infrastructure (either through fresh capital investments - e.g. Reliance Infocom's upcoming facility at Vashi - or through acquisitions e.g. Wipro-Spectramind) as well as setting up their own marketing and sales networks - using personal contacts, client relationships developed from their other businesses, setting up liaison offices in target countries (chiefly the US and the UK) - and thereby attempting to straddle both the BD and Ops positions in the ITeS value chain. Indian BPO firms are setting up overseas arms for exclusive BD work. (Economic Times July 25, 2003).

Big western consulting majors are entering the BD + Ops arena in a big way. The biggest of them have been profiled below (Forbes, 2002).
— Accenture is applying its consulting skills and shifting resources to BPO, which represents some 20 percent of deals in the pipeline. Besides finance and accounting, it also offers CRM, HR and logistics services.
— Clientlogic is best known for managing call-centers. It is increasingly handling multiple customer transactions and interactions for clients like National Geographic, Logitech and TiVo, from order to fulfillment to follow-up. The privately held company, with $384 million in sales, operates 46 facilities in nine countries and serves customers in 19 languages. It is opening its first offshore call-center in India later this year to serve U.S. customers even more cost-effectively.
— Convergys is one of the biggest ITeS providers in customer service, billing and employee care, mainly to wireless phone, cable and Internet service providers. Convergys has 80 percent of the telecom outsourced billing market. Its 45 call-centers make more than 1.7 million customer contacts each day. Its big push now is into HR benefits administration for customers like Honeywell, Pfizer and the State of Florida, with which it just signed a $280 million contract.
Amongst the above firms, Accenture's India Solutions center in Vashi, Mumbai is a separate entity though fully owned by Accenture. We notice that even with Indian software firms branching into ITeS services, the ITeS arm is typically a separate functional and often a separate legal entity. We have seen that the BD function, aided by intangibles such as personal contacts and networking, is harder to establish and hence has its margins protected. Operations, on the other hand will increasingly go the computer hardware way - commoditized with falling prices. ITeS firms in the BD + Operations space, therefore, will seek to focus management time and attention more on developing further the BD function than they will on operations. There would be no incentive to keep operations completely in-house and part of the same business entity. The imperative for BD + Operations players then would be to hive off operations as a separate business entity, part of which may also be sold in the public equities market, while focusing exclusively on BD. Therefore:
Proposition 3: The (big) players occupying both BD and Ops positions will attempt to bifurcate the BD and Ops activities into pure BD and pure Ops.

Specialization
Both the call-centers see themselves as specializing in the financial services outsourcing vertical post expansion and stabilization of their current operations. This is driven by the belief that a vertical focus (while certainly retaining horizontal Ops capability) will lead to more stable and relatively longer term business with clients, greater opportunities for repeat business and higher margins as the firms move up the FVC ladder. The business press too has already noticed and reported on this trend. (Economic Times June 16, 2003).
A second reason could be, and all 3 firms agree on this, that new entry into the Ops space will continue till such time that industry-wide consolidation happens. The main factor motivating fresh entry is that start-up Ops capabilities have come to become (or will soon be) purchasable commodities in the market today in terms of (a) Technology required (b) floor management skills and (c) staff skills. A number of cash-rich firms looking for attractive investment possibilities are seriously considering the call-center idea. This threatens to create an oversupply situation at the Ops end of the market and bring prices under pressure.
Proposition 4: The pure Ops players will attempt to move up the value chain and will try to gain a vertical focus as a protection against oversupply and for premiums, relationships with BD firms and clients.
The two call-centers have been attempting to, or at least are inclined to, bypass as many layers of BD intermediaries as they can. Both call-centers also look at specializing into focus areas - verticals - as an aid in this direction. We think that clients (outsourcers), knowing that the risks of outsourcing are high, will look to outsource their business processes to players who demonstrate adequate, if not deep, understanding of the client's industry. We believe such vertical expertise will form an important signal criterion (Porter, 1985) for BD players looking to acquire business from clients. Further, such expertise may heighten entry barriers into the BD field.
Patni Computer Systems for one has acquired The Reference Inc., a 44-employee Boston financial services IT firm, and now has its own offices in Boston and is further expanding its hub in Massachusetts. The emphasis here is on acquiring the employees who are specialists in the financial services through IT area for use in Patni's outsourcing business. (Economic Times July 30, 2003).
Proposition 5: All client-contact BD players will need to have in-depth knowledge of the client's industry vertical for carrying out the BD function.

De-layering
As shown in Figure 1, there are a number of layers of firms existing between the outsourcer and outsourcee. This reflects knowledge deficiencies and is part of the evolution of the industry. As the ITeS industry in India grows and matures, the numerous layers of intermediaries would become too unwieldy to be viable. Improved awareness about outsourcers and outsorcees will bring them together, thanks to Internet and better communication facilities. End-user clients too would get more comfortable in dealing with, at most, one or two BD players who in turn would negotiate relatively stable business with pure Operations firms that would attain minimum critical size.
Proposition 6: In the pure BD space also, consolidation will happen. Existing layers/levels of intermediaries is unwieldy and unviable. Consultancy and contractual supervision are value-added activities that pure BD may get into.
Software firms see ITeS Ops as a related business; many other corporate houses are also diversifying into ITeS Ops. For software firms, ITeS is a natural extension of sorts, sharing some similarities in execution capabilities required. But more than operations capability, it is the business relationship built with western clients over the years in the software services arena that these firms will seek to leverage. BD being a more difficult-to-establish and difficult-to-replicate function than operations, and since ITeS operations share similarities with software execution competencies, most software firms entering ITeS are likely to occupy the BD + Ops space.
Proposition 7: Entry by software service firms into the BD + Ops space will be higher than by any other sector due to the perception of ITeS and software being related businesses.

Inferences
To conclude, the Indian ITeS scene is likely to undergo some changes. Successful firms will focus in specific quadrants as shown in Figure 3.
The three major strategic options facing a serious player in the ITeS arena in India are shown in figure 3. The four quadrants represent positions a firm could occupy in the ITeS market. After examining the characteristics of each of the quadrants, we delineate our view of the market's evolving future.

Most small players enter either Quadrant 1 or Quadrant 2. Their survival chances are negligible in Q1. This is the position serviced by pure Ops players (High Ops, Low BD). These players will tend to move towards the BD + Ops space (Q3) by developing some vertical expertise and expanding to minimum efficient size. Players that are unable to achieve either minimum viable size or development of strong BD capability will get caught in an oversupply-low margin-commodity situation and we postulate that most will perish. For the players who do manage the transition successfully to a high BD-High Ops position (Quadrant 3), the next logical step in firm evolution would be to strengthen the more profitable and less amenable to commoditization BD capability. Large corporate players (especially the established software firms) are likely to enter this space directly by leveraging past client relationships for their BD capability. They may build their Ops capabilities to critical size at entry itself either by constructing Greenfield facilities (Infosys, Satyam) or by acquiring Ops players (Wipro-Spectramind) leading to market consolidation at this level.

We have further postulated that all the players occupying Quadrant 3 will have an inherent tendency to move towards the Pure BD position (represented by Quadrant 4) by either hiving off or otherwise distancing their Ops arms into separate entities. Separate entities here implies a functional segregation of the two arms that have different cost and activity drivers even though technically, the two arms may yet be part of one legal entity. The future of the market thus seems to favor equilibrium positions in Quadrants 2 and 4 (Pure BD and pure Ops respectively). Though there will always be some firms in Quadrant 3, they will always be under pressure to split their arms and move them into Quadrants 2 and 4.

Sudhir Voleti is faculty member at the ICFAI Business School
Kavil Ramachandran is Professor of Entrepreneurship at the Indian School of Business

References
• Antonucci, Yvonne Lederer & Tucker III, James J. 1998, IT outsourcing: Current trends, benefits, and risks. The Executive's Journal 2:p16
• "BPO firms setup overseas arms for India Roadshows", The Economic Times, July 25, 2003.
• "BPOs may hang up on inbound telemarketing", The Economic Times, July 30, 2003.
• Bureau, The Economist, 2001, Outsourcing to India. The Economist: 61-63, Issue dated 5th May.
• "Captive BPO units face price pressure", The Economic Times, July 1, 2003.
• CII-KPMG report on ITES, 2000 & The Nasscom-McKinsey Report, 2001.
• Forbes. 2002. Business Process Outsourcing, 170, 5:6.
• "Healthcare sector finds BPO pill a heady mix", The Economic Times, July 26, 2003.
• "Keeping the flock together", The Economic Times, June 29, 2003.
• Kotler, P. 1991. Marketing management: Analysis, planning, implementation, and control. (7th ed.). Englewood Cliffs, NJ: Prentice-Hall.
• McWilliams, Abagail & Smart, Dennis L. 1995. The resource-based view of the firm: Journal of Management Inquiry, 4,4: 309.
• Ochs, Joyce R., Parkinson, Kenneth L. 1998. Outsourcing: will it work for credit? , Article in Business Credit, Sep98, Vol. 100, Issue 8.
• Palepu, Krishna & Khanna, Tarun. 1997. Why focused strategies may be wrong for some emerging markets. Harvard Business Review: 41-49, July Aug. 1997
• "Patni plans BPO hubs abroad, to hire 2000 in '03", Economic Times, July 30, 2003.
• Porter, Michael E. 1980. Competitive Strategy: Techniques for analyzing Industries and competitors. New York free press.
• Porter, Michael E. 1985. Competitive Advantage. New York free press.
• Quinn, James Brian & Hilmer, Frederick G. 1994. Strategic Outsourcing. Sloan Management Review, 35:43-51.
• "Rising no. of small companies hit BPO bottomlines", The Economic Times, August 3, 2003.
• "Security concerns in US haunt BPO firms", The Economic Times, June 30, 2003.
• "Specialise or the big boys will eat you up", The Economic Times, June 16, 2003.
• "US, EU security concerns high on draft data legislation", The Economic Times, July 4, 2003.
• "Markets and Hierarchies: Some Elementary Considerations", American Economic Review, May 1973, pp.316-325.