Conventional business wisdom regards most government officials and bureaucrats as obstacles who get in the way of market forces. But a politician and his lieutenant get much of the credit for making the Indian city of Hyderabad a major global center of business process outsourcing (BPO) — the booming practice whereby companies farm out tasks such as call-center operations, billing and claims processing.


As the chief minister of the Indian state of Andhra Pradesh, N. Chandrababu Naidu has pushed hard to modernize the largely rural region of 76 million people through information technology and business-style government practices. About a year and a half ago, Naidu — the equivalent of a U.S. governor — established an agency specifically charged with nurturing the BPO industry. He named one of his special secretaries, Randeep Sudan, as its “CEO.”


Their efforts have resulted in a curious blend of socialism and capitalism in Andhra Pradesh (AP). Even as state officials continue a significant rice subsidy for the poor and invest public land in office park developments, they have pared back labor regulations to lure businesses. But the blend of free market reforms and government interventions is paying off in the form of a fast-growing BPO industry. Revenue for BPO firms in the state soared more than 300% in the nine months ended December 2002, to $247 million. The industry employs about 15,000 workers in Andhra Pradesh, mostly in Hyderabad.


Naidu’s leadership has earned him a high media profile. He was named “South Asian of the Year” by Time Asia and one of 50 Asian leaders at the forefront of change by Business Week magazine. What’s more, the performance of both Naidu and Sudan was praised in a study last August by Nasscom, an Indian trade group representing information technology companies and BPO providers — which are also known as IT-enabled services (ITES) companies. Nasscom ranked Hyderabad as the top destination among nine Indian cities for ITES companies, with the city taking first place in the sub-category of “policy initiatives.”


Nonetheless, Hyderabad and its public leaders are not perfect. Nasscom said the city’s BPO operations do not span all industries and suggested Hyderabad’s public transportation system be improved. Other problems include the local accent, lack of an international airport and environmental challenges despite beautification efforts. “The pollution in AP is not as bad as other major (Indian) cities, but is still extremely bad,” says Anne Rockey, country manager in India for professional services company Deloitte Consulting. “Everybody litters. There is no concern whatsoever for the environment.”


High Ambitions

Naidu and Sudan are working on flaws in the region, and they say they’ve just begun when it comes to BPO in their state. “We have very high ambitions for AP,” Naidu says. “We are gearing up to capture 50% of all business that’s likely to come to India and are targeting approximately 500,000 jobs in this sector by 2008-2010.”


The Andhra Pradesh leadership has latched onto a promising trend. BPO services provided from lower-cost areas such as India and China are becoming attractive to corporations in the United States and Europe. Market research firm Giga Information Group estimates BPO in India will grow by at least 65% this year. According to Giga, India’s BPO sales were $1.5 billion in 2001. Nasscom, meanwhile, has forecast India’s revenue from ITES to rise more than 20 times to $16.9 billion by 2008, capturing more than 10% of the global ITES market. The trade group also predicted that employment in the Indian ITES industry could reach 1.1 million by 2008.


Off-shore BPO in India has emerged in just the past few years, following on the heels of the country’s success in providing overseas clients with IT services such as software development. Not surprisingly, much of the BPO industry initially located in the city sometimes referred to as the Indian “Silicon Valley” — Bangalore. Other centers of BPO activity are Mumbai (formerly Bombay) and the New Delhi region.


But those three BPO strongholds are facing competition, Nasscom’s president Kiran Karnik said last year: “Cities such as Hyderabad and Kochi are emerging as attractive ITES destinations primarily due to rapid improvements in infrastructure (power, international bandwidth and urban transportation) and lower manpower costs due to lower cost of living and lack of alternative employment opportunities in these cities.”


Hyderabad, a city of some 3.6 million, already boasts a number of prominent BPO organizations. One is HSBC Electronic Data Processing. An example of a “captive” business processing facility, HSBC EDP provides data processing and customer service for the overseas operations of London-based financial services company HSBC. Other global players in Hyderabad are Deloitte Consulting, financial transaction processor ADP Wilco, and CapMark Overseas Processing India, which provides back-office work for its parent company, GMAC Commercial Mortgage company. 


Nipuna Services is a home-grown BPO provider in Hyderabad. It started operations this year. Hyderabad made sense because Nipuna’s parent company, IT services provider Satyam Computer Services, already was located there, says S.V.L. Narayan, Nipuna’s head of marketing. But he added that government leaders have been strong advocates for business. “The government of Andhra Pradesh has been very proactive in providing assistance to companies setting up operations here,” Narayan notes. “The (Chief Minister) personally came to inaugurate our facility on October 17, 2002 and spent a lot of time with us discussing the potential opportunity for BPO business.”


AP’s government officials also are highly regarded by Rockey of Deloitte Consulting, which has more than 600 employees in Hyderabad offering services in areas such as finance and accounting and international taxation. “They cut through the ’red tape,’” Rockey says. “The Chief Minister holds the government employees accountable. He listens to the corporate sector, asks for areas of improvement, and asks us to rate his performance.”

Quintessential Politician

Communicating is a key skill for politicians, and Naidu is in some ways the quintessential Indian politician. His father-in-law, the late N.T. Rama Rao, was a film star who later founded a political party and served as the chief minister of Andhra Pradesh. Naidu, 53, was elected to the Andhra Pradesh Legislative Assembly in 1978, held various government roles and eventually became chief minister of the state in 1995.


Over the course of his career in public service, Naidu has found a way to connect with both common citizens — 69% of Andhra Pradesh’s residents live in rural settings — and technology and business leaders. To help reach the former, he takes part in a television program every Monday called “Dial Your Chief Minister” in which citizens voice their problems to him. Naidu’s focus on India’s high-tech future, though, led him to co-chair a national task force on IT, where he proposed steps to dismantle the country’s telecom monopoly. Aside from his awards from Time Asia and Business Week, he’s been labeled “IT Indian of the Millennium” by India Today magazine, “Business Person of the Year” by the Economic Times, and named as a member of the World Economic Forum’s “Dream Cabinet.”


Naidu was an early believer in the BPO industry’s prospects. “Hyderabad was not on the BPO landscape of the world,” he recalls. “In the late nineties, we identified this as an emerging growth opportunity for India and for the state of Andhra Pradesh.”


Andhra Pradesh’s economic policies under Naidu’s watch have been an eclectic mix. On the one hand, the state has curtailed regulations in free market fashion. For example, Naidu’s government amended state law to allow ITES companies to employ women and young people aged 18 to 21 during the night shift. The government also waived for ITES firms a rule that an employee must be given overtime pay after eight hours of work on a given day, as long as the employee doesn’t work more than 48 hours in a week.


What’s more, Naidu’s administration has declared the ITES industry an “essential service” — meaning that workers at BPOs, like those in industries such as milk production and water supply, do not have the ability to strike.


Workers’ Rights
Critics contend that such policies erode the rights of workers.
Sudan, though, says the BPO industry qualifies as “essential” in Andhra Pradesh, since so many jobs in the region depend on companies in the sector running smoothly. And he says there’s been little opposition to the overtime waiver and related reforms. “The (overtime rule) amounts to providing more opportunity,” he says. “People have been by and large very supportive of these initiatives.”


Sudan adds that relatively high-paying wages in the BPO sector will have what economists call a “multiplier effect” in the economy. As BPO employees spend money on such items as clothes and housing, additional jobs are supported. “It does trickle down to the poverty groups,” he notes.


One reason the populace seems to be buying this argument may be that the government shows it cares about the least fortunate in another way. Andhra Pradesh is one of the few states in India that subsidizes rice, Sudan says. Poor people pay 5.5 rupees per kilogram of rice, while the open market price ranges from 9 to 17 rupees per kilogram, he says. According to Sudan, the subsidy helps explain why the state’s poverty rate is 12% to 13%, lower than in most regions of India.


The rice subsidy isn’t the only sign of an activist government in Andhra Pradesh. Other interventions are more directly tied to the ITES industry. A key one was the creation of the APFirst organization about two years ago. Technically known as the Agency for Promoting and Facilitating Investment in Remote Services and Technology, APFirst’s mission is “to make Andhra Pradesh the world’s preferred Business Process Outsourcing / Information Technology Enabled Services (BPO/ITES) destination”. APFirst’s strategies include ensuring the easy availability of trained manpower, supporting the BPO industry through regulatory changes, assisting in the development of infrastructure such as telecommunications and office space, and marketing efforts.


Sudan says the state’s most critical policies have been in the areas of training and infrastructure. When it comes to office facilities, for example, the government has been instrumental in the creation of a business park in Hyderabad named HITEC City that is slated eventually to provide 5 million sq. ft. of office space. At least 1.4 million sq. ft. of office space have been built. The government provided land for the office park and serves as a joint-venture partner in the project.


Andhra Pradesh public officials also have taken a lead role in making sure high-bandwidth telecommunications links are in place. Sudan says the state was the first in India to provide free right-of-way land for laying fibre optic cable. Several telecom companies, including Reliance Infocom and Bharti Telecom, have laid thousands of kilometers of fiber in the past few years, and the state now claims to have the highest density of fiber optic cable in the nation.


Andhra Pradesh officials negotiated directly with telecom players to secure discounts for local businesses. Reliance Infocom, for example, offers BPO firms in the state rates reduced by 30% to 70%. “These (telecom companies) are now getting into smaller cities and expanding their networks,” Sudan says.


Reliable electrical power — still lacking in parts of India — also has been a policy focus. One priority has been making sure BPOs can rapidly set up redundant connections to the state power agency. BPO office parks and facilities also are exempt from regular power outages that affect the rest of the state. HITEC City boasts uninterrupted power thanks partly to diesel generator back up.


When it comes to worker training, Andhra Pradesh scored a victory when the Indian School of Business located in Hyderabad in 2001. Formed through a partnership with the Wharton School, the Kellogg School of Management at Northwestern University and London Business School, the institution offers postgraduate and executive programs. The presence of the Indian School of Business was one of the key factors in CapMark’s decision to choose Hyderabad over Bangalore and Chennai, according to Barbara Miguez, Country Manager for CapMark Overseas Processing India. The CapMark facility opened its doors last September.


Andhra Pradesh officials also helped start the International Institute of Information Technology (formerly Indian Institute of Information Technology) in Hyderabad in 1998. The IT-focused institution stands out for its “corporate schools” on campus, where companies such as IBM, Motorola, Oracle and Satyam teach courses.


Training Programs

Andhra Pradesh officials also launched an ITES training institute. The training program has two tiers, with the first focused on improving students’ basic English language capability. The second tier concentrates on specialized skills for ITES, with elective courses in areas such as HR training, payroll processing and insurance processing.


Other state policies geared toward the BPO industry include financial incentives and what might be called “quality of life” efforts, such as encouraging food and entertainment chains to set up shop in Andhra Pradesh. Naidu, Sudan and Co. have even tackled gardening. The state has increased the amount of green cover in Hyderabad from 7% in 1999 to 19% today.


While government officials have been aggressive in fostering conditions for BPO firms, they’ve also been willing to retreat. For example, state leaders were planning to pass a law related to data protection and consumer privacy based on recommendations from consulting firm McKinsey and Co. But officials backed off from the measure when some global corporations warned industry self-regulation was a better strategy. “They felt it was always better that these things are left to the companies themselves,” Sudan points out. “We’ve just kept it on the back burner.”


In a sense it’s odd to hear Sudan speak approvingly of limiting government involvement. After all, he’s spent nearly 20 years in India’s famed civil service — the Indian Administrative Service (IAS) — which has been accused of being all too happy to wrap up the country in red tape. But the 43-year-old has some capitalistic credentials as well. He has a master’s degree from the London School of Economics and worked in the exports division of a tractor manufacturer in India.


Despite its progress, Andhra Pradesh and its capital Hyderabad have not yet reached BPO nirvana. One question facing leaders is whether the region can capture higher-end BPO work — tasks such as financial planning or loan application analysis that require more sophisticated skills. Naidu is confident the region is up to the challenge. “AP is well positioned to offer higher-level services,” he says. “[W]e have started training courses focused on domains like retail banking and personal finance, insurance, engineering and design, animation and a variety of other vertical areas.”


Naidu also rejects the suggestion that India’s BPO industry will suffer from a lack of middle managers. “[T]here are multiple, good business colleges and management degree focused colleges in India and in AP,” the chief minister says. “These schools simply need to increase their focus on this sector — with that I am confident we can meet the middle management requirements.”


But other obstacles stand in the way of Naidu’s view that Hyderabad could develop into a BPO powerhouse. One potential problem is the city’s water supply, says Shakti Sagar, managing director of ADP Wilco’s operations in Hyderabad and president of the Hyderabad Software Exporters Association. Hyderabad’s water comes from four lakes that are fed by monsoons, Sagar explains. “The monsoon in the last two years has been below average and hence the levels in these lakes (have) depleted to a large extent,” he says. Sagar would like to see state officials look at alternatives such as tapping the region’s rivers in case this year’s monsoon season also proves to be relatively dry.


Rockey of Deloitte Consulting sees problems beyond pollution in Hyderabad. These include dangerous traffic conditions. “The driving behavior of truck drivers and bus drivers is out of control. There are many serious accidents due to (the) callousness of the truck drivers,” according to Rockey, who is from New Jersey but came to Hyderabad three years ago to open Deloitte Consulting’s office there. “Without a government crackdown, neither the truck nor bus drivers will change.”


CapMark’s Miguez suggests Hyderabad could do a better job of providing information to help foreign workers get settled. “I have yet to find any organizations or even a handbook that caters to expats, which would help to make their transition to Hyderabad a bit easier,” she says.


Nasscom, while praising Hyderabad as India’s most attractive BPO site, also said the city has room to improve. Hyderabad seems to lag in the contact center and transcription business, the organization noted in its August report. The city’s infrastructure, especially its public transportation system, should be enhanced, according to Nasscom. In addition, the organization says, accent in the region is a “major problem” and the government must support institutes that train manpower suitable for ITES.


The quality of the workforce’s English language skills helps explain why Indian BPO Progeon is not locating operations in Hyderabad. Progeon’s main operations are in Bangalore, but it is in the process of establishing a second facility in the Indian city of Pune. Progeon CEO Akshaya Bhargava suggests residents of Pune — which is to the north and west of Hyderabad and close to Mumbai — have fewer accent issues to overcome. “Pune has a more flexible labor pool” when it comes to offering voice-centric call center services and non-voice-based transaction processing services, Bhargava says.


The AP government’s ITES training institute helps address accent and worker education issues. So far, about 500 people have graduated from the program, Sudan says, and the state’s goal is to train 10,000 by March 2004. “We are also trying to improve the English skills at the school level itself, by modifying the curriculum,” he adds.


AP leaders also are tackling the potential water problem with a project to connect Hyderabad’s supply with the Krishna River.


Then there’s the issue of what may be called Hyderabad’s “sex appeal.” Nipuna’s Narayan moved to Hyderabad eight years ago from Bangalore. He says Hyderabad is comfortable and its power and water systems are much better than those in many other Indian cities, including Bangalore and Chennai. “However, it doesn’t have glamour like, say, Bangalore, which is a very ’modern’ city,” Narayan says. “Weekends tend to be monotonous.”


He adds that Hyderabad is missing a key feature of cities serious about their economic status: an international airport. Without the airport, Hyderabad BPOs can lose business to India’s other BPO centers. “[T]oday typically a clients lands in Mumbai or Delhi, and sometimes Chennai. Rather than visit too many cities here they select a couple of them,” Narayan explains. “[A]part from the three I have named, Bangalore then becomes the fourth one. Hyderabad is not always on the agenda.” (Bangalore, too, does not have an international airport — a factor that annoys international businesspeople who travel there.)


Naidu, Sudan and their team are working on this problem, though. And their approach again captures the government’s pragmatic policy mindset. Tapping into the free market, the government has allowed the private sector to build the needed airport — a partnership involving Malaysia’s Kuala Lampur International Airport and Indian company GMR Group is in charge. The facility is slated to open within three years, and Sudan says it will be the first brand new, privately built international airport in India.


Even so, Sudan and other government officials also are eyeing the airport as more than a way to please BPO companies. They see it as a means to help the state’s rural population as well. For example, the airport should help Andhra Pradesh’s flower industry, which now serves India’s domestic market. “You can fly out fresh cut flowers if you have international connectivity available,” Sudan says.


It remains to be seen how well Naidu, Sudan and other AP leaders will fare as they push to become a dominant region for BPO. What seems certain, though, is that public officials will not worry about hewing to any particular economic ideology, and they will remain busy in the hunt for BPO business.


Naidu makes AP’s activist approach clear when asked if other Indian cities will be able to emulate Hyderabad and to emerge as BPO hubs. “Certainly,” he says. “The main driver for success, however, is government will and a strong, dedicated team working for the state.”