When Biju Mathew moved to the United States in 2000 to work as a software engineer in a Silicon Valley start-up, he hit an unexpected roadblock in his personal life: finding tutors for his school-age children. His kids had been used to tutoring in India and wanted to continue with it in their new environment. Mathew, however, found tutoring in the United States, both traditional and online, very expensive. At anywhere between $40 and $100 per hour, the kind of daily tutoring that his children were used to was unaffordable.

Mathew looked for some way to connect his children to their tutors back in India. He also realized that, like him, many other parents in the United States would want high-quality tutoring for their children at affordable prices. Spotting a business opportunity, Mathew found a seed investor, Saji Philip. He then hired three software engineers in his hometown in Kochi in southern India to work on the software required for e-tutoring. In January 2004, with the technology in place and three tutors on board, he set up Growing Stars and offered math tutoring at $25 per hour.

Over the last few years, online tutoring from India for students across the globe has taken on the contours of an industry. Along with other services in the burgeoning person-to-person offshoring (PPO) space, it has tremendous growth potential: In the U.S. market alone, revenues for Indian tutoring companies are estimated by some to be at $20 million today, and industry players expect the total to reach $2 billion in three to five years.

Demand for online tutoring from India is driven by its large talent pool of teachers and lower costs. This is similar to the demand for the well-established Indian software and services and business process outsourcing industries. Then there is the advantage of sheer convenience. In most of these companies, online tutors are available 24 hours a day for one-on-one help. Students can log in at their convenience and assignments can be discussed through online chat sessions and voice. A virtual whiteboard allows the use of charts, graphs and diagrams.

While there are no firm numbers about the industry’s size, estimates suggest that well over 100 players fill the space. They range in size from the venture-fund backed TutorVista.com, which has 600 tutors and 10,000 students, to Tutors Worldwide India, a fully-owned subsidiary of the U.S. company Socratic Learning, with 250 tutors. There are also mom-and-pop outfits with five tutors or fewer. Science, mathematics and English are usually taught. Offerings include homework help, regular grade tutoring, and preparation for the SAT, ACT and other exams. In many cases, tutors work from their homes. Though prices vary, they are much lower than those at U.S. tutoring firms, in some cases as low as $10 an hour. TutorVista.com, which charges $99.99 per month for unlimited tutoring, aims to make its service part of a family’s monthly budget, like a health club membership.

A Wealth of End Consumers

A report by Alok Aggarwal of Evalueserve, a global research and analytics services firm, puts online tutoring from India as one of the PPO services to watch out for. Others with strong growth potential are website development, graphic design, and editorial and writing services, according to the report. Aggarwal says that with technology advances and the growth of the Internet, small offices, home businesses and individuals can utilize PPO services. Individually taken, each contract is often of low value, usually between $100 and $5,000. “But since the number of end consumers and small businesses is enormous, the total addressable market in the United States alone easily exceeds $20 billion,” the report says.

Evalueserve’s research shows that from April 2006 through March 2007, revenues from the PPO sector were more than $250 million. Aggarwal says that India’s share was $35 million to $40 million, and that online tutoring from India would have been around $12 million to $14 million. He expects the PPO market to grow to more than $2 billion by 2015.

Indian players are far more bullish. They estimate revenues from tutoring from India to the United States at $20 million, and expect the total to reach $2 billion in three to five years. According to K. Ganesh, founder of TutorVista, “This is like the market for computers or the market for cell phones in India. It is completely dependent upon how disruptive the model is and the price point.” Technology, both by way of advancement and penetration, will play a key role, Ganesh adds.

For Aditya Singhal, founder of TransTutors.com, the figures are immaterial. “It really doesn’t matter what the numbers are,” he says. “We have not even touched the tip of the iceberg and the growth is going to be exponential. The market is simply too huge.”

Indian e-tutoring companies haven’t forayed only into the United States. They are also reaching out to students in the United Kingdom, Canada, Australia, China and West Asia. But it is the U.S. online tutoring market, currently estimated at $200 million and which some players say represents more than half the global market, that excites them most. TutorVista, for instance, has students in 13 countries, but more than 90% of its revenues come from the United States.

A quick look at the U.S. education system reveals why Indian companies find this space so attractive. According to a study of math skills by the Organization for Economic Cooperation and Development, U.S. students rank 24th among 29 industrialized nations in scholastic achievement. Various studies show that around 40% of school students fail to reach minimum expected proficiency in math and English. Reports by the American Association for Employment in Education indicate that a high percentage of U.S. high schools have difficulty filling math openings with qualified instructors. Supplementary education, as pointed out earlier, is extremely expensive.

No Opportunity Left Behind

The Bush administration’s No Child Left Behind Act calls for tutoring for students in underperforming schools. The Act’s goal is to improve results by holding schools responsible for student performance; if their students don’t reach at least grade level in reading and math, the schools stand to lose state funds. Schools, in turn, have turned to American supplemental education service providers, including e-tutoring companies, for help. Public libraries have also partnered with American e-tutoring companies. Big names here include Tutor.com, SMARTHINKING and eSylvan. Under this arrangement, schools and libraries pay the e-tutoring companies and the students use them as a free service.

Indian companies — those already in the education business and start-ups — have been quick to spot these opportunities and are trying out different business models. Some, like Educomp Solutions and TransTutors, have tied up with U.S. e-tutoring firms and get work subcontracted from them. As the back-end vendors for the U.S. firms, these Indian companies put up the infrastructure and hire and train tutors in India. In most cases, the course content is provided by the U.S. company, which also performs the marketing, brand building and student acquisition.

For the U.S. firms, outsourcing some of their work to India for as little as $6 an hour — compared with the $10 to $15 per hour that they pay to tutors in the United States — is a steal. Their success in outsourcing IT services and business processes to India makes it an even more compelling proposition. When students in the United States log on to the U.S. service provider’s website, more often than not they have no idea that their tutor may be in India.

Another business model that companies, including TutorVista, have adopted is the direct-to-consumer route. Along with the back-end operations, these companies develop course content and reach out to students directly. Some companies, such as Career Launcher, started their e-tutoring operations as back-end providers, learned the ropes, then branched out to the retail segment. Others are keeping both options open, a strategy they obviously prefer to keep under wraps for fear of upsetting their U.S. partners.

Each of these business models has its own opportunities and challenges. While the subcontracting model has a low gestation period, it is also very competitive. With an eye toward getting the work, Indian companies tend to undercut each other. The result is low margins, around 10%. On the other hand, the direct-to-consumer model offers much higher margins, around 25% to 30%. But it requires large up-front investments for brand building and customer acquisition.

Industry watchers say it is too early to tell which will emerge as the stronger model. Notes Evalueserve’s Aggarwal: “It is possible that some Indian companies will end up buying a good front end and it is also possible that some U.S. online tutoring services, or even regular tutoring services, will end up buying a back end in India. In the short term, all these models will thrive simultaneously.”

A Potential Game-Changer

Meanwhile, one player that has introduced a potentially game-changing move is the Bangalore-based TutorVista. Started by Ganesh in November 2005, TutorVista has flat pricing of $99.99 per month for unlimited hours of tutoring. “At half the price of U.S. companies, one can create a certain demand, but the demand cannot explode,” Ganesh says. “What we have done is to introduce disruptive pricing.”

TutorVista has also focused on developing proprietary software and building its brand. Over the last two years, it has invested 50 man-years and $2 million to develop its own e-commerce platform. “Our teachers and students have around 200,000 sessions per month. To manage this is a nightmare and can be done only by automation,” Ganesh says.

He sees brand building as TutorVista’s biggest challenge for now. He points out that certain consumer businesses by nature are successful either as extremely small or very large set-ups. Online tutoring, he says, is one such business. “If you want to scale up, you have to be at a completely different level. There can be no in-betweens. The customer acquisition costs alone will kill you. It requires a huge amount of money, and this is what most companies fail to realize,” Ganesh says. “It was only when we raised $2 million from Sequoia Capital in June 2006 that our business really started.”

TutorVista, which turned profitable in January, has received $18 million in venture funding. A big chunk of the money is going toward building the brand. The mandate for TutorVista’s marketing vice president, Anu Bhave, who is based in the United States, is to build partnerships with school districts, schools, libraries and education software companies. “The strategy is to get access to a large number of students at one go,” Bhave says.

Other companies, too, have been busy with their growth strategies. Educomp, for instance, has acquired a 76% stake in Three Brix e-services, the promoter of tutoring website Learninghour.com. It is now looking to address the U.S. market in a big way. Career Launcher has entered into a joint venture with POWERMath, which has both an online and offline presence in the United States. Stepsedu.com recently introduced a “zero investment” affiliate program to expand its reach with students in the Unites States and Canada. Says Stepsedu founder Kamal Wadhera: “Our affiliates don’t have to deliver the service on our behalf. They only have to enroll the students for us.”

TransTutors is in talks with U.S. firms for both investment and possible partnerships. Another company, TransWebTutors, is preparing to launch is own technology platform in the next three to four months and is talking to investors for $5 million to $10 million in funding to take the company to the next level. “Until now we have been focused on getting our back-end operations in place and on customer retention,” founder Nishant Sinha says. “We are now ready to grow exponentially. The funding will be for marketing and building our brand.”

Fraught with Challenges

For all the opportunity, however, the business is fraught with challenges, both external and internal. For one, while students and parents may relish access to affordable, high-quality tutoring, the noise is growing in the United States about outsourcing of services of any kind to India. When it comes to education of their young and impressionable, the noise is only expected to get louder.

According to S. Sadagopan, director of the International Institute of Information Technology in Bangalore, it will be “imperative” that online tutoring companies from India “set standards in place and also build strong assurance mechanisms. Building credibility with quality is the key to the success of this industry.”

To be a player of any reckoning, scale is also a must. This means companies need to invest significantly in technology for a complex e-commerce platform and back-end infrastructure. More important, getting the right tutors and training them is a daunting task. It is not only about voice and accent and tutoring over a machine. It is also about two inherently different attitudes toward learning and teaching. Unlike Indian education, which is structured, formal and often by rote, the U.S. system is more interactive and informal. Then there is the entire business of building the brand and the value proposition.

Growing Stars, for instance, has not been able to build on its early-mover advantage. More than four years after it started operations, it has 60 tutors and 450 students. TutorNext, started by Bhave, now with TutorVista, closed shop within a year for sheer lack of marketing funds. Industry players acknowledge that for every firm that is up and running, many have fallen by the wayside.

Kiran Karnik, former president of the National Association of Software and Service Companies, cautions that companies will not succeed if they remain too focused on keeping costs down. “There is a huge potential waiting to be tapped. Indian companies should not short-change themselves by cutting corners.”