Recession hits small IT, BPO firms

In March 2005 Sampath Nathan, a Bangalore-based first-time entrepreneur, started a small back office processing firm with a corpus of Rs 1.5 crore (Rs 15 million) to make the most of the IT/BPO boom. A large chunk of the funds came from his savings, but he also borrowed Rs 60 lakh (Rs 600,000) from a bank.

The initial response was good. The company, Steve Infotech Solutions, started offering back office support services to US marketing firms for online lead generation. It also secured orders for providing voice-based processing services to a few telecom network providers in the UK.

However, in November last year, in the wake of the global financial meltdown, Nathan closed down the company's Nandidurga Road office where he had employed over 80 persons. He now runs a mobile catering business and is paying off the bank loan from whatever profit he makes.

Text: Bibhu Ranjan Mishra

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Steve Infotech is not alone. Some 6,000 small IT/BPO companies across the country, employing 10 to 100 people each, have closed down during the last one year and forayed into other sectors for survival.

A call centre, operating in Bangalore's Sultanpalya area, has even had its office infrastructure, including the proprietor's Mercedes Benz 'C' class car, attached by the bank that gave them loans to start the business.

The situation is no better in other cities like Chennai, Noida, Hyderabad and Mumbai.

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Sureen Gupta, an employee of a web design and development firm in south Delhi said, "We don't doubt the honesty and integrity of our CEO. But we feel our company lacks business vision, and the cash flow in the balance sheet is almost zero now."

The firm, which has 42 employees, has not paid salaries for the past six months. Last week, the employees went on strike, forcing the management to disclose its financials to them. "After this (the strike), they have promised to give us a token salary every month for our survival," added Gupta.

Most of the units that have closed were running on unsustainable business models, and downed shutters especially after July-August last year, when the third-party consultants who were working as their marketing arms stopped giving them business after the US banking and financial industry took a hit due to the subprime crisis.

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In Bangalore alone, there are 800-900 such companies, whose closure is believed to have rendered some 40,000 people jobless. Then there are 3,000-odd firms that are primarily into BPO/KPO, website design and application development and are registered with the STPI, Karnataka.

Industry sources say that many small IT/BPO firms listed with the Software Technology Parks of India in Bangalore have either frozen operations or are running on an unsustainable basis.

However, R Rajalakshmi, director of STPI, Karnataka, said she had not seen any large-scale closures. "We need to see how many exit applications we have received so far," she added.

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The success of India as an IT/BPO outsourcing destination had seen the mushrooming of many small BPO/IT firms over the last five years. Most of them are highly unorganised and perform low-end outsourcing work.

They provide back-office and voice-based services for loan recovery, credit card support and payment, tele-marketing, website design, development and marketing. They were catering mainly to the US, UK and Australian markets.

Industry analysts say that due to their small size, most such companies don't have their own marketing teams, forcing them to depend on third-party marketing agencies and consultants to procure business. In the process they end up paying a lion's share of their revenues to the consultants.

However, in the last few months the volume of out-sourced work has shrunk, and they have also not been receiving their payments.

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Vivek Kulkarni, CEO of the KPO firm Brickwork India, and a former IT secretary in the Karnataka government says, "Small firms are always under pressure, because government policies are meant for big firms. Besides, a majority of small BPO and IT firms neither have marketing arms in the US nor direct relationships with clients. That's why they fail to realise market realities and in the process succumb to their problems."

With the Indian market showing signs of recovery, many small firms hope to be able to re-start their businesses some time soon.

"It's a good idea to start some new business and survive until the bad times are over. Once things move back to normalcy, we can re-start the business. This is why I have retained the office and infrastructure, hoping things will improve in the near future," says Nathan of Steve Infotech.

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