ABOUT A CENTURY AGO, GEORGE SANTAYANA noted that, “Those who cannot remember the past, are condemned to repeat it.” Today, that sentiment is applicable to Indian BPO aspirants. When I hear about companies—Indian and foreign—creating a near frenzy in setting up BPO operations in India and dominating the world back office processing marketplace, I only hope that they have spent time studying the history of the Indian IT Services industry.

Let's look at this history. Today, Indian IT services providers are enjoying tremendous growth in their revenue. A recent article in the Wall Street Journal contrasted the large revenue growth of Indian IT services providers (TCS, Infosys, and Wipro Technologies) with the lack of revenue growth at companies like IBM, EDS and CSC. But despite this impressive 25to30% revenue growth, the profitability growth of these companies has not matched the revenue increase. Why? The success of IT services providers has been based on offering skilled IT services at a much lower cost than comparable American or European companies. This business model is rooted in the history of Indian companies offering low cost data entry services. The formula for “winning” business from indigenous, well-established companies was based on creating a market by providing programming services at a much cheaper rate. Y2K helped feed this frenzy and many Indian IT services companies got into the business. It also helped that India produced well-qualified software engineers from its schools, and that there was a ready labor pool available to do low cost programming. The mantra became: “Come to India, where IT is done cheaper.”

Indian IT companies achieved quality certifications (CMM, ISO etc.) in order to create a service value in addition to lower labor rates. However, my experience has been that little has changed. Lower cost is still the key value proposition presented by Indian companies. It makes one wonder: what is the value proposition? cheaper rates; Where is the service advantage? Cheaper rates. Where is the differentiation with the Western market place? Cheaper rates. The new mantra still is: “Come to India, where CMM level 5 IT service is done cheaper.”

The latest focus for services companies is the field of “business process outsourcing.” Who are these companies? They are established Indian IT services companies, they are Indian start up companies, they are American start up companies with a business plan for setting up centers in India and they are established global companies with thoughts of commercializing their internal processing centers. Yet given their history of moving from low priced data entry services to low price programming services, Indian companies apparently have not learned the lessons of the past. What do you find when you look at the offerings from these companies? Most of them are touting “low level” transaction processing services at a cheaper cost. For example, they offer a staffed call center (glamorized as Customer Relations Management (CRM) services), or an accounts payable/receivable operation made important as Cash Management services. A bankcard application data entry and processing center is called a “Credit Management services center” and keypunching services are disguised under a new name-medical transcription services. In the name of BPO, these companies are creating a business niche where rates will become the battleground, cheaper services will be the value proposition and competition will be among each other. To me, the mantra has become: “Come to India where transaction processing services are done cheaper.”

What are the lessons learned? Have the IT companies' experiences taught the new BPO players anything or are they doomed to repeat the IT history?

In my opinion, the goal should be to become the BPO provider of the world by offering something more than low rates. Why not leverage the strong IT heritage and skill sets, and offer BPO services priced for value? Is it too late? No. The BPO field is still nascent—even in US and Western world—and there is an opportunity to define the “India advantage” as more than cheap labor.

BPO entrants and wannabes need to think beyond their first contract and determine what service offering has a lasting value beyond rate arbitrage. Let's create the mantra for future: “Come to India, the back office of the world.”

Jagdish Dalal has held senior positions: CIO and VP of e-business at Carrier Corporation, a partner at PriceWaterhouse Coopers handling BPO for Nortel, and VP of information management at Xerox. He now consults with Fortune 500 companies in BPO and IT Services.